Gold Market Radar (January 16, 2012)

Saturday, January 14th, 2012

Gold Market Radar (January 16, 2012)

Strengths

• Gold, which had been trading below the 200-day moving average, crossed above on Tuesday with momentum players joining the markets. For the week, gold closed just above the 200-day moving average at $1,639.30 an ounce. Palladium also had a strong move, up almost 3 percent for the week on warnings of power supply curtailments in South Africa which could effect mine production.
• China’s Ministry of Industry and Information Technology reports that China produced 32.61 tons of gold in November, a 2.7 percent increase from the previous month. Total output for the first 11 months of 2011 rose 4.85 percent. More importantly, the latest trade data shows China imported 102 tons of gold from Hong Kong in November, the most ever. In addition, gold coin sales in the U.S. surged to 85,500 ounces sold during the first 12 days of January, according to the U.S. Mint. At this pace of sales, January could be the highest level of gold coin purchases since December 2009.
• In the midst of earnings season, a number of companies reported very positive results. Yamana Gold forecasted a 13 percent increase in gold equivalent production for 2012 after producing a total of 1.1 million ounces in 2011. Goldcorp also forecasted a 70 percent increase to 4.2 million ounces of gold production in five years and 2012 gold production guidance of 2.6 millions ounces. This comes after the company met 2011 gold production guidance at 2.5 million ounces. Freeport McMoRan reported that workers who returned to their Grasberg mine in Indonesia continued to ramp up production. The strike had gone on for three months, tightening copper production. The stock was up nearly 8 percent for the week on this positive news.

Weaknesses

• With earnings being reported for a number of companies, investors took short-term profits where they could on Friday. This led gold and the NYSE Arca Gold Miners Index (GDM) down 0.68 and almost 1.3 percent, respectively, for the day. Although the gold rally was dented, it was not reversed. Senior gold equities were hit the hardest on Friday, down 1.14 percent for the day, while juniors were only down 0.21 percent. On a country-specific basis, South African gold stocks were hit the most as currency and electricity restrictions weighed on their performance. Junior gold exploration and development stocks outperformed senior gold equities on the whole for the week, with added strength seen in the senior silver names.
• Momentum in the gold market stalled on Friday with a bit of profit taking from short-term players. The Shanghai Gold Exchange also announced it would temporarily raise margin requirements on gold and silver ahead of the week-long Lunar New Year holiday.
• Hecla Mining’s Lucky Friday mining project has turned out to be not-so-lucky. The company announced this week that it would be shutting down a silver shaft on the project due to maintenance and a safety review following a rock burst in late December. This mine accounts for 25 percent of its silver production. Accordingly, the company reduced its 2012 silver guidance by 2.5 million ounces to 7 million ounces. Hecla was down over 20 percent on the news.

Opportunities

• Asian demand for gold seems to be picking up again. While the Indian rupee has slightly strengthened, prices have remained stable, laying the groundwork for improved Indian demand for the metal. With the Chinese New Year holiday just around the corner on January 23, news reports show gold imports through Hong Kong are at record levels and the Chinese government is successfully managing its economy by taming inflation. This is reassurance that gold demand will continue to rise from the country.
• While central banks have been net purchasers of gold since 2009, pension and insurance funds only hold 0.3 percent of their assets in gold and mining shares. A commentary on Mineweb.com made the point that with continuing losses and growing pension deficits, these funds may be forced to hold gold because it is the only asset class negatively correlated to financial assets such as stocks and bonds. With over $200 trillion of global financial assets, this would represent a massive shift from the $2 trillion in gold bullion privately held today.
• Argentina is expecting the mining sector to continue to expand over the next six months as two Canadian miners, Pan American Silver and Goldcorp, plan to start construction on sizeable projects. Although it still lags behind regional heavyweights such as Chile and Peru, Argentina’s mining industry has been experiencing rapid growth since 2003.

Threats

• Research analysts expect gold mining to be socially challenged in 2012 as industry participants will need to demonstrate that the existing formal mining models in the host country, rather than the informal/illegal type of mining, are working and contributing to the country. A significant shortage of skilled labor and a necessity for companies to show that their activities are socially responsible and positively contributing to the local communities will also prevail.
• Members of the London Metal Exchange (LME) are pushing the LME to retract a new user trading fee that would boost the exchange’s revenues and encourage potential bidders. Brokers are concerned that it would hurt their way of doing business. Traditionally, the LME has kept trading fees low. Mineweb.com reported that industry sources say members were not consulted on the levy and some are rallying their peers to try and persuade the LME board to head off the move scheduled to take effect in March.
• Poland’s controversial mining tax has been approved by the committee that prepares government legislation and now only requires final clearance from the government and parliament. This new mining tax would be helping to raise 1.8 billion Polish zlotys for state coffers this year. KPGM Polska Miedz SA, the country’s most profitable company and sole copper producer, is now considering returning to the debt markets for the first time since 2003 should the government approve this new mining tax. The company will need to pay 1.8 billion zloty in new taxes this year.

Tags: 6 Millions, Copper Production, Earnings Season, Freeport Mcmoran, Gdm, Gold Coin Sales, Gold Market, Gold Miners, Gold Production, Goldcorp, Grasberg Mine, Information Technology Reports, Market Radar, Moving Average, Nyse Arca, Nyse Index, Palladium, Positive News, Term Profits, U S Mint
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Bill Gross: Investment Outlook (October 2011) – Six Pac(k)in’

Monday, October 3rd, 2011

Six Pac(k)in’

by William Gross, PIMCO

• Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor.
• There is only a New Normal economy at best and a global recession at worst to look forward to in future years.
• If global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible.

The midsection of a 67-year-old is not a pretty sight. No matter how many sit-ups I do during my daily workouts there are no six-pacs there, or anywhere in the vicinity for that matter. I can’t even get a one-pac going. Perhaps that’s because so many Budweiser six-packs made their way downstream over the past half century or so. In any case, not being able to avoid seeing my spare tire, I take my wife Sue’s advice when it comes to weighing herself – do it only first thing in the morning. In this case, there is the additional appeal of lights being dim and if I can creep past the bathroom mirror while turning my head the other way, then all the better.

I will say that I have lots of company – the fifties being the approximate age when the muffin top seems to magically appear. Even a “man-man” like Arnold Schwarzenegger is not immune. I saw him in a bathing suit in Hawaii five years ago and I can report that the arms and well the tummy had a certain flabby-like quality to them that was unlike any terminator I’ve ever seen on the big screen. Actually Jack LaLanne, now passed, was about the only aging male specimen I can recall who managed to beat the bulge. Still, he only did it by pulling barges with his teeth from Alcatraz to the San Francisco mainland. Betcha his choppers were no pretty sight even if they were still there at 80. In addition, all the vegetable juice he promoted is not my style, nor can I imagine being able to drink it down with a smile like he pretended to do on TV. I think I’d prefer the laxative I have to gulp before my colonoscopy tests. Whatever.

Sue never mentions the bulge, which is her loving style, but I know she must be looking every once in a while. I try to do the “blousy” thing when I wear tight golf shirts, but there’s only so much material to go around, so to speak. Swimming also presents a problem because in this case the solution is to pull the waistband up above the navel, which is a sight for even sorer eyes. I never let Sue see my backside, however. Having not seen it myself for 20 years, I’m afraid I might tell her to buy a gun and just shoot me before the fat and the cellulite strike again.

The midriff “bulge” would be a rather kind description of today’s debt crisis. No muffin top there – if anything, sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack. Still, if global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible. Several of the structural roadblocks have been publically identified by myself and Mohamed El-Erian over the past several years: 1) Globalization has hollowed developed economy labor markets, 2) technology has outdated entire industries that produce physical as opposed to “cloud”– oriented goods and services – books, records, postal letters and DVDs among the most recent dinosaurs, and 3) an aging demographic is now favoring savings as opposed to consumption in almost all developed nations.

It has been these three structural hurricanes that have led to our economy’s six-pac becoming a one-pac over the past several decades. Globalization and technological innovation have been extremely negative influences on domestic wages and employment. China and “cloud space” have favored cheaper consumption, but have been decidedly job unfriendly in developed economies if observers were to be honest about it. Schumpeter’s “creative destruction” has been destructive of product and related labor markets yet has failed to recreate many jobs in the process. In order to maintain our caloric intake, policies favoring debt accumulation as opposed to savings took hold. Falling interest rates, lower taxes, deregulation and financial innovation all favored financial asset growth that unrealistically brought future earnings and spending power forward to peak levels last seen at the popping of the dotcom and housing bubbles. Developed economies now resemble a 110-pound weakling as opposed to Charles Atlas or a much younger Arnold.

Yet to return to my initial criticism of cyclically finance-based as opposed to structural policy solutions, almost all remedies proposed by global authorities to date have approached the problem from the standpoint of favoring capital as opposed to labor. If the banks could just be stabilized, if the “markets” could just be elevated back in the direction of peak 401(k) levels, if interest rates could just be lower so that borrowers would inevitably take the bait, then labor – job creation – would inevitably follow. It has not. The explanation for why not must at least include the rationale that Wall Street and Main Street are symbiotically connected and if one benefits at the expense of the other, then both ultimately can falter.

Tags: Approximate Age, Arnold Schwarzenegger, Bathing Suit, Bathroom Mirror, Bill Gross, Bonds, Brazil, Financial Solutions, Future Years, Global Recession, Gold, Gross Investment, Investment Outlook, Laxative, Male Specimen, Midsection, Muffin Top, Outlook, PIMCO, Six Pac, Six Pacs, Spare Tire, Term Profits, Vegetable Juice
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“Money is made in the buying”

Tuesday, December 8th, 2009

Referring to the lofty valuations of the US benchmark indices, the quote du jour today comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “Long-term profits depend largely on your original buy price. Today, as I write, stock valuations are extremely high. For instance, the price-earnings (PE) ratio for the Dow is now 18.02. The dividend yield for the Dow is a thin 2.67%. For the S&P 500 the PE is 86.20; the dividend yield is a mini 1.96%. In the face of these valuations, the odds of building impressive profits over the next decade are very poor (unless, of course, there’s a crash and a new bull market).

“The great fortunes in stocks are made by buying stocks at true bear market lows. At today’s bloated values, profits in stock over the coming decade will probably not be any better than the percentage increase (if any) in the GDP over the same time period.”

What can one expect as far as future returns are concerned?

A good way of looking at valuation levels, and cutting through the uncertainty of having to forecast earnings, is by means of Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), effectively muting the impact of the business cycle by averaging ten years of earnings. Using rolling ten-year reported earnings, my research (based on Shiller’s methodology, but including some refinements) shows that the “normalized” PE ratio of the S&P 500 Index is currently 20.4. This compares with a long-term average of 16.4 and implies an overvaluation of 24%. The graph below show data since 1950, but the actual calculations date back to 1871.

As a next step, the PEs and the corresponding ten-year forward real returns were grouped in five quintiles (i.e. 20% intervals) as shown below.

The cheapest quintile had an average PE of 8.5 with an average ten-year forward real return of 11,0% per annum, whereas the most expensive quintile had an average PE of 22.6 with an average ten-year forward real return of only 3.1% per annum.

Based on the above, with the S&P 500 Index’s current ten-year normalized PE of 20.4, investors should be aware of the fact that the Index is by historical standards in expensive territory. As far as the stock market in general is concerned, this argues for unexciting long-term returns for quite a number of years to come, providing support for Richard Russell’s statement above.

Tags: Bear Market, Benchmark, Business Cycle, Buying Stocks, Dividend Yield, Dow Theory Letters, Fortunes, Future Returns, Intervals, Lows, Pe Ratio, Percentage Increase, Price Earnings Ratio, Quintile, Richard Russell, Robert Shiller, Same Time Period, Stock Valuations, Term Profits, Valuation Levels
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