Month: March 2013

London Gold Market Report
from Ben Traynor
BullionVault
Friday 1 March 2013, 07:15 EST

SPOT MARKET gold bullion fell to one-week lows below $1570 per ounce Friday morning, on course for a third straight weekly loss, having ended February down 5.9% as gold exchange traded funds saw their biggest calendar month bullion outflows on record.

“ETFs will probably contribute negatively to investment demand for the first time in eight quarters,” says today’s Commerzbank commodities note.

“It is nonetheless too early to proclaim the end of the twelve-year bull market for gold. The ultra-loose monetary policy of major central banks, negative real interest rates and gold purchases by the central banks of emerging economies continue to suggest that gold prices will rise.”

Silver meantime fell to just above $28 an ounce this morning, while stocks and commodities also ticked lower as the US Dollar gained.

Over in India, traditionally the world’s biggest gold buying nation, the government’s annual budget unveiled Thursday included the introduction of inflation-linked bonds as part of an effort to encourage people to invest in alternatives to gold.

“The household sector must be incentivized to save in financial instruments rather than buy gold,” said finance minister P. Chidambaram.

India’s authorities have expressed official concern about the impact of gold imports on the country’s trade deficit, with the government raising the import duty on gold to 6% last month.

“We are happy with the budget,” said All India Gems & Jewellery Trade Federation chairman Bachhraj Bamalwa.

“We were expecting something wrong to happen in the form of another hike in import or excise duty. Today is the first day after the budget, we are not expecting great sales in March due to the fiscal year end, but April sales should increase due to weddings.”

Elsewhere in Asia, “[gold] demand from jewelers has recovered a little [with] prices below $1600,” says Heraeus Metals general manager Dick Poon in Hong Kong, “though investors are either selling or sitting on the sidelines.”

Growth in China’s manufacturing sector slowed a little last month, according to both the official purchasing managers index and the one produced by HSBC which were published Friday.

Over in Europe, Germany’s manufacturing PMI rose back above 50, indicating the sector returned to expansion, while for the Eurozone as a whole the PMI held steady at 47.9, slightly better than analysts’ consensus forecast.

The Eurozone unemployment rate however rose to a record high 11.9% in January, data published Friday show.

“All the data is supporting a [European Central Bank interest] rate cut, which we see in the second quarter,” says Standard Chartered economist Sarah Hewin.

Britain’s manufacturing sector meantime fell back into contraction last month, PMI data published Friday show.

“Clearly the data are weak,” says ING economist James Knightley, “and with [Wednesday’s] GDP report showing little sign of rebalancing in the UK economy, the Bank of England has more work to do.”

BoE deputy governor Paul Tucker confirmed earlier this week that the Monetary Policy Committee has discussed the possibility of introducing negative interest rates.

The Pound fell sharply against the Dollar this morning following the release of the PMI data, hitting its lowest level since July 2010 at just above $1.50. Gold in Sterling meantime recovered earlier losses as the Pound fell to trade around £1045 per ounce by the end of Friday morning.

The average Sterling gold price in February was £1051.35 an ounce, slightly up on the previous month, in contrast with the average Dollar gold price which fell 2.6%.

In the US meantime, President Obama is due to meet with congressional leaders later today, as $85 billion of defense and welfare spending cuts known as the sequester begin today.

“We do not think the US sequester…will change [gold market] sentiment one way or the other,” says Ed Meir, metals analyst at brokerage INTL FCStone.

“The $85 billion in spending cuts is simply too small to make much of a difference to the economy and although it could cause some problems, it will have no bearing on influencing investor allocations among different asset classes… [but] we suspect that we will see more price erosion heading into next week given gold’s poor fundamental and technical backdrop.”

US Mint gold coin sales meantime fell from a month earlier in February, but were up 283% year-on-year, while by contrast, exchange traded funds saw their biggest monthly outflow on record, according to Bloomberg data.

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. Ben can be found on Google+

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By MoneyMorning.com.au

This Wednesday, at 5.25pm, Diggers and Drillers readers got an email from me with a bold prediction.

I’ve put myself squarely on the chopping block in saying that:

‘…We can expect gold to start a multi-month rally that could see it close to or even above a new high by the middle of the year. ‘

That would require gold to rally 20% in the next four months.

It’s a bold call, but in the last few weeks, three long-dormant alarms went off to warn me of a major move in gold.

Each one was enough on its own to suggest that the game is back on.

But in combination, they were yelling at me to sit up, pay attention, and get ready to make some money from gold – and gold stocks…

The first of these ‘top secret indicators’ is shouting that the gold supply has dried up. No one is selling. And if the market wants more, the market has to start paying far more for it.

It wouldn’t be fair to Diggers and Drillers readers for me to reveal too much about this indicator, but I can tell you that since 2008, every single time the indicator hit a certain level, gold went on to start a 20%-30% rally straight afterwards.

I’ll be clear – this indicator has had a 100% strike rate predicting big moves in gold, and that is a track record to pay attention to.

This is possibly the most exciting thing to happen to gold since the US debt downgrade in August 2011 sent it soaring $300.

So know this: this indicator has already crashed through this level and just keeps falling.

It’s already at a three year low, which warns us of a major move brewing.

But last night it fell again – in a big way.

It’s now a gnat’s whisker away from reaching levels not seen November 2008, the depths of the GFC. Back then, such low levels for this indicator shortly preceded gold doubling inside of two years.

If you’ve been watching the gold price in recent months, my big call on gold may sound like the ramblings of an overexcitable madman.

As you can see in the chart below, gold has been anything but strong recently. In fact it has just seen its fifth consecutive month of falls.

The Dark Hour Before Dawn for Gold?

This February was particularly rough, with a 5% drop. But this sharp fall is part of the process. Every time my indicator has gone off, the first thing gold did was to have one quick, sharp shakeout; and then the rally started.

So the current pullback simply looks like the dark hour before dawn for gold.

The World’s Biggest Gold Buyer

It’s hard to see it falling much further. Because, when gold dipped last week, buying on the Shanghai gold exchange reached record levels. The other thing is that gold is trading at a $20, or 1.2% premium, in China to the US. China is the world’s biggest gold consumer, so what is happening in China is more important than just about anything else in the gold market.

So it’s good for gold investors to see that 2012 was China’s biggest ever year of gold imports. These jumped 94% on the previous year, to hit 834 tonnes in 2012.

This represents 18.5% of the annual global gold (mine and scrap) new supply; up from just 1.1% of the annual global gold market in 2009. China is putting vast and growing pressure on the physical supply.

This pressure on the physical supply of gold is showing up all over the place now. Apart from my top secret indicator, you can also see it in the futures market.

Gold futures have been trading slightly below the spot price of gold. This is called ‘backwardation’, which is another one of those long words finance types coin to sound clever.

All that matters is that this is another warning siren. It means that investors don’t reckon that counterparties will be able to deliver gold when they say they will. In other words, it’s another sign that physical supply has dried up.

The few times it has happened before, gold has seen major moves very soon after.

The fundamentals are pointing towards a move in gold. But the charts are also sending out some powerful signals too.

The ‘RSI’ is a measure of how oversold, or cheap, something is.

For gold, last week it got down to levels only seen three times in ten years.

Last time it happened was in May 2012, which marked the start of a 15% rally. You can see this in the chart below. The RSI is in the line at the top. I’ve circled that record low in red. Gold is the big chart below that, and I’ve highlighted the subsequent move in green.

Gold’s 15% Move in 2012 – History Repeating Now?

It looks like history is now repeating. After gold’s RSI hit record lows last week, gold has followed the same script as it did last year: first a big bounce (4% in a week), and now a slight pullback.

I don’t think it will be long before we see it recover fully, and take off in earnest as the lack of physical supply kicks in.

Watch the US Fed

Besides, we only have to wait until tomorrow for US Federal Reserve Chairman Ben Bernanke to give a speech called ‘Low long-term interest rates’. He’s speaking at a conference called ‘The past and future of monetary policy’, which should be a riot.

But the important point is that he will use this as a platform to argue why the Fed will keep rates low for a long time. As a rule, gold rallies every time the ‘Bernank’ opens his mouth in public.

So this public outing of the bearded wise one could give gold fresh legs next week.

And don’t forget, when gold rallies – silver tends to rally even harder.

…But silver’s a story that will have to wait until Tuesday.

Dr Alex Cowie
Editor, Diggers & Drillers
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By MoneyMorning.com.au

Protesters descended upon Washington, DC, recently. They visited our nation’s control centre to oppose construction of the Keystone XL Pipeline, from Alberta to the Gulf Coast.

At a higher level, Keystone protesters don’t want Canada to develop its oil sand resources in Alberta. It’s ‘dirty oil,’ they say. Leave it in the ground is their view.

One way or another, whether the pipeline operators build Keystone XL or not, there’s money to be made on either side of the outcome. Let’s look into it. Read on…

Strategic Keystone

I’ve discussed Keystone XL on other occasions. It’s a very important project. It’s strategic, in a profound way. Expanding the pipeline – or not – impacts America’s strong relationship with Canada, a longstanding ally.

Also, Keystone is a major issue for the US in terms of long-term energy security. Will Canadian oil flow south from Alberta, toward the US midcontinent? Will Canada’s energy economy remain tied up with the US energy economy? Or will Canadian oil flow west to Pacific ports, and thence load into tanker ships bound for Asia – and all that such a turn of events implies?

Keystone XL boils down to basic American national interests. Keystone will help secure Canadian-sourced hydrocarbons for the US economy, and do so well into the next century. Or not.

Security of oil supply will certainly matter, as time goes by, because most of the ‘traditional’ oil-exporting nations of the world – most of the critical US suppliers – have profound problems and risks associated with future oil exports.

That is, oil fields are depleting in many states (Kuwait, Arab Emirates, et al.), and/or societies are in turmoil (Libya, Saudi Arabia, Nigeria, et al.).

By building Keystone XL, the US will send a message to the rest of the world – or not, as I’ve mentioned. We’ll answer the question of whether the US is serious about long-term energy security.

Will the US take steps to develop world-class energy resources here in North America? Or – not to put too fine a point on it – has US national governance become fully divorced from energy reality?

Carry out that last line of thinking a bit more. Is the US truly in free fall from great power status? If so, should the rest of the world continue to use the dollar as a reserve currency? Some people – important people – are already discussing the need for ‘gold trade notes’ to use in international commerce. These are people with lots of gold and an antipathy toward the dollar and US hegemony in the world. I just thought I’d mention it.

‘Dirty’ Oil?

Oil from Canada’s oil sands is, to be sure, energy intensive. Still, ‘dirty’ – as the Keystone protesters label it – is the wrong word. Oil from oil sands is no more carbon-intensive than heavy oil from most places in the world – say, Venezuela, Russia, California.

When it comes to energy, we’re riding history’s timeline. It’s not your father’s world of energy. It’s not the 1970s or 1980s anymore. Heck, it’s not even the 1990s or early 2000s. The energy landscape has changed dramatically over the past decade. Large-scale energy development today requires putting lots more energy into the ground to get energy back out.

Specifically, oil sand development requires more of everything than in the past – more wells, more steel, more concrete, more equipment, more natural gas, more water, more labour, more money and capital. With more inputs of everything, we see lower ‘energy return on energy investment’ (EROI) – more goes in, less goes out. It’s thermodynamics, but it’s not ‘dirty’ oil.

At root, we’re dealing with energy economics. Oil sand development also requires higher prices to support all of the investment. If there were lots of ‘cheap’ oil out there, every barrel of which was threatening to undermine the market, then few would dare to dig oil sand in Alberta.

We’re Going to Make Some Money

We’ll see how it all unfolds over time. One way or the other, however, we’re going to see a lot of money flow into energy development in the years to come.

Look at Shell Oil, for example. Shell delivered strong numbers in the fourth quarter of 2012. Cash flow was about $10 billion, with worldwide earnings up 15%, to $5.6 billion. For the full year 2012, Shell’s cash flow was $46 billion, and earnings were $27 billion. Shell has poured funds into exploration and development, while successfully reducing debt. And the shares pay a dividend yield of 5.3%.

Or consider Norwegian oil giant Statoil. Here’s an oil major that puts its spending to good use. Statoil’s Q4 earnings were $2.7 billion, with fabulous news from the field in terms of operational performance.

That is, Statoil delivered 110% reserve replacement – it found 110 barrels for every 100 barrels it produced, thus replacing its output and then some. Statoil shares pay a dividend yield of 3.5%.

Statoil management added about 1.5 billion barrels of oil-equivalent resources in 2012. The company forecasts 2-3% annual production growth through 2016 and targets 2.5 million barrels per day of output (oil equivalent – oil plus natgas) by 2020, up from the current level of 1.8 million barrels.

That said, we’re still dealing with the oil business. As I learned long ago working for the former Gulf Oil Co., the only easy day was yesterday. No one can rest on their laurels. What did you find this morning? What are you going to find this afternoon? The key is to figure out how to improve operating performance, deliver new discoveries and operational successes and truly move the needle.

We’re in the midst of sustained high oil prices. We live in a world of growing demand and constrained supply – Keystone protesters or no.

With high prices, these should be great times for oil companies. Still, the reality is that despite oil generating immense piles of cash, everyone has to work harder and harder to keep the pipelines flowing and the tankers filled. As I said at the beginning, there’s money to be made in all of this, whichever way the winds blow.

Byron King
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Daily Resource Hunter

From the Archives…

The Biggest Crisis to Hit the Stock Market Since the Last One
22-02-2013 – Kris Sayce

My Wife and Warren Buffett
21-02-2013 – Kris Sayce

How a Share Trader Approaches the Market
20-02-2013 – Murray Dawes

The Poster-Child for the US Shale Gas Revolution
19-02-2013 – Dr. Alex Cowie

The Two-Dimensional Diamond That’s Set to Turn Your World Upside Down
18-02-2013 – Dr. Alex Cowie

By MoneyMorning.com.au

Nobody was really shocked when Venezuela devalued the bolivar from 4.3 to the dollar to 6.3.

When it comes to the currency wars, massive devaluations are simply one of the keys to this ‘race to the bottom’ strategy.

But Venezuela’s bad behaviour, and that of several other countries in the region, means that several Latin American countries are now likely to suffer hyper-inflation or declare bankruptcy.

For investors in Latin America, that raises the risks for everyone, even for countries with good policies and relatively low debt.

Unfortunately, long-standing investors in this part of the world have seen this hyperinflationary pattern before.

Hyperinflation Gone Wild

For instance, Argentina suffered average annual consumer price inflation of 546% between 1975 and 1991. During that period it went through three currency re-denominations that included a 10,000-for-1 devaluation in 1983, a 1,000-for-1 in 1985 and another 10,000-for-1 change in 1992.

Similarly, Brazil suffered average inflation of 773% between 1981 and 1995. During that period it went through four currency re-denominations, with multiples of 1,000 for 1 in 1986, 1989 and 1993, and 2,750 for 1 in 1995.

Finally, Peru suffered average inflation of 809% between 1978 and 1993; during that period it went through two currency re-denominations, with multiples of 1,000 for 1 in 1985 and 1,000,000 for 1 in 1991.

In other words, in a period of less than 20 years, the three countries knocked 9, 11 and more than 12 zeros off the value of their currencies.

You’d think hyperinflation would prevent debt defaults, but in these cases it didn’t.

Argentina defaulted in 1982 and 1989, in addition to its other defaults in 1827, 1890, 1951, 1956 and 2002. Brazil defaulted three times during its period of hyperinflation – and another 7 times outside it.

Peru also defaulted three times during its period of hyperinflation – and six more times outside it. You wouldn’t want to buy the debt of any of these three losers, in my view, although Peru is currently notably better run than the other two.

As for Venezuela, it has managed so far to avoid the hyperinflation that has afflicted the other countries, in the sense that its annual inflation rate has never made it into three digits.

However, its record on default is correspondingly worse, having defaulted no fewer than 11 times in its 202 years of existence as an independent nation.

What Latin American Investors Need to Know Now

Foreign investors in these sorry track records have lost their shirts, over and over again.

In the 1990s and 2000s, it seemed that the Latin American countries had grown up, with Argentina being carefully run and very popular in the 1990s, and Brazil having a very good run since 2002.

In some cases, the perception has continued:

• Chile has been well run economically by both autocratic and democratic governments since President Augusto Pinochet took over in 1973. It now has very little foreign debt and a reputation for integrity better than that of the United States, according to global surveys.
• Colombia, which had always been better at avoiding debt defaults (none since 1935) and has also avoided hyperinflation, currently appears one of the world’s best growth stories.
• Peru, which had a dreadful track record in 1978-93, has been much better managed since then, with relatively low debt. Even in 2010, in the early stages of the current enthusiastic market for emerging-market bonds, it managed to issue 40-year bonds.

Nevertheless, overall there are as many likely losers as winners.

Venezuelan inflation is clearly headed towards the triple digit level (49% annually in the last two months) and even if Hugo Chavez goes, his Vice President, Nicolas Maduro, is committed to the same overspending and hostility to international capital.

Argentina’s Cristina Kirchner jails people who disclose the true inflation rate (somewhere north of 30%) and is likely to run out of money soon – if she doesn’t start a war with Britain over the Falkland Islands first.

Brazil under Dilma Rousseff has gone ex-growth and is about to ramp up public spending again to pay for the 2014 World Cup and 2016 Olympics. In addition, smaller countries such as Bolivia, Nicaragua, and Ecuador are enthusiastically following in Chavez’ and Kirchner’s footsteps.

The point is if half the South American continent goes bust, it can’t be good news for the other half.

For one thing, trade relationships will be disrupted and companies with large operations in the bankrupt countries will suffer large losses.

For another, international capital markets are likely to ‘redline’ the continent altogether as they did in the 1980s, even though at that time a number of Latin American countries were competently run.

Then there are the political repercussions if countries suffering hyperinflation or bankruptcy try to distract their citizens by starting a war. Old rivalries die hard, and Argentina/Chile, Bolivia/Chile and Venezuela/Colombia are all borders that have seen flare-ups in recent years.

It’s a great shame for the well-run countries of Latin America, which are doing things right, growing their economies rapidly, and deserve to be rewarded.

But as investors, we should be careful with our money. The currency wars make Latin America a very slippery slope.

Martin Hutchinson
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

The Biggest Crisis to Hit the Stock Market Since the Last One
22-02-2013 – Kris Sayce

My Wife and Warren Buffett
21-02-2013 – Kris Sayce

How a Share Trader Approaches the Market
20-02-2013 – Murray Dawes

The Poster-Child for the US Shale Gas Revolution
19-02-2013 – Dr. Alex Cowie

The Two-Dimensional Diamond That’s Set to Turn Your World Upside Down
18-02-2013 – Dr. Alex Cowie