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2013

Apr 2013 - Gold Saga

  • What happened in April 2013 ?
  • In what is best described as the "Gold Saga" over a period of almost exactly 2 weeks from 9 April to 23 April (with the market impact from 10 April to 24 April), the gold price fell by more than $200/oz within a week. Goldman Sachs (Goldmans) went from bullish/buy gold up to 9 April at ~$1570/oz through "short" gold on 10 April, only to "change horses" back again on 23 April at ~$1408/oz stating close the gold "short" positions, as the gold price could rise. (It is currently [28 May] finding resistance at ~$1400/oz).
  • The gold price coincidentally fell from ~$1565/1575 on 9/11 April to $1380 on 16 April (based on London pm fixes) with a trading low of $1321 and had recovered to $1408 on 23 April amidst unprecedented world-wide demand for delivery and purchase of physical gold, and then increased to resistance about $1470/oz (and sold back down on Friday 10 May to ~$1420/oz & closing ~$1445 [Merrills 9 May forecast: $1200 by June]).
  • November 2012: gold futures margins dropped from 15% to 5% by a Nth Am trader, followed by other Nth Am traders & then the Asian traders.
  • 10 April 2013: Goldmans switch from bullish gold up to 9Apr, to bearish, reduce y/e gold forecast to $1450/oz, recommend "shorting" gold. Gold price drops from ~1580 to ~$1560 as shown in Figure 1a
  • 11 April 2013 (Thursday) : 24-hour Gold trading holds $1550 long-term support (shown in Figure 2a), trading ~$1560 to $1565.
  • 12 Apr 2013 (Fri): After Asian market & as London closes (for weekend) $6bn short futures trade (costing $300m [due to 5%margin]) rep 4moz/124t of gold executed on Comex, London screens "freeze" blocking buy orders, & Comex  follows with 35mins of $15bn (cost ~$750m) short trades rep 10moz/300t of gold.
  • 12 April 2013: Critical $1550 Gold support level broken, computerised stops begin to occur selling gold positions automatically taking gold to $1500.
  • 14 April 2013 (Sunday) : Hong Kong opens Mon 15th, gold drops down to ~$1450/oz.
  • 15 April 2013 (Mon) : London opens, gold falls to pm fix at $1380,
  • 15 April 2013 : Goldmans re-iterates "short" gold, reduces y/e forecast to $1400. Comex down to 1350, HKong opens, down to 1321, & recovers to 1340.
  • World-wide stampede to buy physical gold starts.
  • 16 April 2013 : Goldmans states "Gold no longer a safe haven, switch to natural gas" (their author appears to not understand the allure of gold).
  • 17 April 2013 : Gold finds resistance at $1400.
  • 16/17 April : Asian traders raise futures margins back up from 5% to 15%.
  • 17 April 2013: Gold holds around $1380, falls with HK briefly to $1340 before recovering to ~$1360.
  • ~17 April 2013 : North American traders raise futures margins back up again to 15%.
  • 18/19 April 2013 : Gold encounters resistance at $1400; then $1420 and support at $1400.
  • 21 Apr 2013: Rises back through $1420 with Hong Kong opening.
  • 22 April 2013 (Monday) : Gold recovers in London to $1440.
  • Falls with Comex opening, as Goldmans state that Gold ETF's are a "bubble", ie still negative gold & gold ETF holdings were continuing to fall dramatically (but the gold price held $1420).
  • 23 Apr 2013: Goldmans "changes horses" back again, calls off "short" recommendation as gold could now rise.
  • (Despite no change in the rationale that Goldmans applied : Cyprus, on-off reduction of $85bn per month injection, Gold ETF's actually falling faster than expected, & leave their y/e $1400 target unchanged).
  • 25 April 2013 (Thursday) : Gold recovered to resistance at ~$1470/oz.
  • Conclusions / Results :
  • Goldmans "calls" may have simply been pure coincidence with what happened. The "short" call was made based on falling ETF holdings, and "comments" such as some IMF notes that suggested Cyprus could sell part of its gold for ~$0.5bn to reduce the ~$40bn debt package being sought; and the Fed in its FOMC minutes were considering slowing the $85bn per month injection down to $50bn, which could strengthen the US$ (less money being printed - even though the monthly printing does not appear to have materially weakened the US$).
  • Or Goldmans may have had exposed "short" positions that were at risk of the gold price rising from its $1550 support level shown in Figure 2a, and/or they had a large buy order at lower levels and switched back again when the order had been completed. Apparently it's not the first time Goldmans have been possibly involved in a gold price fall, the prev time (not proven) was ~2008.
  • Whatever was the reason, the reality is that the gold price has fallen through its $1550/oz support level, with only the 10-year trend still intact as shown in Figure 2a, and has severely damaged share market confidence in gold and gold shares.
  • Pandora's box has been opened, hedge funds found the classic unregulated play, where they could "short" $21bn worth of a "stock", in this case "gold", for an outlay of ~$1bn, and score a "multiple whammy" by shorting the other precious metals (they all followed gold down - regardless of individual fundamentals), & could also short the major gold stocks ahead of the "hit".
  • There is no other "stock" that we know of that you can naked "short" $21bn worth at its opening (ie without holding any). Comparatively, it would be like selling ~20% or ~600m BHP on its opening.
  • Shorting the major gold stocks has the benefit of extra downside leverage, if you know that your actions should result in the gold price falling and hence gold share prices falling too - and you can't face prosecution for it because gold trading is not regulated.
  • The Libor ruling at the end of March 2013 was when a landmark class-action civil lawsuit against some banks for Libor-related offenses was dismissed. In that case, a federal judge accepted the banker-defendants' argument: "If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place" (Source:rollingstone). So if instead "a group" colludes in "shorting" then they may not be liable either (it will be interesting to see if the same excuse holds for BP & Shell over UK fuel prices since ~2001).

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Jul 2013 - Commodity Prices

  • Commodity prices - China , blah, blah - BUT !?
  • I just have 3 devil's advocate (/observation) questions or is it a question in 3 parts.
  • At the China Mining Conference in Tianjin in November 2012, there were two very clear messages, namely : "why should we (China) pay for our own demand (commodity prices)" ? and according to the Chinese presenters "commodity prices are going to be weak in 2013" (in defiance of western presenters who were overall more bullish, based on the US recovery etc) [for more detail see pages 8 and 9 of the Goode News column in the April 2013 issue of Paydirt, or the "Nov 2012 - China Visit" Comment on www.eagleres.com.au]
  • The Chinese presenters were right, so :
  • 1. Did the Chinese presenters know that despite the official view of 8%pa GDP growth, that a policy change was coming and China's GDP from 2013 was likely to be re-stated as 7% to 7.5%, and that perception could cause commodity prices to weaken ? - which they have.
  • 2. BUT, that there was underlying demand as has been illustrated by MMG's JQ 2013 release on 23 July (available from its website - it has a Hong Kong Listing) stating that China's demand for copper cons has been firm with imports in the first 5 months up by 30% (yoy) and copper cathode falling in bonded warehouses by 50% to ~400kt at the end of June 2013, such that premiums have risen to $200/t (levels last seen in 2009). Also that China's zinc con imports for 2013 so far have been the same as 2012, and the global demand for zinc has been firm.
  • How or why ? - quite simply from 2 sources, namely :
  • Firstly that GDP numbers are a broad guideline (as stated by a China-based presenter at the Sydney RIU conference in May 2013 "why are you focused on the GDP numbers, everyone in China knows that they are just a broad average of the provinces and areas with an error of ~10%, so 7.5% can mean between 7% and 8%").
  • Secondly the market has completely overlooked / missed the fact that in order for China to achieve its 20 to 50 year growth targets it initially needs to develop access to the rest of the world through joint venture construction projects with all countries (ideally using Chinese materials and expertise). [for more detail see the Goode News column of the August 2013 issue of Paydirt]. China basically needs the rest of the world to be developed too.
  • 3. Or in other words, commodity prices should not be weak. So how to get them to weaken or appear to be weak, and pay less for the required underlying demand ?. Is it simply one of the 36 Chinese strategies of the "Art of War" - one recalls John Hewson's comment at the recent Symposium Broken Hill Conference in May 2013, Paul Keating phoned John afterwards and said "I didn't mean those things I said, you must understand that politics is a 'game' and I'll say or do anything I can to win it". So does China perceive commodity markets and prices as a 'game' to be won by any means possible ?

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Aug 2013 - A$ Going to Fall

  • In the post Diggers weekend AFR, page 40 had an article titled "Currency - Spike in Aussie will be short-lived"..............in our/ERA experience "will" is a dangerous word, as it gives no "lee-way" - "expected to be" may have been safer.
  • The AFR article focuses on the realisation that China is slowing down (a different opinion to our Purple Patch July Resource Roundup emailed on 26 July 2013, and also in complete conflict with page 12 of the same 10/11 August edition of the AFR that China's growth was on-track to meet its 7.5% target, especially after China's industrial production jumped from 8.9% in June 2013 to 9.7% in July). The article also expected that (on the basis of a China slowdown) the RBA would have to consider rate cuts.
  • The IP jump should not really have been a surprise, iron ore prices have remained strong, and the iron ore producers at Diggers ([in no particular order]: Fortescue, BCI, Mt Gibson & Atlas) all made comments along the lines of being unable to meet demand for their iron ore products/deliveries, and consequently still expanding where possible.
  • In the AFR article, CBA were quoted as stating that they envisioned the A$ as heading for their forecast of 85c by the end of 2014, and sub-80c over the longer term. The recent strength to 91c was due to the Fed to-ing and fro-ing about when the QE taper is going to start (as in Sept or Dec) and hence resulting in minor weakness in the A$. The A$ was expected to be depressed because rate cuts by the RBA and closing bond yields between Australia and the recovering world would have to depress it.
  • But let's face it, most A$ forecasts for a weak A$ were wrong last year, because they did not factor in a weak US$ and a weak Euro. As the keynote (ex-IMF) speaker in the Diggers 2012 Q & A session after his speech stated last year, the A$ could be relatively strong because it was a safer alternative to the US$ and the Euro, and offered a higher interest rate. The "hot money" was hence probably temporarily parked in the A$, and has weakened with a stronger US$. Last years' Diggers' speaker made no mention of China in regards to the strength of the A$.
  • The post Diggers keynote speech Q & A sessions are usually when the "gems" come out over what may have an impact in the world and hence affect Australia, and sometimes the speaker links the "gems" to their speech. This year (2013) was no exception.
  • This years' 2013 Diggers' keynote speaker was Austan Goolsbee (a former Obama economic adviser), who stated in the Q & A that he thought that QE would historically be viewed as an essential event. The fact is that QE is a combination of monetary x volatility/velocity of money. But the volatility is down, so hence there is no inflation. QE is printing money to avoid deflation, and create growth and hence he thought that it has to continue until the US turns around and its growth exceeds 3%, ideally back to its previous levels of 3.5%pa. (Note : it would appear that the rising debt is not an issue, because the US has to print money in order to grow).
  • However, the US is currently mired with 2% growth and 2% inflation, the growth for the 2nd Qtr of 2013 was 1.7%. In the US, if growth stays ~2%, then that is regarded as "the steady state", and no one really needs to be hired. The US has not had its usual "V" shaped recovery, so far, it has an "L" shaped one.  It could become a "U" shape if the US has a "housing bubble" because the US turns on housing, but that seems unlikely, so that means probably little change for the next 6 months as the growth rate is expected to remain below 3% for the remainder of 2013.
  • At least 70% of the US agree that Govt spending is out of control, but no lobby group wants to have a cutback, as in reduction of its benefits. So the US is grid-locked and can't agree on a solution. Austan drew an analogy of unblocking an apartment's kitchen sink drain full of lasagne with a shotgun and due to a u-bend the lasagne ends up splattered in another apartments kitchen. Clearing the lasagne was resulting in dumping the problem onto someone else - and apparently that is what Washington DC is currently doing.
  • Austan thought that although the new Fed governor (replacing Bernanke) may or may not have differing views, it probably mattered little, because they would be "locked in" to the existing processes.
  • Fortunately for the US, the EC appears to be in a worse state, with its banking system currently perceived as not solvable and its govt bonds similar to the US mortgage backed securities debacle. Ideally the Euro needs to devalue, but Germany having bailed out East Germany appears unlikely to accept bailing out the rest of Europe too. W Germany solved its crisis through labour mobility from E Germany to W Germany and a US$1.3trn subsidy to E Germany - that solution is not available for the EC. Austan envisaged a probable financial crisis in Europe every 6 months or so until they solve it.
  • The US has so far been the only country to print money and avoid inflation and a weaker currency, because it is printing a recognised reserve currency, namely US$. Other countries have printed currencies that have been based relative to the US$. As the President of Argentina commented a month or so ago, what she needed was a printing press that could churn out US$, not Argentinian currency or a substitute currency.
  • A drifting US, may result in a drifting to lower US$. As far as Austan was concerned, the key to a US recovery without housing construction was when the 25-year olds have to move out and buy poor quality pots and pans, and pay rent. However, Austan also thought that the Shale gas revolution would reduce US energy costs with a resulting impact on manufacturing, combined with selective growth city areas in the US (such as Seattle, San Francisco and Silicon Valley) also gradually resulting in a US recovery. 
  • Austan thought that Australia would feed off the growth of others, such as Asia/China and the US, while the EC faced greater issues.
  • So yes, it's great to have a weak A$, gold at A$1450/oz and 91c looks a lot better than gold at US$1320/oz and a 1:1 exchange rate. It may be on a wish list for a number of companies and industries for the A$ to fall to 85c or lower, but as they say "don't count your chickens before they have hatched".

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