Monthly Archives: July 2015
Gold better at 1095.18 (+0.91). Silver 14.62 (+0.051). Dollar lower. Euro lower. Stocks called higher. US 10yr 2.26% (+4 bps).
Puerto Rico Lacks Cash for Aug. Bond Payment, Official Says
27-Jul (Bloomberg) — Puerto Rico currently lacks the funds needed to make a payment due next month on bonds sold by its Public Finance Corp., a government official said.
Victor Suarez, the chief of staff for Governor Alejandro Garcia Padilla, told reporters Monday in San Juan that whether the payment is made will depend on if the commonwealth has cash available. He didn’t say whether the island will be able to do so.
The payment will hinge on “the liquidity the government has to attend to each of its obligations,” he said. “The priority will always be to attend to the essential services to citizens, such as security, health care and education.”
Puerto Rico faces $58 million of interest and pricipal due Aug. 1 on the Public Finance Corp. bonds, according to Moody’s Investors Service. It may miss the payment because the legislature has failed to allocate the funds, which would be the first default by the commonwealth as it moves toward restructuring $72 billion of debt.
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The world is experiencing a ‘negative feedback loop’ decades in the making
27-Jul (BusinessInsider) — The world is experiencing a “negative feedback loop” as commodity prices fall, according to Goldman Sachs.
What’s more, this loop is a huge story decades in the making — and there isn’t a country on the planet that won’t be affected.
Slowing Chinese demand for raw materials has pushed the Bloomberg metals index down 25%. Liquidity is low. Cash is in shorter supply.
This is all part of a global market cycle, Goldman argues, and commodities are getting caught in the violent shuffle.
Three forces are working together to make this happen: a general oversupply of commodities, a strong US dollar, and weak economic growth in emerging-market economies such as Brazil and China.
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PG View: If you want stop the look and generate commodity price inflation, everyone needs to print more dollars, euros, yen, yuan etc . . .
ECB warned to pump more money to save eurozone
27-Jul (Telegraph) — The European Central Bank should stand ready to use the full force of its financial firepower to stop the eurozone from falling into renewed turmoil in the wake of the Greek crisis, according to the International Monetary Fund.
It its annual health-check of the eurozone, the IMF made a controversial claim for the ECB to extend its unprecedented programme of quantitative easing beyond a provisional September 2016 end date.
Despite praising the ECB’s €1.1 trillion QE blitz, the report said the ECB “should ensure that banks continue to have access to ample liquidity and maintain orderly conditions in sovereign debt markets”.
“If financial conditions tighten significantly, the ECB should consider further loosening monetary policy through an expansion of its asset purchase program,” recommended the report.
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The Daily Market Report: Gold Consolidates Within Range Ahead of FOMC Meeting
27-Jul (USAGOLD) — Gold is trading modestly lower in the U.S. session, but price activity remains confined to last Monday’s range. The market is looking ahead to this week’s FOMC meeting, hoping to get some indication as to the likely timing of that first rate hike.
The Fed begins a two-day meeting tomorrow. The Fed has suggested that lift-off is likely to occur in September, but the market is leaning more toward December or early in 2016. The Wall Street Journal suggests that this presents the Fed with a “slight signaling challenge”:
The Chinese stock market got hammered again today, registering it’s biggest percentage drop (-8.5%) since 2007. U.S. stocks are under pressure again as well, with the DJIA falling to a 5-month low. If shares remain under pressure, it will be difficult for the Fed to pull the trigger on a rate hike.
Mind you, the Fed’s mandates have nothing to do with stock market performance! They are only concerned with maximum employment and price stability. Even the Fed has expressed some concern about the data behind the headline jobs numbers, and inflation remains well below their stated objective.
I say that with some measure of sarcasm. Of course the Fed watches the stock market. Even Ben Bernanke made that quite apparent when he said several years ago: “I do think that our policies have contributed to a stronger stock market.”
The Fed certainly isn’t alone. The Chinese government has already massively intervened in the stock market (unsuccessfully thus far). They said today that they plan to buy even more shares in order to “stabilize market and investor sentiment…and prevent systemic risk.”
The BoJ has been aggressively buying stock ETFs for some time, propping up their market as part of the Abenomics plan. Since the ECB began their QE program, certainly a lot of of the new-found liquidity has found its way into the stock market. However, since the very beginning, there have been rumblings that the ECB program would eventually be expanded to include direct purchases of shares.
As the risks for a Chinese hard-landing rise, odds of a U.S. rate lift-off diminish. Or certainly the hope for a sustained tightening campaign. That will likely undermine the dollar and provide some support for gold.
How much gold does China really have?
27-Jul (PerthMint) — On Friday I posted on the messaging China may have been sending with its central bank gold reserves announcement. Today I will update this analysis from 2012 to estimate how much gold the Chinese government unofficially holds and how much the population holds. I estimate that the total amount of gold in China is approximately 10,950 tonnes, with the population holding 6,490t, commercial banks holding 2,060t and the government, officially and unofficially, holding 2,400t.
How much gold is in China?
Koos Jansen estimates the total amount of gold within China at 13,781 tonnes. In large part the difference between Koos’ figure and mine is due to Koos assuming that the Chinese held about 2,500t of jewellery prior to 1994. In my 2012 post I quoted a source that notes that after the revolution all gold held by citizens, and gold mined, went to the government and was used to pay for imports. The analysis that follows does not rely on this total stock figure to work out official and other government gold holdings but it does affect the balance the population holds. If you agree with Koos then you can add the 2,500t to my 6,490t estimate of private stocks.
Where does China buy its gold?
It is my view that Chinese government acquires gold both domestically and from overseas, that all of it is held with China, and that any imports are reported in customs figures. Koos disagrees with this, arguing that as we see no figures in the customs category “monetary gold” from any country reporting gold exports to China, and since all SGE transactions are non-official, the government must be buying its reserves gold from overseas and importing it without having it declared.
I agree with Koos that “the PBOC buys gold in utmost secret or it would influence the market and geo-politics” and that they may make overseas purchases, but I find it hard to believe that China can dictate to the customs department of another country that their gold exports should not be reported at all (which would draw attention to the movement and negate secrecy). I also find it hard to believe that the PBOC would buy in its name from the overseas markets. It would be impossible to hide such activity from Western bullion banks and secure carriers and the information would leak out eventually, even if it could get the movements not reported in customs figures.
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Low gold prices seeing Chinese pile in again. SGE withdrawals exceeding new mined supply.
25-Jul (LawrieOnGold) — One of the big questions which the gold sector may be asking is what is the low gold price doing to Chinese demand. Have the Chinese become disillusioned with gold given they piled in so strongly in 2013 when Shanghai Gold Exchange withdrawals for the year hit a massive record 2,181 tonnes, but the gold price has largely been on a downwards path ever since.
We had already seen the beginnings of a pick up in Chinese demand, as expressed by SGE withdrawals, when they hit well over 60 tonnes for the week ended July 10th (see Huge latest week SGE gold withdrawal figure – 62 tonnes) all at a time when seasonality suggests Chinese demand should actually be at its lowest. But the gold price continued to fall so it would be particularly interesting to see how demand would continue, or whether it would actually increase with more bargain hunters climbing in. In the event, SGE withdrawals for the week ended July 17th have come out at the fifth highest weekly total ever – again, it should be emphasised that this high demand level has been at what is normally a very weak time of the year for Chinese demand – and brings SGE withdrawals for the year to date according to the chart below from Nick Laird’s excellent www.sharelynx.com and www.goldchartsrus.com charts sites to a huge 1,366 tonnes – probably nearly 80% of global new mined production over the same period.
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U.S. Mint has 3 mln oz of American Eagle silver coins as sales resume
27-Jul (Reuters) — The U.S. Mint said on Monday it has 3 million ounces of its popular 2015 American Eagle silver bullion coins to sell on an allocated basis this week as it resumed sales after running out of stock almost three weeks ago.
The mint halted sales on July 7 after selling out of inventory due to strong demand.
So far this month, the mint has sold 2.7 million ounces of the silver coins.
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Gold holds above 5-1/2-year low as dollar weakens, bears still dominate
27-Jul (Reuters) – Gold found respite from recent hefty losses, trading just under $1,100 an ounce on Monday as a weaker dollar helped it up from 5-1/2 year lows, but expectations for a near-term U.S. interest rate hike was seen keeping momentum firmly with the bears.
The Federal Reserve will hold a two-day meeting this week where policymakers are likely to send more signals pointing to a rate rise later in the year as the U.S. economy strengthens.
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Chinese shares tumble 8.5 percent in biggest one-day drop since 2007
27-Jul (Reuters) — Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing’s efforts to stave off a deeper crash into doubt.
Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.
“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide.
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Varoufakis reveals cloak and dagger ‘Plan B’ for Greece, awaits treason charges
by Ambrose Evans-Pritchard
27-Jul (Telegraph) — A secret cell at the Greek finance ministry hacked into government computers and drew up elaborate plans for a system of parallel payments that could be switched from euros to the drachma at the “flick of a button”.
The revelations have caused a political storm in Greece and confirm just how close the country came to drastic measures before premier Alexis Tsipras gave in to demands from Europe’s creditor powers, acknowledging that his own cabinet would not support such a dangerous confrontation.
Yanis Varoufakis, the former finance minister, told a group of investors in London that a five-man team under his control had been working for months on a contingency plan to create euro liquidity if the European Central Bank cut off emergency funding to the Greek financial system, as it in fact did after talks broke down and Syriza called a referendum.
…Mr Varoufakis recruited a technology specialist from Columbia University to help handle the logistics. Faced with a wall of obstacles, the expert broke into the software systems of the tax office – then under the control of the EU-IMF ‘Troika’ – in order to obtain the reserve accounts and file numbers of every taxpayer. “We decided to hack into my ministry’s own software programme,” he said.
…Mr Varoufakis told the Telegraph that Mr Schauble had made up his mind that Greece must be ejected from the euro, and is merely biding his time, knowing that the latest bail-out plan is doomed to failure.
“Everybody knows the International Monetary Fund does not want to take part in a new programme but Schauble is insisting that it does as a condition for new loans. I have a strong suspicion that there will be no deal on August 20,” he said.
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PG View: This is a chilling indication of just how close Greece was to bringing back a parallel drachma. What might have happened from there is anyone’s guess, but this surely does’t instill confidence in the Syriza government.
US durable goods orders +3.4% in Jun, above expectations of +3.1% vs negative revised -2.1%; ex-trans +0.8%, vs neg revised -0.1% in Jun.
Gold lower at 1090.75 (-7.90). Silver 14.58 (-0.059). Dollar lower. Euro higher. Stocks called lower. US 10yr 2.23% (-3 bps).
Emerging Market Currencies Tumble to Record Low in ‘Violent’ Selloff
24-Jul (Bloomberg) — Emerging-market currencies are in free fall.
An index of the major developing-nation currencies fell to an all-time low this week, extending its drop over the past year to 19 percent, according to data compiled by Bloomberg going back to 1999. The Russian ruble, Colombia’s peso and the Brazilian real have fallen more than 30 percent over the past year for some of the worst global selloffs.
China’s economic slowdown is pushing down commodity prices, weighing on raw-material exporters from Brazil to Mexico and South Africa. Adding to the pain is the expectation that the Federal Reserve will soon embark on the first interest rate increase since 2006, threatening to lure capital away from developing nations.
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Gold Below $1,100 Threatens Profit at One-Third of Producers
24-Jul (Bloomberg) — With gold trading below $1,100 an ounce, profit at one-third of the producers of the precious metal is under threat, according to Bloomberg Intelligence.
Among 18 gold companies that reported so-called all-in sustaining cash costs in the first quarter, six had costs above $1,100, according to a Bloomberg Intelligence note on Friday.
That means the companies are under tremendous pressure to cut costs or shut unprofitable operations, said Kenneth Hoffman, the BI analyst who wrote the note. The big question is, how quickly will they respond.
“I think these guys are scrambling right now,” Hoffman said by phone on Friday. “This has been a really fast decline. I don’t think anybody really saw this coming,”
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PG View: The scaling back of production would likely further tighten supply, underpinning prices.
The Daily Market Report: Gold Rebounds After Testing Range Low
24-Jul (USAGOLD) — Gold dropped again in overseas trading to plumb the recent lows. However, physical buying remains strong and the yellow metal rebound in U.S. trading to probe back above $1,100. Gold is presently more than $6 higher on the day and more than $20 off the intraday low.
The World Gold Council reiterates some of the reasons — which we also noted this week — that the financial press is citing for the drop in the gold price:
• The continued recovery in the US economy, the associated strengthening dollar, and an expected rise in interest rates. This, they believe, represents major
headwinds for gold.
• A slowdown in China’s gold demand.
• The recent broad commodity sell-off, which is itself a result of US dollar strength and concerns over China’s economic growth.
• And in the background, political tensions have eased, as illustrated by the tentative resolution of a Greek bailout.
All of these factors are significant in one way or another, although perhaps not as significant as it is often implied relative to the price of gold. The WGC goes on to explain that in a Market Commentary published yesterday:
• Gold is different from commodities. Its demand drivers are diverse and it has low correlations with commodities and other assets classes.
• China’s gold demand remains in good health. Demand may have eased since the highs of 2013, but its growth trend is intact. Q1 2015 was the fourth best quarter on record and the People’s Bank of China has increased its gold reserves by 57% since 2009.
• Headwinds such as the strong dollar and an expectation of US rate rises are probably overstated. It would be surprising if expectations of a US rate rise were not already factored into the gold price. And despite the US dollar index rising by 12.5% in 2014, the US dollar gold price was flat.
The real reason for recent losses has everything to do with very large sell orders in the futures markets, conspicuously occurring during times of day that have very low liquidity. The WGC calls them “isolated trades” and states that they are “not representative of the broader supply and demand dynamics” in the gold market.
Traders that slam markets with super-high volume at times of poor liquidity “do not shape demand over the longer term.” There actions however, do tend to bring out those that do shape demand over the longer term. Buyers of physical gold have been out in force, taking advantage of the lower prices that come courtesy of the paper market.
The WGC also makes this interesting observation:
This type of speculative trading, which actually broke the market on Monday and caused trading to be halted twice, may actually drive the business that is more reflective of “broader supply and demand dynamics” to the Chinese markets.
This is something that was alluded to by our own Michael J. Kosares in a special report published 2-weeks ago. Kosares notes that in Chinese gold markets “an institution wishing to bet against gold would be forced to do so by delivering the physical metal itself in kilo bar form (the standard trading unit) upon settlement – an expensive and cumbersome process likely to further discourage excessive speculation or attempts at price manipulation.”
“In short, the physical flow of metal – its purchase and sale in real terms – will govern pricing in Shanghai, not leveraged paper trades, as is the case in the West,” says Kosares. Sounds like a much more transparent and ‘real’ market to me.
Be sure to read Mike’s insightful report: The Shanghai stock crash and China gold demand: What it means for the future of the gold market
Two Week Shanghai Gold Exchange Withdrawals Exceed All 2014 Comex Deliveries
23-Jul (IRD) — The Shanghai Gold Exchange is the only major official physical gold trading market in the world. All trades on the exchange are settled with the exchange of ownership on physical gold bullion. Paper future contracts do not trade on the SGE. In contrast, trading occurs on the LBMA and Comex in paper gold. The Comex is de facto a 99.999% paper gold exchange for which the percentage metal backing the paper traded is minuscule. The LBMA has been rapidly “catching up” to the Comex in this regard, although on a percentage basis the LBMA experiences a higher amount physical gold exchanged than the Comex.
Because of the way in which the SGE functions, gold withdrawn from the SGE measures the true demand for gold in China in a given time period. All gold – except for the gold purchased by the Peoples Bank of China – purchased by any form of end user must pass through the SGE by law. It is for this reason that “withdrawals” represent the most accurate measurement of demand for gold in China – except the Central Bank’s demand.
In the past two weeks, 106.1 tonnes of gold were withdrawn from the SGE. As Smaulgld.com has observed:
Gold withdrawals on the Shanghai Gold Exchange the past two weeks were larger than the amount of gold delivered on COMEX during 2014 and greater than the amount of gold Germany has repatriated from the New York Fed since 2013.
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PG View: For a more detailed look at how the SGE differs significantly from other exchanges, be sure to read this excellent piece by Michael J. Kosares: The Shanghai stock crash and China gold demand: What it means for the future of the gold market
Metals hit multi-year lows on global growth concerns, dollar rises
24-Jul (Reuters) — Metal prices hit multi-year lows on Friday after weaker-than-expected data from China and the euro zone raised concerns about global growth, but the U.S. dollar rose as a Federal Reserve rate hike was still on the table.
London copper fell to its lowest level since 2009 after a survey showed China’s factory sector contracted by the most in 15 months in July due to shrinking orders, fuelling worries over demand in the top metals consumer as stockpiles steadily mount.
The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.2, below economists’ estimate for a reading of 49.7. It was the fifth straight month below 50, the level which separates contraction from expansion.
Euro zone business activity also started the second half on a less secure footing than expected, hit by Greece’s near-bankruptcy woes. Markit’s flash PMI fell to 53.7 this month from June’s four-year high of 54.2. A Reuters poll had predicted a more modest dip to 54.0.
While economies looked weaker in Europe and Asia, better-than-expected U.S. jobless claims kept the Federal Reserve on track for a rate hike in coming months.
The U.S. dollar was 0.3 percent higher against a basket of currencies.
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Gold lower at 1079.22 (-11.66). Silver 14.48 (-0.166). Dollar higher. Euro lower. Stocks called better. US 10yr 2.27% (unch).
IMF warns Japan must avoid over-reliance on weak yen
23-Jul (Reuters, via CNBC) – Japan must avoid overly relying on a weak yen to reflate the economy by deploying a new round of structural reforms such as steps to boost labour market participation, the International Monetary Fund said on Thursday.
The global lender also warned that while inflation is seen accelerating to about 1.5 percent over the medium term, hitting the Bank of Japan’s 2 percent target remained “challenging.”
The BOJ must stand ready to expand stimulus to meet its target, though further easing without bolder structural reforms and a credible fiscal strategy could lead to over-reliance on yen depreciation to reflate the economy, it said.
“Abenomics needs to be reloaded so that policy shortcomings do not become a drag on growth and inflation,” the IMF said in a statement after Article 4 consultations with Japan.
The IMF said further declines in the yen relative to its 2014 average was beneficial for Japan’s economy and would help boost exports and aggregate demand, but had to be accompanied by policy changes.
“With the depreciation of the yen … further monetary easing without bold structural reforms and a credible medium-term plan could lead to sluggish domestic demand and over-reliance on yen depreciation,” Japan mission chief Kalpana Kochhar said on a conference call with reporters, noting that yen appreciation could also undermine the recovery.
“The risks are on the downside, including from external developments, weaker growth in the United States and China and global financial turbulence that could lead to safe-haven appreciation of the yen, which would take the wind out of the recovery to some degree.”
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PG View: Japan needs to do more, but further weakening of the currency is not advised. It hasn’t really worked anyway . . .