Month: May 2012

By MoneyMorning.com.au

In Slipstream Trader, Murray Dawes explained the bizarre state of the market in a recent update to his subscribers:

‘The twilight zone of bad news being good news and good news being good news can’t last forever…’

Sure enough, yesterday the RBA said:

‘This decision [to lower interest rates] is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected…’

Weak economy? Why wouldn’t you buy stocks!

Of course, it’s not quite that simple. Investors try to buy and sell in advance of good or bad news. When you get the good or bad news, that’s often seen as the time to buy…or sell.

Investors who bought yesterday figured that lower interest rates would stimulate the economy, which would be good news for stocks.

Last week Murray told us that this is one of the toughest markets he’s traded during his 20-year career. We can see why when the stock market seemingly trades the opposite to what a rational person would expect.

But what the stock market did yesterday is history. What’s more important is what the stock market will do today and tomorrow.

Will the stock market continue with the ‘bad news is good, good news is good’ mentality? Or will we finally see Aussie investors wake from their daydream of believing Australia is the best-managed economy in the world?

Either way, the outcome will shock most unprepared investors. To make sure that you’re not shocked, you better get ready for more big market moves…in either direction.

Cheers.
Kris.

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The Twilight Zone Trader

By MoneyMorning.com.au

‘Mortgages get paid in good times and bad. Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.’

So said Alfredo Saenz, chief executive of Spanish bank Banco Santander.

That’s the kind of quote you can’t help thinking will go down in history alongside credit crunch classics such as this 2007 line from Ben Bernanke: ‘we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.’

We suspect so…

Spain’s Housing Bubble is Like Ireland’s Magnified

The credit rating of Spain’s economy was cut by two notches to BBB+, which is the same as Italy’s. Standard & Poor’s wasn’t telling us anything we didn’t know. You only have to look at Spain’s cost of borrowing – hovering around the 6% mark – to see that it’s a troubled economy.

What’s bothering S&P in particular is the risk that Spain’s banks will need more support from the government. S&P’s Mortiz Kraemer told Reuters: ‘It’s not going to be an easy job for most Spanish banks to find funding in the market. So the state may be called for.’

When you look at the Spanish economy’s  public debt-to-GDP figure, you wonder why it’s in trouble. As a proportion of GDP, the national debt is only 68% (as of the end of 2011).

Yes, it’s hardly anything to be proud of. But compared to its troubled peers, Greece (165%), Italy (120%), Portugal and Ireland (108% each), it’s positively frugal. And Britain and France are both on 86%.

But if you’re confused, it’s only because you’re looking in the wrong place. Spain’s economic problem lies in its private sector lending. In terms of its problems, you can think of Spain as being a big version of Ireland. Easy credit drove a massive bubble in the Spanish property market. That bubble has burst.

So the fear is that the banks will be left in such a bad state, that the government will end up needing to bail them out. As a result, that dodgy private sector debt will end up on the government’s balance sheet. And as happened with Ireland, foreign lenders will no longer be willing to fund Spain’s spending.

As Vincent Cignarella put it in the Wall Street Journal last month: ‘It’s not hard to imagine a transfer from private to public sector debt rapidly blowing the sovereign debt ratio toward 100% of GDP in the next few years. Does Spain then become the next Greece?’

Spain’s Suspiciously Healthy Housing Market

The Spanish government hasn’t been sitting on its hands. It has already rescued several of the smaller lenders – in fact, there have been ‘three rounds of forced clean-ups and consolidations’ so far, notes Reuters.

As a result of all this, the banks have put aside enough to protect themselves against any losses on loans to property developers, notes The Economist.

Trouble is, ‘there are almost no provisions’ for all the other loans on the banks’ balance sheets. This includes residential mortgages, of which there are more than €600bn outstanding. The Bank of Spain says that less than 3% of these loans are in trouble.

To put it gently, that seems odd. The optimistic argument on Spanish property is that Spanish banks were more cautious lenders than banks in the US, for example.

But as the New York Times put it last week, when you’ve got unemployment above 24%, ‘the distinction between a prime and subprime borrower can be hazy.’

And given that, as a whole, dud loans are at their highest level since 1994, it seems particularly unlikely that the mortgage sector has escaped unscathed.

What’s more likely is that Spanish banks have done just what British banks have done. The strategy is ‘extend and pretend.’ Shift people to interest-only home loans, to cut their payments. Try to avoid repossessing homes. If you do repossess, keep them off the market where possible, in the hope that better times will come.

But as the Spanish economy continues to deteriorate, and inventory builds up, it’ll get harder and harder to continue with this line. As analysts at JP Morgan tell Bloomberg, mortgages may be the ‘next leg downward in a prolonged banking crisis where solvency remains a risk.’

What’s the solution? Well, temporary money printing by the European Central Bank (ECB) certainly didn’t do it. But in essence, it’s because the LTRO was temporary.

The ECB gave money to Spanish banks to buy Spanish government debt. The money ran out. So now banks of questionable solvency hold even more debt owed by a government of questionable solvency. Why would anyone sane give either party more money?

The Fate of the Euro Will Be Decided by Voters

The likely end result of all this is that the Spanish economy needs some sort of bail-out. But Spain’s economy would be very expensive to bail out. Whatever funds exist are probably not sufficient.

So once again we’ll end up going to the wire. As Jeremy Batstone-Carr of Charles Stanley notes, we may have to see Spanish 10-year bond yields above 7% before we get the next panicky move to settle the eurozone down.

What’ll that mean for the euro? One thing that’s become clear about this crisis is that the euro comes down to politics. As long as there is the political will – in other words, as long as people want it – the euro will be around.

For all that the populations of many European countries are suffering, they don’t so far seem to blame the euro currency itself for their woes. The idea of going back to their old currencies is a frightening step into the unknown.

If they blame anything, they’re angry with Germany for not sanctioning money printing and fiscal transfers.

In the long run, the euro can’t survive. There are too many countries, with too many different needs. But it may take a larger, more self-confident nation, declaring that it’s had enough of the currency and can go its own way.

Perhaps Germany will get fed up subsidising the others and leave. Or post-election, perhaps France will be next to be targeted by the markets and stomp off in a huff. My gut feeling is that the ECB will eventually be persuaded to print money, and that a formal break up will remain further off in the future. But the final decision will be down to voters, rather than markets.

John Stepek

Editor, MoneyWeek (UK)

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Why Graphite is the High Tech Commodity of the Future
2012-04-27 – Dr. Alex Cowie

Why Gold is Hands-Down the Best “Money” You Can Buy
2012-04-26 – Kris Sayce

12% Compulsory Super – Get Ready for the Government’s Next Tax Grab
2012-04-25 – Kris Sayce

Westfield – The Aussie Retail Stock That Could Make You Money
2012-04-24 – Shae Smith

Why Natural Gas Is Still My Favourite Resource Opportunity
2012-04-23 – Kris Sayce

Expect Eurozone Panic as Spanish House Prices Tumble With it’s Economy…

By MoneyMorning.com.au

Natural gas has been described as the ‘fuel of the future’. But it’s not behaving like it.

Prices in the key US market have plunged by 75% in the last four years. And they’re still falling. In 2012 alone, natural gas futures have dropped by 35%.

That’s been welcome news for American consumers. But from an investment point of view, does it mean that natural gas has now become a busted flush?

Far from it. In fact, now is the right time to position your portfolio for a recovery.

Don’t Expect Natural Gas Prices to Recover Soon

No mass energy source is perfect: coal is too messy; nuclear energy is seen as too risky; solar and wind are too expensive.

Natural gas looks like a great long-term alternative to all of these. It’s the cleanest-burning fossil fuel, and it’s non-toxic. All we need to do now is convert our cars and power stations to natural gas, and the planet’s energy problems will be solved.

Not only that, but anyone invested in natural gas would profit handsomely as natural gas demand soared along with natural gas prices.

Of course, it’s not that simple.

It takes lots of time and money to convert large numbers of vehicles and power plants. And meanwhile, existing natural gas consumers are using less of the fuel.

Last winter was the warmest in the US since 2000, says the National Climatic Data Center. That’s one reason why the US price of natural gas has just hit its lowest point in a decade at around $2 per million British thermal units (MBtus).

But it’s not just down to depressed demand. American natural gas companies have been ramping up their output, which has resulted in excess supply. Indeed, US stockpiles are at record levels for the time of year.

‘The weather exacerbated the problem,’ says J Marshall Adkins at Raymond James & Associates. ‘But when gas supply is up 8-10% year-on-year, you’re going to have a problem.’

This natural gas glut won’t evaporate in a hurry. Marketed gas production will increase by 4.5% this year, says the US Energy Department. So barring a freak cold spell, there’s limited chance of the US natural gas price picking up much in the near future.

Understandably, the shares of many natural gas producers have been clobbered along with the gas price. So should we just forget about investing in natural gas for the moment?

Natural Gas is An Obvious Choice For ‘Fuel of the Future’

The short answer is no, we shouldn’t. I won’t try to predict exactly when the price of natural gas will bottom out, but I do believe in the long-term case for the fuel – and that the price will eventually recover sharply.

The potential supply is huge, and that makes natural gas a clear frontrunner in the race to be ‘fuel of the future’.

The discovery of vast reserves of shale gas under North America is a game changer for the US. This January, President Obama claimed that the US now has 100 years of natural gas supply. A few people have since queried his maths, but whatever the precise truth, there’s still plenty to be going on with.

The UK may soon join the party. Two weeks ago the British Geological Survey said that UK offshore reserves of shale gas – ie natural gas extracted from shale rock formations – could exceed one thousand trillion cubic feet (tcf).

That compares with Britain’s current gas consumption rate of 3.5 tcf a year. Even if only 10-20% of total reserves are currently recoverable, the UK should still become energy self-sufficient. With our oil running out, that’s got to be good news. And with our North Sea oil production expertise, Britain is well placed for offshore shale gas extraction.

Sure, there’s been some controversy about the technique used to extract natural gas. Hydraulic fracturing, or ‘fracking’, involves pumping pressurised water, sand and chemicals underground to open fissures and to improve the flow of oil and gas to the surface. This has led to concerns about chemicals escaping into water sources.

But a recent University of Texas study says that there’s no direct link between groundwater contamination and the fracking process. And this month, a UK government report once again backed onshore shale gas drilling after a temporary fracking ban.

Natural Gas Prices to Recover?

If the potential future supply of natural gas is this large, then why will prices recover? Because the future potential demand is even larger. The US Energy Information Administration forecasts that by 2035, 80% of all America’s new electricity generation capacity will come from natural gas-fired power plants.

That alone looks a good reason for being bullish on natural gas. But the real story lies outside the US. Natural gas prices around the rest of the world are much higher – $11.5/MBtu in Spain, $13.65/Mbtu in India and $16.65/Mbtu in Japan.

So as soon as it can build enough facilities, America will export much more of its natural gas glut to meet global demand.

Further, the smart money is now moving into the sector. Australian oil and gas firm Aurora is run by some clever operators, and it’s looking to snap up shale deals while natural gas prices are in the doldrums.

‘We expect gas prices to remain subdued through this year and next year,’ says Aurora’s boss, Jon Stewart. ‘But it’s unsustainable for gas prices to remain as low as they presently are, because there’s little if any incentive for companies to drill gas wells.’

David Stevenson

Associate Editor, MoneyWeek (UK)

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Why Graphite is the High Tech Commodity of the Future

2012-04-27 – Dr. Alex Cowie

Why Gold is Hands-Down the Best “Money” You Can Buy

2012-04-26 – Kris Sayce

12% Compulsory Super – Get Ready for the Government’s Next Tax Grab

2012-04-25 – Kris Sayce

Westfield – The Aussie Retail Stock That Could Make You Money

2012-04-24 – Shae Smith

Why Natural Gas Is Still My Favourite Resource Opportunity

2012-04-23 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Don’t Write Off Natural Gas

USDJPY may be forming a cycle bottom at 79.63 on 4-hour chart. Another rise to test the resistance of the downward price channel would likely be seen, a clear break above the upper line of the channel will signal completion of the downtrend from 84.17 (Mar 15 high), then the following upward movement could bring price back to 83.00 zone. However, as long as the channel resistance holds, the rise from 79.63 is treated as consolidation of the downtrend, and one more fall to 79.00 is still possible.

Daily Forex Forecast

By Central Bank News
Here's today's Central Bank News link list, click through if you missed the previous central bank news link list.  Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.

Article by Investment U

I’m going to demonstrate a few key principles of investing using randomness… Including how it trumped the performance of the S&P 500 by five-fold.

“The game is rigged…”

That’s the lament from a lot of investors over the last few years.

I feel for the people who share that view. It means they got burned… And probably pretty bad.

But the sad reality is they more than likely got burned because they made mistakes. They either over-leveraged themselves, they didn’t do their research, they took some bad investment advice from someone, and ultimately didn’t have an exit strategy or plan.

It’s an unfortunate situation. Though an avoidable one.

Small investors still have yet to enter the market in any significant numbers. They’ve been sitting on the sidelines for years, happy to gain a fraction of a percent interest in their money market accounts in lieu of taking a chance in stocks. They’re scared away by the volatility or flat returns of the broader markets… They believe it’s rigged.

But the fact of the matter is, none of that really matters.

A “Notorious” Portfolio That Beat the S&P

Ask any finance or economics professor and they’ll tell you flat out randomness can’t outperform the market… At least not consistently.

Well, I’m going to demonstrate a few key principles of investing using randomness… Including how it trumped the performance of the S&P 500 by five-fold.

I began this experiment early in 2011. It was just a silly experiment that came up in conversation around the office. And the portfolio I created became some what notorious.

To start, all I needed was a way to randomly select companies.

I could blindfold myself and lob darts at the stock pages… I could randomly type letters into a terminal… I could draw letters out of a Scrabble bag… But none of those seemed like much fun.

So, what I decided was I needed a system that was built on two-, three- and four-letter words. I chewed on this for a while, and decided there was no better basis for my experiment than this ground-breaking idea: Using the names of hip hop artists and rappers as ticker symbols.

It’s kind of perfect since there are a number of artists in the genre who use short, bite-sized names. I scooted over to the Wikipedia list of “Rappers” and started typing in names. Whenever I got a hit, I added that company to the portfolio.

Thus was born, the infamous “Hip Hop Portfolio…”

As you can see, the outcome was actually pretty spectacular. (I fully plan on copywriting and patenting this portfolio into a Hip Hop ETF…)

But not only could I pull from old school, new school and underground artists – the portfolio itself ended up with a level of diversification that’s pretty amazing. Some of the companies are very solid, though admittedly a few were oversold in 2011.

Here’s the crazy part: The S&P 500 had a terrible year last year. Its return for 2011 was a mere 0.97%. The Hip Hop Portfolio returned a hair over 5%.

That’s not really spectacular, but it was at least positive. And it was five times the performance of the S&P.

So What’s The B.I.G. Deal?

Keep this is mind every time you hear some market bear or anti-equity guru mention that the stock market returns over the last several years have been basically flat or negative. They’re talking about the indices.

Well, we don’t typically invest in broad indices (and if you do, we recommend Alexander Green’s full Gone Fishin’ Portfolio).

At Investment U, we recommend investing in a diverse mix of individual, fundamentally sound companies.

If five of the randomly selected companies in The Hip Hop Portfolio outperformed the S&P, imagine what your performance looks like with actual technical and fundamental analysis…

Good Investing,

Matthew Carr

Article by Investment U

Article by Investment U

In a bold and futurist statement last year, Germany pledged to obtain a third of its power from renewable sources by 2020, and reach 80% by 2050.

Imagine if the United States could derive 33% of its power from renewable energy eight years from now, and more than 75% in just 38 years.

Sounds like a tall order for our bi-partisan congressional bureaucracy that can’t come to a compromise on anything as of late.

But all we have to do is look across the pond to Europe’s most populous state and largest economy – Germany – to see a country that’s actually making decisions and taking steps to curb their carbon footprint and reduce their dependency on fossil fuels.

In a bold and futurist statement last year, Germany pledged to obtain a third of its power from renewable sources by 2020, and reach 80% by 2050.

When the country pledged to shut down all 17 of its nuclear reactors within a decade, it set foot on a path where it plans to replace around 30% of its energy (that’s currently produced by nuclear reactors) and replace all of it with renewable power.

Some might see this as outrageous and unrealistic, but with recent innovations in “virtual power plants” coupled with subsidies, Germany’s visionary future has become surprisingly plausible.

Virtual Power Plants

It’s time for a quick rundown. A virtual power plant is essentially a centralized control system that can manage a group of different power sources.

Think of wind turbines, hydro plants, solar and back-up systems that are working in full concert through a central control room that has the ability to deliver and control energy for peak use times and store surplus.

Using software-based systems, virtual power plants are designed to store immense amounts of power, which is important for green technologies like solar and wind that don’t produce energy evenly.

And virtual power plants are anticipated to help provide detailed information about what power supplies are available and even help predict their output in advance.

The good news is Germany isn’t the only country pushing for a virtual future. You might have heard the word “smart grid” thrown around in infrastructure conversations recently, and virtual power plants are part of that equation.

The smart grid idea is, in a nutshell, to have all users and generators of electricity connected through information networks.

Italy, the Untied Kingdom and the United States have already started putting in smart electric meters on residences, and hope to provide more power use flexibility to consumers, even allowing for discounts to those who save energy.

But at the moment, Germany truly is the country with the most ambition for a cleaner and more advanced power grid.

Zi First to Zi Party

In February this year, Germany’s second-largest generator of electricity RWE AG (PINK: RWEOY) began operating the world’s first commercial-sized virtual power plant.

Working with the large German engineering company Siemens AG (NYSE: SI), RWE built wireless links on power equipment and used an energy-management system designed along with Siemens.

This system has established a way to intertwine a number of small green energy sources into a steady stream of electricity and government subsidies. By monitoring renewable power supplies digitally, RWE can tie them together into a large supply of electricity it can then sell on computerized exchanges.

Today the virtual power plant can produce about 80 megawatts of electricity. RWE is now offering this power to bidders on the continent’s largest market for trading energy, the European Energy Exchange in Leipzig

While selling energy to the exchange is regular business for the company, it’s quite another story for operators of renewable power technologies. This is the first time they have been able to sell their green technology to the exchange, which allows them to compete directly for power contracts with coal, nuclear and natural gas plants.

Now lets get to the subsidies, a word that some (like myself) are always skeptical of… and why not?

I’m truly a believer of free markets, where prices determine supply and demand.

Subsidies can be influenced by corporate giants looking for a bailout, and create surpluses of unneeded resources. And many argue that they can have no effect at all, only making beneficiaries wealthier that they otherwise would have been.

The list could go on and on.

But in the case of decreasing carbon emission and reducing dependency on fossil fuels (a supply that will eventually run out, just simple math), subsidies for renewable power sources is a pill I can swallow for the greater good of our plant and our children’s future.

The German government gives heavy subsidies for renewable power, with this year’s number reaching about $18 billion.

Profound subsidies like this have generated a rush to build wind farms and solar arrays.

Problem is, these spread-out and irregular power sources have outpaced the ability for anyone to control them, creating unruly electrical flows on grids along with additional volatility in Germany’s energy market.

New Technology to the Rescue

The explosion of renewable energy sources being pumped into the grid has created strong growth and demand for Siemens and RWE since the launch of their virtual power plant.

Just by providing power to the energy exchange in Leipzig, they have quadrupled their output from 20 megawatts to 80 megawatts in only two months.

And RWE customers have really helped generate more power, as they’re now selling power they generate at their businesses and homes directly back to the grid.

It has been a sweet ride so far for the system. The virtual program might very well be able to achieve their original goal of reaching a 200-megawatt capacity by 2015 by the end of this year… not too shabby.

Reaching a 200-megawatt capacity would put the virtual power plant in the same weight class as some natural gas-fired power plants. And the sky is the limit as the system could continue to increase capacity.

Hard subsidies given to renewable energy producers have really pushed development in Germany and boasted virtual power plant capacity. The current downside is that the system’s supply still relies on heavy government subsidies.

Good news is that in time subsidies might become inappropriate if power prices rise, which is very likely. Over time the system could evolve from a regulated machine to a more market determined one. And surely, if shown to be successful, other developed nations would follow suit.

Surfing on the German Green Energy Wave

Pike Research projects that the virtual power plant market could reach $7.4 billion by 2015. And both RWE and Siemens are in a position to profit from this growing market.

The two companies operate in the energy industry and are working to develop more environmentally friendly solutions.

RWE is an electricity and gas producer that also provides services and products on the transmission side, as well as power plant construction. They provide electricity to 17 million customers and gas to eight million in the Netherlands, Belgium, the U.K., Germany and other eastern and central countries in Europe.

Siemens is an electronics and electrical engineering company and provides a diverse range of products and services. The company works in six segments of energy, healthcare, equity investments, industry, financial services and IT solutions.

So while there are some small differences in what both companies do to make a profit, both are working on smart grid and virtual power solutions to help boast their bottom lines.

And if I had to choose one I would prefer to jump onboard Siemens. Take a look at the chart below for a quick comparison:

Reviewing the breakdown you can see that Siemens beat RWE in every category except dividend yield. And as we have mentioned before at Investment U, picking stocks solely on the fact that they have higher dividend yields can get you in trouble.

So yes, RWE pays a 6.06% dividend yield compared to Siemens 4.2%. But if you dive into the company’s payout history you’ll see that RWE’s dividend has been shrinking while Siemen’s has been growing.

Over the past three years RWE’s dividend has decreased 23.60%, while Siemen’s has grown 22.92%. As an income advocate, I will always choose a company that’s growing its dividend over one that’s shrinking it; that’s a no-brainer.

And let’s take a look at the debt to equity on both stocks. A lower debt to equity percentage means that a company is using less leverage and holds a stronger equity position. Siemen’s is much lower at 57.83% compared to RWE’s at 128%.

Add on top the fact that Siemen’s has better revenue growth, profit margins, earnings-per-share growth, return on equity and operating margins, and the true winner starts to shine.

Not to mention RWE’s CEO Jurgen Grobmann recently stated “the coming years will be difficult for us,” as the company is in the process of a corporate reorganization.

When you hear the word “reorganization” and a negative statement about future performance from a company’s CEO, it should instantly raise a red flag in your head. No use trying to capture a dividend on this one.

Raise Your Green Glass to the Future

Investors should keep an eye on virtual power plant development in Germany and other nations. Utility companies in Canada and the United States are already testing virtual power plants in smart grid projects.

And what ever your beliefs are on developing cleaner energy sources with the help of subsidies (I’m sure we’ll receive some feedback from IU readers on this), the virtual power plant system will at least promote green energy production by allowing for small creators to bid alongside the big energy dogs.

So while time will only tell if Germany will be able to achieve their ambitious goals of obtaining one third of their power from renewable energy by 2020 or 80% by 2050, companies like RWE AG and Siemens will still be on the receiving end of German investment and subsidies for some time to come.

I would just be more inclined to pick up shares of Siemens over RWE for the reasons that we have discussed above.

Good Investing,

Ryan Fitzwater

Article by Investment U

Source: ForexYard

After taking losses against most of its main currency rivals throughout the overnight and morning sessions today, the USD was able to stage a mild recovery following a better than expected US ISM Manufacturing PMI. The news resulted in a spike of over 30 pips for the USD/JPY, bringing the pair back above the psychologically significant 80.00 level. Against the Swiss franc, the dollar was able to move up over 50 pips reaching as high as 0.9087.

Turning to tomorrow, all eyes will likely be on the US ADP Non-Farm Employment Change figure, scheduled to be released at 12:15 GMT. The ADP figure is considered an accurate predictor of Friday’s all important Non-Farm Payrolls figure, and consistently leads to market volatility. At the moment, analysts are forecasting tomorrow’s news to come in at 178K, well below last month’s figure. If true, the dollar may reverse the gains it made today. That being said, the ADP figure has proven notoriously difficult to predict. If tomorrow’s news comes in above analyst forecasts, the dollar may be able to extend today’s bullish momentum going into the second half of the week.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 1 May 2012, 08:45 EDT

WHOLESALE MARKET prices for buying gold climbed above $1670 an ounce for the first time in over a fortnight Tuesday lunchtime in London, while stocks and commodities were broadly flat, with the main European markets except London closed for the May 1 holiday.

Prices for buying silver meantime broke through $31.20 an ounce, though they remained below last week’s close by Tuesday lunchtime in London.

The previous day, gold was broadly steady for most of Monday’s trading, with the exception of a sharp $15-an-ounce drop reportedly triggered by 7,500 gold futures – equivalent to around $1.2 billion – being sold in just one minute, leading to a 10 second suspension in trading.

“The reason for the selloff remains uncertain,” says Standard Bank commodities strategist Leon Westgate.

“However, given the volumes traded, it is unlikely to be a fat finger.”

Over in India, where Rupee gold prices hit an all-time high today, interest in buying gold “has become anemic after the recent gold buying festival ended,” according to a note from Barclays this morning.

Indian exports meantime fell in March for the first time in three years, dropping 5.7% by value from a year earlier, official data published Tuesday show.

Ratings agency Standard & Poor’s last week cut the outlook on India’s credit rating from ‘stable’ (BBB+) to ‘negative (BBB-), adding that India’s sovereign debt faces a one-in-three chance of losing its investment grade status.

The move has made it more difficult for India’s central bank to halt the depreciation of the Rupee, one Reserve Bank of India official told news agency Reuters on Tuesday.

“The main problem now is lack of confidence among investors and this is getting reinforced every time by either data or events like S&P cutting rating outlook,” said the RBI official.

“When risk aversion is high, the success rate of intervention is low and that is why we are seeing Rupee at such low levels despite intervention.”

The Rupee has fallen 18% against the Dollar over the past 12 months.

China’s manufacturing sector growth accelerated last month, according to official purchasing managers’ index data published Tuesday. The official manufacturing PMI came in at 53.3, up from 53.1 in March. A figure higher than 50 indicates expansion in manufacturing activity.

“The peak reading in a year usually occurs in April so the actual strength of China’s manufacturing sector was probably not as resilient as indicated,” warns Societe Generale economist Yao Wei in Hong Kong.

“There’s a big chance that the second quarter is going to be weaker than the first quarter,” adds Joy Yang, chief economist, Greater China at Hong Kong’s Mirae Asset Securities, speaking to Bloomberg Television this morning.

“We see that the external environment has sort of stabilized but we don’t see drivers in growth yet. I think [policymakers] will have to start easing no later than the middle of the year.”

“Beijing will continue its pro-growth policies,” agrees Ting Lu, economist at Bank of America Merrill Lynch.

“But the markets should also be wary of overly optimistic [growth] forecasts.”

Here in the UK, official data suggest a slowdown in manufacturing activity, with the PMI falling to 50.5 last month, down from 51.9 in March.

The fall was “partly due to a sharp reduction in new export orders,” said a statement from Markit, the data services provider that produces the PMI.

Tuesday saw a series of anti-austerity protests across Europe, with workers in France, Greece, Italy, Portugal and Spain using the May 1 holiday to attend rallies.

Across the Atlantic, the Occupy movement is set to mark the day with a series of demonstrations across the United States.

The US is “in a low-key version of the Great Depression,” according to Princeton economics professor and New York Times columnist Paul Krugman.

“We have had a massive failure of our political system that has come to accept that 8% unemployment is the new normal and there is nothing that can be done,” Krugman said in Bloomberg’s ‘Paul vs Paul’ debate between Krugman and Congressman Ron Paul on Monday.

“What we really want from the Fed now is that kind of resolve to do whatever it takes.”

“The most likely trigger for more private sector involvement in the gold market,” says a research note from Deutsche bank today, “would be from a deterioration in the US labor market alongside a weakening in the US Dollar.”

Quantitative easing and ultra-low interest rates will lead to “gradually higher rates of inflation” warns Bill Gross, managing director of world’s largest bond fund Pimco, in his monthly ‘Investment Outlook’.

“Real assets/commodities should occupy an increasing percentage of portfolios.”

Americans’ appetite for buying gold coins however appears to have diminished since this time last year, with April’s US Mint sales showing an 81% year-on-year drop in gold American Eagle sales.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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