The key in the coming months will be to be selective in which metals and other commodities one is exposed to.
Those commodities most related to industrial production will have the harder time in this global recessionary environment.
For Metals, Buying Chance Coming, But Still Months Away
The four-month slump in gold and other metals by nature is setting up a buying opportunity somewhere, but it could be months before a solid entry point materializes.
Full Story:
http://www.cnbc.com/id/45816423
NICOSIA – Cyprus said on Wednesday that an offshore prospect where exploratory drilling is under way contains an estimated 5tn-8tn cubic feet (tcf) of natural gas, a first for the island which could make it self-sufficient in the commodity for decades.
Based on the exploratory drill by US-based Noble Energy, the prospect, which lies south of the island, contains a gross mean of 7 tcf of gas, Cypriot president Demetris Christofias said in a statement.
"The discovery of natural gas in the exclusive economic zone of our country opens great potential for Cyprus and its people, which with prudence and in a spirit of collectiveness we will utilise in the service of public interest," Mr Christofias said.
"New favourable economic prospects have opened for the future of the country," Christofias added.
It was an auspicious end to a traumatic year for Cyprus, which was hammered by rating agencies for fiscal slippage, shut out of international capital markets and hit by a large munitions blast that destroyed its largest power station.
Its northern neighbour and old rival Turkey has challenged Cyprus's bid to search for hydrocarbons, saying the island has no jurisdiction. The island was split in a Turkish invasion in 1974 after a brief Greek-inspired coup, and Ankara supports a breakaway state in northern Cyprus.
The island, which is run by an internationally recognised Greek Cypriot government, says estranged Turkish Cypriots can benefit from hydrocarbon finds in the context of a political settlement ending decades of division.
Turkey says it plans to conduct its own hydrocarbon surveys off Cyprus. When Noble started its exploratory drilling in September, it sent its own survey vessel to the area.
"We call upon Turkey to show a spirit of peace and reconciliation [and to] avoid any adventurous acts and provocations which cause problems to [peace] talks and also tension in the eastern Mediterranean," Mr Christofias said.
Greek and Turkish Cypriot sides have been engaged in peace talks under UN auspices for decades. The latest round of talks began in 2008.
Turkish Cypriots reacted coolly to the announcement.
"In our view the Greek Cypriots should be investing more in the negotiations, and not in things that cause further disputes," said Kudret Ozersay, chief aide to Turkish Cypriot leader Dervis Eroglu in peace talks.
The Cypriot block, known as Block 12, covers about 40 square miles and will require additional appraisal drilling prior to development.
It was a "significant" discovery, Noble Energy chairman and CEO Charles Davidson said in a statement. Noble has also reported significant natural gas discoveries off neighbouring Israel.
"This is the fifth consecutive natural gas field discovery for Noble Energy and our partners in the greater Levant basin, with total gross mean resources for the five discoveries currently estimated to be over 33 tcf," Mr Davidson said. "This latest discovery in Cyprus further highlights the quality and significance of this world-class basin."
The gross mean resource range of 5 tcf to 8 tcf could be a conservative estimate, US-based brokerage Sterne Agee said.
"If we use prior news releases on the Tamar and Leviathan discoveries as a guide, we believe that today's initial resource report by Noble is likely to be conservative, and we would not be surprised to see significant upward revisions in the next couple of years as the project nears production," analyst Michael McAllister said in a note. Leviathan and Tamar are two fields off Israel.
Proved discoveries could make Cyprus, which now relies almost exclusively on imported and expensive fuel oil to fire its energy grids, self-sufficient for decades. The island has estimated needs in gas of 1bn cubic metres per year.
The Gold Report asks Eric Sprott and silver insiders what impact limiting sales of newly mined silver could have in one of the most volatile subsets of the resource sector.
In an open letter to silver producers at the end of November, Sprott Inc. Chairman Eric Sprott cited an overleveraged banking system, weakening dollar and increasing demand as reasons to hold profits in silver rather than selling all production and putting the proceeds in the bank. "Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals," Sprott said.DT: Yes. I would say China is definitely the dominant growth driver. Along with India and Russia, China is going to account for about half of the new build in the world. While China has temporarily suspended approvals pending stress tests and further review in light of Fukushima, and rightly so, the country maintains strong support for nuclear power. The country is up to 15 reactors in operation from 11 just one year ago, and it has another 26 under construction, 51 planned and 120 proposed. So China is definitely leading the way.
TER: And utilities are in the game now.
DT: I think the Asian utilities are going to go out of their way to either purchase uranium in the markets through long-term contracts, but probably and most importantly, buy some of those large uranium mines around the world. This, potentially, leaves less uranium for the next country.
The coin concerned is known as the "Brasher Doubloon" with the punch on the breast, this rare numismatic treasure is considered America's first and most important gold coin. Tthe transaction is the single highest price ever paid for a coin in a private transaction. The coin is thought to be truly unique as there is only one known example.
"Not only is this the highest-valued gold coin in the world, but it is also one of the most iconic pieces in all of numismatics," says John Albanese, widely considered one of America's leading numismatists. "It is not a stretch to call this the holy grail of all collectible gold coins."
According to the Blanchard release, the gold coin in question was originally minted in 1787 by Ephraim Brasher, a silversmith and goldsmith in New York City, and it contained $15 worth of gold at the time of its minting. At 26.4 grams of 22 carat gold this would now be worth perhaps around $1275 in its gold content today. It was called a doubloon because it was similar in weight to the Spanish gold coins with that designation. Brasher made a small number of gold coins that historians today believe were intended for public circulation.
While Brasher worked as a regulator with the New York Chamber of Commerce certifying the weight and value of foreign gold pieces he established a solid reputation for his expertise, and his "E.B" hallmark counter stamp was esteemed in the area. He also stamped his own doubloons with his personal hallmark on the obverse, and this is the single-known piece of his making that includes the stamp at the centre of the eagle's breast rather than on its wing. There are believed to be six examples of the coin stamped by Brasher on the eagle's wing.
Why is it significant? Recent research has established that the Brasher Punch-on-Breast Doubloon is the first American-made gold coin that had a denomination in dollars and that was struck to the same standard that was later adopted for all U.S. gold coins, making it what is today considered the first truly American gold coin. No other U.S. Colonial or Federal coin can make that claim, putting Brasher's first New York-style Doubloon in a class by itself.
You want to know where the global commodities markets are heading in the coming years? Then it's probably best that you remember a single word: China.
As the biggest and one of the fastest-growing of the world's developing economies, China has become a voracious consumer of industrial and agricultural commodities. Its shifting needs are now the most important driver in the prices of many of those goods. Producers often base massive capital investments largely on their expectations for Chinese demand for their products. Investors often make similar calculations before buying or selling commodities contracts or related securities.
That's why no single factor is likely to have a more far-reaching impact on commodities markets over the next few years than how Chinese demand changes as the country's economy evolves. "That's the big question," says Richard Adkerson, chief executive of Freeport-McMoRan Copper & Gold Inc.
So what's the answer? Here are three possible economic scenarios, and what each would mean for global commodities markets.
If China's consumption of commodities continues to grow at the rate it has over the past 10 years, this is what the world would have to do to meet that demand in 2020, assuming that the rest of the world's collective appetite doesn't change at all:
![[CHINAonline]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_v4UGGcOVtgvtCHDOjsmRexfoKMUjEv5DTV8NDVvONH9RPqHwry00YmPOAUvkFUnyg13OeBqY18uFAAp07OrNLvOd7fORp-aN8xXqSc2F0VehymVHDoORYdojF4UgK3nIKXIGee_D5OBxgpyEFEWQxfd_U=s0-d)
Craig Frazier • Pump almost as much additional crude oil as Saudi Arabia now provides per year.
• Grow more than three times as many soybeans as currently come out of Iowa, which alone provides 5% of global output.
• Extract nearly three times as much new copper as the current annual production from Chile, which mines about four times as much as any other nation.
And that's just for starters. Vast increases in supply would be needed for all sorts of other commodities as well.
Prices that rocketed to record heights in recent years on Chinese buying could fly even higher. That would be good news for companies that produce those commodities and investors who have placed bets on them—unless high prices abruptly choke off demand or spur the Chinese and other buyers of commodities to seek alternative goods.
Materials in tight supply or at risk of significant constraint, like crude oil, copper and palladium, could be vulnerable to sharp price increases. Their prices shot up 50%, 106% and 207%, respectively, in the five years through 2010. By contrast, aluminum is plentiful, cotton production is rising sharply and nickel output is climbing—at least for the moment—which can make them less vulnerable. It's also easier to produce some commodities in greater quantity when needed, which can limit price shocks. It takes less time, for example, to grow more corn than it does to find new oil beneath the ocean floor.
Many analysts consider the fast-growth scenario improbable. The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits six times, according to the World Bank. If the consensus is right, the question becomes how much China's growth will slow.
A growth rate of 4% to 6% would be a big leap forward for the U.S. economy and plenty of others. But not for China.
That's the range of growth expected for the Chinese economy by around 2013 or 2014 by Roubini Global Economics LLC, a New York-based research and consulting firm. Shelley Goldberg, the firm's director of global resources and commodity strategy, calls that a "hard landing" after the far more rapid expansion of the past decade. "Obviously, it doesn't bode well for commodities," Ms. Goldberg says.
Demand for steel, copper and other industrial metals could drop significantly if China does stall, because those materials are heavily used in construction—which would be at risk from weakness in the Chinese real-estate market—and because China often accounts for some 40% of global demand for those materials. Coal demand could also tumble, she says, because the fuel is heavily used in China to generate power.
Some commodities could take a hit not because China uses more of them than anyone else but because it has been providing much of the growth in their markets. For instance, while China accounts for just 11% of global oil demand, according to Barclays Capital, it provides 60% of the growth in that demand.
Similarly, a hard landing might hurt the soybean market more than the corn market, because China is a huge importer of soybeans but produces almost all the corn it needs at home, says Kevin Norrish, managing director for commodities research at Barclays Capital.
For many China watchers, including Barclays, the most probable scenario is an economy that keeps expanding strongly but at a less blistering pace, with annual GDP growth rates in the high single digits. That would mean continued upward pressure on most commodities prices, with some possibly rising substantially, but in most cases not the soaring prices that a red-hot economy would produce.
"We still see loads of reasons why growth is going to continue, but the rate of growth is going to slow over time," says Jim Lennon, who specializes in Chinese commodity markets as an analyst at Macquarie Group Ltd., one of the leading financiers for commodities producers. The first half of the current decade will see more rapid growth than the second half, in Mr. Lennon's view, as the main engine of the Chinese economy over time switches from massive infrastructure projects to consumer demand for durable goods.
The result will be a tamer increase in consumption of base metals and other commodities, he says. Between 2000 and 2010, Chinese consumption of copper, aluminum, zinc, nickel and lead grew at compound annual rates ranging from 13.9% to 24.4%, according to a presentation Mr. Lennon delivered in October. For 2010 to 2020, the projected growth range is 5.3% to 9.3%, the presentation said.
Even in a slower-but-steady world, demand—and prices—could shoot up for some commodities. For instance, China uses less natural gas per capita than many other countries, notes Neil Beveridge, a Hong Kong-based senior oil analyst for investment bank Sanford C. Bernstein. That will change, he says, as more people use the fuel to heat or cool their homes and greater volumes are consumed by industry. In 2010, China imported about 1.6 billion cubic feet of natural gas per day, according to the U.S. Energy Information Administration. Mr. Beveridge expects China's imports to grow to 10 billion cubic feet per day by 2015 and 20 billion by 2020, more than any other nation's at that point.
Meanwhile, demand is likely to continue growing for some food commodities but shrink for others, says Scott Rozelle, a professor at Stanford University who studies Chinese agriculture. As China's growing middle class consumes more meat, animal feed such as soybeans and corn will continue to be in increasing demand, he says. But "the demand for wheat and rice will fall" as diets continue to evolve, Mr. Rozelle says, and China may occasionally even export some of those less-coveted staples, as it has over the past 10 years.
One thing to keep in mind is that China is such a big market now that any increase in consumption—even in a slower but steady economic expansion—can create a big chunk of fresh demand, and push prices up accordingly. As Ms. Goldberg notes, "They still are 1.3 billion people."
Mr. Pleven is a staff reporter in The Wall Street Journal's New York bureau. He can be reached at liam.pleven@wsj.com.
China is the key to the outlook for commodities markets, but it isn't the only factor. Commodities prices could face upward pressure over the next 10 years if other countries start to consume anything like China did over the past decade.
Take India. Compared with China, India consumes a small fraction of the world's commodities—for instance, 3% of the copper, compared with China's 37%, according to Barclays Capital—despite having nearly as many citizens. But that could change, because India is less developed than China, meaning it still has a vast amount of work to do on improving its infrastructure, particularly upgrading its power grid.
It also wants to boost manufacturing, says Deepak Lalwani, director for India at Lalcap Ltd., a London-based consulting firm. He expects India's gross domestic product to increase fourfold by 2020.
The list is long of other, smaller countries that consume fewer raw materials per capita than the developed world, leaving lots of room for global demand to grow. While some have been ratcheting up consumption, they haven't been doing so as fast as China, suggesting their appetites could get even bigger.
For instance, between 2000 and 2010, copper consumption in Brazil, Indonesia, Russia and Turkey increased between 36% in Brazil and 172% in Indonesia, according to data from the International Copper Study Group, an intergovernmental organization. Over the same period, China's consumption nearly quadrupled.
"The one trend that's clear to me is that people in undeveloped countries around the world want to live a better life," says Richard Adkerson, chief executive of Freeport-McMoRan Copper & Gold Inc. "The longer-term growth story goes beyond China, and hasn't really been scratched yet."
Liam PlevenAdds | |
Alexco Resource (Canada) | AXR |
Intrepid Mines (Australia) | IAU |
Midway Gold (Canada) | MDW |
Richmont Mines (Canada) | RIC |
Sabina Gold & Silver (Canada) | SBB |
Saracen Mineral Holdings (Australia) | SAR |
Scorpio Mining (Canada) | SPM |
Deletions | |
AuRico Gold (Canada) | AUQ |
Real Gold Mining (China) | 246 HK |
Sino Prosper State Gold Resources (Hong kong) | SSOCF |
We know the gold bug/Austrian case.
When the United States broke away from the gold standard in the 1970s it allowed for unchecked credit creation, beyond what could realistically be supported by economic growth.
Given this scenario, what should gold bugs make of the market's move towards re-collateralisation in all funding areas? A move not dictated by regulators or authorities, but the markets themselves?
After all, the latest trend towards gold collateralised bank loans shows in some ways that the market is demanding the recollateralision of credit with gold.
Banks don't need gold as much as they need cash. They use the gold to get cash. Cash is once again being backed by gold. In the interim, there is less demand for gold as a buy-and-hold asset, and more demand for its use as a funding instrument: collateral.
As the FT reported last week:
A dash for cash by European banks in a little watched corner of the gold market has accelerated this week, highlighting the continued scarcity of dollar funding even after a co-ordinated intervention in the market by the world's largest central banks.
Gold dealers said that banks – primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars in the past week.
Naturally, this recollateralisation of credit with gold has very important implications for the gold price.
While gold could previously generate an income from being loaned out — the result of gold producers's hedging needs in an environment where gold demand was uncertain — it no longer can. Gold is now reflecting a negative lease rate, otherwise known as a repo rate. It means there is more demand for using the asset to obtain credit, than there is demand for asset, using credit. Or, for that matter, demand for hedging the asset.
The more it's used as collateral, the more you can consider it to be on par with something like a zero-coupon Treasury bond or bill. Gold begins to determine the cost of money. What's more, if gold begins to exchange hands as collateral more often than government bonds, it might even begin to reflect a greater velocity in its use as a monetary instrument than a government security.
If you consider that the velocity of traditional collateral such as government bonds is deteriorating, that opens the question to whether or not gold is switching places with Treasuries as the ultimate form of collateral?
In that context, the move in lease rates could be considered pretty significant. Think of them as a reflection of the cost of funding with gold. The more negative the rate, the higher the cost of funding using the collateral. And just like in the bond markets, it seems there's been a move towards funding over short durations rather than long — meaning even gold is not enough of a guarantee to secure 12-month funds, while it used to be just a few months ago.
Here, for example, the one-month lease rate:
Here's the three month rate:
And here, finally, is the 12-month rate (firmly in positive territory):
With more demand for gold as collateral — and with gold arguably influencing the cost of money — it's natural that central banks should behave in gold markets like they have been used to behaving in bond markets, i.e. for executing rate policy.
When repo rates fall below the policy rate, the central bank usually intervenes by providing more collateral to alleviate collateral squeezes, lifting rates as it goes. When repo rates rise above the policy rate, the central bank can intervene by absorbing collateral from the system, making it more desirable (since there is less of it) lowering rates as it goes.
Apply that to the current market where gold 'repo rates' are rising, that should call for central banks to absorb gold collateral to hold rates at bay. Unless, of course, 'repo rates' are rising because central banks have started flooding the system with gold for use as collateral — so as to ease the funding squeezes elsewhere. While unconfirmed, it's definitely something that's been on the market radar this week.
The more unencumbered gold in the system, the more likely banks will use it for funding — and/or for covering shorts.
You can think of it as the ultimate QE. Or 'printing gold' to ease the collateral crunch.
With surplus gold being put into the system, the price of gold has no choice but to stall. Especially as those 'squeezes' get eliminated.
Related links:
Why gold forward rate inversion is important – FT Alphaville
Cash for gold, financial market edition - FT Alphaville
Cash is king – FT Alphaville
HSBC Sues MF Global Over $850,000 of Gold – Bloomberg
SocGen and the hand of GOFO – FT Alphaville
This entry was posted by Izabella Kaminska on Monday, December 12th, 2011 at 17:40 and is filed under Capital markets, Commodities. Tagged with gold, repo, repo rates.
Hedge fund manager John Paulson, whose prowess earned heady profits of upwards of $15 billion when markets tumbled during the financial crisis, continues to see his fortunes sink in 2011.
Sources tell the Deal Journal that Paulson & Co.’s Advantage Fund was down 3% in November, raising its losses this year to around 32%. At the same time, Paulson’s Advantage Plus Fund — which uses similar strategies but applies leverage — fell 3.6% last month. It’s reportedly off by 46% for the year. By comparison, the S&P 500 traded flat on the month.
But it wasn’t all negative for Paulson’s investors in November. His bets on gold proved beneficial as the firm’s Gold Fund rose 1.3% in the month, leaving it ahead by 11% in 2011. By comparison, the SPDR Gold ETF (GLD) entered today’s session with a return of more than 23% on the year.
Paulson has bet big on a relatively quick economic turnaround, losing so far this year on financials such as Citigroup (C), Bank of America (BAC) and China’s Sino-Forest (SNOFF), a forestry firm accused of overstating its holdings by short-seller Carson Block.
In a third-quarter letter to investors, Paulson acknowledged that his performance was “the worst in the firm’s 17-year history.” The letter also stated that “we are disappointed and apologize.”
The European sovereign-debt crisis, slowing economic growth and disagreement over the debt ceiling in the U.S. combined to pressure fund performance, Paulson explained. “As the year progressed our assumptions proved overly optimistic and net equity exposure too great,” he added.
Paulson has reportedly dramatically slashed his equities exposure in key hedge funds. The net exposure in his main hedge fund is believed to have been cut to around 30% — about half what it was just four months ago.
Paulson sold stakes in several of his lagging positions in the third-quarter. Those included Citigroup and SunTrust Banks (STI). The hedgie also reported no shares in previous holdings NYSE Euronext (NYX) and J.P. Morgan (JPM).
