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Stocks & Equities

Another Black Monday coming for global financial markets?


Posted by Arabian Money

on Friday, 15 June 2012 08:29

ec121111

You do not need to be terribly good at reading the tea leaves to spot the alarm calls for next Monday morning. Greece will have its general election result and Egypt may well have elected a member of the Islamic Brotherhood as president.

Call it a double whammy if you like, and it is so obvious that markets are going to anticipate it, then again being confronted with a new reality is never quite the same as expecting it to happen.

New hope or hopeless case?

....read more HERE




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Energy & Commodities

3 Reasons Why Oil Prices Will Go Lower Short-Term


Posted by Sean Brodrick: Uncommon Wisdom

on Friday, 15 June 2012 07:32

OPEC is meeting today (June 14th( in Vienna. And boy, does this group have a lot to talk about.

That’s because the price of U.S.-benchmark West Texas Intermediate crude is down about 25% since hitting a 10-month high of $110.55 a barrel back in March.

That’s a big move in anyone’s book. But I think the price could drop even lower from here.

Part of the reason for that big move down? More supply.

‘A Tremendous Oil Surplus’

According to data from Platts, crude oil production from OPEC rose to 31.75 million barrels per day in May. That’s up 40,000 barrels a day from April; it exceeds OPEC’s own production ceiling by 1.75 million barrels a day, and is the highest level since October 2008.

This occurred even as Iranian supplies were being squeezed by a drop in the number of customers willing to take its oil. Kuwait, Libya and especially Saudi Arabia led production higher.

The Saudis could face pressure from some countries at the Vienna meeting to rein in production. In fact, OPEC president, Abdul-Kareem Luaibi, who also serves as Iraq’s oil minister, told reporters on Monday: “It’s very clear there is a tremendous surplus that has led to this severe decline in prices in a very short timespan. This will not serve anyone.”

So that should put a floor under oil prices, right?

While we could see a bump in the price of crude, the short-term trend for oil prices is actually down. In fact, I wouldn’t be surprised to see crude drop to $70, $65 or even LOWER before the pendulum swings the other way.

Let me give you some reasons why …

#1. Saudi Arabia Could Tell OPEC to Take a Hike.

Recently, Saudi Arabia increased its production to 10 million barrels a day to pick up the slack from sanctions against fellow OPEC member Iran. What’s more, Saudi Oil Minister Ali al-Naimi said the desert kingdom saw increased oil production (and lower prices) as a “stimulus” for the sputtering global economy.

What’s more, Mr. al-Naimi said Saudi Arabia’s analysis “suggests we will need a higher (production) ceiling than currently exists.”

While the Saudis will see how other OPEC members react before formulating a position, Mr. al-Naimi added that his country needs to be allowed to produce more than it currently does. Saudi Arabia says it has spare capacity of another 2.5 million barrels per day.

Is Mr. Luaibi, the oil minister for Iraq, going to tell the Saudis otherwise? Iraq’s oil exports are expected to rise to 2.9 million barrels-per-day next year, from 2.4 million barrels this year. So, Mr. Luaibi might have trouble convincing the Saudis to cut back.

It may all be a wash because Saudi Arabia said it is going into the meeting planning not to ask for OPEC to raise the production level. But that won’t stop it from cheating like a bandit … indeed, any OPEC country that can produce more oil seems to be ready to do so, regardless of quotas.

Also, Saudi Arabia has every incentive to keep prices low enough to discourage a search for alternative fuels and keep demand high for its oil.

Sources say while Iran needs $117 oil to balance its budget, Saudi Arabia is happy with $100 oil. I think the Saudis might be happier with even-lower prices than that, considering that they can pump oil for an estimated cost of $20 per barrel.

Think about it: If the Saudis keep the price of oil low enough, long enough, a lot of expensive deepwater-oil projects will have to be shelved.

Compare their $20-per-barrel cost with North Sea fields that have a marginal cost of about $60 per barrel, while other new deepwater discoveries can cost from $70 to $90 per barrel.

That means more market share for the Saudis, who can ride prices back up again after they put some deepwater competitors out of business.

#2. U.S. Oil Production Soars; Imports Drop.

U.S. oil production has risen 25% since 2008 (an additional 1.6 million barrels per day), and last year, the United States registered the largest increase in oil production of any country outside of OPEC. America’s oil production could increase by 600,000 barrels per day this year.

Hydraulic fracturing has led to a monumental increase in U.S. natural gas and oil production, which will only increase further as the country’s demand for those resources grows.

Result: We are becoming more independent of imported oil. Net petroleum imports have fallen from 60% of total consumption in 2005 to 42% today. Here’s a chart I picked up from economics professor Mark J. Perry’s excellent Carpe Diem blog …

image1

What’s more, the composition of our imported oil is changing. The output of Canadian oil sands has tripled since 2000. Not only is Canada a friendly country, but Canada’s production is already hooked into the North American oil grid. So, more production from Canada lowers U.S. oil prices, which already trade at a steep discount to the Brent crude international benchmark.

I’m not saying we’re going to be free of imported oil, or even free of importing oil from countries that hate us. I’m saying that the more independence we get with our energy supply, the better off we are.

Does more oil supply here in the U.S. translate to lower prices at the gas pump? Bet on it! The average price for a gallon of regular gasoline in the United States fell 15.9 cents to $3.624 in the past three weeks.

#3. Global Economic Growth Is Slowing Down.

The debt crisis is just one problem Europe is grappling with. Another is that economies all over Europe are slowing down rapidly, including the engine of Europe, Germany.

This economic slowdown — with a threat of recession — is weighing on oil demand and prices. In fact, Europe’s fuel demand has fallen so fast that nearly a quarter of Europe’s refinery capacity was taken offline in May, as refiners responded to declining demand for gasoline and diesel.

The euro zone accounts for just 12% of global oil demand, or about half as much as the United States. But since oil prices are made on the margins, a euro-zone recession will be a heavy weight on crude.

Meanwhile, in China, imports went up 0.4% in May to a record 6 million barrels, but that’s because China is building up oil stockpiles. In fact, the most bullish news for oil is that China diverted 40 million barrels to its strategic petroleum reserve and could add another 85 to 110 million barrels in the second half of the year.

But China’s economy is hitting the brakes. China’s inflation dipped to a two-year low in May while economic activity remained weak. Steel production fell 2.5% in May compared to April. Iron ore spot import prices fell 8% through most of May. And output of copper fell 1.4% month-on-month, its second-consecutive month of decline.

Here in the U.S., our economy is still growing. But job creation slipped alarmingly in April and May, and manufacturing orders slid lower in the last two months.

I don’t know if we’re going into another recession. In fact, I hope we can avoid it, and one thing that will help us avoid a recession is lower oil prices. But the fear of a recession should be enough to cause traders to make bearish bets on oil prices. And that could send oil prices lower, faster than anyone thinks possible.

OPEC has a poor record of halting such dives. Deutsche Bank data shows that, over the past 20 years, OPEC has slashed production 13 times to try and prop up prices. Three-quarters of the time, the tactic has succeeded within three months. There are three notable exceptions: 1998, 2001 and 2008. In each instance, amid a worldwide economic slump, it took an average of 15 months for the cuts to work.

So oil prices should go lower. Hooray! But don’t get too comfortable …

Why the Drop in Oil Prices Won’t Last Longer-Term

I am expecting oil prices to go down in the short term, but they’ll probably bottom and head higher again by next year at the latest.

For one thing, the election results should clear up the gridlock in Washington one way or another, so we’ll see more economic stimulus. And there will likely be more stimulus in Europe, as well as in China and other countries. That should get the global and U.S. economies firing on all cylinders again.

Another reason — the ramp-up in production from Saudi Arabia is amazing, but advances in technology will only get you so far. You can’t extract an infinite amount of oil from a finite world. So, I expect production in Saudi Arabia to peak either because the Saudis cut to support prices or because aging oil fields simply can’t keep up.

Meanwhile, the marginal cost of oil production, defined as the cost of pumping the last and most expensive barrel required to satisfy demand, is rising as old, cheap oil is pumped and new wells and fields cost much more. If the oil price falls below the marginal cost, there is no incentive to produce more oil. That will remove supply from the global market until prices go higher again.

According to The Wall Street Journal, in 2011, the average marginal cost of oil production was $92.26 a barrel for the 50 largest listed oil and gas companies. And it will reach $100 a barrel next year.

Of course, the best-laid plans of mice and oil men often go awry, so we’ll see what really happens down the road.

4 Ways to Profit from Lower Oil Prices

  1. For now, you should be hedging bullish positions in oil producers, if you have any. And if you have the stomach for speculation, rallies in oil can be shorted.
  2. Also, you might want to look at long positions in companies that do very well when oil prices go down — airlines, for example.
  3. And you know who is helped by falling oil prices? Gold miners! Fuel costs are a big part of the cost-per ounce, so as oil prices go down, profits go up for well-run miners.
  4. One more thing to consider — when oil prices do bottom, we should see some really attractive opportunities on the long side in the under-loved energy companies.

All the best,

Sean

P.S. What will come out of OPEC’s meeting? As a member of my Red-Hot Global Resources service,you can be among the first to find out how I’m playing the ebb-and-flow of oil prices. Sign up for your risk-free trial membership today!

Sean Brodrick is a natural resources expert and editor of Global Resource Hunter, a monthly newsletter designed to help you ride the commodity supercycle – an ongoing surge in price of food, energy, metals and more.

Sean is also the editor of Red-Hot Global Resources, a weekly newsletter that aims to help you rack up profits with commodity-focused exchange-traded funds (ETFs) and natural resource-sensitive stocks that operate around the world.



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Gold & Precious Metals

Bullish and Bearish Developments in Gold


Posted by Ben Traynor - BullionVault

on Friday, 15 June 2012 00:00

Highlights from this week's GFMS Gold Survey 2012 launch…

EARLIER this week, Thomson Reuters GFMS, the world's foremost research firm focusing on precious metals, launched its Gold Survey 2012.
 
For those weighing up the pros and cons of making a gold investment this year there were both bullish and bearish signals.
 
Here are some highlights that caught BullionVault's eyes (and ears) at this week's launch presentation:
 
Bullish Signals
 
• Gold investment demand is expected to set a new record in 2012
 
GFMS expects gold investment demand to be the main driver of gold prices this year, as it was in 2011. Furthermore, the consultancy expects investment demand for gold to set a fresh all-time high of close to 2000 tonnes in gold bullion terms.
 
A key driver of gold investment, says GFMS, is likely to be ongoing loose monetary policies adopted by the world's central banks.
 
"A corollary of all this monetary largesse," says GFMS's global head of metals analytics Philip Klapwijk, "is fears about resurgent inflation, and that becomes all the more likely if oil prices motor higher should tensions get any worse between Iran and the US."
 
• Physical gold investment demand continued to be strong last year
 
Investment demand for physical gold saw "an excellent performance" last year, Klapwijk told the audience at the London launch of 'Gold Survey 2012'.
 
Europe, China, Thailand and the Indian subcontinent all saw growth in physical gold bar investment (investors in North America, as Klapwijk pointed out, tend to prefer gold coins to gold bars).
 
On a global level, combined demand for coins and bars was 1543 tonnes – a 30% gain on 2010, and a new all-time record. Indeed, the majority of gold investment in 2011 took the form of physical investment, GFMS says.
 
The significance of this is that investments in physical gold tend to represents "stickier" investments than other forms of getting exposure to the metal (for example buying gold futures) – meaning it would probably take more for such investors to exit the positions they've built.
 
 That said, there is obviously a limit to most investors' stickiness. A lot will depend on whether, as GFMS expects, the economic environment will continue to be supportive of gold investment, with negative real interest rates and fears of inflation prevailing in most parts of the world.
 
• Scrap supply appears to be flat
 
On a global level, scrap supply fell by around 50 tonnes 2011 – equivalent to almost two thirds of the year's gold mining production growth. This was the second consecutive year-on-year fall for scrap supply.
 
Only Europe saw significant growth in scrap gold bullion supply last year (old jewelry, gold watches etc.), most likely the result of distressed selling prompted by the Eurozone crisis.
 
North America and Latin America meantime posted modest scrap supply growth. East Asia and the Indian subcontinent meantime saw scrap supply fall, as did the Middle East, where it dropped by over 100 tonnes.
 
Although GFMS says it expects scrap supply to rise this year, another traditional source of supply – central banks – is expected to be absent (see below). GFMS points out there was a "secular increase" in supply from scrap, producer hedging and official central bank sales between 1987 and 1999 – a factor which it reckons contributed to the lackluster gold price during that period. 
 
By contrast, supply from these sources has been flat since 2000, despite a sharp jump in scrap supplies at the onset of the financial crisis. This period in flat supply has broadly coincided with gold's bull market.
 
• Central banks are expected to keep buying gold
 
GFMS expects central banks to remain net gold buyers this year, although there may be a slight dip on last year's figure, with net official sector buying having risen 491% year-on-year in 2011.
 
The swing to net buying by central banks is a key factor behind the flat supply picture of recent years that was noted above. Signatories to the Central Bank Gold Agreement have made what GFMS calls "trivial sales" in recent years, while emerging market central banks have been buying gold in significant quantities.
 
Bearish Signals
 
• Gold mining supply is expected to continue growing this year
 
Worldwide gold mine production rose for the third year running in 2011. Last year saw an annual gain of 2.8%, or 78 tonnes.
 
New gold mining operations contributed 47 tonnes of supply, while Africa was the region that saw the strongest growth, increasing production by 51 tonnes (despite its largest player, South Africa, seeing a five tonne drop).
 
Gold mine production has entered a "new era", Klapwijk told the London launch, with GFMS expecting a further 3% growth this year. 
 
• A lot of gold investment is required just to maintain current prices
 
Rising mine supply contributes to what GFMS terms the gold market "surplus" – the difference between combined mining and scrap supply and fabrication demand (jewelry plus industrial uses).
 
GFMS estimates that this leaves a "surplus" of gold supply equivalent to around 110 tonnes. Gold investment therefore needs to take up that slack.
 
At current prices "purchasers of bullion need to take gold to the tune of $130 billion out of the market for it to clear," said Klapwijk this week. One attendee at the launch asked whether there might be a case for saying many western investors are now overinvested in gold.
 
Klapwijk agreed such a case could be argued, and that many wealth investors interested in gold have probably already built their positions. He also pointed out that institutions such as pension funds and sovereign wealth funds – where gold investment remains relatively rare – could still offer some scope for growth.
 
• Hedging activity by miners can now only be a source of supply
 
For much of the 1980s and 1990s, gold miners would hedge their price risk by selling future production forward to lock in the current price, adding to current supply and putting downwards pressure on the gold price.
 
This process went into reverse as the bull market got underway. With gold prices rising, producers began to de-hedge, buying back positions and thus contributing to gold demand.
 
Measured as the total outstanding forwards and loans, plus gold options positions weighted according to their sensitivity to movements in gold futures (i.e. an option's delta), producers' overall hedging position last year was equivalent to 157 tonnes of gold bullion. Last year was the first year in over a decade that net hedging was positive, the producers in aggregate adding six tonnes to their combined position.
 
By contrast, hedging positions were equivalent to around 3000 tonnes in 1999 and 2000. Most of the de-hedging – which contributed to the demand side – appears to have been done.
"[Producer hedging] cannot be a source of demand in future," said Klapwijk.
 
"It can only be a source of supply. The question is: how much supply?"
 
Klapwijk noted, however, the most of the hedging seen last year appeared to be related to specific mining projects, adding that there seemed little appetite for strategic hedging against a fall in gold prices.
 
• Gold jewelry demand is expected to fall again
 
Gold jewelry fabrication demand fell 2.2% in 2011 – though given the rise in gold prices, the fact that the fall wasn't larger led GFMS to describe this source of demand as "resilient".
 
The bulk of fabrication demand was again accounted for by developing countries, where gold jewelry is often bought for investment as much as adornment purposes. 
 
Although most of the world's regions saw a fall in gold jewelry fabrication in tonnage terms, there was a slight gain in Russia and more significant growth of around 40 tonnes in East Asia, which "boils down to China" said Klapwijk.
 
Despite this eastwards demand pull, though, GFMS expects gold jewelry consumption to fall again this year, citing high gold prices and a slowdown in global growth. Jewelry consumption however "is still expected to remain above 2009's historically depressed level" says GFMS.
 
The Outlook for Gold Prices
 
Weighing up the above factors, and many more besides, GFMS forecasts an average gold price in 2012 of $1731 per ounce, with a range of $1530 to $1920. 
 
Klapwijk adds that "a push towards $2000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of the year".
 
Of course, short-term gains are not the primary reason most people make a gold investment, especially not those buying gold in physical bullion form. From developing nations in the East to the quantitatively eased economies of the West, people are turning to gold as a vehicle for defending the value of their wealth and an insurance hedge against tail risks. 
 
The dynamics behind most gold investment will continue to play out well beyond the end of this year.
 
Ben Traynor
 
Gold value calculator   |   Buy gold online at live prices
 
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
 
 
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.




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Gold & Precious Metals

Opportunity in The Precious Metals Sector


Posted by Bob Hoye: Institutional Investors

on Thursday, 14 June 2012 11:07

"Civilized people don't buy gold." - (Charles Munger, Berkshire Hathaway Inc.)

For a while this department was called the Gold and Silver Sector, giving recognition to the problems left over from the speculative surge to April 2011. With what seems to be the start of a new bull market, the appropriate title is used again.

Is it a new bull market?

As noted, the dismal slide in gold stocks accomplished one of the worst oversold conditions in a hundred years. Actually at 24 on the monthly RSI, it was the second worst with 1924 at 22 being the worst. Other examples at 25 to 27 occurred in 1942, 1948 and 2008, which is the full list.

Also noted in mid May was that once the condition registered the rally was virtually immediate. The low was 39 in mid May.

Let's put this in perspective. GDX set a good momentum high at 64 in April 2011, but it was not in the order of the momentum high for silver. The next high for the GDX was at 66 in September with the same 70 on the RSI.

Our point has been that as the selloff on gold’s completed it would be equivalent to the overbought for silver a year ago. Some sort of symmetry.

Technical measures of the plunge suggest a new bull market. The rise out of the middle of May has had two constructive corrections. But, a large test of the lows and subsequent advance would confirm a new bull market.

Let's look at the fundamentals--not of the supply/demand analysis, but in what influences profitability.

The world has likely started a cyclical recession, which means a cyclical bull market for gold's real price. One proxy is our Gold/Commodities Index, or GCI. This rose to 499 with the crisis that ended in September and slumped to 419 in mid March. The test was successfully completed at 421 in early April and it has rallied to 464 this week.

This also needs a bigger test to conclude the possibility of a cyclical advance.

There could be some new developments in the tech sector, but the gold industry is the only sector with a track record of doing well when most of industry and commerce is suffering post-bubble pricing pressures. Such pressures show up as positive pricing for the gold sector.

Our advice in early April was to begin to accumulate into weakness.

Our advice to Mr. Munger is that civilized people should abhor an experiment in unlimited government funded by central bankers with unlimited ambition.

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bobhoye@institutionaladvisors.com

WEBSITE: www.institutionaladvisors.com

 



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Timing & trends

Fear of a dollar collapse will make the Chinese the biggest buyers of gold this year


Posted by Peter Cooper - Resource Investor

on Thursday, 14 June 2012 08:52

 

China is widely expected to overtake India as the world’s biggest consumer of gold this year with gold purchases rising by 10 per cent, according to the leading Chinese bank ICBC. Why?

The Chinese are moving out of the dollar and into gold. That is what a seemingly ill-educated gold trader in the Sharjah Gold Souk told us earlier this year.

King for a day

You don’t need to be a genius to see the logic behind this move. The dollar might be king today but only against the faltering euro. But what happens when we are reminded that US debts are running at levels comparable with Greece?

As the largest holder of foreign dollar reserves the Chinese are only too painfully aware of how exposed this leaves their savings in a slump. US treasuries are the biggest bubble in history as legendary investment adviser Dr Marc Faber reminded us recently (click here).

Diversification for protection really means something if you have most of your wealth tied up in US t-bonds. And where do you go for safety? Things have already gotten so bad for the Swiss franc that it has become pegged to the euro to stop further appreciation.

Then again if you are Indian and with your money in gold and not rupees then you are laughing. The massive depreciation of the rupee puts gold at a fresh all-time high in rupees, even while it is several hundred dollars off its dollar-denominated high of last September. This experience is not lost on the Chinese.

There are less and less safe haven assets in the world and more and more financial markets are manipulated by central banks because they have control over the supply of paper money. Gold and silver they can suppress through the collusion of the bullion banks but this will not withstand the pressure of massive demand for precious metals as the global economic system cracks up.

Base rate scenario

Imagine what the US economy would look like with the base rate set to Italian levels of six per cent. Asset values from bonds to stocks to real estate would be decimated. A deflationary depression would set in.

And yet nobody currently looks seriously at what is a very obvious future scenario as the artificial supports used to keep the world economy afloat since the global financial crisis begin to fail. The Chinese in buying gold and silver are just peering a bit further into the future and buying insurance against the worst case scenario.

The problem is that a seriously mishandled eurozone sovereign debt crisis may now make this the base case scenario.

201206085MinGold


About Peter Cooper:

Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group. 

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner inwww.ameinfo.com, which later became the Middle East's leading English language business news website. 


Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier. 

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation. 

Order my book online from this link 



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