Friday, August 6, 2010

Commodity Call (060810)

1. Positional Call: Sell Nickel 1025-1028, s/l 1037, trg 1000-975. cmp 1021.70.
2. Daily Call: Buy Crude 3770, s/l 3750, trg 3800-15. cmp 3776

Monday, February 1, 2010

Dollar-Revival, Euro- Dowslide, Gold- ?

Greece, Portugal, Spain, Italy apart from being tourist hot spot have some thing else in common, all of them are in are position to default in coming days due to their ballooning debts. Greece has deficit of 12.5% of its GDP highest in Europe and more than quadruple of what it should be according to ECB guidelines.
Debt crisis in Europe has put considerable downward pressure on Euro, leading it nosedive against dollar from $1.5144 on 22/11/09 to 1.385 on 01/02/10. Strengthening of dollar has lead to fall in gold price by almost $100.
US economy despite posting third quarter GDP of 5.7%, (which has been primarily due to build up in inventory) still has 10% unemployment and no economy can said to improving if it has that level of unemployment. So revival in dollar can't be comprehended due to recovery in US and Fed has again retreated that interest rate will be near zero levels.
Recent fall in gold has just been a consolidation phase and due to dollar's strengthening. In the coming days I think the negative correlation between Gold and Dollar will end and both will move in same direction in near future. Reason behind this is Euro will be under immense pressure in coming days due to debt crisis in European region which in turn reduces the appeal of Euro, take for example:
Central banks that disclose currency breakdowns bought a record $60 billion worth of Euros in 2009’s second quarter, more than half of their new foreign reserves in that period. The purchases prompted speculation that U.S. attempts to spend itself out of the worst global recession in six decades would prompt policy makers worldwide to continue diversifying away from the greenback. Instead, Central banks reversed course, putting 15 percent of new reserves, or $17.8 billion, into Euros in the next three months, the smallest share for any quarter in which policy makers’ reserves grew since early 2008. Central banks put 45 percent, or $52 billion, into dollars in the third quarter, up from 36 percent.
This goes on to show the low confidence Euro is enjoying at the moment, but dollar can't keep on reaping benefit due to Euro's misfortune. Dollar itself is facing considerable pressure due to towering debt that US government has build up in the past year. This year Obama has proposed a staggering budget of $3.8 trillion almost 3.5 times of India's GDP. Budget deficit will soar to $1.56 trillion, (I tried to figure out how many countries have economy of that size and guess what it is 8 out of around 200 reported).
Dollar being the international currency (and will remain that in near future until countries start to accept SDR as currency to trade with), and most of the commodities are quoted in dollar terms any movement in dollar impact the pricing of that commodity.
Thus with Gold although lacks any commercial value in comparison with silver, has from ages been considered as the wealth accumulator, so in times of panic / lack of confidence in other safer asset, GOLD will benefit.

Monday, January 18, 2010

Marc Faber's View on Gold

Marc Faber's Favorite Currency remains gold, whose supply is extremely limited. In fact, I am wondering if gold, which is now at around $1,100 per ounce, is less expensive than when it sold for less than $300 per ounce. How could this be? I suppose that, in the same way that a company’s stock could be less expensive at $100 than when it was selling for $10, because earnings growth has out paced the appreciation of the shares and therefore its P/E has declined, gold could be cheaper at the current price than when it was at less than $300 because of the explosion of foreign exchange reserves in the world, zero interest rates, the huge debt overhang, and the expectation of further money printing. International reserves have grown from about $1 trillion in 1995 to over $7 trillion.
Gold’s share in world’s reserves
As a result, the share of gold in the world’s official reserves has declined from 32.7 per cent in 1989 to a current record low of 10.3 per cent. As an aside, I am still puzzled by the deflationists, who cannot understand that the explosion in foreign exchange reserves over the last 15 years is a symptom of a massive monetary inflation. Ergo, I could argue that gold is now actually less expensive than when it sold for around $300 per ounce.
I should add that central banks in emerging economies keep only a tiny fraction of their reserves in gold. Eventually, I would expect them to follow the example of the Reserve Bank of India (RBI), which recently bought 200 tonnes from the IMF for $6.7 billion. The RBI, thus, increased the share of gold from 3.6 per cent of its $286 billion foreign exchange reserves to just over 6 per cent. (Guess who will be out of business first: the IMF or the RBI?)
Now, just consider what the impact would be if China were to increase its gold holdings from presently less than 2 per cent of its $2.2 trillion reserves to 6 per cent or 10 per cent. Each 1 per cent increase in gold weighing would mean gold purchases of more than $20 billion, or nearly 600 tones. Its intrinsic value
I also find it encouraging that an economics professor, Willem Buiter , recently called gold a “barbarous relic” in a Financial Times blog. (Keynes had used the expression to refer to the gold standard). The good professor conceded that “its value may go from $1,100 per fine ounce to $1,500 or $5,000.” However, he stated that he “would not invest more than a sliver” of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs”.
I am not entirely sure what the professor means by “intrinsic value”, but the fact remains that gold has been a currency for 6,000 years, whereas I am not familiar with any paper currency that has survived for more than a few hundred years. Moreover, it would seem that over time the “intrinsic value” (whatever the professor means) of paper currencies declines, whereas the “intrinsic value” of gold appreciates. (Maybe the professor should take the time to explain to us what the intrinsic value might be of a Gutenberg bible, a flawless 50 carat diamond, or a Picasso or Warhol painting)

Tuesday, January 12, 2010

China raises the interest rate

China has raised the credit reserve ratio by 50 basis points, which will lead be sucking out CNY 300 billion or $50 billion from the market. The new rates will be 16% for big banks and 14% for small banks.
Indiacation about the rate hike was imminent when China sold bills for the first time in nine months at higher rates. Bills worth $8.8 billion were sold at 1.3684%, four basis points higher than previous. Although the rise was small, it did provided the signal of the direction in which China central bank will move.
Impact will be negative intially but more of sentimental than anything else. Base metals will be primarily be impacted in commodities front, as the Chinese are the one who are playing a major role in pricing of base metals. Well maintianing 10% growth rate is no mean achivement, to maintain that they have become the largest consumer of virtually all metals and energy products(India is still the largest consumer of GOLD, but i doubt till what time we can maintain that as GFMS has already predicted that China will overtake India).
But looking at other side, i think raising the rates signifies the confidence in the economic front and the belief that economy will be able to sustain without the loose economic policy.
When we look at the stimulus package by China which was $586 billion, the squeezing is miniscule around 1.5%.
The important question is will it have any impact on dollar. I think it should be positive as rise in rate will have negative impact on other currencies such as Australian dollar, Brazilian real and other currencies of those country who have large Chinese investment. As Chinese banks will be less inclined to lend due to higher reserve requirment, thus lower investment in these countries. Dollar will strenthen due to weakness in other currencies.

Friday, January 8, 2010

HOW CHINA CONTAIN INFLATION AND WEAK YUAN

Foreign Inflows in China (dollars, euro) --> Demand for yuan rises which will lead to strengthening of yuan (China doesn’t want that as it hurts their EXPORT industry) --> China’s central government prints huge amount of yuan to buy the foreign exchange --> China’s government makes its bank to keep large amount of yuan to lend more and buy the foreign exchange --> this excessive lending and flow of yuan in the market increases the scope of INFLATION (which no government wants) --> Here is where China play its master stoke --> to control inflation and strengthening of yuan, the central bank sells its bills mainly to banks, which pay in yuan that the central bank then effectively takes out of circulation, slowing growth in the country’s money supply. This process sucks out liquidity from market in turn taming the inflation and keeping the yuan weak --> but to play this game they have to buy $300 billion of foreign currency every year leading its foreign exchange reserves exposed to currency fluctuation, this is what they are trying to restrict by diversifying towards other assets such as GOLD. --> The biggest benefit they are getting is keeping there export going and keeping there people employed in turn raising the unemployment rate of other country (look at US and UK, both countries have unemployment rate of 10%. US have virtually shifted all there manufacturing base to CHINA).
Dollar has depreciated against all major currency except yuan (against some currency it has made yearly low for example Yen). Many central goverment including US have raised there concern about China's policies. This policy have made export from these countries including India less lucrative, thus impacting there export industry.
But why can't other goverment apply the same policy as China. The likely answer are:
1. China despite its economic expansion, is a puzzel many still trying to solve. The economic policies it follow is difficult to replicate in other countries.
2. It's currency is not free floating as it does not want its currency to rise. Other countries do allow their currency to free float, India follows partial covertible rule. Many economist have recently said that China should allow its currency to appreciate.

Monday, December 28, 2009

Strike at Chile's Altonorte copper smelter

News: Union workers at Chile's Altonorte copper smelter plan to strike and block roads on Monday after scrapping a final wage offer from owner global miner Xstrata.
Company’s profile: Altonorte is a custom copper smelting operation located near the port of Antofagasta in northern Chile. The smelter has the capacity to process 900,000 tonnes of copper concentrate per year, yielding 290,000 tonnes of anode copper and 800,000 tonnes of sulphuric acid annually.
Impact: Impact could be minimal due to ongoing general maintenance of the metallurgical complex, which already lowered its copper anodes output to a minimum. The maintenance, which started last week and is carried out every 2-1/2 years, is expected to end on Jan. 20. A prolonged strike at the metallurgical complex could delay some copper anodes shipments from top producer Chile. Mining companies could also be forced to look for other smelters to process their concentrate, which could increase costs; however, analysts say the impact on the market would be minimal.

05/01/10 - Strike in Chile copper smelter has ended, with union leaders agreeing on a settlement with mangment. According to the deal, Xstrata workers will receive a 2 percent increase in base pay, a bonus of 2.4 million pesos ($4,745), a production bonus of 750,000 pesos a year and a low-interest loan of 2.04 million pesos.

Strike has provided good support to the prices, as price have risen to Rs 347 levels, a rise of Rs 10 after the news came out.

Tuesday, December 22, 2009

Gold

Recent fall in Gold seems to have given the chance to investors to buy gold. Fall in prices seems to be a more of correction rather than a genuine fall. Prices in Gold (MCX) have corrected from its high of 18364 on 3/12/09 to current 16650 as on 22/12/09. Correspondingly in COMEX prices have corrected from $1227 to current $1090.8 levels.
There are two reasons which proves gold has not topped out:
1. The gap between yields on US Treasuries and TIPS (Treasury inflation adjusted security) due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. TIPS being an instrument issued by Fed, which protects investors from inflation in a way that principal will increase with the rise in inflation. The yield on TIPS is negative, negative yield in inflation signifies that investors are giving away the yield for the sake of protecting themselves against rise in inflation. Rising difference between treasury and TIPS, seems to be positive for Gold in long term as Gold has been traditionally considered as hedge against inflation.
2. SPDR Gold ETF has risen from 1,116.247 tons on 08/12/09 to current levels of 1,132.708 tons. The current holding is near to its life time high of 1134.03 tones. The rise in holding has coincided with fall in gold price, it just goes on to prove that demand for the metal has not at all detreotiated despite recent sharp fall in prices.

12/01/10 Gold has recovered from the day of the posting of the article, stating that fall in gold has given chance to investors to buy the gold. Price made a high of $1161 in COMEX and 17104 in MCX.