Roundup: Gold Market

Sunday, January 10th, 2010

Gold Market

For the week, spot gold closed at $1,136.60 per ounce, up $39.28, or 3.58 percent. Gold equities, as measured by the XAU Gold & Silver Index rose 8.02 percent for the week. The U.S. Trade-Weighted Dollar Index fell 0.51 percent.

Strengths

• According to statistics compiled by Commodity Online Bullion Research, investor holdings in the major global gold exchange-traded funds increased as gold spiked 39 percent for the year. The value of the total daily investment flows at the end of 2009 was $61.3 billion, a gain of 84 percent for the year.
• The Bombay Bullion Association said India imported 300 to 350 metric tons of gold in 2009, higher than the previous estimate of a little over 200 metric tons. Also noteworthy is that a recently stronger rupee has ignited gold buying in India, causing several physical dealers to report declining levels of stocks.
• The Ministry of Industry and Information Technology said China’s gold output in the first 11 months of 2009 was around 282.5 metric tons, a 14.6 percent increase over the same period in 2008. However, the estimated demand for gold in China was 450 metric tons, up 13.8 percent over the prior year.

Weaknesses

• Gold fell after a week of healthy gains mainly due to profit taking after the Labor Department announced 85,000 jobs had been lost in December. The U.S. dollar also fell after being pushed up by speculators on hopes that the much anticipated jobs report would be positive.
• The world’s largest bullion-backed ETF witnessed reserves decline by 5.25 metric tons, or 0.47 percent, to 1,123.5 metric tons.
• Treasuries were the worst-performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion of notes to fund stimulus packages. According to Bank of America-Merrill Lynch, investors in U.S. debt lost 3.5 percent on average through December 30, the biggest annual slide since at least 1978.

Opportunities

• According to the Sovereign Wealth Fund Institute (SWF), there are a total of 55 SWFs globally, half of them being investment funds linked to the United Arab Emirates. Western economies have expressed concern during Dubai’s debt crisis because of neighboring Abu Dhabi securing a $10 billion bailout package. The issue going forward is that sovereign wealth funds may withdraw from their overweight investment positions in the U.S. and Europe in order to raise cash for ailing businesses domestically, which may cause weakness in those currencies.
• Zimbabwe’s mining secretary expects mining production in the state to increase 30 percent this year following the reopening of various mines that were forced to shut down during the nation’s decade-long recession.
• Gold may rise as New York gold futures command a greater weight in the Dow Jones UBS Commodity Index in 2010. The new weighting is 9.1 percent, up from 7.86 percent.

Threats

• BNP Paribas analysts expressed concern that the heavy level of investment demand for gold seen in 2009 will need to be maintained for prices to keep gaining, unless other sectors such as jewelry can adjust to these high prices.
• Venezuela has begun rationing electricity use in businesses aimed to save power amid a power drought. Breitbart has reported the new regulations came into effect on January 1, which requires businesses to comply with reduced consumption limits. Authorities have warned of forced power cuts and rate hikes if measures are violated.
• The U.S. Commerce Department said the U.S. has imposed duties of 43 to 289 percent on imports of more than $300 million worth of Chinese steel. Following the news, the United Steelworkers union and several U.S. companies filed a new petition asking for duties of at least 109 to 274 percent on Chinese-made drill pipes.

Tags: 5 Metric Tons, Bank Of America, Bullion, China, Commodities, Debt Market, Dollar Index, Emerging Markets, ETF, Exchange Traded Funds, Global Gold, Gold, Gold Equities, Gold Exchange Traded Funds, Gold Market, Gold Output, India, Labor Department, Merrill Lynch, Rsquo, Silver Index, Sovereign Debt, Speculators, Spot Gold, SWFs, Treasuries, Xau
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How Solid are the BRICs? (Part 2)

Sunday, February 3rd, 2008

Feb. 3, 2008 - The nature of the economic strength and stability of the BRIC (Brazil, Russia, India, China) countries is a less well known or understood fact among investors. There remains a wide gap between perceptions and reality.

Remember 1997 and 1998? Many investors, excited about the growth of Asian and emerging countries in the late nineties and invested their money found out about credit related risk first when the 1997 ‘Asian Contagion’ occurred and was followed upon by the Long Term Capital Management bailout which unfolded in 1998. These events destabilized global markets and investors were taken by surprise as markets melted down.

For this reason, its important to go back to that time and re-examine Malaysia and Thailand, as examples, of where investors were excited by the rapid economic growth, but ignored the then inherent high credit risk, much to their expense. A decade ago (yes, a decade ago) when all of this was happening, only 3% of the grand total of emerging markets sovereign debt was rated as investment grade by any of the ratings agencies.

In 1997, only 10 out of 120 companies that form the MSCI Emerging Markets Index, had ADRs. 

Excited by the G7 debt-financed growth, investors made bets that were inherently risky to their preservation of capital, not simply volatile. Circa 1997, emerging markets were in debt to the industrialized world by about $100-billion in the current account deficit column, and dependent on the kindness of their G7 financiers.

When the Malay and Thai governments were unable to meet current account obligations, and started printing money in order to meet them, the Fed blew the whistle upon discovering that sufficient reserves were not available to support the currency valuations. Hence the overnight slashing of Asian currencies.

At best, the general sentiment surrounding emerging markets has remained sceptical, and for this reason, as fundamentally sound as the BRIC countries economies are today, the market has been adopting the BRIC investment story very gradually. This time though, it is credit worthiness that is being overlooked.

Source: Merrill Lynch October 2006

Source: Merrill Lynch, October 2006

Today, emerging markets sit atop a current account surplus in excess of $700-billion, and it is the industrialized G7 who are in debt, by the same amount. Longer term surpluses in excess of $3-trillion are to be found on the balance sheets of mostly the BRIC countries today in the form of Foreign Exchange surpluses, and trade surpluses. China alone now nurses a trade and forex surplus nearing US$1.5-tillion. Russia, has managed to build up reserves of US$450-billion as well as Putin’s US$150-billion ‘contigency’ fund, set aside so that it may sidestep any kind of financial shock. India has amassed a forex surplus of around US$275-billion. Brazil’s forex reserves now stand at US$178-billion.

BRIC countries have been financing the debt, and driving the growth of G7 countries for the last 5-7 years. China has emerged as the worlds manufacturing hub, while India has come on very strong as its counterpart hub in services, both providing Western firms access to inexpensive educated and -or- highly-skilled labour. Russia, under Putin, has successfully emerged as a highly profitable energy and raw materials producer, second in oil and gas reserves to Saudi Arabia. Brazil has changed the regional balance in the Americas by turning itself into the winds of east-west trade in hard and soft commodities and using its strength to bolster its new economic clout in relation to North America. 

China’s growth is less dependent on the health of the US economy, as is commonly perceived. A recent Economist article points out that China’s true exports-to-GDP ratio is actually below 10%, that China has been quite successful to date at rebalancing its economy in favour of domestic growth as a driver. As for India, 87% of its GDP is consumed domestically, making it quite independent from the risk of the US threatened consumer hegemony. Russians are enjoying three times the disposable income of 7 years ago and driving consumption growth, as are Brazilians.

North American and European companies are looking to these consumers to drive demand and growth to their top and bottom lines.

In a word, things have changed.

They have changed in a very meaningful, very important way. The relationship that now exists between emerging markets and G7 countries is ‘symbiotic.’ and interdependent.

Source: Merrill Lynch, October 2006 

Today, around 60-70% of emerging markets sovereign debt is investment grade rated and all 120 companies that form the key MSCI Emerging Markets Index have ADR listings.

In 1997-1998, the world’s biggest western banks took advantage of bailout conditions to take ownership of Asian banks, once protected by thousand-year-old protectionist laws. Today, powerful and wealthy Sovereign Wealth Funds (SWFs) are bailing out the same banks, Citigroup, Merrill Lynch, and Morgan Stanley.

On Wall Street in the past few weeks, the sums have been bigger and the actions more benign—at least so far. This week Merrill Lynch and Citigroup became the latest to get the sovereign-wealth treatment, picking up a further $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East (see article). Sapped by the subprime crisis, rich-world financial-services groups have been administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley.

Commodities are not the only source of sovereign wealth. Many Asian emerging markets have been running current-account surpluses at the same time as they have been managing their exchange rates. As they have mopped up dollars, using government bonds, they have accumulated reserves. At first these went into safe, liquid assets like American Treasury bonds—the Asian financial crisis of 1997-98 was still a recent memory and many countries were keen to amass reserves. But economies like China, South Korea and Taiwan now have more reserves than they need to defend themselves against shocks. Their governments understandably want to earn a higher return than Treasury bonds will pay, so they create a fund to manage their assets. Source: The Economist, Jan. 17, 2008, Asset-Backed Insecurity

It has become such that neither Emerging Markets nor the G7 can allow each other to be destabilized, as evidenced by the large, noted, SWF investments, as they have each other’s economic ‘lives’ in the balance.

You might get the idea that emerging markets are correlated more to the US than they actually are, when you see that they have suffered like western stock markets, from a selloff. Their correlation is low, between .30 and .40, not zero or negative. There are those who would have us believe that the decoupling thesis is suffering from the same disease as the bull market. Those are probably the same folks, who last year began to re-write their theses from decoupling to recoupling to suit themselves this year, as the need to raise cash by selling the last two year’s profitable trades became an increasingly inevitable requirement, in order to shore up balance sheets.

Our expectation is that the credit squeeze ailing the market will come to a reversal point, at some point over the next 2-4 weeks as the banks round the corner on the cash call that has forced the wholesale liquidation of emerging markets and commodities related investing.

Emerging Markets are strong, and some of their [inflationary] growth pressures may get somewhat solved by a slowdown in the US, in the form of an imported soft landing. This is by no means advice, but if you subscribe to this thesis, then there is reason (for those of us on the buy-side) to believe that there will be a recovery in the decoupling thesis, and thus emerging markets equities throughout the second half of the year, from the current lows.

First, however, until the cash call is complete, and the future of the monoline insurers (MBIA, ABK) is resolved in the form of perhaps a bailout, we may continue to see more downside.

Now may prove to be a good time to nibble at emerging markets and commodities again and add or gain exposure as they are far more attractively priced. Here are a variety of ETFs and open ended funds (Canadian fund companies with offerings) that provide broad (diversified) and narrow exposure (country and regional funds) to BRIC and emerging markets.

On the AMEX

“Total” Emerging Markets ETFs
iShares MSCI Emerging Markets Index Fund (EEM)
PowerShares FTSE RAFI Emerging Markets Portfolio (PXH)
SPDR S&P Emerging Markets ETF (GMM)
Vanguard Emerging Markets ETF (VWO)
   
Dividend Emerging Markets ETFs
WisdomTree Emerging Markets High-Yielding Fund (DEM)

Multi-Region (but not Total) Emerging Markets ETFs
BLDRS Emerging MKTS 50 ADR Index Fund (ADRE)
Claymore/BNY BRIC (Brazil, Russia, India, China) ETF (EEB)
streetTRACKS SPDR S&P BRIC (Brazil, Russia, India, China) 40 ETF (BIK)
iShares MSCI BRIC Index Fund (BKF)

Latin America Regional ETFs
iShares S&P Latin America 40 Index Fund (ILF)
SPDR S&P Emerging Latin America ETF (GML)

European Emerging Markets Regional ETFs
SPDR S&P Emerging Europe ETF (GUR)
Middle East and Africa Regional ETFs
SPDR S&P Emerging Middle East & Africa ETF (GAF)

India - Barclays iPath India ETN (INP)

On the Toronto Stock Exchange
Claymore BRIC ETF  (CBQ.T)
Open Ended Funds (Canadian)

Broad Mandate Emerging Markets

Tmpleton Emerging Markets
AGF Emerging Markets
Pro FTSE RAFI Emerging Markets Index
TD Emerging Markets 
United-Emerging Markets Pool Cl A
CI Emerging Markets
United-Emerging Markets Pool Cl W
BMO Emerging Markets
Brandes Emerging Markets Equity
CIBC Emerging Markets Index
National Bank Emerging Markets

Region/Country Mandates
Excel India Fund
Excel China Fund
Excel Chindia Fund
Excel Emerging Europe Fund
Templeton BRIC Fund

Tags: ABK, Asia, Bailout, Banks, Blog, BMO, Brazil, BRIC, BRICs, Canada, China, CIBC, Citigroup, Commodities, Consumption, Correlation, Credit, Credit Market, Credit Risk, Currency, de-coupling, Dollar, Economy, Emerging Market, Emerging Markets, energy, ETF, Euro, Fed, FTSE, GDP, Government Bonds, India, inflation, Investment, Latin America, Long Term Capital, Long Term Capital Management, Malaysia, Markets, oil, Oil and Gas, Recession, risk, Russia, Slowdown, South Korea, Stock Markets, SWFs, Taiwan, Thesis, Trillion, Valuations, Wall Street, wisdom
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Markets, Oil and Gas, Outlook | No Comments »

Breakingviews: Sovereign Wealth Funds Risk Index

Friday, January 25th, 2008

Jan. 25, 2008 - Today, we received this piece about Breakingviews.com’s new SWF Risk Index:

Breakingviews sovereign wealth fund risk index

By Una Galani AND Simon Nixon

To see the full index with detailed rankings, click on the link below

Sovereign Wealth Fund Index: Sovereign wealth funds were hardly talked about twelve months ago. Now they are one of the hottest topics in global financial markets. Over the last year, these state-owned entities have spent over $75bn snapping up stakes in some of the world’s biggest banks, taken big positions in stock exchanges on both sides of the Atlantic and even attempted a takeover of one of Britain’s leading supermarkets.

Such funds have existed for decades, but the shift in global economic power and the current weakness in western markets has given SWFs – forecast to grow assets fivefold to $13.4tr by 2017 – new influence and raised new fears about their motives. Critics such as President Sarkozy of France and some US politicians worry that SWFs tend to be secretive, target political as well as financial returns, and operate at the whim of governments not always sympathetic to western economic and political interests…

Tags: Banks, Biggest Banks, Brazil, Breakingviews, BRICs, China, Economic Power, Emerging Markets, France, Fund Index, Fund Risk, Galani, Global Financial Markets, Markets, Miscellaneous, Motives, Nixon, Political Interests, risk, Risk Index, Russia, Sarkozy, Stock Exchanges, Supermarkets, Swf, SWFs, Takeover, Target, Twelve Months, Western Markets, Whim
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