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Tagged with: Reviews

Mar 2012 - Year End & China

  • As the Wall Street Journal commented on 6 March 2011, "Canadian stocks posted a sharp loss on Tuesday as concerns over the global economic outlook weighed down markets, and worries about resources demand from China pushed down prices of commodities producers....index slumped 4% (-4.3%)...copper producers fell amid concerns about demand from China after it lowered its growth projection to 7.5% from 8% on Monday 5 March 2011" (China's Premier Wen Jiabao stated that a level of 7.5% was more sustainable and efficient). And again on the morning of 21 March 2012,"....stocks decline on China growth concerns...".
  • The economists must be cheering "at last !, China is (appears to be) showing signs of slowing down". After they first predicted it to occur in April 2004, following China's reduced target of 7%pa in mid-March 2004, resulting in commodity prices falling - whereas the growth rate has often been ~10%pa since then.
  • So it should be recognised that 7.5% is still a target, and hence may not be achieved. The reality is that China is being rebuilt, and a vast number of its citizens are becoming increasingly wealthy. At the China Mining Conference in November 2011, it was very clear that China appears likely to continue to fuel the commodities boom for at least the next 10 years, but does not want to pay high commodity prices, and will try and pay lower prices any way it can. We (ERA) thought that it may take ~2 years before the market begins to gloss over possible "sabre-rattling" by China trying to reduce commodity prices (it took ~2 years for the market to realise that there were no significant Russian gold or platinum stockpiles).
  • In the Equatorial Resources presentation that was made to the Sydney Mining Club on 1 March 2012, an ambitious quote was given by Wu Xichun of the China Iron & Steel Association that "By 2015, China wants to import 50% of its iron ore from Chinese owned mines elsewhere in the world".

Nov 2012 - China Visit

  • Key Points
  • China expects to have ~8%pa GDP growth for at least the next 10 years.
  • From what we saw and where we went, China appeared to be booming in construction. However, it also appears that China does not want to pay high commodity prices to achieve its growth and may hence dampen expectations.
  • Main Statements by Chinese Presenters at the 2012 China Mining Conference :
  • The commodity prices are high due to our (China's) demand, why should we (China) have to pay high commodity prices for our own demand?
  • We (China) have so far been given two gifts to acquire resources cheaply, namely the GFC in 2008, and the current Euro crisis.
  • No additional big infrastructure capex/stimulus injection is required, because it is not as dramatic as the 2008 & 2009 situation, annual infrastructure development is already occurring and the cpi (inflation rate) has been declining.
  • The growth rate of ~7.5%pa to ~8%pa is expected to be achieved by the movement of 400mn to 500mn people from rural to urban areas in the next 10 years, with income per capita rising from the current 7,000Rmbpa per rural person & 21,000Rmbpa per urban person (expected to at least double in the next 7 years), and them then increasing consumption (both urban and rural in for example electrical and home appliances, medical, social, education),  USA is ~75% consumption / 12% investment vs China ~38% consumption / ~ >55% investment - and is slowly changing .
  • Iron ore prices were expected to be weak in 2013 due to weak European demand an'd the US fiscal cliff (CRU disagreed with this view, because they thought Europe was gradually turning upwards, and the US had bottomed in the 3rd Qtr 2012).
  • Iron ore demand was expected to continue increasing to possibly 1.5bt in 2015, with imports peaking at ~700mt except that China expected to be supplying ~60% of its iron ore from its mines (~400mt in China) & overseas, with China's own mine component rising (as its African mines are commissioned) during 2015 to 2020, sourcing less from Australia and Brazil.
  • For commodities : prices were seen to be flat in 2013 with steady demand for copper, nickel, aluminium, zinc, gold at $1700/oz and silver, due to a flat to weak Europe, and slowing India. However, steel demand was somehow seen to increase with no commodity price impact and uranium prices were expected to one day recover to the long-term contract price of $65/lb.
  • Main Observations :
  • China's GDP growth rate appears to be a case of "pick a figure" as it is an average across the country, with some parts of China significantly higher than others, e.g. the highest in 2011 appears to have been Chongqing 16.5% [collective pop: 33mn],  Tianjin @ 16%; Sichuan (includes Chengdu [pop:15mn]), Guizhou and Yunnan @ 15%; and then Shandong & Zhejiang @ 14%.
  • China's GDP increased from $1.45trn in 2002, to $7.32trn in 2011 (with a target of 28% of world GDP in 2030), while the world's GDP apparently incrd from $43trn to $69trn, Tianjin incrd from $26bn to $175bn in 2011, with Shandong's GDP at ~$650bn & Zhejiang's GDP ~$500bn.
  • Tianjin, Chengdu and Chongqing were a case of construction, construction, construction with crane farms, metros and bullet trains. The older apartments are gradually being replaced with 20 to 28 storey blocks with a study showing that it is more environmentally efficient to have 20 to 28 storey blocks (although there are also some areas of blocks of 2 storey houses).
  • Chengdu has 4 metro lines under construction / extension, as does Beijing, Chongqing, & Tianjin.
  • Bullet train lines are criss-crossing the country, and duplicate ring roads have started construction such as the tier above the second ring road in Chengdu.
  • Chongqing also has at least 5 (that we saw) bridges under construction over its rivers and valleys.
  • The market appears to be overlooking Brazil (which has an FDI of half of China's at ~$60bnpa).

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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