Energy and Natural Resources Market Radar (August 20, 2012)

Sunday, August 19th, 2012

Energy and Natural Resources Market Radar (August 20, 2012)

Strengths

• The price of oil gained 3.5 percent this week, to $96 a barrel, the highest level since May 11.
• Output from the world’s largest copper mine, Chile’s Escondida, jumped 18.3 percent in the first half of the year compared with the same period of 2011, to 533,200 metric tons.
• China electricity consumption in July increased 4.5 percent year-over-year to 456 million MWh. The growth rate remains somewhat subdued due to soft manufacturing sector demand.

Weaknesses

• The latest composite leading indicators (CLI) from the Organisation for Economic Co-operation and Development, designed to anticipate turning points in economic activity, continue pointing to a slowdown in activity for most of the world’s major economies.
• The civil disorder issues at Lonmin’s Marikana platinum mine appear to be worsening. South African riot police have reportedly opened fire on striking miners armed with machetes and sticks, killing more than 30 miners. Lonmin said it had lost the equivalent of 15,000 ounces of platinum from the six-day disruption.
• Baosteel cut September prices of its main steel products for a third time since June, following a fall in demand. Its list price for hot-rolled coil (HRC) was reduced by Yuan 100/t to Yuan 4062/t ($635/t).

Opportunities

• Colombia’s main railway, Fenoco, has restarted shipping coal to ports after the end of a nearly month-long strike in the world’s fourth-largest coal exporter, the company’s president reported on Friday. The union on Thursday ended the 25-day strike, which had prevented exports from Colombia’s main coal-producing province of Cesar.
• Vale’s CEO expects iron ore prices to start recovering in September due to falling stocks in China.
• Newcrest Mining expects to spend about $5 billion over the next five years to lift output to 3.5 million ounces of gold by 2017 (vs. target of 2.5 million ounces for 2012).

Threats

• The probability of a large scale asset purchase announcement (QE3) at the September 12-13 Federal Open Market Committee meeting is not as certain as originally thought, according to some economic analysts.  This could be a headwind for further gains in the commodities asset class.
• Markets are facing a potential threat from the “fiscal cliff,” a series of U.S. tax and spending policies scheduled to take effect on New Year’s Day 2013. It is difficult to predict exactly whether or how a solution can be reached given impending elections, leading to increased market uncertainty.

Tags: China Electricity Consumption, Coal Exporter, Copper Mine, Economic Activity, Gold Miners, Hot Rolled Coil, Hrc, Iron Ore Prices, Leading Indicators, Machetes, Manufacturing Sector, Market Radar, Metric Tons, Newcrest Mining, Next Five Years, Price Of Oil, Riot Police, Steel Products, Striking Miners, Target, Yuan
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Invest Like a Champion Today

Friday, February 10th, 2012

by Scott Ronalds,

Warren Buffett’s perspectives on investing are worth their weight in gold (or better yet, stocks). Invest in things you understand. Wait for the right pitch. Don’t follow the herd. Buy things you’d be comfortable holding forever.

In a recent article in Fortune magazine, Buffett lays out his views on what he considers the three major categories of investment possibilities: fixed income (currency-based investments), assets that will never produce anything (gold), and productive assets (businesses, farms, real estate).

Not surprisingly, Warren thinks that the third category is the place to be: “I believe that over any extended period of time this category of investing [ownership of businesses] will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”

He notes, “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Consider Buffett’s views on gold. “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be about $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

There are lots of other unique perspectives in the article, which is an adaptation of his upcoming shareholder letter. Buffett fans may also be interested in watching a 12 minute segment that aired on CBS’s ‘Person to Person’ last night, in which he takes Charlie Rose and Lara Logan through his private office in Omaha.

Tags: Baseball Infield, Cropland, Exxon, Exxon Mobils, Fixed Income, Fortune Magazine, Gold Stock, Herd, Holding Period, Investment Possibilities, Metric Tons, Million Acres, Ounce, productive assets, Profitable Company, Purchasing Power, Recent Article, Runaway Winner, Trillion, Volatility, Warren Buffett
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Gold Bullion Demand Trends – Bullish!

Friday, November 18th, 2011

The World Gold Council has just published the latest issue of “Gold Demand Trends” (Third quarter 2011). This is a rather bullish report, highlighting a surge in central bank purchases – more than doubling from the second quarter and increasing by 556% from a year ago!

The report said: “Activity among central banks continued to fulfil our expectations of further purchases in Q3. In fact, net buying accelerated notably during the quarter – totaling 148.4 metric tons – as the issues surrounding the creditworthiness of western governments’ debt seeped into the official sector. A number of banks continued their well-publicised programs of buying, while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves. We see this trend continuing into 2012.”

This reports is very positive for the gold price and should limit the downside risk of corrections.

Click here to download the full report.

[pdf http://worldgoldcouncil.newsweaver.co.uk/images/5861/10802/1883495/WOR6562%20GDT%20Q3%202011.pdf 500 670]

Source: World Gold Council, November 17, 2011.

Copyright © Investment Postcards

Tags: Bank Purchases, Bullish Report, Central Banks, Creditworthiness, Downside Risk, Gold Bullion, Gold Demand Trends, Gold Holdings, Gold Price, Images, Metric Tons, Postcards, Q3, Report Pdf, Second Quarter, Slew, Source World, Western Governments, World Gold Council, Worldgoldcouncil
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Chinese Purchases of Gold Leap Six Fold – Country Purchases as Much Gold in 1 Month as Almost Half of 2010

Tuesday, November 8th, 2011

Looks like with the relatively small dip in gold prices (considering the move the past 3-4 years), the Chinese swooped in to load up in September.  In September alone, they bought as much as they did during half of 2010, the FT reports.  With the U.S. working overtime since 2008 to trash its currency, and Europeans most likely eventually forced to, this looks like a logical move.  Also keep in mind how small of a horde of gold has relative to other countries. [Oct 13, 2009: Largest Gold Reserves by Country]

As important for investors, it is good to have such a large buyer providing a floor in the metal.

• Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010.
• The buying spree follows a sharp drop in the price of the precious metal. After hitting a nominal all-time high of $1,920.30 a troy ounce in September, gold fell to a three-month low of $1,534 an ounce later in the month. Chinese investors snapped up the metal as prices fell.
• Analysts expect the September import surge to continue until the end of the year as Chinese gold buyers snap up gold in advance of Chinese New Year, China’s key gold-buying period.  “In September we saw some bargain hunters come back into the market on the price dip,” said Janet Kong, managing director of research for CICC, the Chinese investment bank.
• China is the world’s second largest gold consumer and demand has grown rapidly over the past year as Chinese investors buy gold to hedge against inflation and consumers buy more gold jewelry. Beijing does not publicly disclose its gold imports, but analysts consider the Hong Kong import figures a good directional proxy for the country’s total gold overseas buying.
• Data from the Hong Kong government showed that China imported a record 56.9 metric tons in September, a sixfold increase from 2010. Monthly gold imports for most of 2010 and this year run at about 10 metric tons, but buying jumped in July, August and September. In the three-month period, China imported from Hong Kong about 140 metric tons, more than the roughly 120 metric tons for the whole 2010.
• China has liberalized regulations for importing gold over the past year, widening the number of banks authorized to import gold. “China’s gold demand will continue to increase as per capita income increases,” said Shi Heqing, a Beijing analyst with Antaike. “There aren’t many investment channels available in China other than the stock market, property market and some commodities.”

Tags: Bargain Hunters, Chinese Investment, Chinese Investors, Chinese New Year, Commodities, Director Of Research, Ft Reports, Gold, Gold Buyers, Gold Imports, Gold Jewelry, Gold Prices, Gold Reserves, Hong Kong Government, Horde, Import Surge, Investment Bank, Logical Move, Metric Tons, Precious Metal, Troy Ounce, Working Overtime
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China Economics – 30% of Shipyards Showing NO Orders

Wednesday, November 2nd, 2011

China Economics – 30% of Shipyards Showing NO Orders

Good news and bad news. Now that China may be nearing the end of their tightening spree, news of manufacturing hitting a slump may actually be beneficial for the equity markets. Whether or not there is a new stimulus plan that will eventually be announced is hard to predict, but it is getting more obvious that the government will need to lay off their effort to slow the economy, because it is working.

Bloomberg reported on two important economic releases out of China on Monday night. China’s manufacturing activity increased in October, according to Markit. The HSBC Manufacturing Purchasing Managers’ Index rose to 51.0 in last month, compared with 49.9 in September. Another report had a bit of contradiction as China’s October Manufacturing PMI Fell to 50.4.

In fact, the Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower any of 16 economists estimated in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

There are other factors in play as well. Due to the slowdown in Europe, there is a slowing of exports from China. Even as there are reports that China is very involved in propping up the Euro for their benefit, the additional strain of European imposed austerity measures are showing up throughout Asia.

One of the areas that is this is becoming evident is the shipping loads. According to the South China Morning Post, September new orders are 940K deadweight metric tons, the least since June 2006, citing National Development and Reform Commission.

• As of Sept. 30, 30% of nation’s yards had’t received orders
• 9M orders drop 43% on year to 29m dwt
• Sept. ship completions jump 67% M/m to 7.86m dwt

Is this enough to cause the end of rate hikes? Perhaps, but it is interesting that all of this is being taken rather well by the equity markets in China, Taiwan and Korea during the early Tuesday morning sessions.

Copyright © The Disciplined Investor

Tags: Asia One, Austerity Measures, Bloomberg News, China Economics, China Morning Post, Contradiction, Deadweight, Economic Releases, Economists, Exports From China, Metric Tons, Pmi, Purchasing Managers Index, Shipyards, Slowdown, Slump, South China Morning, South China Morning Post, Spree News, Stimulus Plan
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Gold Market Cheat Sheet (August 29, 2011)

Saturday, August 27th, 2011

Gold Market Cheat Sheet (August 29, 2011)

For the week, spot gold closed at $1,827.95, down $24.15 per ounce, or 1.30 percent. The U.S. Trade-Weighted Dollar Index fell 0.38 percent for the week.

Strengths

• This week we saw gold reach another all-time high of $1,911.46 a troy ounce, set in late trading on Monday. Throughout the week, however, we witnessed considerable movement of the precious metal’s price. The funds performed relatively well during such a volatile week. Considerable weight in the seniors continued to work in the funds’ favor, despite juniors and venture stage companies not seeing significant investment interest. We also witnessed strength in gold equities’ performance this week, which is contrary to their generally weak performance relative to the bullion.
• The World Gold Council said in a report Thursday that gold ETFs added nearly 52 metric tons of bullion in the second quarter, reversing the outflows from the first quarter. ETFs listed around the world that invest in gold hold more than $1 trillion in total assets as investors continue to move into metals ETFs to hedge against inflation and seek shelter from sovereign debt uncertainty.
• The World Gold Council recently highlighted that current gold price levels are being supported by central banks; they have been continuing to accumulate positions in gold over the last six months. In February and March, the Bank of Mexico accumulated almost 94 tons of gold, representing the largest accumulation of gold by a central bank in over a decade. The second-largest growth in the precious metal’s accumulation was made by South Korea in June. With the exception of the Philippines, every central bank has reported increased reserve holdings over the last six months. Kazakhstan’s Central Bank has plans to add to its gold reserves by exercising its right to buy the Central Asian state’s entire bullion output, according to Mineweb.

Weaknesses

• The performance divergence between the junior and venture stage mining companies relative to their senior peers has not seen such spreads since the 2008 credit crisis.
• Gold suffered its largest two-day absolute fall in more than three decades, dropping $160 per ounce between Tuesday and Wednesday in a move that highlighted the dangers of an asset viewed as a haven. Spot gold prices fell to a session low of $1,750.55 per troy ounce from $1,911.46 a troy ounce. The previous, largest two-day absolute drop was in January 1980.
• Late Wednesday, CME Group, the operator of New York’s Comex exchange, increased gold margin requirements by 27 percent, following a 22 percent increase two weeks ago. The margin increase came as gold futures fell more than $100 during the day, in one of the steepest falls ever. The Shanghai Gold Exchange (SGE) raised trading margins on three gold spot-deferred contracts to 12 percent from 11 percent from August 26 to limit trading risks following recent wild price swings. It also widened daily trading limits for those contracts to 9 percent, up from 7. This is the second time the SGE has raised collateral requirements on gold forward contracts this year, as international gold prices hit a series of new highs over the past few weeks. Interestingly, Central Banks’ purchases more than quadrupled for this same period.

Opportunities

• Despite the correction, investors noted that gold remains the second-best-performing commodity so far this year, up 24.6 percent since January. Silver is the best-performing commodity, up nearly 30 percent since the beginning of the year.
• Net central bank buying, renewed investment demand for gold and record levels of inflows into Southeast Asia are providing positive fundamental drivers for gold. Coupled with ongoing eurozone debt crisis, concerns over the U.S. debt and the prospect of another round of Quantitative Easing (QE-3), there is a continuing sound market for continuing strength in gold.
• RBC analysts believe investment upside opportunities lie within the gold stocks. Although gold stock performance is lagging presently, RBC analysts believe that the disconnect can be attributed to concerns over rising operating and capital costs, a shift out of equities in general and doubts over the sustainability of a higher gold price over the long term. They believe gold equities are poised to outperform the gold price as investors take advantage of growing free cash flow that they forecast to be generated over the next 12 to 24 months.

Threats

• Doug Silver, founder of International Royalty Corp. and portfolio manager for Red Kite Management, recently advised that the “mining ‘supercycle’ has stalled.” He highlighted that mining companies are now contending with a global debt crisis, smaller areas available for exploration, and competition with Chinese mining investment, as more metal goes into the Shanghai Exchange and less metal goes to the London Metals Exchange. He also made the connection between the world’s top consumers pulling back on their consumption in the wake of the global economic crisis and the fact that U.S. jobs are moving overseas because domestic companies have no incentive to invest in America, both contributing to an overall decrease in living standards, reducing metals consumption in the long term. He further commented that major western mining companies are concentrating on mega mines with long mine life and multi-billion-dollar capex budgets, which leaves very little available capital for mid-tiers and juniors.
• Greece has been forced to activate an obscure emergency fund, the Emergency Liquidity Assistance program, for its banks because they are running short of collateral that is acceptable to the European Central Bank. Greece’s bailout faltering has been in the news lately and this appears to the last stand for Greek banks, according to the London Telegraph. The ongoing debate of the eurozone’s economic crisis continues.
• South Africa’s state-owned power utility, Eskom Holdings SOC Ltd., may raise power costs by 60 percent over the next three years, raising the average electricity tariff to about 75-80 cents per kilowatt by 2016. This could potentially create downward pressure on margins for all South African businesses.

Tags: Asian State, Bullion, Central Banks, Cheat Sheet, Current Gold Price, Divergence, Dollar Index, Gold, Gold Equities, Gold Etfs, Gold Market, Gold Reserves, Investment Interest, Metric Tons, Precious Metal, S Central, Sovereign Debt, Spot Gold, Stage Companies, Troy Ounce, World Gold Council
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Energy and Natural Resources Market Cheat Sheet (June 20, 2011)

Saturday, June 18th, 2011

Energy and Natural Resources Market Cheat Sheet (June 20, 2011)

Strengths

• The National Development and Reform Commission reported this week that China’s oil processing volume for the month of May rose 4.4 percent year-over-year to 34.9 million tons.
• Nickel consumption was 126,000 metric tons in April, exceeding refined metal supplies of 123,200 tons, according to an International Nickel Study Group report. That was the fourth monthly shortage in a row.
• Crude steel production from China, the world’s biggest steel producer, rose 7.8 percent to 60.25 million tons in May from a year earlier, according to data released this week by the Beijing-based National Bureau Statistics.
• U.S. industrial production rose by 0.1 percent month-over-month and 3.4 percent year-over-year, with manufacturing faring better, rising by 0.4 percent month-over-month and 3.7 percent year-over-year, with auto assemblies rising to 7.88 million annually.
• The International Lead and Zinc Study Group estimates that world refined zinc consumption increased by 3.8 percent year-over-year to 4.093 million tons, with China’s zinc consumption increasing by 7.3 percent year-over-year in the first four months of 2011.

Weaknesses

• Preliminary data released this week showed that unwrought copper and aluminum imports continued to decline, falling 36 percent and 21 percent year-over-year. Copper imports in May dropped by 3 percent month-over-month to 254,738 tons from 262,676 tons in April, according to China’s General Administration of Customs.
• Norwegian oil output in May was down due to planned maintenance and technical problems on several fields, with total liquids production at 1.828 million barrels per day and crude production at 1.541 million barrels per day. The total production was down 383 thousand barrels per day year-over-year, one of the largest year-over-year declines ever.

Opportunities

• On July 1, Russia may lower its export duty on most crude shipments by as much as 4.1 percent. This will be the first decrease in its export duty since October.
• Petro Vietnam, the national oil and gas group, intends to build 6 gigawatts of coal-fired power capacity, which is estimated to increase imports to 10 million tons in 2012 and 100 million tons by 2020 from further grid and power plant development.
• The International Energy Agency said that growth in oil demand should average about 1.2 million barrels per day every year for the next five years. It also reported that the 2011 “bull run” in oil was justified by changes in fundamentals.

Threats

• With heavy rainfall resulting in severe flooding at the middle and lower Yangtze River, a major rice producing region, food prices and inflation may remain elevated. China’s inflation rose to 5.5 percent in May from 5.3 percent a year earlier.
• Germany’s 2011 grain crop of all types is likely to fall 7.9 percent on the year as dry spring weather has damaged crops, according to the German Farm Cooperatives Association.
• The U.S. Senate voted 73-27 to approve an amendment to end the 45 cents per gallon subsidy the government gives refiners and to also abolish the 54 cents per gallon tariff on imported ethanol. Republican leaders agreed that removing the ethanol subsidies would not be considered a tax increase, so the amendment could be adopted by the House of Representatives.

Tags: Bureau Statistics, Cheat Sheet, Crude Oil, Crude Production, Crude Steel Production, General Administration, Group Estimates, International Nickel, Liquids, Metric Tons, Nickel Study Group, Norwegian Oil, Oil Output, Planned Maintenance, Refined Metal, Refined Zinc, S Industrial, Steel Producer, Study Group Report, Year One, Zinc Study Group
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Energy and Natural Resources Market Cheat Sheet (April 18, 2011)

Saturday, April 16th, 2011

Energy and Natural Resources Market Cheat Sheet (April 18, 2011)

Strengths

• Copper inventories in warehouses monitored by the Shanghai Futures Exchange dropped 4.8 percent.
• China has exported 42,600 metric tons of refined copper during the first two months of 2011, eight times the amount in the last year.
• Mexico (up 13 percent year over year) and Argentina (up 20 percent year over year) became the largest contributors to mine supply according to Gold Fields Mineral Services (GFMS), GFMS estimates a rise of 2.5 percent to a record 22.9kt, driven by growth from the primary and Lead/Zinc sector.
• Seasonally adjusted US auto sales for the month of March remained above 13 million vehicles per year; the sales figures crossed the 13 million vehicle level the second time since the cash for clunkers program that ended on Nov 1, 2009.
• The National Bureau of Statistics reported this week that China’s crude steel rose 9 percent to 59.42mt in March from a year ago and 9.4 percent higher than February’s 54.3mt. This boosted China’s production to the second-highest level on record amid higher demand from builders.
• China’s Gross Domestic Product (GDP) increased 9.7 percent in the first quarter, which was higher than expected and despite inflation rising to the highest level in almost three years.

Weaknesses

• Manufacturing growth, which makes up about 80 percent of India’s industrial production index, was at 3.5 percent for the month, down from 16.1 percent a year ago.
• A drop of 16 percent to 8.37 million tons for the first quarter iron ore shipments was reported by Fortescue’s due to heavy rains in Australia, the company said it will raise output to 12 million tons in second quarter.
• China Iron and Steel Association reported a decline in China’s daily crude steel output in the last ten days of March to 1.922 million tonnes per day.
• After the African Union said Muammar Gaddafi had accepted a roadmap to end the civil war in Libya, as a result Brent crude fell below $126. Furthermore, Brent crude fell sharply to below $122 and U.S. crude dropped by $2 a barrel this week on concern high fuel prices will destroy demand.

Opportunities

• China’s preliminary March trade data shows a 29 percent month over month increase in copper imports. This could provide more support to this metal, which ended the week at a one month high.
• Gasoline is crowding out retail sales at rapid pace, its share of total retail sales exploded higher in March to 10.72 percent from an upwardly revised 10.49 percent in February.
• A Transocean owned rig has drilled the deepest-ever water depth well off the coast of India, drilling in 10,194 feet of water, more than the previous record of 10,011 feet.
• Diego Hernandez, CEO of state mining giant Codelco, said this week that the global salmon farming industry could need up to 50,000 tonnes of copper a year to build rearing cages thanks to the metal’s anti-bacterial qualities.
• One of the world’s main suppliers of grain, Argentina, may revive a controversial tax system on grain export. A similar plan to raise taxes on soy exports in 2008 sparked nationwide farmer protests that rattled global commodity markets and hit the popularity of President Cristina Fernandez, who plans to bid for re-election in October.
• The Association of American Railroad reported this week that Major Class 1 cross-continental railroads hauled almost 200,000 multi-modal shipping containers, which was easily a record for this time of the year, conforming business survey data suggesting the U.S. economy has entered a mini boom as cheap money revs up the recovery.

Threats

• Although copper prices have almost quadrupled after a two-year rally, largely driven by the belief that China has an insatiable appetite for this metal. Evidence recently surfaced of previously unreported copper stockpiles, which shows signs of about 15 percent of the country’s annual consumption of Copper hasn’t been yet put to use. Chinese buyers are facing a dual problem of higher copper prices and the government’s aggressive move to tighten credit.
• Eskom, a South African power supplier, has said power supply is likely to remain tight for the next five years; a potential risk for the Platinum Group Metals (PGMs) production.
• Plans to halt the approval of new aluminium plants in China to tackle serious overcapacity in the industry. The decision would put a hold on investment worth $ 11 billion.
• Mohammad Ali Khatibi, governor of OPEC, was quoted last week as saying that the global oil market is oversupplied; despite prices that have been pushed up by upheaval in the Middle East.
• Global 2010-11 cocoa surplus estimates last week have expanded to 184,000 tonnes and prices look set to fall further from the 32-year high hit last month. Cocoa exports from Cameroon, the world’s fifth largest grower, hit 186,305 tonnes by the end of March from the start of the season in August, up 21 percent year over year.

Tags: Bureau Of Statistics, China, Crude Oil, Crude Steel, Eight Times, Fortescue, Gold, Gold Fields, Heavy Rains, India, Industrial Production Index, Iron And Steel, Iron Ore, Metric Tons, Million Vehicles, Mineral Services, Month Of March, Muammar Gaddafi, National Bureau Of Statistics, oil, Refined Copper, S Industrial, Shanghai Futures Exchange, Steel Association, Steel Output
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Nine Bullish Arguments for Gold

Friday, September 10th, 2010

September 10, 2010

Dr. Martin Murenbeeld, chief economist for Dundee Wealth Economics and one of the smartest gold minds around, recently released his latest chart book – hundreds of useful visuals to help him tell the gold and commodity stories.

Dr. Murenbeeld also outlines his nine bullish arguments for gold.

1. Global fiscal and monetary reflation – The world’s major economies have taken on extensive amounts of debt to keep their economies afloat. The struggles of Greece and other nations in Western Europe haven’t gone away. The U.S. has spent hundreds of billions of dollars in stimulus money and is still losing jobs.
2. Global imbalances – The dollar has benefited from the troubles in other countries in its role as a relative safe haven. “Relative” is the key word – roughly $10 trillion is expected to be added to the U.S. federal debt burden through 2019 and the U.S. trade imbalances are huge. These trends stand to weigh on the dollar and support gold’s safe haven status over the longer term.
3. Global foreign exchange reserves are “excessive” – Global foreign exchange reserves have expanded exponentially in just the past few years, reaching $8.17 trillion in April 2010. Meanwhile, the gold reserve ratio has dropped significantly since 1980.
4. Central bank attitudes to gold – Under the current central bank selling agreement, only the International Monetary Fund has been a seller of gold. Latin American countries, who were net sellers of gold up until 2002, are now buying gold again. India purchased 200 metric tons from the IMF in the fourth quarter of 2009, setting a floor under gold just above $1,000. China has increased its gold reserves from 395 metric tons in 2001 to 1,054 metric tons as of the end of the first quarter—a 166 percent increase in less than a decade.
5. Gold is not in a bubble – Gold’s run has been slow and steady. As I mentioned last week, we’re not seeing large price spikes that are typical with bubbles. The chart below illustrates just how different gold’s current bull run has been from previous ones. A key difference today is that we’re seeing greater affluence in the developing world, where people have traditionally turned to gold to store their wealth.
   
6. Mine supply is flat – World mine production is about 2,500 metric tons—roughly 25 percent higher than it was in 1990—but net mine supply is less than it was 20 years ago. Dehedging, increased scrap supply, lower grade discoveries and higher replacement costs will continue to constrain supply. We’re already seeing this affect the marketplace. During the second quarter of 2010, gold demand rose 36 percent year over year, while supply was up just 17 percent.
7. Investment demand – Investment demand in the second quarter of 2010 more than doubled compared to the same period in 2009, and accounted for more than half of total global demand. Investors bought the most gold since the first quarter of 2009, at the depths of the Great Recession.
8. Commodity price cycle – Commodity price cycles tend to last multiple decades. Going back to 1800, the shortest gold cycle is 10 years and shortest copper cycle is 14 years. The current bull cycle began in 2001.
   
9. Geopolitical environment – Historically, gold has performed well in times of political and financial turmoil. Gold hit an all-time high (inflation adjusted) in 1980 amid the Iran hostage crisis and the Soviet invasion of Afghanistan. Today’s geopolitical climate is also volatile given the ongoing wars in Iraq and  Afghanistan and the pursuit of nuclear arms by Iran and North Korea.

With these nine factors, Dr. Murenbeeld makes a strong bullish case for gold and others seem to agree. A Bloomberg survey of 29 analysts last week reported that they see gold prices averaging $1,500 in 2011—a 20 percent jump from current levels.

Tags: Chief Economist, China, Debt Burden, Dr Martin, Dundee Wealth, Federal Debt, Foreign Exchange Reserves, Global Foreign Exchange, Gold, Gold Commodity, Gold Dr, Gold Reserve, Gold Reserves, Imf, India, International Monetary Fund, Key Word, Latin American Countries, Metric Tons, oil, Price Spikes, Reflation, Reserve Ratio, Safe Haven, Stimulus, Western Europe
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Energy and Natural Resources Market Diary (August 30, 2010)

Saturday, August 28th, 2010

Energy and Natural Resources Market Diary (August 30, 2010)

Strengths

• Despite concerns over global growth, the price of copper gained 1.7 percent on the week and has consistently traded above the key $3 per pound level during the month.
• The 4-week moving average of chemical railcar loadings increased 5.1 percent in the week ended August 21 following a 5.8 percent increase the prior week.
• Chicago corn futures continued to rise late in the week, extending the previous session’s biggest one-day rally in nearly a month as strong global demand and concerns over the size of the U.S. crop supported the market.
• Ferrous scrap prices into Rotterdam rose 3.4 percent to $365 per metric ton, according to Platts.

Weaknesses

• The price of natural gas fell nearly 10 percent this week, below $4 per million BTU, on amply supply and waning consumption entering the shoulder months for demand.
• Power rationing in China’s Zhejiang province is expected to cut demand from copper fabricators for at least several months, with some fabricators indicating production levels down 30 percent. Zhejiang province accounts for approximately 20 percent of China’s total production of copper-fabricated products.
• China’s coking coal imports fell in July to 3.1 metric tons from 4.9 metric tons in July 2009 and 3.6 metric tons in June this year.

Opportunities

• The Wall Street Journal reported that China’s second largest utility is aiming to increase coal self-sufficiency. The executive director of Datang International Power Generation said that the company aims to boost its coal self-sufficiency ratio to 40 percent by 2015 from 20 percent now by seeking to buy mine projects in Inner Mongolia to secure supplies.
• China called for further mergers and consolidation in its massive coal industry to eliminate outdated capacity and improve efficiency, the State Council said on its website.
• According to media reports, state-owned Oil India has $2.5 billion available in cash and is looking to purchase shale-gas assets in the U.S. and Australia. The government has asked Oil India and Oil & Natural Gas Corp. to each make at least one acquisition this year to meet demand in Asia’s second-fastest growing major economy.

Threats

• The combination of slowing Chinese economic growth and expanding refineries means this year’s 51 percent decline in profit margins from turning crude into gasoline, diesel and kerosene is poised to worsen.

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