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September 22 2016

Commentary by Eoin Treacy

California's legal marijuana market is on the verge of exploding

This article by Ben Gilbert for Business insider may be of interest to subscribers. Here is a section:

We're not talking about de-criminalization, or police de-prioritization.

We're talking about alcohol-style regulation and sale of marijuana to adults, age 21 and up. We're talking about legally allowed personal cultivation, state/local taxation of retail sales/distribution, and re-evaluation of sentences/records for people charged with marijuana offenses.
We're talking about outright, full-on legalization of marijuana. And in the world's sixth largest economy, that means billions of dollars. 

If California's Proposition 64 passes on November 8, and sales begin by January 1, 2018, California's looking at an additional $1.5 billion flooding into the marijuana market. That number swells to just shy of $3 billion in 2019, and nearly $4 billion by 2020, based on the latest report from New Frontier Data and ArcView Market Research.

And to be clear, that's on top of the already booming medical marijuana market — the total size of the cannabis market would reach $4.27 billion in 2018, and would grow to $6.45 billion by 2020.
The ballot initiative has overwhelming support in California: Over 60% of respondents support Prop. 64, compared to just 34% opposed, according to Ballotpedia's average of polls.

 

Eoin Treacy's view -

Evidence from companies like GW pharmaceuticals and others means that the Drug Enforcement Agency’s (DEA) assertion cannabis is a Schedule 1 narcotic with no medical use and a high probability for misuse is looking increasingly outdated. Arguments for full legalisation go a step further and promote the view cannabis is no more dangerous for consenting adults than alcohol. Considering the damage abuse of alcohol is capable of that’s not a particularly high barrier. 



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September 21 2016

Commentary by Eoin Treacy

Gold Seen Entering Long-Term Bull Cycle as Asset Bubbles Pop

This article by Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Parrilla joins a slew of investors who are bullish on gold because of low borrowing costs and central-bank bond buying. Billionaire bond-fund manager Bill Gross has said there’s little choice but gold and real estate given current bond yields, while Paul Singer, David Einhorn and Stan Druckenmiller have all expressed reasons this year for owning the metal.

Some are not confident prices will rise. The probability of three rate hikes through end-2017 means there’s little room for rallies, according to Luc Luyet, a currencies strategist at Pictet Wealth Management. Cohen & Steers Capital Management, which oversees $61 billion, has pared its gold allocation, while investor Jim Rogers said after the Brexit vote in June that he’d rather seek a haven in the dollar than bullion.

While global bond yields are still very low, they’ve been rising. Yields have climbed to 1.21 percent from a record low 1.07 percent in July, according to the Bloomberg Barclays Global Aggregate Index in data going back to 1990. The odds of the Fed hiking in December have risen to 58 percent after the U.S. reported higher-than-expected inflation in August, from just below 50 percent on Thursday.

 

Eoin Treacy's view -

Despite the fact precious metal prices have been in a reaction and consolidation for the last few months, the biggest bulls are unabashed because they don’t see a solution to how central banks can support growth while simultaneously reducing the debt mountain without the assistance of inflation which could involve helicopter money. 



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September 21 2016

Commentary by Eoin Treacy

September 20 2016

Commentary by Eoin Treacy

Performance and valuations of junior gold companies

Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

As shown in Exhibit 1, the GDXJ index of smaller cap gold companies (up 129% YTD) is holding near highs of the year despite a recent pull back in the gold price, and since May has outperformed the GDX index of larger cap names, which has risen by 89% YTD. Similarly, junior gold companies we track are currently trading at an average EV/oz valuation of $64/oz versus the YTD high of $74/oz seen in mid- August, the highest level since the $70/oz observed in 2011 and well above the $20–30/oz range of the 2013–2015 trough (Exhibit 2). We believe these valuations are in part due to a scarcity of higher quality gold projects, and we would expect a pick-up in M&A activity and the junior gold companies to continue to post strong relative returns during the remainder of 2016.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Precious metal prices have been confined to a reaction and consolidation, of this year’s impressive early gains, for the last few months with many instruments having already completed reversions to the mean. With the Fed and BoJ meetings tomorrow it is reasonable that investors are not rushing to initiate long positions with so much debate about what exactly central banks have planned and the headwind higher rates would pose for precious metal related instruments. 



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September 16 2016

Commentary by Eoin Treacy

How the sugar industry bought out scientists for decades, and how to stop it from happening again

This article by Jessica Hall for Bloomberg may be of interest to subscribers. Here is a section: 

According to a report just published in the Journal of the American Medical Association, a delegation from the Sugar Research Foundation paid off Harvard scientists to produce reports that falsely downplayed the role of sugar in coronary heart disease.

Yep. Sugar contributes to coronary artery disease, more than we have been led to believe.
Reports had linked both dietary sugar and dietary fat to heart disease as early as the mid-50s; by 1960 we knew that low-fat diets high in sugars still resulted in high cholesterol levels. So in 1964, the director of the SRF proposed that the group “embark on a major program” to dispute the data as well as any “negative attitudes toward sugar.” They found a group of Harvard nutrition scientists who would take their money, and started making plans.

Complete with a codename, Project 226 was designed to protect the interests of the sugar industry by “recapturing” the 20% of American calorie intake they expected to lose once this whole sugar-isn’t-great-for-your-heart thing percolated through into public awareness. It resulted in a two-part review published in the prestigious and influential New England Journal of Medicine, which hand-waved away huge swathes of research pointing out the risks of dietary sugar.

The authors went to absurd lengths to discount studies that didn’t tell the story the Sugar Research Foundation wanted to tell. For example, to get the results they wanted, they had to throw out all the studies done on animals, because not a single animal study supported the conclusion they wanted. But after they finished their work, they reported that epidemiological studies showed a positive association between high dietary sugar consumption and better heart disease outcomes. The review concluded that there was “no doubt” that the only way to avoid heart disease was to reduce saturated fat.

How did this get past the sanity check at NEJM? The authors were experts, respected in their fields, and they were at least consistent cherry-pickers. They also conveniently failed to report that the Sugar Research Foundation funded their “study.” NEJM didn’t start requiring authors to report conflicts of interest until 1984, and by then the sugar industry had floated comfortably on their 1964 precedent, funding study after study supporting their pro-sugar narrative “as a main prop of the industry’s defense.”

Nobody knows how many reviewers they paid to endorse the conclusions of their faux science.

 

Eoin Treacy's view -

The role of sugar in contributing to coronary heart disease is now being hotly investigated as consumers become progressively more involved in controlling their nutrition. Inflammation is the new buzz word and the fact that pursuing a diet where processed sugars are limited results in a trimmer figure and lower cholesterol is an additional incentive for many. The sugar lobby has been enormously successful in avoiding the kind of health warnings that have been imposed on the tobacco sector. However it is looking increasingly likely the tide is turning; in the West at least. 



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September 14 2016

Commentary by Eoin Treacy

Copper Rises Most in 3 Months on Signs of Better Chinese Growth

This article by Yuliya Fedorinova and Joe Deaux for Bloomberg may be of interest to subscribers. Here it is in full:

Copper posted the biggest gain in almost three months as strong economic data from China fueled speculation that demand will strengthen in the Asian nation, the world’s largest metals consumer. An index of global mining stocks advanced for the first time in six days.

China’s broadest measure of new credit exceeded estimates in August, rebounding from a month earlier and bolstering evidence that growth is stabilizing. Chinese reports this week on factory output, investment and retail sales all exceeded economist estimates.

“The Chinese data is improved,” Michael Turek, the head of base metals at BGC Partners Inc. in New York, said in an e-mail.

“Credit has been easier. That enables manufacturing to operate more smoothly and profitably and reduces bankruptcies.”

Copper for delivery in three months rose 2.6 percent to $4,771.50 a metric ton ($2.16 a pound) at 5:50 p.m. on the London Metal Exchange, the biggest increase since June 15.

The Bloomberg World Mining index of producers added 0.4 percent, heading for its first gain since Sept. 6.

Users, including power-wiring companies, are stepping up purchases of copper ahead of China’s autumn festival after prices fell, Xu Maili, an analyst with Everbright Futures Ltd., said by phone from Shanghai. The three-day Chinese holiday starts Thursday.

 

Eoin Treacy's view -

The Chinese market is closed tomorrow and Friday for the Mid-Autumn Festival and the annual golden week holiday will be between October 2nd and 7th inclusive. Therefore there is some merit to the argument that stockpiling ahead of the holidays may have contributed to recent firming in copper prices. 



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September 14 2016

Commentary by Eoin Treacy

September 13 2016

Commentary by Eoin Treacy

Gold Sags in Longest Slump Since June as Demand Ebbs on Dollar

This article by Joe Deaux for Bloomberg may be of interest to subscribers. Here is a section:

“You have rising expectations that there is the possibility of a rate increase this year,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “A December rate hike is a distinct possibility that’s hurting the gold market.”

Gold futures for December delivery fell 0.1 percent to settle at $1,323.70 an ounce at 1:44 p.m. on the Comex in New York. The losing streak is the longest since June 23.

Precious-metals traders have been in thrall to contrasting comments from Fed officials before the Fed’s policy meeting next week. Boston Fed President Eric Rosengren said Friday that the economy may overheat if the bank waits too long.

Eoin Treacy's view -

Gold does best when people are most worried about the integrity of their respective currency; when it is being eroded by negative interest rates in response to deflation or purchasing power is being destroyed by inflation. However between those extremes gold needs an additional catalyst to rally and if the Fed is going to gradually raise interest rates that represents a headwind. 



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September 09 2016

Commentary by Eoin Treacy

Gold Investors Brace for Lower Prices on Interest-Rate Outlook

This article by Luzi Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:

More than 2,500 lots exchanged hands Friday for a put option giving owners the right to sell October futures at $1,300 an ounce, making it the most-traded option for the second straight day. The most active contract on the Comex slipped as much as 0.6 percent to $1,334.10. Holdings in exchange-traded funds backed by gold fell for a second day on Thursday.

There’s reason to be worried. Federal Reserve Bank of Boston President Eric Rosengren, who shifted his stance in recent months in favor of monetary tightening, warned Friday that waiting too long to raise interest rates risks overheating the economy. Higher rates make bullion less competitive against interest-bearing assets. The comments come a day after the European Central Bank played down the prospect of an increase in asset purchases.

“The markets are quite nervous that an interest-rate hike might actually happen this month,” Phil Streible, a senior market strategist at RJO Futures in Chicago, said by telephone.

“Investors and traders know that gold futures have held above $1,300 and this looks like a key level of support. It’s rational for investors to be looking at protective put options at $1,300 in the event a surprise interest rate increase occurs.”

 

Eoin Treacy's view -

Total Known ETF Holdings of Gold have not been affected by the pullback witnessed in precious metals markets this week suggesting the action is more driven by traders than investors. 



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September 08 2016

Commentary by Eoin Treacy

GW Pharmaceuticals Jumps on Report It May Be Acquisition Target

This article by Caroline Chen for Bloomberg may be of interest to subscribers. Here it is in full:

GW Pharmaceuticals Plc jumped after Reuters reported that the company had hired Morgan Stanley as an adviser after being approached by several drugmakers interested in an acquisition.

GW gained 20 percent to $101.47 at 3:31 p.m. in New York trading, its biggest intraday gain since March. Reuters cited people familiar with the matter in its report.

The U.K. company, with a market value of $2.56 billion, develops drugs derived from cannabis. Its leading asset is an experimental treatment for epilepsy, and it’s also working on candidates for cancer, type 2 diabetes and schizophrenia. GW has one approved drug, Sativex, which is used to control involuntary muscle spasms from multiple sclerosis.

Insys Therapeutics Inc., which develops drugs based on synthetic cannabis, rose 5 percent to $15.67.

GW, based in Cambridge, England, isn’t currently interested in a sale, Reuters reported, citing people familiar with the matter. A representative for GW declined to comment.

 

Eoin Treacy's view -

Cannabis is increasingly being recognised for its uses as a pain reliever and mood stabiliser; confirming what millions of users in the illicit market have testified to for decades. With the tide of public opinion turning there is a race on to secure interests in the sector as companies bet on the potential for further legalisation to be approved in the USA, not least during the November ballot. 



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September 07 2016

Commentary by Eoin Treacy

September 02 2016

Commentary by Eoin Treacy

Solid Hiring Without Wage Jump Tests Fed Hopes for Inflation

This article by Craig Torres for Bloomberg may be of interest to subscribers. Here is a section:

The August employment report released Friday will sharpen the debate. The figures showed a monthly net gain of 151,000 jobs, an unemployment rate holding at 4.9 percent and a slowdown in wage growth. There’s ammunition in the latest data for officials who want to delay a rate increase as they look for signs of continued tightening in the job market. A critical component in Fed officials’ forecast is a rise in wages that boosts demand and drives prices higher.

“Nobody understands the inflation process, including the Fed,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “When we are near full employment, why has inflation been so incredibly well-behaved?”

After the report, traders trimmed their bets on a rate hike at the Sept. 20-21 FOMC meeting to a roughly 14 percent chance, according to federal funds futures contracts.

The mystery of weak wage growth is troubling, for the short run and the longer-term. If Yellen and the FOMC majority are wrong, inflation could remain stuck below their target, setting the economy up for lower rates of inflation in the next downturn.

 

Eoin Treacy's view -

Wages are one of the most important figures to watch to decipher what the direction of Fed policy is likely to be because it cannot simply be headoniced out of the data. For example unemployment is a factor both of how many people are unemployed but also how many are looking for jobs. Lower participation rates flatter unemployment. You can’t do that with wages and because wage demands rise when workers feel they need more money to meet their liabilities they act as a barometer for inflation. 



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September 02 2016

Commentary by Eoin Treacy

August 30 2016

Commentary by Eoin Treacy

The Frozen Concentrated Orange-Juice Market Has Virtually Disappeared

This article by Julie Wernau for the Wall Street Journal may be of interest to subscribers. Here is a section:

Americans drank less orange juice in 2015 than in any year since Nielsen began collecting data in 2002, as more exotic beverages like tropical smoothies and energy drinks take market share and fewer Americans sit down for breakfast.

When they do drink orange juice, they aren’t drinking it from concentrate.

Frozen concentrated orange juice was invented in Florida in the 1940s, primarily as a way to provide juice for the military, readily storable and easy to ship. But frozen juice has been losing favor for years.

Not-from-concentrate orange juice surpassed the concentrated orange-juice market in the 1980s. Now, the 1.4 million gallons of frozen concentrate that Americans drink each month pales in comparison to the 19.1 million gallons of fresh juice consumed each month, Nielsen said.

Louis Dreyfus Co. is scaling back the one citrus facility in Florida that is devoted entirely to concentrated orange juice. The commodities giant is laying off 59 of the plant’s 94 workers as its sells the operation that packs frozen concentrated orange juice into cans for retail.

 

Eoin Treacy's view -

Changing consumption habits where people are more concerned not only with the taste but the quality of the foods they consume are having wide ranging effects on the commodity markets. To most people frozen orange juice does not taste as good as a freshly squeezed navel or Valencia orange. However since squeezing one’s own oranges is both time consuming and expensive the vast majority of orange juice consumed comes from either concentrate or is pasteurized. 



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August 25 2016

Commentary by Eoin Treacy

August 16 2016

Commentary by Eoin Treacy

Gas Glut Upends Global Trade Flows as Buyers Find Leverage

This article by Tsuyoshi Inajima for Bloomberg may be of interest to subscribers. Here is a section:

Historically, LNG has been sold on long-term contracts that guaranteed buyers supply and helped producers finance liquefaction plants at a time when less of the product was shipped. Now, a gas glut is causing LNG importing countries to support renegotiating existing deals that can run 20 years or more while suppliers offer more flexible terms to lock up customers spoiled for choice.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. That country’s Fair Trade Commission is in the process of probing resale restrictions in longer deals in an effort that could mean the renegotiation of more than $600 billion in contracts and boost the number of shorter-term agreements.

“There will be 40 million to 50 million tons of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a fuel buyer that plans to increase spot and short-term LNG deals. “Homeless LNG will provide a great opportunity to improve liquidity in Asian and global markets.”

 

Eoin Treacy's view -

The evolution of a global transportation network for natural gas is creating the impetus to divorce pricing from long-term oil contracts. While Russia floated the idea of creating a natural gas equivalent of OPEC a few years back, as a way of preserving it pricing power, it was unable to reach critical mass. 

The reality today is that a substantial number of new entrants to the market, not least Australia, the USA and developing east Africa, all have a vested interest in capturing market share. Meanwhile major consumers like Japan, India and China would understandably like to avail of lower prices. The expansion of the Panama Canal also boosts the viability of US exports to Asia. 

 



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August 16 2016

Commentary by Eoin Treacy

Tackling the fungi that could wipe out the world's banana supply within a decade

This article by Michael Irving for Gizmag may be of interest to subscribers. Here is a section:

The most common type of banana the western world eats is the Cavendish, which is produced through vegetative reproduction – instead of growing from seeds, cuttings of the plant's shoots are replanted and cultivated, making all Cavendish bananas essentially "clones" of one specific plant. Without genetic variety, as diseases gain a foothold over the fruit, they're equipped to potentially take out the entire worldwide crop.

"The Cavendish banana plants all originated from one plant and so as clones, they all have the same genotype – and that is a recipe for disaster," says Ioannis Stergiopoulos, plant pathologist at UC Davis.

Currently, close to 120 countries produce about 100 million tons of bananas each year, but 40 percent of the yield is spoiled by Sigatoka, a fungal disease complex comprised of three strains: yellow Sigatoka, black Sigatoka and eumusae leaf spot. To combat the ever-present threat, farmers need to apply fungicide to their crops 50 times a year, which isn't only costly, but can pose a threat to the environment and human health.

"Thirty to 35 percent of banana production cost is in fungicide applications," says Stergiopoulos. "Because many farmers can't afford the fungicide, they grow bananas of lesser quality, which bring them less income."

 

Eoin Treacy's view -

The susceptibility of bananas to bacterial attack, due to their lack of genetic diversity, puts me in mind of the Irish potato famine where reliance on a single breed of tuber left the population bereft of a major portion of their diet when blight destroyed the crop. Of course no one is as heavily reliant on bananas yet they do form a constituent part of many people’s diet globally. It should be possible, given today’s technology, to protect the crop from infection and potentially even enhance yields which could flatter profitability for major producers.   



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August 10 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 9th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on the nuclear sector:

Many of the nuclear power plants that were built in the 1960s and 1970s are now approaching the end of their commercial lives. The challenge is that nuclear power plants have the potential for very long operating lives, often on the order of 80 years, meaning that those older plants might have an additional 20 or 30 years of operating life remaining. The issue is that over their very long lives, these nuclear plants require extensive and costly periodic upgrades and repairs. In order to finance these modifications, the plants must generate significant profits during their operating lives. Low coal and now low natural gas prices have undercut the price of nuclear power, often making these plants the highest cost fossil fuel plants in utility company portfolios. These economic challenges ignore the fact that nuclear power plants have the highest operating ratios of all power plants, meaning that they produce power when people need it and that the power output is carbon-free. 

And

Low natural gas prices have seriously undercut the power prices for the nuclear power plants upstate, to the point that the owners – Exelon (EXC-NYSE) and Entergy – have threatened to shut down the plants. If that were to happen, New York State’s plan to have half its power coming from clean energy sources by 2030 would be doomed. In fact, the state has determined that if the nuclear power plants were shut, local utilities would have to rely on power from power plants fueled by dirty gas and coal. That would detract from the governor’s clean energy goal. That goal is why Gov. Cuomo has fought the use of hydraulic fracturing in the state to tap greater supplies of locally produced natural gas. Natural gas, although cheaper than the governor’s favored three sources of clean energy, would have released more greenhouse gases, but it is likely that the cost to consumers would have been less than what will happen in the future. Gov. Cuomo has championed a plan that was embraced by New York’s Public Service Commission and will force utility customers in the state to pay nearly $500 million a year in subsidies designed to keep the three upstate nuclear power plants operating. The Indian Point plant will not receive any subsidy funds because downstate power prices are sufficiently high that the plant can earn a profit.

According to the Public Service Commission, starting in 2017, the subsidies will cost utility ratepayers in New York State $962 million over two years. However, the overall cost of the clean energy program to utility customers would be less than $2 a month, according to the Public Service Commission. The chairman of the commission said that state officials had calculated the social and economic benefits of the program, including the reduction of carbon emissions, lower prices for electricity and more jobs in the electricity generation business, and that these benefits would be greater than the cost of the subsidies. Environmental groups are fighting back, claiming that while they supported the governor’s plan to mandate the purchase of renewable energy by utilities, they viewed the magnitude of the subsidies that could amount to several billion dollars over the 12 years to 2030 as a mistake. Exelon, the owner of two of the three up-state nuclear power plants applauded the Public Service Commission announcement and pledged to invest $200 million in the plants next year if the plan is approved.

Environmentalists who are serious about clean energy should pay attention to the comments of Michael Shellenberger, the president of nonprofit research and policy organization Environmental Progress. He said that nuclear power plants produce so much more energy than other forms that they can be more environmentally friendly than even renewables when all the mining, development and land disturbances are taken into account. As Mr. Shellenberger put it, “from the whole life-cycle analysis, it’s just better.” Of course, on the other side of the issue is someone such as Abraham Scarr, director of the Illinois Public Interest Research Group, a consumer advocate group, who said, “We should be building the 21st century energy system and not continuing to subsidize the energy system of the past.”

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The above paragraphs highlight just how much of an influence low natural gas prices have had on the utility sector and the broader energy mix. Closing down nuclear plants because the cost of upgrades and repairs cannot be justified when competition with natural gas is so intense suggests demand for the commodity is going to intensify in coming years if nuclear is not subsidized. 



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August 10 2016

Commentary by Eoin Treacy

Palladium at Year High, Driving Precious Metals on Chinese Cars

This article by Eddie Van Der Walt and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Palladium is up 19 percent in the past month, the best performing commodity. Chinese vehicle sales in July gained the most in 17 months, data showed this week. A weaker dollar since late July has also spurred precious metals.

That “highlighted a generally supportive backdrop to palladium demand, exacerbated by ongoing concerns that output from top producers Russia and South Africa may be under threat,” said Jonathan Butler, a precious metals strategist at Mitsubishi Corp. in London. “We could see a bit of profit taking from here, but the $700 level seems to have been recaptured convincingly.”

 

Eoin Treacy's view -

Chinese car sales coming in well ahead of expectations has been positive for palladium prices due to increased demand for catalytic converters but has also been a contributing factor in the outperformance of the German DAX Index.



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August 10 2016

Commentary by Eoin Treacy

Brazil's Messy Impeachment Drama Almost Over. Markets Can't Wait

This article by Isabel Gottlieb for Bloomberg may be of interest to subscribers. Here is a section:

After taking over in May, Temer has yet to drive through any major policy proposals amid concern that painful spending cuts or unpopular reforms could weaken Senate support for his administration ahead of the impeachment vote. His economic team is expected to propose changes to social-security laws immediately after the ruling, and support for that and other measures will be an important indicator of whether Brazil’s world-beating currency, bond and stock rallies have staying power.

Optimism about political change in Brazil “is somewhat being reflected in year-to-date momentum, but it’s not completely priced in,” said Sean Newman, a senior portfolio manager for emerging markets at Invesco Advisers in Atlanta.

Investors will likely remain bullish on Brazil’s corporate and government debt throughout August, and credit default swaps may extend this year’s gains once Rousseff is removed for good, he said. In the swaps market, the cost to hedge against losses on Brazil’s bonds has fallen by almost half since February. The currency, meanwhile, has rallied 26 percent against the dollar, the most in the world, and the benchmark Ibovespa index’s 68 percent increase in dollar terms in 2016 outperforms all other major benchmarks.

 

Eoin Treacy's view -

Foreign investors had been waiting for a catalyst to re-enter the Brazilian market and the prospect of a new reform minded president has seen the Real surge and the iBovespa challenge a six-year progression of lower rally highs. The big question is to what extent these rallies have already priced in much of the good news since none of the expected fiscal reforms have yet been passed.



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August 09 2016

Commentary by Eoin Treacy

Email of the day- on financial repression

I just came across this article which was published a week ago by Bloomberg.   So, money market funds will become less safe for storing cash than they have been. One could see this as the US government wanting to attract billions into its own coffers by issuing 2 month bills that attract the money. Or maybe it's concern over the solvency of large money market funds if things go haywire during another crash. I wondered if you have any insights on this change.

Eoin Treacy's view -

Thank you for this article which highlights the continued trend of financial repression where governments, and not just the USA’s, are creating markets for their paper. They have little choice considering the quantity of debt that has been issued over the last decade and the outsized debt to GDP ratios we are presented with. The simple fact is investors are going to help out with the problem like it or not. I covered this issue in relation to another article focusing on the changes to money market fund holdings on August 2nd 



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August 08 2016

Commentary by Eoin Treacy

The surplus cash will go to shareholders

This interview with DRD gold’s CEO Niel Pretorius may be of interest to subscribers.

Eoin Treacy's view -

Gold miners are increasingly focusing on free cash flow. As the gold price recovers and they demur from massive expenditures on expansion. the potential for dividends to increase is a major positive development for investors and is contributing to the positive performance of related shares. This is particularly noteworthy when interest rates are so low and investors are hungry for yield. 



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August 04 2016

Commentary by Eoin Treacy

Brazil Real Rises to One-Year High as High Yields Lure Investors

This article by Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section: 

Emerging-market currencies rallied after the Bank of England cut its key rate for the first time in more than seven years, boosting speculation that policy makers around the world will continue to ease monetary conditions and the U.S. Federal Reserve will delay rate increases. After keeping its Selic rate at 14.25 percent at a meeting last month, Brazil’s central bank said there is no room for monetary flexibility, citing the need for further fiscal adjustment and an unfavorable climate that is harming global food production.

"The real is gaining momentum as most central banks across the globe continue to ease further their monetary policy," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland. "Investors are desperately chasing higher returns, while volatility in the FX market is at multi-month low, which creates an enabling environment for carry trade and definitely drove the real higher over the last few months."

Buying the real with borrowed dollars in a carry trade has returned 32 percent this year, the most among 42 currencies tracked by Bloomberg.

Bank of England officials voted to reduce the benchmark rate to a record-low 0.25 percent and also to expand quantitative easing, as they slashed economic growth forecasts by the most ever.
"The BOE actions help foster expectations that other central banks might follow and improve liquidity worldwide," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo. "And when the general market mood improves, the search for returns causes the high yielding real to outperform."

 

Eoin Treacy's view -

Brazil has an overnight deposit rate of 14.15% which is attractive to investors, particularly those residing in negative interest rate jurisdictions, despite the obvious issues the economy is subject to that require such a high rate. 

Governance is Everything has been a mantra at this service for decades. Brazil represents another great example of how a failure to improve standards of governance during the good times means the drawdown during the bad times is often worse than anyone might have expected. 

 



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August 04 2016

Commentary by Eoin Treacy

August 02 2016

Commentary by Eoin Treacy

Email of the day on gold share benchmarks

Here's a link to an educative article by Adam Hamilton - an explanation and comparison of the gold benchmarks, HUI and GDX. I thought it might be of interest to subscribers: Warm regards and great appreciation to you and David for all you do.

Eoin Treacy's view -

Thank you for your kind words and the link to a history of gold share benchmark indices. The financial repression referred to in my first piece above, where governments are creating a ready market for their paper harks back to a time when gold was considered a powerful hedge against too much government interference in one’s financial affairs. Here is a section on some of the primary differences between the GDX and HUI:

A big advantage GDX has over the HUI is its component list is actively managed by expert analysts. So while HUI component changes are rare to nonexistent, GDX's are constantly being shuffled around. I see this on a quarterly basis as I analyze the top GDX component stocks' quarterly operating results. There's no doubt GDX is a more-accurate ongoing reflection of this dynamic sector than the static HUI.

But GDX has other disadvantages in addition to extreme over-diversification. By virtue of including so many stocks in such a small sector, GDX also has to include plenty of primary silver miners. While their stocks generally mirror gold-stock action, the substantial silver weighting among GDX's top components makes it more of a precious-metals-stock benchmark than the pure gold-stock one it is often advertised as.

For many contrarian investors gold stocks and silver stocks are synonymous and interchangeable, they own both. While gold price action overwhelmingly drives silver, occasionally silver disconnects from gold and its miners' stocks follow. Such divergences weaken GDX's gold-stock tracking, and I've heard from plenty of investors not happy their "gold-stock ETF" also includes most of the major silver miners as well.

The HUI on the other hand is a pure gold-stock benchmark, including no silver miners that dilute its core mission. Ideally gold-stock benchmarks should only include primary gold miners since that's what they are supposed to track. Silver stocks can go into other silver-stock ETFs. This separation helps investors more easily tailor their specific gold and silver exposure via their respective miners exactly how they want it. 

 



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July 29 2016

Commentary by Eoin Treacy

Platinum takes limelight from gold with best month in four years

This article by Eddie van der Walt and Ranjeetha Pakiam appeared in Mineweb. Here is a section:

The two lesser-known precious metals, used in devices that control toxic car emissions, are benefiting from better auto sales in China, concern over labour in South Africa and loose monetary policy from central banks around the world.

“Platinum and sometimes palladium occasionally get dragged along by gold, but here we’re also seeing internal market dynamics playing in their favour,”  David Wilson, an analyst at Citigroup in London, said by phone.

Analysts have speculated that stricter legislation on vehicle pollution in China will raise demand in the long term. On the supply side, miners in South Africa, one of the biggest producers of the metals, are in wage talks with unions. In the past, labour strikes in the country curbed output.

Platinum rose 0.9% to $1 146.40 an ounce by 11:59am in London, touching the highest in more than a year. It now leads gold for the year with a 29% gain compared with bullion’s 26%.

Palladium added 0.1% to $702.15 an ounce on Thursday. It has risen in all but one of the last 17 sessions.

Net-long positions held by managed money on the Comex exchange have climbed for at least the past three weeks in both metals, exchange data showed as of last Friday.

Eoin Treacy's view -

Platinum hit a medium-term low near $800 in January and has rallied impressively since, to at least partially close an historic undervaluation relative to gold. Platinum is denser than gold which helps to explain why platinum jewellery is more expensive; you need more of it to create the same piece. The fact it is rarer than the yellow metal also contributes to its appeal. 



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July 28 2016

Commentary by Eoin Treacy

3 Trends in Wastewater Treatment

Thanks to a subscriber for this article by Ralph Exton at GE. Here is a section:

It is critical that we seek to spur increased adoption of water reuse – a strategy that allows the world to take advantage of a water source constantly replenished every day regardless of drought or climate change. Treated municipal wastewater is a virtually untapped resource. In North America, 75 percent of wastewater is treated (16 trillion gallons of water every day), but less than 4 percent of that water is reused. It’s a gap that needs to be closed.

The vast majority of treated municipal effluent is discharged into a local receiving stream. Technology exists to take this wastewater and treat it to a quality suitable for other, non-potable purposes: agricultural needs, groundwater recharge, industrial applications. In fact, wastewater can be treated to a quality suitable for drinking (if we can get past the “ick” factor of the toilet-to-tap water recycling concept).

Historically, policy has focused on effluent quality, pushing for discharge limits to protect the environment. This is important – and necessary. However, policy and regulation need to catch up with the growing acceptance of water reuse and begin to structure guidance around its implementation. It’s starting to happen in several corners of the world. For example, Saudi Araba increased its water tariff to encourage water reuse. The United Arab Emirates is opting for stronger conservation and reuse rather than investing in desalination technologies, which are effective but expensive.

Eoin Treacy's view -

Fresh water is a precious commodity and, as with any naturally occurring resource, is unevenly dispersed globally. Nevertheless it is an expensive resource to develop infrastructure for and, because of its integral role in fostering life, the care that needs to go into making it potable means water represents a cost for the majority of households. 



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July 26 2016

Commentary by Eoin Treacy

Gold miners back in the game

Thanks to a subscriber for this report from GMP which may be of interest. Here is a section:

Our favourable view of gold is based on the following factors:

Challenging global economic growth;

Prevailing low to negative interest rates and easy monetary policies. Central banks with negative deposit rates incl. ECB, Japan, Switzerland, Denmark and Sweden. Correlated against the US 2-year real rate (r2 is 0.73), the implied gold price is ~$1460/oz (Figure 2);

Lingering uncertainty in the Eurozone since the Brexit vote;

Risks associated with China’s debt and debt: GDP ratio at ~$30 trillion and >200% which could force the People’s Bank of China to mobilize selling additional US treasuries to support the yuan and reduce capital outflows; and

Risks to the US dollar as balanced with the upside from potential modest rate hikes offset by potential instability post US elections. Call this the Trump factor! Although the US dollar is broadly inversely correlated with gold (r2 is 0.54), the (inverse) correlation with real rates is a better predictor for gold.

The conditions noted above have driven investors back to gold as an alternative safe-haven with no opportunity holding cost when compared to almost one third of global sovereign bonds trading at negative yields. Global ETF holdings are at a level last seen in May 2013 (Figure 4). In addition, COMEX net speculative positions in gold are at a multi-year high, which poses some risk of sell-off liquidations (Figure 5).

It is worth noting that the recent pullback in gold from this year’s near-term high of $1,360 is due to a certain level of political stability in Britain, but more importantly stronger US economic data triggering a reversal in bond yields and US dollar. Gold initially shrugged off the strong June employment data but last week’s manufacturing and retail sales data led to an acceleration in expectations of a fed funds rate hike by December (currently 45%). Nonetheless, we see this pullback as healthy and would look to accumulate gold equity exposure on weakness.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The gold mining sector is offering leverage to the gold price for the first time in a decade following a painful process of rationalisation that squeezed management expansion plans and forced a return to a focus on cash flow. It is being helped by the fact that gold and gold miners are among the few sectors not hitting new all-time highs and therefore represent relative value and potentially catch up potential. 



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July 21 2016

Commentary by Eoin Treacy

Komatsu Signals Mining Optimism in $2.9 Billion Joy Takeover

This article by Simon Casey, Masumi Suga and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

The deal creates a competitive landscape with two matching global peers, Stephen Volkmann, a New York-based analyst at Jefferies LLC, said Thursday by phone.

“This deal allows Komatsu to compete toe-to-toe everywhere with Caterpillar,” Volkmann said. “There’s just two major players and each one basically does everything.”

Joy is the largest independent maker of underground-mining equipment and has long been viewed as a potential target for Komatsu, which manufactures dump trucks and large excavators for companies such as Rio Tinto Group. Komatsu looked at Joy as recently as 2012 but rejected a deal after concluding there were few cost savings.

Conditions in the mining industry have deteriorated since then. Tumbling metal and coal prices spurred producers to cancel projects and rein in spending, reducing demand for everything from underground tunneling kit for copper mining to big shovels used to extract coal. Joy has posted a net loss in each of the last three quarters and its share price is down by more than half over the last five years.

The pullback contrasts with the mining-machinery industry’s boom during 2000-2010 on the back of surging commodity prices.

Back then, miners complained of shortages and long lead times to secure equipment. Companies such as Joy were able to raise prices, benefiting from both increased demand and higher margins.

 

Eoin Treacy's view -

Low interest rates and the potential for additional monetary stimulus have boosted M&A activity right around the globe and with rebounding commodity prices the resources sector is ripe for similar activity. 

Komatsu’s takeover of Joy Global is opportunistic but gives it the potential to compete in sectors that were not previously open to it. Whether it is successful will depend largely on the continued relative strength of the commodity sector. 



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July 20 2016

Commentary by Eoin Treacy

July 13 2016

Commentary by Eoin Treacy

Jeffrey Gundlach on Stocks, Trump, and Gold

Thanks to a subscriber for this transcript of an interview from Barron’s. Here is a section:

How much lower could yields on Treasury bonds go? Could we see a 1% yield? 
We just passed the all-time low on the 10-year yield of 1.39%, which we saw in July 2012. It is no surprise the 10-year has been strong after Brexit. I’m not at all convinced that we are going to see much lower yields in the U.S. But even if we do, you’re talking about a de minimis profit. Even if the 10-year yield drops another percentage point, how much will you make? Less than 10%. There are better ways to speculate. 

Such as? 

Gold miners have a very high probability—if you bought them today and were disciplined—of making 10%. One of the things driving markets lower is a declining belief in—and enthusiasm for—central-planning authorities and the political establishment. In this environment, gold is a safe asset. There’s an 80% chance of making 10% in gold; the probability of a 10% gain on Treasuries is 20% at best. I’ve never seen a worse risk-reward setup. 

That doesn’t make for a very exciting portfolio. 

Our portfolios are high-quality bonds, gold, and some cash. People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.

Eoin Treacy's view -

With yields well below the dividend on the S&P 500 Treasuries are relying on momentum to boost returns. Like any market, when prices are accelerating higher, it will look like the strongest thing in the world until it turns. Then the repercussions of running a momentum strategy will become painfully obvious for those not also running a tight money control exit strategy such as trailing stops and diligent position sizing. Quite when that is likely to happen is another question entirely. 



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July 11 2016

Commentary by Eoin Treacy

South Africa girding for another platinum strike

This article by Andrew Topf for Mining.com may be of interest to subscribers. Here is a section:

In what seems like an annual event, platinum mining companies in South Africa are bracing for what could be another year of labour unrest.

The firms that mine the precious metal and the labour unions that represent their workers are in talks next week, trying to hammer out a deal that could avert a strike of similar magnitude to 2014.
That year, a strike led by the Association of Mineworkers and Construction Union (AMCU) forced major producers Amplats (LSE:AAL), Implats (OTCMKTS:IMPUY) and Lonmin (LSE:LMI) to shed over 70,000 jobs. The strike lasted 21 weeks, cost the industry R24 billion, and resulted in 1.3 million ounces of lost production – about a third of global output. South Africa and Russia combined account for close to 80% of global supply of palladium and 70% of platinum output which are mainly used to clean emissions in automobiles.

BDLive, via Reuters, reports the AMCU is demanding a pay rise of 56%, in line with a "living wage", while the National Union of Mineworkers is asking for a 20% wage hike – well over the 6.1% rate of inflation. The mining companies say they can't afford the pay increases, arguing that last year they were forced to tap shareholders to raise cash, and that the unions' demands are unrealistic:

 

Eoin Treacy's view -

Labour unrest in South Africa’s mining sector is, as the above article highlights, an almost annual occurrence. Negotiations with unions, for what can only be described as inflated pay demands, must be irksome for management but the reality is mining companies are in better positions this year than last. 



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July 08 2016

Commentary by Eoin Treacy

Barrick Says Becoming Debt-Free Within a Decade Is in Reach

This article by Danielle Bochove and Scott Deveau for Bloomberg may be of interest to subscribers. Here is a section: 

Barrick Gold Corp., the largest miner of the metal, could be free of debt within a decade on bullion-price gains, cost cuts and asset sales, President Kelvin Dushnisky said.

The Toronto-based miner had about $9 billion in debt in the first quarter, down from a peak of $15.8 billion in the second quarter of 2013. Dushnisky said debt could fall to $5 billion in three years and zero within 10 years.

“That’s not unreasonable,” Dushnisky said in an interview on Bloomberg TV Canada. "Yet again, it’s gold-price dependent.

We’ve been very clear, Barrick was the only company with an A- rated balance sheet for the longest time. Our intent is to be strong investment grade, and we’d like to be in the position where we have no corporate debt.”

Barrick has set a target of paying down $2 billion in debt this year after exceeding its $3 billion debt-reduction goal in 2015. Dushnisky said the company had already achieved 40 percent of that goal by the end of the first quarter and, if the tailwinds continue, it may exceed those targets.
"We certainly could. We’re staying with our $2-billion target for now," he said during a separate interview in Toronto.

 

Eoin Treacy's view -

Gold miners have found religion. Most have given up their profligate ways, stopped carousing with M&A advocates, shed administrative and marketing staff and now espouse a more upright business model of only indulging in spending when it can be afforded and justified by the geology and cost structure. The result has been transformative for shares prices many of which have doubled this year; offering a high beta play on the gold price.  



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July 06 2016

Commentary by Eoin Treacy

UK listed gold miners

Eoin Treacy's view -

Last year the Rand collapsed but gold prices were reasonably steady. With the fall in energy prices corporate profits of South African gold miners improved and with returning investor interest the Johannesburg Gold Miners Index turned to outperformance early this year.

The Index failed to sustain the break below 1000 in August then surged higher from early January and continues to improve in line with the breakout in gold prices. While that is in nominal terms, it is an impressive performance nonetheless. 

 



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July 05 2016

Commentary by Eoin Treacy

What Really Drives White Metals Prices

Thanks to a subscriber for this report from ETF securities which may be of interest. Here is a section:

Silver supply drivers
While overall silver stocks are high globally, over the last few years silver has experienced what is known as a “supply deficit,” as annual production has been less than the demand for the metal, gradually eating away at current stocks. What many investors may not realize is that only 25% of silver production is derived from silver mines; the rest—roughly 75%—is a byproduct of mining for other metals, most notably lead, zinc, copper, and gold. As of year-end 2015, as mining capital expenditures for these other metals has been scaled back in response to relatively low prices, silver production has correspondingly fallen.

Silver demand drivers
Although it may not be the first thing that comes to investors’ minds when they think of silver, industrial applications are a significant demand driver, accounting for more than half of the precious metal’s usage worldwide. Silver’s unique characteristics include its outstanding thermal and electrical conductivity, along with its ductility, malleability, optical reflectivity, and antibacterial properties. These features make the precious metal invaluable as an input in myriad industrial applications including electrical components, batteries, photovoltaics (solar panels), auto parts, pollution abatement technology, ethylene oxide (an important chemical precursor), as well as brazing alloys and solders. 

Of the white metals, silver also tracks gold most closely, boasting a correlation of 0.8 over the past five years. Since gold is seen as a defensive asset in times of expanded bank balance sheets or quantitative easing programs by central banks, monetary policy tends to have a “shadow impact” on silver—far less so than gold, but still noticeable. Lastly, albeit accounting for just 20% of silver use worldwide, it’s worth noting that jewelry demand has held more or less stable over the past decade. 

Looking forward 
Deep capital expenditures cuts in the industrial metals space is likely to have a significant effect on silver supplies, as the majority of silver is mined as a byproduct of zinc and copper. In the context of weakening global demand, especially from China, low commodity prices have reduced production incentives. Looking forward, as the global growth outlook improves, demand for commodities, including silver, is likely to rise.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

If “the cure for high prices is high prices” is one of the oldest adages in the commodity markets then it also works in reverse. Industrial metal prices trended lower for four years and the LME Metals Index more than halved in the process. That forced miners to cut back on spending, cancel expansion plans, hold off on acquisitions, fire workers, especially administrative staff, and become much more conservative with their expectations for growth. 



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June 30 2016

Commentary by Eoin Treacy

Email of the day on oil prices and their effect on commodity prices more generally

David has often referred to the out-performance of commodities in the latter stages of a bull market.  You have reinforced that message with regular reference to the consistency of the crude oil chart (see below).To this observer, that chart is looking very tired.  Doesn’t the chart, and the threat of the return of supply dominance, suggest that future oil price rises will be limited, even as other commodities are strong?

Eoin Treacy's view -

Thank you for this question which raises a number of relevant points. We have both highlighted how the outperformance of the resources sector following a large decline is generally a confirmation that the medium-term bull market is entering its latter stages which can last for a couple of years. We can expect the resources sector to be among the last to peak and as such is unlikely to be a lead indicator but rather could act as a relative and absolute performer even as leading sectors roll over. 



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June 24 2016

Commentary by Eoin Treacy

Apres le vote, le deluge

Eoin Treacy's view -

I recorded an additional Audio last night to share my initial impressions following the vote to leave the EU because I wanted to have something for UK subscribers to listen to when the market opened, not least because it was a very panicky environment. 

The betting couldn’t have got it more wrong in assuming people would fall into the place behind business and politicians. As an avowed libertarian I’m excited that the UK is still a democratic state where Whitehall will listen to the will of the British people to retake control of their economy and political fate.   

I believe the UK will be better off in the medium to long-term but there are obviously challenges in the short-term. 

 



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June 23 2016

Commentary by Eoin Treacy

June 21 2016

Commentary by Eoin Treacy

RBA Sees Positive Economic Data Outweighing CPI for Now

This article by Michael Heath for Bloomberg may be of interest to subscribers. Here is a section:

Australia’s central bank hailed recent positive economic data while reiterating inflation would remain low, in minutes of its June meeting where interest rates were left at 1.75 percent and no policy guidance was provided.

The expansion “over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity,” the Reserve Bank of Australia said Tuesday in the minutes. “Nevertheless, inflation was expected to remain low for some time.”

Australia’s economy is showing a split picture: recession- level wage growth and record-low inflation on the one hand; and economic growth close to its 30-year average and unemployment below its 20-year mean on the other. The central bank, meanwhile, appears content to stand pat for now as the country heads toward a July 2 election and international events like Britain’s vote on leaving the European Union play out.

“The board judged that leaving the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” the minutes said. The Australian dollar rose to 74.81 U.S. cents at 11:34 a.m. in Sydney from 74.65 cents before the minutes were released.

Eoin Treacy's view -

The Australian economy is a clear outperformer when compared to other OECD countries and with the New South Wales economy reporting a substantial surplus today the domestic economy is benefitting from improved competitiveness following the 36% decline in the Australian Dollar from its peak. With low inflation it is unlikely the RBA is going to hike rates any time soon but the interest rate differential and recent stability of the currency represent attractive characteristics from the perspective of international investors. 



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June 14 2016

Commentary by Eoin Treacy

June 10 2016

Commentary by Eoin Treacy

A Guide to Helicopter Money

Thanks to a subscriber for this report from National Australia Bank. Here is a section:  

Unlike ‘QE’, Helicopter Money has an explicit fiscal element. Moreover, in a Helicopter Money operation the central bank commits to making any asset purchases permanent and to not paying interest on the resulting bank reserves. It differs from a normal fiscal stimulus as it is not financed by interest paying debt (a bond issued to the public) but by money creation by the central bank. 
Introducing Helicopter Money will potentially affect existing monetary policy goals and tools. For example, it might require a change to the inflation target and changes to the system of interest on reserves. It could also complicate how monetary policy will operate in circumstances when the central bank seeks to tighten monetary policy. 

The key channels through which it is expected to work are increased demand for goods & services (either by government or households) and by raising inflation expectations, thereby lowering real interest rates. Proponents also argue it gets around possible problems with normal fiscal stimulus – crowding out (though higher interest rates) and households increasing savings as they perceive a future higher tax burden. 

In theory Helicopter Money should result in some combination of inflation and real economic growth. Exactly what the mix will be is harder to determine, and it is even possible for inflation to be rising while real activity goes the other way. How individuals and business react to Helicopter Money, and how it changes their expectations of the future, will be an important determinant of its effectiveness. 

While a central bank money financing government spending is not new, there are good reasons why it is considered a ‘taboo’. There are many cases where too much money printing has led to hyperinflation, with disastrous consequences. 

What this points to is the need for credible institutions and the need for any Helicopter Money program to be consistent with the inflation goals of the central bank. An open question is whether credible arrangements could be put in place given political realities. 

Legal and political obstacles to Helicopter Money vary by country. Of the major advanced economy central banks, the European Central Bank is the one facing the greatest possible constraints, given legal prohibition of (direct) money financing of governments by the ECB, the lack of a central fiscal agency and the difficulty of getting agreement amongst member states. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

With an increasing quantity of the global bond market now yielding less than zero, the ECB accepting just about anything counterparties wish to lodge as collateral and negative deposit rates at a handful of central banks, speculation is understandably turning to what central banks might next try to achieve their inflation goals. Negative rates represent something of a Rubicon for bond investors so helicopter money, which was once inconceivable, is now openly being discussed as a possibility. 



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June 09 2016

Commentary by Eoin Treacy

Brazil Frost Risk Highest in South Parana Cane Area, MDA Says

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here it is in full: 

Southeastern fringes of Parana cane and coffee areas face coldest threat on morning of June 12, Kyle Tapley, meteorologist at MDA Information Services in Gaithersburg, Md., says in telephone interview

Temperatures also to fall below freezing in Santa Caterina, Rio Grande so Sul

“The whole weekend will be pretty cold” with temperatures gradually rising by middle of next wk

NOTE: Parana suffered sugar-cane losses from frost in 2013

Most of threat this weekend remains south of Center-South w/temperatures forecast to drop below avg into 30s degree Fahrenheit, not low enough to hurt coffee, cane or oranges

Citrus trees can be damaged if temps. drop below 28 degrees F (minus 2 Celsius) for several hours w/ coffee at greatest risk below 32 F, and “I certainly don’t see that happening”

NOTE: In recent decades, coffee farms in Parana were moved norrthward, away from high frost-risk prone areas.

 

Eoin Treacy's view -

The risk of frost to crops that depend on warm temperatures is a non- trivial consideration and helps to explain the recent run up in prices for sugar, coffee, orange juice and soybeans. Perhaps the more important point is to highlight how dependent the global soft commodity sector has become on bumper crops. The after effects of the El Nino and the potential for a La Nina to develop could continue to exacerbate volatility in these markets.



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June 08 2016

Commentary by Eoin Treacy

ECB "Monetary Amphetamine" Propels Gold to Best Start Since '79

This article by Luzi-Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:

In the U.S., traders are pricing a zero percent chance of an interest-rate increase in the Federal Open Market Committee’s meeting next week, and the odds of such a move stay below 50 percent until December, according to Fed-fund futures. The Bloomberg Dollar Spot Index dropped as much as 0.6 percent to the lowest since May 5.

Gold probably has bottomed and will be supported by risks surrounding a U.K. vote on whether to leave the European Union, U.S. monetary policy and elections in the U.S. and Spain, according to Clive Burstow, who helps manage $35 billion at Baring Asset Management Ltd. in London. 

 

Eoin Treacy's view -

At the last count $7.8 trillion in sovereign bonds was yielding less than zero and with the German 10-year at around 4 basis points it might not be too long before an even larger swathe of the global debt market is in the same condition. The ECB begins its corporate bond buying program today which is likely to depress yields further. 

Against that background it is hard for the Fed to raise rates because the resulting upward pressure on the Dollar would be counterproductive. Equity markets have been quite steady over the last month, taking their cue from the bond markets, and the near-term conclusion is that interest rate hikes will be modest at best and we might have to wait for them. That suggests the liquidity on which the market has been dependent will remain in place and that is positive both for financial assets and the price of items that cannot simply be loaned into existence. 



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June 08 2016

Commentary by Eoin Treacy

Unconventional future: man vs. machine

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Mining costs: labour, electricity drive continuing inflation at conventional mines
You may have opened this expecting a sci-fi/marvel-esque drama, instead, it is about cost history of PGM producers we cover. Cost inflation has run at around 9% p.a over the past five or so years. We estimate conventional mines unit costs are 20-25% above mechanised, & may continue to increase at around 10% p.a. without stringent cost control. Around 70% of their costs are labour & electricity. Mechanised mines have a balanced cost composition & could limit increases at mid-to-high single digit percentages. We adjust our cost inflation expectations & valuations for longer-term cost inflation rates. With a shift to lower costs, AMS is our top pick: Buy. Lonmin is our least preferred: Sell.

Unit costs and inflation by mining method: conventional disadvantage to widen 
Each mine faces different circumstances and each company has different cost disclosure. However, we are able to draw some broad industry conclusions. Conventional mines have c.25% higher unit costs relative to mechanised operations. Conventional mines’ inflation rates have been c.10% p.a. or higher over the last 5 to 6 years, driven by electricity and wages (making up c.70% of costs) and we think this cost-pressure is likely to continue. Mechanised mines’ costs have a greater proportion of contractors and stores/materials than conventional mines and are relatively light on labour costs. While mechanised mines have also faced strong cost inflation, some operations have managed to keep inflation to mid single digit CAGR percentages.
Composition of costs by mining method and cost inflation of categories

Labour costs (c.60% of conventional costs) as a category have increased c.9 to 12%p.a. over the past 5-6 years. Utilities, c.8-10% of conventional on-mine cash costs, have increased at between 11 to 20%p.a. Stores/materials have increased at c.5.5% to 6.5% p.a. and are approximately 25 to 30% of costs. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

Platinum’s scarcity, the high cost of extraction and an increasingly uncertain situation in South Africa are long running considerations the market is familiar with. The growth of the electric vehicle market is a new development that needs to be considered because with no catalytic converters they don’t need platinum. That is one of the primary reasons platinum producers are so keen to promote fuel cell technology because they use the metal and electric car batteries don’t. That represents a hurdle for platinum entering a sustained bull market but it is rallying in sympathy with the other precious metals at present. 



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June 03 2016

Commentary by Eoin Treacy

June 03 2016

Commentary by Eoin Treacy

Email of the day on corn

Regarding the price chart for corn: I have been watching this with interest for a few months after seeing that for at least the past 4 years there have been relatively large price movements in June/July. Not knowing much about corn, presumably this is related to crop information? With the price ranging in quite a tight pattern for 2 years now I wonder if you have any thoughts as to what this could indicate for the coming month or two. Thanks

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. The majority of US corn is planted in April and May so by June and July farmers have a reasonable idea of how the crop is coming along but it is heavily dependent on just the right amount of rain around this time of year to support rather than damage the crop. There are also a number of major USDA reports that come out in June/July that give some insight into stockpiles, exports and crop health which tend to have an effect on price.



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June 02 2016

Commentary by Eoin Treacy

The Deepening Deficit That Makes Zinc One of 2016�s Top Bets

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The Chinese smelters that churn out more than 40 percent of the world’s zinc may cut production for the first time in four years because they can’t get enough raw material, further lifting prices of one of this year’s strongest-performing commodities.

Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that’s refined to produce the metal, just as to Macquarie Group Ltd. see further gains, while Glencore Plc, the biggest miner of the metal, says structural deficits are back.

 

Eoin Treacy's view -

$1800 represented the lower side of a five-year range in zinc prices, so when it broke below that level in August sentiment understandably turned bearish. However the rally that has been underway since the beginning of the year has not only taken the price back up into the overhead range, but zinc has rallied enough so that the drop below $1800 can be considered a failed downside break. A sustained move below $1800 would now be required to question potential for additional upside.



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May 26 2016

Commentary by Eoin Treacy

Miner Sees Silver Price Surging Ninefold as Global Gadgets Boom

This article by Natalie Obiko Pearson for Bloomberg may be of interest to subscribers. Here is a section:

While long coveted for use in jewelry, coins and utensils, silver is increasingly in demand for its industrial applications. Last year, about half of global silver consumption came from such use, including mobile phones, flat-panel TVs, solar panels and alloys and solders, according to data compiled by GFMS for the Washington-based Silver Institute.

“Silver is not a precious metal, it’s a strategic metal,” Neumeyer said in an interview in Vancouver, where the company is based. “Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it.”

Industrial demand is set to increase, driven by rising incomes and growing penetration of technology in populous, developing nations, as well as thanks to new uses being found for silver’s anti-bacterial and reflective properties in everything from hospital paints to Band-Aids to windows.
“Over the next 10 or 20 years, more and more people are going to be using these devices, and silver is a very limited commodity,” Neumeyer said. “There’s just not a lot of it around.”

Use of silver, including investment demand, coin sales and what goes into inventories to settle trades, has outstripped annual supply of the metal in every year since 2000, according to data from GFMS, a research unit of Thomson Reuters Corp.

Still, not everyone agrees that the world is headed for a shortage of the metal.

“I would tend to disagree that silver is rarer than thought,” David Lennox, a resource analyst at Fat Prophets in Sydney. “Silver cannot be easily substituted but there’s been no need as it’s in abundance. I’d expect the search for silver would intensify and the search for substitutions would happen long before silver got to” $140 an ounce.

 

Eoin Treacy's view -

The uses for silver in the high technology sector are likely to increase over time but the quantity of silver used in each item is likely to decrease. Production efficiencies and the evolving nanotechnology sector where silver will have a great deal of utility help to explain that view. Therefore to postulate prices are going to $140 any time soon would appear wildly ambitious. 



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May 18 2016

Commentary by Eoin Treacy

Death of the Gold Market

Thanks to a subscriber for this report by Paul Mylchreest for ADM Investors Services International Limited covering the most bullish scenario for gold. Here is a section:  

Using data from the LBMA and Bank of England on gold stored in London vaults and net UK gold export data from HM Revenue & Customs, we estimate that the “float” of physical gold in London (excluding gold owned by ETFs and central banks) has recently declined to +/- zero.

If we are correct, the London Bullion Market is running into a problem and is facing the biggest challenge since it collapsed from an insufficient supply of physical gold in March 1968.

Besides the growth in physical gold demand from existing sources (see below), there is more than US$200 Billion of trading every day in unallocated (paper) gold. If buyers lose confidence in the market’s structure and ability to deliver actual bullion, the market could become disorderly (via an old fashioned “run” on the vaults) as it seeks to find the true price of physical gold.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The argument often cited by gold bugs is that the derivatives market for gold dwarfs the size of the physical market. That is also the case in the equity, bonds and other futures and options markets because most people wish to benefit from volatility in prices rather than holding the physical asset. This only becomes a problem when someone attempts to corner the market, by buying up available futures contracts then taking delivery and refusing to have their holdings lent against. 



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May 17 2016

Commentary by Eoin Treacy

El Nino-Hit Brazil Doubles Cocoa Imports as Harvest Tumbles

This article by Isis Almeida and Gerson Freitas Jr. for Bloomberg may be of interest to subscribers. Here is a section: 

"The drought we suffered starting at the end of last year and the first month of this year, it has really, really hurt not only the main crop, which came in much smaller than was expected, but mainly it will hurt the mid crop that’s starting right now," Hartmann said.

Brazil is being forced to import cocoa to keep processing factories running. Processors need to work with 240,000 tons of cocoa to ensure capacity is utilized and to prevent costs rising, he said. Beans come mainly from Ghana, the second- largest producer, as shipments from top grower Ivory Coast are banned along with those of Indonesia, which ranks third.

"The only permitted cocoa to come to Brazil is from Ghana, which is the most expensive stuff," Hartmann said.

 

Eoin Treacy's view -

Cocoa prices have been subject to some quite abrupt volatility over the last couple of months with the result that the sharp peak to trough swings, evident within the two-year range, remain in place. With prices falling back towards the lower boundary a clear upward dynamic will be required to signal a return to demand dominance which would pressure shorts. 



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May 16 2016

Commentary by Eoin Treacy

California is poised to become the center of cannabis culture

This article by Robin Abcarian for the Los Angeles Times may be of interest to subscribers. Here is a section: 

Personally, I am not a weedinista. I hate feeling stoned. I don't think pot will save the world, and dependence, especially with younger users, can be a problem. But I do think, in some settings, it can work miracles.

A year ago, probably after hearing me knock pot smokers one too many times, David Downs, a San Francisco cannabis journalist, who is married to my niece, sat me down and explained something I hadn't known. There are two important components in marijuana. The primary psychoactive ingredient in pot is THC, which also has medicinal properties such as pain relief and nausea reduction. And there's CBD, a non-psychoactive ingredient that has been shown to be helpful for many ailments, including epilepsy, cancer pain and anxiety.

Increasingly, researchers are investigating the health benefits of CBD. Growers, in turn, are meeting consumer demand for pot strains that are high in CBD and low in THC.

You can achieve a tremendous benefit from high-CBD marijuana and never feel stoned.
This was a revelation.

 

Eoin Treacy's view -

I have to smile at signs proclaiming UCLA is a smoke free campus when driving through Westwood Los Angeles since the smell of marijuana smoke is such a common occurrence. Cannabis is available to anyone who wants it today and not just in California. Considering it is now legal in a handful of states and the FDA is coming under increasing pressure to reclassify it, the movement to build a greater awareness and market for the drug is increasingly successful. 



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May 13 2016

Commentary by Eoin Treacy

Email of the day on intermarket correlations

The January 2016 to April 2016 correlation between the CCI Index (especially oil component), and world equity markets, and the $US (inverse) has been widely noted. From late April the equities/dollar relationship has been maintained (both have mildly reversed) but unusually, the stronger dollar seems not to have had the same impact on commodity prices.

That a stronger dollar has not hit oil or gold is a little surprising.  This is especially the case for oil, which also faces the prospect of increasing supply, but how can gold be expected to continue its advance?  

 

Eoin Treacy's view -

Thank you for raising a question which I suspect many investors are puzzling over. I certainly have and I’m not sure there is a conclusive answer. In fact considering the lack of commonality I think the answer lies in treating each market on their individual merits. 



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May 11 2016

Commentary by Eoin Treacy

Email of the day on Chinese commodity trading

Do you have any insights to share regarding reported chaotic futures trading in China. You said markets were likely be volatile going forward but I never imagined this wild ride. As for my personal investments I have consciously sold into recent market rally's while significantly increasing my weighting to cash. I need to maintain a disciplined response to markets otherwise I get stressed.

Eoin Treacy's view -

Thank you for a topical question. There is a lot of hot money chasing short-term profits in China. It’s a symptom of a wider problem where there are limited options to invest for yield, a wide spread between the lending and deposit rates and lax to non-existent regulation. The result is that manias tend to occur with uncomfortable regularity. The stock market last year and the commodity markets this year are two examples. 



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May 11 2016

Commentary by Eoin Treacy

Crop Prices Rally as Report Points to Easing of Glut

This article by Jesse Newman for the Wall Street Journal may be of interest to subscribers. Here is a section: 

The Agriculture Department report offered the first official forecast for the new season’s production and consumption around the world.

It said poor weather in South America would contribute to a surge in soybean exports from the U.S. as production in places like Argentina falls off.

“The demand that USDA set forward is incredible,” said Mr. Reilly of the forecast for soybean exports.

The USDA expects U.S. soybean reserves to dwindle to 305 million bushels by August 2017 from an estimated 400 million a year earlier as exports pick up.

Even at their current level, however, soybean prices are about 40% lower than their peak in 2012, and the level of stocks still are comfortable.

Corn futures jumped even though the USDA forecast farmers would harvest a record 14.43 billion bushels this year. The agency’s supply estimates, however, fell short of analysts’ expectations. The USDA projected stockpiles will climb to 2.153 billion bushels by August 2017 from 1.803 billion a year earlier, the largest since the mid-1980s.

The USDA said global corn reserves at the end of the 2016-17 season would total 207 million tons, down from an estimated 207.9 million tons for the current season.

 

Eoin Treacy's view -

A link to the full article is posted in the Subscriber's Area.

The full effects of the El Nino weather phenomenon are now becoming evident in soft commodity pricing despite the fact it has already peaked. Soybeans  completed a six-month base in March and continues to extend the breakout. An increasingly overbought condition is developing but a clear downward dynamic would be required to check momentum. 



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May 09 2016

Commentary by Eoin Treacy

Lithium 101

Thanks to a subscriber for this comprehensive heavyweight 170-page report on lithium. If you have questions on the lithium sector the chances are they will be answered by this report. Here is a section: 

Global lithium S&D analysis highlights opportunity for high-quality assets
The emergence of the Electric Vehicle and Energy Storage markets is being driven by a global desire to reduce carbon emissions and break away from traditional infrastructure networks. This shift in energy use is supported by the improving economics of lithium-ion batteries. Global battery consumption is set to increase 5x over the next 10 years, placing pressure on the battery supply chain & lithium market. We expect global lithium demand will increase from 181kt Lithium Carbonate Equivalent (LCE) in 2015 to 535kt LCE by 2025. In this Lithium 101 report, we analyse key demand drivers and identify the lithium players best-positioned to capitalise on the emerging battery thematic. 

Global lithium demand to triple over the next 10 years
The dramatic fall in lithium-ion costs over the last five years from US$900/kWh to US$225/kWh has improved the economics of Electric Vehicles and Energy Storage products as well as opening up new demand markets. Global battery consumption has increased 80% in two years to 70GWh in 2015, of which EV accounted for 35%. We expect global battery demand will reach 210GWh in 2018 across Electric Vehicles, Energy Storage & traditional markets. By 2025, global battery consumption should exceed 535GWh. This has major impacts on lithium. Global demand increased to 184kt LCE in 2015 (+18%), leading to a market deficit and rapid price increases. We expect lithium demand will reach 280kt LCE by 2018 (+18% 3-year CAGR) and 535kt LCE by 2025 (+11% CAGR). 

Supply late to respond but wave of projects coming; prices are coming down 
Global lithium production was 171kt LCE in 2015, with 83% of supply from four producers: Albemarle, SQM, FMC and Sichuan Tianqi. Supply has not responded fast enough to demand, and recent price hikes have incentivized new assets to enter the market. Orocobre (17.5ktpa), Mt. Marion (27ktpa), Mt. Cattlin (13ktpa), La Negra (20ktpa), Chinese restarts (17ktpa) and production creep should take supply to 280kt LCE by 2018, in line with demand. While the market will be in deficit in 2016, it should rebalance by mid-2017, which should see pricing normalize. Our lithium price forecasts are on page 9.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The cost of lithium ion batteries falling rapidly and the fact this is occurring at the same time solar cells costs have been trending lower is a major incentive for installations of both technologies; increasingly in parallel. With costs coming down and technology improving growth in demand is a major consideration as factories achieve scale and miners invest in additional supply. 



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May 09 2016

Commentary by Eoin Treacy

Dollar Extends Best Streak Since March on Fed Speculation, China

This article by Andrea Wong and Taylor Hall for Bloomberg may be of interest to subscribers. Here is a section: 

"We’re expecting a bit of dollar rebound," said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. "The baseline for the Fed is still for two hikes. We’ve had some negative prints off the China data, that’s weighing on the commodity currencies."

The greenback has pared its 2016 decline on signs the move had become overdone and as policy makers including New York Fed President William Dudley restate plans to raise rates. The dollar has rallied during the month of May for nine of the past 10 years.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, gained 0.6 percent as of 2:42 p.m. in New York, after climbing 1.5 percent last week, the most since Nov. 6. The U.S. currency rose 1.3 percent to 108.48 yen, touching the highest since April 27.

The rebound hasn’t stopped hedge funds from extending their bearish bets on the dollar. Speculators extended so-called net- short positions on the U.S. currency versus eight major currencies to the most since April 2014, according to the most recent figures from the Commodity Futures Trading Commission.

Hedge funds’ bearish dollar bets against the yen held near their April peak, which was the highest in data going back to 1992. Speculators have turned "extremely bearish on the dollar,"

 

Eoin Treacy's view -

The Dollar extended its rally today against a broader swathe of international currencies not least the Yen and Rand. That is supportive of the view that it had already priced in more than short-term worries about the pace of growth and was assuming there was no chance of a hike this year. Right now there is some repricing a potential Fed rate hikes. 



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May 05 2016

Commentary by Eoin Treacy

The Value of Gold

Thanks to a subscriber for this bearish, or at least cautious report, on gold by John LaForge for Wells Fargo. Here is a section:

In February, we published a cautionary gold not titled “Not the Time to Buy More Gold” The title pretty much said it all. To be clear, we do not detest gold. Rather our long-standing guidance has been that gold should be a regular position in a diversified portfolio. Our beef is not with owning gold, but how much gold to own. 

Many signs point to underweighting gold in portfolios today. In February’s gold publication, we highlighted two vital negative trends 1) persistently poor price action, and 2) repeated performance losses to other major assets (stocks, bonds, housing). Both trends by the way are characteristics of commodity bear super-cycles.    

Poor price and performance trends, while important, only tell part of the underweight story. The value of gold is a major concern of ours too. Said simply – gold does not look particularly cheap. This may sound odd with prices down $640 per ounce since 2011, but history argues for even cheaper relative prices in order for gold to begin a new bull market. As we will explain next, gold does not appear to a great bargain vs. stocks, bonds or housing. And gold is downright expensive compared to the average commodity, and especially other precious metals.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

To balance this view of gold being expensive. Here is an interview with Jim Rickards who expects gold to move to new all-time highs. Gold is a market that tends to elicit extreme predictions so let’s stick to what I believe are the two most important factors concerning the market. It is a monetary metal and often seen as a safe haven during times of stress



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

The gains come after five straight years of annual losses when slowing Chinese demand and rising output produced a global supply overhang for most commodities. The rout hurt producers including Exxon Mobil Corp., Freeport-McMoRan Inc., Glencore Plc and Anglo American Plc, who boosted production following a decade-long so-called super cycle of rising consumption and higher prices.

“I believe with what we’ve witnessed early in 2016 will be the trough for the commodity markets,” Albanese said on a conference call after Vedanta reported quarterly earnings.

Oil prices in New York are up about 19 percent this month in New York, the largest increase since April 2015. U.S. crude output declined for a seventh week, according to data Wednesday from the Energy Information Administration. Futures traded at $45.60 at 11:45 a.m. on the New York Mercantile Exchange.

 

Eoin Treacy's view -

Crude Oil is by far the largest, most liquid commodity market and represents a significant cost in the production and transportation of other commodities. The falling cost of energy was a major enabler for marginal producers remaining in business so the subsequent rally has been a catalyst for increased interest right across the commodity spectrum. 



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April 27 2016

Commentary by Eoin Treacy

Email of the day on inflation expectations and rates

You've drawn attention to the 12 month T-bill rate a couple of times over the past week. Additionally, it is also very instructive to monitor inflation expectations to gauge what is discounted in terms of the future direction of interest rates. The five-year “breakeven” rate, a market measure of inflation expectations derived from comparing the yield of Treasury Inflation protected bonds (Tips) and conventional Treasuries, has climbed from a low of 0.95% in early February, to 1.56% now. It peaked at 2.4% in October 2012 after reaching an unprecedented minus 0.9% in 2008. 

Movements in Tips have tended to reflect investor expectations about future consumer price inflation, and these have been stoked by the recent rise in oil prices and a weaker dollar, which means higher import prices. In fact, the breakeven rate has been rising in tandem with oil prices since February. Interestingly, the “core” US inflation rate, which strips out the impact of volatile components such as energy and food, has also been rising. The current buying of Tips reflects a view that the cycle of dollar strength and commodity weakness has come to an end. 

Like you and David, I also think that commodities have bottomed. However, there are no signs of strong underlying demand and inflationary pressures from the real economy at the moment. Furthermore, Janet Yellen, the Fed chair, has cast doubts on the durability of the recent pick-up in core inflation and inflation expectations, arguing that the case for moving cautiously on interest rates was still strong. It is not surprising that she would say that given that the Fed has reduced the likely number of rate rises this year. 

My view is that the US breakeven rate will rise with commodity prices which will push conventional yields up and stock markets down but I don't believe that oil prices, for example, will get anywhere near the previous peak for the reasons discussed by this Service. Thus bond yields too will peak at a much lower level. The collapse in commodity prices in the last few years has distorted valuations in various markets and there will be a ripple effect across the other asset classes.

 

 

Eoin Treacy's view -

Thank you for this thoughtful email and for highlighting breakeven rates which I have not looked at in a while. I watch the 12-month yield because if gives us a good indication of how the bond market is pricing the risk of the Fed raising rates. 



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April 21 2016

Commentary by Eoin Treacy

As prices surge, Vale joins iron ore production guidance cuts

This article by Frik Els for Mining.com may be of interest to subscribers. Here Is a section: 

Top iron ore producer Vale followed rivals Rio Tinto and BHP Billiton on Wednesday by announcing that it expects full-year iron ore production to come in at the lower end of guidance.

Vale  said it produced 77.5 million tonnes of iron ore in the first quarter, marking a record for output during the first three months of the year for the Rio de Janeiro-based company.

Its Carajás operations also achieved a production record for a first quarter of 32.4 million tonnes, representing an increase of nearly 18%, offsetting the halt in production at its Samarco 50-50 joint venture with BHP and the decrease in output at its Mariana mining hub. Operations at Samarco remains suspended following the failure of a tailings dam in November.

The company total output was down 12% from the December quarter however.

"Production in the first quarter and the plan for the rest of the year suggests an annual production towards the lower end of our original guidance of 340-350 million tonnes," Vale said in a statement. The company produced 345.9 million tonnes in 2015.

Eoin Treacy's view -

On the supply side, the reductions in production announced by the iron-ore oligarchy of BHP Billiton, Rio Tinto and Vale may be transient in nature. In the first two cases they are the result of infrastructure upgrades and for Vale it is a case of the Samarco dam break accident leading to the mine being closed. The demand side of the equation on the other hand may be more important. 



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April 20 2016

Commentary by Eoin Treacy

Mining the balance sheets

Thanks to a subscriber for this report from Goldman Sachs dated February 29th. Here is a section:

Our commodities analysts believe that China’s demand for commodities will normalise to a level consistent with its GDP/capita, as the economy transitions from investment-led (i.e. where the government pays) to consumption-led (i.e. where the consumer pays). In short, fewer roads, buildings, bridges and airports, and more cars, air conditions, fridges and the like. This part of an economy’s development is less commodity-intensive, and we expect China’s commodity demand evolution to follow a more conventional path. This suggests a significantly lower level of demand than that seen through 2003-2014.

The implication for the supply-demand balances of the major metals is that without a significant change on the supply-side of the equation, oversupply will widen and prices will fall further

Which brings the argument back to liquidity. We would argue that mines don’t close through choice, but because they have to. Typically, this point comes when a company runs out of funds to meet its obligations (liquidity). We have seen African Minerals and London Mining join and leave the London stock market and their mines close - the capital markets were not prepared to continue to fund losses.

Ultimately, if demand does not return, then the industry’s current position could prove to be something of a holding pattern. Keep producing, drive more productivity and cost reduction and wait for the capital markets to pass judgement when the more weakly positioned companies need to refinance.

Eoin Treacy's view -

The role of energy prices in the total cost of production for mining operations is a topic that does not appear to be covered by this report. Yet, it is a major consideration for miners and declining oil prices were a key factor in the ability of very marginal operations remaining viable. That is one of the primary reasons why the rebound in oil prices has been a positive catalyst for commodities. 



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April 19 2016

Commentary by Eoin Treacy

Australia's Stevens Posits Whether Policy Has Reached Its Limits

This article by Michael Heath for Bloomberg offers a window on the thinking of a major central banker approaching the end of his tenure so with little to lose. Here is a section: 

Australian central bank Governor Glenn Stevens speculated that monetary policy may have reached its limits in spurring economic growth and suggested this could explain why markets are being easily rattled.

“Monetary policy alone hasn’t been, and isn’t, able to generate sustained growth to the extent people desire,” Stevens said in a speech in New York on Tuesday. “Maybe we need to be clearer about what we can’t do. Monetary solutions are for monetary problems. If there are other problems in the underlying working of the economy, central banks won’t be able to solve those.”

The irony here is that Stevens, who has resisted the global movement to further easing and kept his benchmark rate at 2 percent for almost a year, is facing a currency that has reversed course in the past three months and threatened his push to broaden Australia’s growth drivers. He warned in minutes of this month’s policy meeting Tuesday that the Aussie’s appreciation could complicate efforts to rebalance the economy away from mining.

Stevens, who is in the final months of his 10-year stint at the helm of the Reserve Bank of Australia, also questioned in the notes of his speech whether central banks and their unorthodox policies are solely responsible for the decline in long-term interest rates. 

“Monetary policy is not supposed to be able to affect real variables -- like real interest rates -- on a sustained basis,” he said. “Presumably, changes in risk appetite, subdued growth and expectations that growth will continue to be subdued have also played a role in lowering real rates.”

 

Eoin Treacy's view -

The need for Australia to develop additional sources of economic growth outside the resources sector was a major focus of attention while the price of commodities was falling. With the rebound in energy, industrial resources and soft commodities now underway the urgency of that drive is less pressing. In fact it is likely to act as headwind because the RBA will be less inclined to ease monetary policy when commodities are doing well. 



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April 15 2016

Commentary by Eoin Treacy

Brazil Is Throwing a Big Impeachment Party

This article by Anna Edgerton for Bloomberg may be of interest to subscribers. Here is a section:

Cunha is the showmaster, a Brazilian Democratic Movement Party member who came out against Rousseff last year, around the time that prosecutors revealed he was under investigation for allegedly hiding money related to corruption in a Swiss bank account.

The speaker is just one of many caught up in a long-running anti-corruption blitz that has put top executives and politicians behind bars. And more than half the members of the congressional panel that recommended the impeachment vote take place are under investigation for everything from alleged campaign financing irregularities to environmental offenses.

As for Rousseff, the current impeachment accusation against her is that she used accounting tricks to hide a budget deficit, which she says isn’t a crime that warrants impeachment. The president has denied any wrongdoing. Still, in the view of many Brazilians, she’s guilty of far worse, presiding over an economy that has sunk into a crippling recession.

 

Eoin Treacy's view -

Unfortunately being bad at your job and taking office just ahead of a major commodity price decline are not impeachable offenses. Rousseff’s close ties with those being investigated for wholesale corruption within Petrobras and a host of other state owned companies is a different matter. 



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April 15 2016

Commentary by Eoin Treacy

Has Dr Copper gone on sabbatical?

Thanks to a subscriber for this report from NAB which may be of interest. Here is a section:

2016 is shaping up to be a crucial year for copper producers and copper markets. Its biggest consumer, China, is going through a period of slower economic growth, with structural transitions under way and a depreciating currency. The end of China’s unprecedented growth rates of infrastructure investment, which pushed up metals demand and prices when it started, is now putting downward pressure on commodity prices, including copper. Copper price is now down over 50% since its peak in 2011, while the Chinese economy has been pushing ahead with slower, yet still impressive growth rates. The price falls have certainly been driven by the demand slowdown, but maybe more so by the supply glut and market sentiment in our view. 

One complicating factor is the scale and direction of some large carry trades which use metals (including copper) as collateral to take advantage of China’s domestic to foreign interest rate differential (see Page 3). There is a significant amount of copper tied up in these financing deals, with some estimates putting it at as much as ten per cent of total global copper demand. With the narrowing of the interest differential and a depreciating yuan, these trades are now starting to reverse, potentially releasing significant supply into the market, putting downward pressure on copper prices. 

On the supply side, producers responded to the previous high levels of demand and prices with increased exploration efforts and new mine constructions. The International Copper Study Group estimates global mined supply increased by 2.6% p.a. between 2009 and 2015, compared to 1.7% between 2001 and 2008. Last year’s large price declines have prompted some negative supply responses, although the cuts have not been enough to fully offset the new capacity. Existing producers have also managed to cut costs to remain in operation and maintain market share. Looking ahead, more than 4.5 million tonnes of copper mine capacity is scheduled to be added by 2020, the timing of which could be important for copper prices. 

Overall, our view on China and its metals demand are not as downbeat with a lot of the downside already priced in. The risks could be more from the supply side and overall market sentiment. As a result, we forecast a largely balanced market for 2016 and 2017 and still depressed price levels, with downside risks remaining around new mine supply growth outstripping demand while the China outlook will remain closely watched. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A point we regularly make is that supply represents the strongest influence on how prices evolve. Therefore how China’s commodity collateral agreements are resolved and just how much mine supply is taken out of the market will be important if copper prices are to continue to rally. 



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April 15 2016

Commentary by Eoin Treacy

Sugar Surges Most in 7 Weeks as Bulls Return on Deficit Outlook

This note by Marvin G. Perez for Bloomberg may be of interest. Here is a section:

This wk, price posted a gain of 2.2%, first since March 18

NOTE: Trader Czarnikow says world may be heading for the biggest shortage of sugar in seven yrs
 
“The bulls may also have been encouraged by reports of some physical off take appearing at these levels,” James Liddiard, partner at Agrilion Commodity Advisers in New York, says in an e-mailed note

While Brazilian farmers are set to collect a bigger harvest, crop problems in other major producers such as China, Central America, the EU, India, Thailand and Southern Africa, are supporting prices, he says

Eoin Treacy's view -

Sugar prices been the subject of quite a lot of volatility but found support this week in the region of the 200-day MA to reassert medium-term demand dominance. A sustained move below the MA would be required to begin to question potential for additional upside. 



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April 14 2016

Commentary by Eoin Treacy

Deutsche Bank Confirms Silver Market Manipulation In Legal Settlement, Agrees To Expose Other Banks

Thanks to a subscriber for this article from ZeroHedge detailing continued attempts to prove manipulation in the silver market. Here is a section: 

According to Reuters, Deutsche Bank has signed a binding settlement term sheet, and is negotiating a formal settlement agreement to be submitted for approval by U.S. District Judge Valerie Caproni, who oversees the litigation. A Deutsche Bank spokeswoman declined to comment. Lawyers for the investors did not immediately respond to requests for comment.

As noted above, investors had accused Deutsche Bank, HSBC and ScotiaBank of abusing their power as three of the world's largest silver bullion banks to dictate the price of silver through a secret, once-a-day meeting known as the Silver Fix.

None of this will come as a big surprise to readers, most of whom have been aware that this took place for years.

But wait there's more.

In a curious twist, the settlement letter reveals a stunning development, namely that the former members of the manipulation cartel have turned on each other. To wit:

“In addition to valuable monetary consideration, Deutsche Bank has also agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement. In Plaintiff’s estimation, the cooperation to be provided by Deutsche Bank will substantially assist Plaintiffs in the prosecution of their claims against the non-settling defendants.”

 

Eoin Treacy's view -

The method used to set the daily benchmark rate for sliver changed to an electronic system in January. This change to a decades old method was in recognition of the fact that the honour based system that had prevailed previously was woefully inadequate. The admission by Deutsche Bank of culpability and its willingness to share correspondence pertaining to what amounts to conspiracy is likely to continue to make headlines and may draw more attention to the silver market. 



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April 12 2016

Commentary by Eoin Treacy

Email of the day on precious metals ratios

I just wonder if there is a chart of the Gold Silver ratio, as well as the HUI to gold and silver stocks to silver ratios available

Eoin Treacy's view -

Thank you for this question and I was just looking at these ratios following what has been an impressive breakout in gold and silver miners. You can recreate these ratios using the Charting function in the Chart Library. Here is a video showing how this can be achieved. 



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April 12 2016

Commentary by Eoin Treacy

Email of the day on ETFs that track the gold miners' index

I always enjoy reading your articles on PMs. On April 11th you showed HUI Gold shares chart How does one invest in this index from here in the UK? Is there an ETF one can buy? Thank you 

Eoin Treacy's view -

Thank you for your kind words. Gold miners are among the best performing stocks so far this year so interest in the sector is definitely picking up. There are a wide number of instruments that track the Index of gold miners. 



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April 12 2016

Commentary by Eoin Treacy

Soybeans Extend Rally to 8-Month High as Demand Seen Recovering

This article by Aya Takada for Bloomberg may be of interest to subscribers. Here is a section:

Futures up 0.2% at $9.30 1/2/bu at 11:25am in Tokyo, rising a 3rd day, longest streak since Mar. 11

“A weakening dollar is boosting optimism demand for U.S.  supplies from overseas buyers will keep expanding,” says Takaki Shigemoto, analyst at JSC, researcher in Tokyo

NOTE: U.S. soybeans inspected for export jump +70.5% w/w to 386,768mt: USDA

 

Eoin Treacy's view -

Spring planting started last week and with favourable ground conditions the potential for a large crop, barring incident, is high. Against that background demand dominance for soybeans is likely to be a short to medium-term affair rather than a major bull market.



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April 11 2016

Commentary by Eoin Treacy

April 08 2016

Commentary by Eoin Treacy

April 07 2016

Commentary by Eoin Treacy

Jamie Dimon's Rate-Spike Nightmare

This article by Lisa Abramowicz and Rani Molla for Bloomberg may be of interest to subscribers. Here is a section: 

3) Investors are piling into medium and longer-term U.S. bonds with increasing conviction that borrowing costs will stay low forever. The biggest exchange-traded funds that focus on such notes have experienced a surge of new money this year, with the volume of short interest on the ETFs' shares falling. This has helped fuel a 4.9 percent surge in Treasuries maturing in seven to 10 years so far this year, according to Bank of America Merrill Lynch index data.
 
4) The demand hasn't only come from ETFs and mutual funds. Big institutions and hedge funds have also bought more U.S. government bonds, particularly those maturing in the next decade, as they seek safe spots to park cash in the face of global economic uncertainty. 

Eoin Treacy's view -

How the Fed measures inflation does not appear to bear a great deal of resemblance to what we experience in our day to day lives. The cost of services such as insurance, education and healthcare have all trended higher and housing prices have recovered in many major cities but inflation measures have not responded. When I look at what I spend on a monthly basis that doesn’t make sense but the other side of the balance sheet also needs to be addressed.

Wages have been static for a long time and that means people have had to pay more for services but have cut back elsewhere to make ends meet. That is probably closer to how the Fed views inflation than any other explanation but it means wages are vital in how they decide to act. 



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April 05 2016

Commentary by Eoin Treacy

April 04 2016

Commentary by Eoin Treacy

Amcu to launch strike at Sibanye Gold on Wednesday

This article by Zundi Shabalala for Mineweb may be of interest to subscribers. Here is a section:

South Africa’s Association of Mineworkers and Construction Union (Amcu) said on Monday it plans to launch an indefinite strike on Wednesday at Sibanye Gold to demand higher wages.
Amcu members had voted in October to strike in the gold sector, including at Sibanye, but had agreed not to down tools immediately.

Amcu spokesman Manzini Zungu said on Monday the union had given a 48-hour strike notice to Sibanye.

“We will go on strike for as long as our members are saying ‘stay on a strike’,” he said.
“Sibanye is on a shopping spree, acquiring other assets but their workers are paid very low wages.”

Sibanye, which in 2015 bought Anglo American Platinum‘s labour-intensive Rustenburg mine and Aquarius Platinum, signed an agreement with three smaller unions and extended the wage deal to Amcu members.

Sibanye spokesman James Wellsted said the company had received the strike notice.
“They have a right to strike but we have the right to limit the potential damage to our business,” he said. “We have robust strike plans and will be implementing,” he said, without elaborating how Sibanye would cope with the work stoppage.

 

Eoin Treacy's view -

South African mines have been subject to headline grabbing labour disputes for much of the last five years and this is an issue that has the potential to become problematic for shareholders unless handled extremely delicately. 



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April 04 2016

Commentary by Eoin Treacy

We interrupt this rally to bring you...fundamentals

Thanks to a subscriber for this report from Deutsche Bank focusing on the mining sector which may be of interest to subscribers. Here is a section: 

The rally year to date reflects a rotation into sectors benefiting from a weaker US dollar, Chinese stimulus and the oil price rebound more than it reflects the slowly improving fundamentals - and we think each of these positives is now priced in. The sector has re-rated to a P/NPV of 0.86x, in line with the average trough multiple since 2003. It's the same for earnings multiples, where we now forecast a sector 2017e PE of 30x, well above the average trough PE of 9x, and the 17x of the most recent low in May 2015. We prefer Rio at 0.76x P/NPV compared with BHP at 0.92x. We have downgraded Glencore to Hold (0.8x NPV), but prefer it to Anglo (0.6x) given deleveraging progress.

FCF now healthy across the sector and gearing coming down
The 1Q16 commodity price recovery, with the oil price and producer currency weakness early in the quarter, plus continued ‘self-help’, has boosted free cash flow across the sector. 17 of the 19 companies under our coverage are now producing free cash flow after dividends in 2017. FCF yields average 10% for the big four diversified miners and 8.4% for the whole sector next year. Gearing is also reducing: we forecast a drop from 26% in 2015, to 22% in 2016 and 16% in 2017.

Lots for sale, lots of window shopping, no real buying…yet
A few companies are starting to use their balance sheets in selective M&A, but for rich multiples which are too high for most to justify when downwards pressure on long-term commodity prices prevails: today we have cut our LT copper price by 7% to USc300/lb and our LT iron ore price by 14% to US$57/t. There is a lot of window shopping going on, but valuations have run hard very quickly and we think both buyers and quality “for sale” assets remain scarce. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The commodities sector was about as unloved as is possible late last year and an impressive short covering rally has taken place over the first quarter. A similar move in oil prices has been the catalyst for renewed interest in miners because somewhat higher energy prices will have helped to push marginal supply out of the market. 



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April 01 2016

Commentary by Eoin Treacy

Lithium Story is (Quietly) Taking Off

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

Key takeaways 
1) Q1 is firmly on track led by good growth in Lithium and solid growth in Surface Treatment, including in China, where auto/industrial demand is above expectations. The weakest region is Latin America where hydroprocessing catalyst demand is down as refiners in Brazil and Venezuela have sharply curtailed purchases. 2) Spot lithium carbonate prices in China of $21,000/m.t. are “fiction” with no relation to prices Albemarle receives or its large battery customers pay. Albemarle sells no spot lithium in China. The vast majority of Albemarle's lithium is sold under annual contracts. We estimate Albemarle’s battery grade lithium carbonate prices will be up ~15% in '16 to ~$6,.900 (vs $6,000 in '15). 3) All options for Bromine have been explored. A spin does not work as it would increase Albemarle's leverage at a time when it is trying to reduce leverage. A sale does not work as there are no strategic buyers and private equity would likely only pay 7x. A JV does not work due to required divestitures. As such, Albemarle is focused on running Bromine for cash for the next 3-5 years and using the cash to fund organic growth in lithium. 4) A sale of Surface Treatment would be much easier (and valuable) as evidenced by last week’s acquisition of Valspar for 15x EBITDA. However, with an onerous tax clawback until 2H'17 (stemming from the tax free separation of the business in '12), a sale before then is unlikely. 5) Assuming the recently announced MOU with Chile is formalized, Albemarle’s next lithium capacity will be a 20k m.t. plant in Chile. If it is built in La Negra, where Albemarle’s new 20k m.t. lithium carbonate plant is ramping (commercial sales ’17), the cost would be <$200MM versus $220MM spent on the new plant. This next increment of capacity should be on-stream in ‘20 and will increase Albemarle’s Chilean lithium carbonate capacity to 64k m.t. (70k m.t. with debottlenecking) plus 6k m.t. of US capacity. After Chile, Albemarle intends to bring on a 25k m.t. lithium hydroxide (from spodumene) plant in ’22-‘23 at a cost or ~$300M.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

With Tesla reportedly taking 180,000 pre-orders for its anticipated $35,000 Model C yesterday it is perhaps a good time to think about where the batteries to power these vehicles are going to come from. Tesla’s gigafactory is expected to begin production next year and factories in China, Japan and South Korea are ramping up production for their own EV solutions. This all requires lithium. 



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March 16 2016

Commentary by Eoin Treacy

Lumber Jumps as Trudeau-Obama Meeting Fuels Hopes for Trade Pact

This article by Jen Skerritt for Bloomberg may be of interest to subscribers. Here it is in full:

Lumber prices touched an eight-month high after a state visit to the U.S. by Canadian Prime Minister Justin Trudeau raised expectations that the latest chapter in a long-simmering trade dispute is closer to being resolved.

Futures for May settlement rose 3.6 percent to their daily limit of $291.60 per 1,000 board feet at 12:45 p.m. in Chicago, the highest intraday price for a most-active contract since July 14.
The two nations have long sparred over softwood lumber, with the dispute gathering steam in the early 1980s when U.S. lumber companies complained Canada gave producers access to cheap timber on government land. The 2006 Softwood Lumber Agreement expired last fall and both countries have until October to iron out a new trade accord, after which U.S. companies can file new trade cases against Canadian imports.

Trudeau brought up the dispute at a meeting with President Barack Obama in Washington on Thursday and said he’s confident the two countries can find a solution in the coming weeks and months. Comments from both sides point to the conclusion of a new, compromise deal before the deadline, Bloomberg Intelligence analyst Caitlin Webber said Friday in a note.

A new accord would probably boost prices as imported Canadian lumber will be subject to a tax at the border, Paul Quinn, an analyst at RBC Capital Markets in Vancouver, said in an interview.
"We would expect benchmark lumber prices to rise following the reintroduction of a trade deal," Charles Gross, an analyst at Morningstar Inc. in Chicago, said via e-mail.

 

Eoin Treacy's view -

The relative weakness of the Canadian dollar has acted as a headwind for lumber prices because it makes supplies north of the border more attractive. This weighed on the commodity until recently and the potential that the USA and Canada can come to an agreement on tariffs is a positive catalyst. 



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March 14 2016

Commentary by Eoin Treacy

World Sugar Market Seen in Deficit for Few Years, Archer Says

This note by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here it is:

“World production and consumption for the next 2-3 years show a reasonable chance that we will continue having deficits” as prices remain below production costs for many producers, Archer Consulting says in March 12 report.

Consumption around the world is rising faster than production, says Arnaldo Correa, partner at the Sao Paulo- based firm

As Brazil’s average sugar-yield (known as ATR) dwindles fourth year in row, “it’s no wonder that we will have constant deficits (though small) over the next years”

Thailand’s costs of production is 15.10c/lb, India’s 24.47c/lb, while Australia’s is 11.90c/lb and Brazil’s 11.25c/lb, Archer estimates

Near term, recent price rally needs validation from physical market, where demand came to a standstill since early March

NOTE: Raw sugar for May delivery rose 2% last wk to 15.13c/lb on ICE Futures U.S. in N.Y.

Rebounding Brazilian real helping sugar rally as it deters producer selling of commodities priced in greenback: Archer

 

Eoin Treacy's view -

“The cure for high prices is high prices” is one of the oldest adages in the commodity markets but it also works in reverse and particularly for agricultural commodities where farmers can choose what to plant. As prices for one commodity fall they have an incentive to plant a more lucrative cash crop. 



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March 14 2016

Commentary by Eoin Treacy

Copper A Pause for breath

Thanks to a subscriber for this report from Standard Chartered which may be of interest. Here is a section

One critical question facing copper-market participants at the conference was why China’s copper imports have been so strong since September. The latest trade data (for February) showed that preliminary copper imports rose 50% y/y to 420 thousand tonnes (kt), just 5% down from January and 10% lower than the average in Q4-2015. Conversations with market participants offered four key drivers supporting the level of imports. First, H2-2015 was dominated by fears of sharp CNY devaluations versus the USD, which would make imports of copper more expensive. As a result, China’s fabricators bought more cathode than usual, seeking to limit the potential cost impact. It was generally observed that the People’s Bank of China’s (PBoC’s) CNY management since the LNY holiday had settled these concerns to some extent. We expect a relatively benign environment for the CNY in 2016, and therefore that this currency-related restocking will moderate.

Second, another import driver was the relative weakness in Yangshan copper premia versus last year’s long-term contracted premium (USD 130/tonne, ‘t’) and 2016 terms (USD 98/t). Alongside the lower price environment and fears of CNY devaluation, this supported fabricators’ and traders’ appetite for cathode purchases. Contracted tonnage volumes for 2016 potentially fell 20-30%, leaving China’s traders and fabricators with a larger discretionary volume to be purchased from the spot market early in 2016. While Yanghsan premiums dropped from close to USD 100/t in January to USD 70/t currently, until the domestic copper discount narrows or Yangshan premiums falls further, spot demand was seen limited. In this respect, further builds in bonded stocks were expected through March

Third, another key support for imports early in 2016 was the State Reserve Bureau’s (SRB’s) copper purchases in January. The SRB clearly signalled that it was tendering for 150kt of cathode from domestic smelters early in the year, and purchases were completed within the month. This tightened the domestic market temporarily and boosted refined imports. There was also discussion of potential commercial stockpiling being undertaken in China. Although not officially confirmed, media reports in December noted that the China Development Bank (CDB) had allocated a three-year interest-free loan to producers of various metals to use for commercial stockpiling. The tenor of the loans suggested the goal was to remove the metal from domestic markets for a substantial period of time. It was reported that at the time, a CNY 9bn loan had been offered to copper producers, which would equate to just under 250kt of copper cathode at current Shanghai Futures Exchange (SHFE) prices. This commercial stockpiling has been undertaken in China’s aluminium sector, but it remains unclear whether this has been the case in copper.

 

Eoin Treacy's view -

Copper prices are currently about half of their peak 2011 value and this chart of the futures curve highlights how small the spread is between the various contracts. At only a 2¢ over three years the curve suggests the market is in relative balance. 



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March 10 2016

Commentary by Eoin Treacy

March 08 2016

Commentary by Eoin Treacy

Caffeine Addicts, Beware the Shrinking Coffee Supplies

This note by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

Slumping coffee stockpiles are signaling that caffeine fiends may start paying more for their morning buzz. Inventories of arabica beans at warehouses monitored by ICE Futures U.S. have tumbled 12 percent this year to the lowest since May 2012. Prices traded in New York reached a two-year low in January, and the shrinking glut shows that cup of Joe may not stay cheap for long as global demand gains, said Fain Shaffer, the president of Infinity Trading Corp. in Indianapolis.

Eoin Treacy's view -

Coffee is addictive so demand growth is reasonably unaffected by moderate moves in the price of the commodity. It’s also a high margin business for companies like Starbucks where the majority of costs are in rent and labour rather than raw materials. 

Supply is a different story because of the life cycle of the coffee tree. It can take anything up to five years to produce a fruit bearing tree. This means coffee prices are prone to multi-year moves where uptrends eventually lead to increases in supply and downtrends eventually mean trees are ripped out to make way for more profitable cash crops or diseased plants are not replaced. 

 



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March 04 2016

Commentary by Eoin Treacy

Brazilian Real, Stocks Rally as Traders Root for Impeachment

This article from Bloomberg may be of interest to subscribers. Here is a section: 

"Brazilian stocks have already risen a lot these past days as investors reverted bets on the worsening of the economy," said Alvaro Bandeira, economist at Banco Modal. 

"The market clearly wants a better government, one that’s credible and stable, and able to change economic policies that have led the country into this recession."
Some market watchers warned the rally could be short-lived as the process to impeach the president drags on, potentially plunging Brazil deeper into chaos.

“The market is reacting like Brazil woke up today as a whole new country, but a corruption investigation is hard, long and full of surprises," said Adeodato Volpi Netto, head of capital markets at Eleven Financial Research. "There’s room for profit taking on stocks as short-term investors play to make money, not to discuss politics."

Eoin Treacy's view -

I had hoped Dilma Rousseff would lose the 2014 election but that was not to be the case and her success resulted in a loss of investor confidence that Brazil could deal effectively with its challenges. The collapse of oil prices highlighted how much of a piggy bank Petrobras had become for the ruling elite and pictures today of former, and well-loved, president  Lula da Silva being arrested highlight just how high up the payments may have gone. As the above segment suggests impeachment is not a simple process so we can expect this saga to persist a while longer unless of course she resigns which appears unlikely given the protections from prosecution afforded the president. 



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March 03 2016

Commentary by Eoin Treacy

Iron-Ore and Steel

Eoin Treacy's view -

A firmer tone in oil prices inhibits the ability of marginal miners to continue to remain in operation which should remove supply from the market. This has predictably acted as a catalyst for bullish interest in other commodities. 

Following a five-year downtrend and 80% price decline, Iron-ore rallied this week to break back above the 200-day MA for the first time since late 2013. 

 



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March 02 2016

Commentary by Eoin Treacy

The Silver Institute

Thanks to a subscriber for this edition of Silver News, which highlights innovations in industrial uses for silver. Here is a section on supply: 

Global mine supply production is projected to fall in 2016 by as much as 5 percent year-on-year. This would represent the first reduction to global silver mine production since 2002. The lower price environment provided little incentive for producers to invest in expanding capacity at existing operations. Looking further ahead, many analysts expect global silver mine production to fall through 2019 as primary silver production from more mature operations begins to drop.

Scrap supply, which has been on the decline for several years, should further weaken in 2016. This outlook is based on additional losses in photographic scrap, a depleted pool of near-market silverware, jewelry and coins, and slowed scrap flows from industrial sources. Industrial scrap such as electronics cost more to recycle and the current price environment has weighed on the profitability of recovering silver from these end-of-life items.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The loss of the photographic film market was a major blow to the silver market from the 1990s. However the metal also has other industrial uses not least in healthcare and the fight against antibiotic immunity. 



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March 01 2016

Commentary by Eoin Treacy

Copper Bargains Scant With Best Assets Hoarded, Antofagasta Says

This article by Danielle Bochove and Millie Munshi for Bloomberg may be of interest to subscribers. Here is a section:

When asked about the possibility of future asset purchases, Hernandez said the company would prefer to remain in the Americas. Copper prices, down more than 50 percent from an early-2011 peak, are unlikely to recover significantly for the next two to three years, he said. As that happens, more miners may be forced to put up assets for sale.

“Mining companies don’t want to dispose of their copper assets,” Hernandez said. “We haven’t seen too many opportunities on the market. On the other hand, many companies are very stressed financially, and we don’t know what will happen.”

 

Eoin Treacy's view -

Copper has been trending consistently lower since 2011 so we know a lot of bad news is already in the price. It has stabilised near $2 over the last couple of months in what has so far been a relatively gradual process of mean reversion. It is going to have to sustain a move back above the 200-day MA to confirm more than temporary support has been found. 



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February 29 2016

Commentary by Eoin Treacy

Electric car war sends lithium prices sky high

This article by James Stafford for Mineweb may be of interest to subscribers. Here is a section:

That’s why Goldman Sachs calls lithium the “new gasoline”. It’s also why The Economist calls it “the world’s hottest commodity”, and talks about a “global scramble to secure supplies of lithium by the world’s largest battery producers, and by end-users such as carmakers.”

In fact, as the Economist notes, the price of 99%-pure lithium carbonate imported to China more than doubled in the two months to the end of December—putting it at a whopping $13,000 per ton.

But what you might not know is that this playing field is fast becoming a battlefield that has huge names such as Apple, Google and start-up Faraday Future throwing down for electric car market share and even reportedly gaming to see who can steal the best engineers.

Apple has now come out of the closet with plans for its own electric car by 2019, putting it on a direct collision course with Tesla. And Google, too, is pushing fast into this arena with its self-driving car project through its Alphabet holding company.

Then we have the Faraday Future start-up—backed by Chinese billionaire Jia Yueting–which has charged onto this scene with plans for a new $1-billion factory in Las Vegas, and is hoping to produce its first car next year already.

Ensuring the best engineers for all these rival projects opens up a second front line in the war. They’ve all been at each other’s recruitment throats for months, stealing each other’s prized staff.

And when the wave of megafactories starts pumping out batteries—with the first slated to come online as soon as next year–we could need up to 100,000 tons of new lithium carbonate by 2021. It’s an amount of lithium we just don’t have right now.

 

Eoin Treacy's view -

Describing lithium as the “new gasoline” is an interesting take on the projected demand for electric cars. Last week’s Bloomberg article proclaiming batteries would cause the next oil crisis would appear to be in the same vein. These estimates are based on the fact that large battery factories are going to come on line in the next 18 months and not just Tesla’s giga-factory in Nevada. With additional supply, prices can be expected to decline and demand should rise. Home batteries and home charging stations are likely to become much more visible and utilities are already installing industrial scale batteries to tackle intermittency of renewables and to become more efficient with fossil fuel use. 



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February 29 2016

Commentary by Eoin Treacy

It's expensive, but you need some insurance

Thanks to a subscriber for this report from Deutsche Bank focusing on the outlook for gold not least as a hedge against fear in other asset classes. Here is a section:

As a hedge against a weakening currency, we think Chinese gold demand will continue to increase, and whilst we do not forecast a repeat of 2013, physical demand could grow in the order of 10% or 100 tonnes. Chinese demand has increased by 14% CAGR since 2005. In the recent bout of RMB weakness we have seen increased trading volumes on the Shanghai Gold exchange, suggesting a higher propensity to buy gold as a hedge against a depreciating currency. Chinese buying remains tactical with the most activity occurring on the dips. We note that since the strong rally in gold, we have seen activity drop off on the SGE.

Gold holds its own in a US recession
Although we are not as bearish on the US to suggest that the entire economy will lapse into a recession, there are certain manufacturing sectors that are in a recession. Assuming the worst case scenario where the US slips into a recession, dragging the global economy with it, the USD normally performs very well as investors search for safe havens and US investors repatriate funds onshore. Gold is normally inversely correlated to the USD, but under these conditions i.e. extreme risk aversion, gold also performs relatively well. We outline the performance of the USD in the past two global recessions.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Gold rallied as negative yields made it attractive based on what is now a positive carry. That alerted people once more to its characteristics as an uncorrelated asset class which was ignored while prices trended lower. 



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February 26 2016

Commentary by Eoin Treacy

A step change for Sibanye

This article by Warren Dick for Mineweb may be of interest to subscribers. Here is a section: 

The yawning margins South Africa’s gold producers are now enjoying courtesy of the current rand-dollar exchange rate and gold price are bringing a whole lot of positive problems that revolve around what to do with the cash.

“A situation like this only comes around once or twice in a lifetime,” is the way Sibanye CEO Neal Froneman put it in our interview. To add numbers for context: Sibanye has guided the market that it will produce 50 000 kilograms of gold in 2016 (the company’s financial year runs to the end of December). The current rand gold price means that Sibanye will earn R612 000/kg, whereas forecast All-in Sustaining Cost (AISC) is expected to be R425 000/kg. Should these assumptions hold, it would indicate the margin of R187 000/kg would generate earnings before interest and tax of R9.35 billion, with cash flow from operations in that region. This massive increase in potential free cash flow explains why Sibanye’s share price has risen 182% in the last three months.

So what will it do with the cash?

This year it will have to pay for the acquisition of Aquarius Platinum and the Rustenburg Operations from Amplats which amounts to about R6 billion. Using existing cash resources and debt facilities means the company would only marginally breach its self-imposed comfort level of debt to operating profit without factoring in the windfall from the margins it would enjoy during the course of the year.

 

Eoin Treacy's view -

David has long said that happiness in the currency markets is about having both the trend and the central bank on your side. Gold is a monetary metal and its supply does not depend on a central bank. However since no currency can be valued in isolation the influence of whatever central bank is issuing the currency you want to denominate gold in is important. The Dollar has been strong over the last year which has held back gold’s advance against the greenback. On the other hand, the Rand has been among the weakest currencies, so gold has been hitting new all-time highs against it. 



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February 24 2016

Commentary by Eoin Treacy

Trends & Inflection Points

Thanks to a subscriber for this note by Mark Steele for BMO which may be of interest to subscribers. Here is a section: 

Gold does well when the banking system is at risk.

The banking system is at risk.

Yesterday, we highlighted the CDS curve on Deutsche Bank, which went inverted (Markit pricing) when WTI hit $26. We updated that chart as of 5:30am, only this time with gold overlaid on the DB curve – Figure 3.

 

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area. 

The correlation between the underperformance of the financial sector and the surge in gold prices is not a coincidence. Gold has been in need of a bullish catalyst and it has attracted interest as government bonds yields moved into negative territory. 



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February 19 2016

Commentary by Eoin Treacy

The multi-asset essay: Why commodities will recover

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

Our call for a final leg down in metals prices is based on weaker-than-expected oil prices and the potential depreciation of the Chinese renminbi. Metals currently are factoring in oil at $40 a barrel – not today’s prices of low $30s. Furthermore, a weaker Chinese currency is likely to drag down commodity currencies even further. But that is likely to be the end of this deflationary cycle.
Management teams may be able to take out more costs, but we are at the point where these cuts would be unsustainable, ultimately leading to lower output in the future.

Why is that? Because current spot prices are 40 to 50 per cent below so-called incentive prices, which are the prices required to earn a 12-15 per cent rate of return on a project. As a result, capital spending on new capacity has simply dried up, with industry capex down over 60 per cent versus the peak in 2012. Ore bodies are depleting assets and current capex levels are not sufficient to sustain current output for more than two to three years. In copper, for example, the world needs two new large-scale mines every year just to offset the reserve depletion.

While oil prices are low, current spot prices for metals are well below the marginal cost of most producers. As an extreme example, nearly two-thirds of the nickel industry is under water. That has placed mining company balance sheets under intense pressure. We estimate the net debt of the largest companies will approach an uncomfortable 3.5 times ebitda by the end of the year. This could force an industry tipping point and, indeed, supply curtailments have already started to gather momentum. In aggregate, around five per cent of the industry’s capacity is in the process of closing. We need at least ten per cent of the capacity to be shuttered to reach critical mass. Given the stresses in the industry, we think this will occur during 2016 and will stabilise prices. It may take a little longer for capital constraints to become apparent, but as they do, metal price deflation will quickly turn to inflation. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I was talking to a Scotland based nickel buyer in Heathrow a couple of weeks ago who testified to how difficult the business of buying scrap has been over the last few years. Prices have been falling in a jerky fashion, which complicated their hedging strategy making it largely ineffectual. They are now surviving on thin margins and really hope for a turn in the price environment soon to ensure survival. 



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February 15 2016

Commentary by Eoin Treacy

Downside risk remains

Thanks to a subscriber for this report from Deutsche Bank focusing on the shipping sector. Here is a section:

Supply discipline is the only resort, but looks difficult to achieve 
Another 518k TEU of mega vessels will hit the water in 2016 (with 800k more in both 2017 and 2018), which will force Asia-Europe capacity to grow c.10% in 2016 (vs. est.2% demand growth). Liners’ supply discipline has also become increasingly difficult to achieve, given the widening cost gap. While the latest mergers (Coscon+CSCL; CMA CGM+NOL) should further consolidate market share, pricing competition typically intensifies post mergers, based on prior experiences. This is due to liners seeking to preserve market share while cargo owners seek to diversify their risks. Moreover, the existing alliances are set to break up post mergers, creating short-term instability for the industry. 

How deep and long will this downturn last? 
The sector has traded down to 1.0x P/B, vs. 2016E ROE of -19%, which still looks expensive. During the GFC, the sector troughed at 0.5x P/B vs. ROE of -20%. More importantly, investor interest has waned over the past several years as the sector’s oversupply was widely expected to persist. This explains why the sector’s P/B range has not only moved down but also contracted. We expect a prolonged downcycle; hence, value will only emerge when P/B is closer to the GFC trough of 0.5x.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Bull markets begin when new sources of demand emerge amid an environment where supply is constrained. Likewise they peak when supply has caught up and overwhelms demand. We occasionally get periods of time when demand falls but then prices retreat enough to encourage consumers to participate again. As a result supply is a more important factor than demand when thinking about how a market is likely to evolve. Bearing that in mind it has often puzzled me why people tend to think about the Baltic Dry Index as being an indicator of demand rather than supply; since that kind of interpretation is contrary to how we tend to look at just about every other commodity related market. 



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February 15 2016

Commentary by Eoin Treacy

Early Morning Reid

Thanks to a subscriber for this report by Jim Reid for Deutsche Bank which may be of interest. Here is a section:

Talking of Oil and Gold, last week we showed a long-term graph of Oil in real adjusted terms, showing that the average real price since 1861 was $47. Following on from that, one ratio we occasionally look at is the ratio of various assets to the price of Gold. So today in the off we update the Oil/Gold ratio back to 1865 and find that the Gold price has just hit an all-time high at around 44 times the price of Oil. The previous high of 41 in 1892 has just been exceeded. For perspective, the ratio was at 6.6 in June 2008 and only 12 in May 2014. The long-term average is 15.5. While this says nothing about where the ratio is going in the short-term surely this looks a good trade to exploit over the longer-term for those who care about such things.

A big reason behind the rally in Gold this year has been a flight to quality and the fading expectations of further Fed tightening in the next twelve months. Yesterday Yellen stuck largely to the script in acknowledging market concerns emanating from tightening financial conditions, while at the same time refusing to fully close any doors still open to the Fed later this year. That said the overall tone was certainly of a dovish leaning. Much was made of the passage suggesting that ‘financial conditions in the US have recently become less supportive of growth, with declines in broad based measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar’. Yellen said that should these developments prove to be persistent then they ‘could weigh on the outlook for economic activity and the labour market’.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

When gold was used to buy oil the ratio between the two would have been a powerful indicator of sentiment towards the economy and relative value of savings over investment. That may no longer be the case in an era of fiat currencies but when the ratio hits new highs it tends to turn heads. 



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February 15 2016

Commentary by Eoin Treacy

February 12 2016

Commentary by Eoin Treacy

Crude Oil Futures Surge After Closing at Lowest in 12 Years

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section: 

"It makes a lot of sense to cover shorts after plunging to new 12-year lows," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "We had one of the more reliable people in OPEC say that it was willing to cooperate in making cuts. I don’t believe anything will come of it but you have to pay attention."

And

“Prices are not appropriate, I won’t say for the majority only, but for all producers,” U.A.E.’s Al Mazrouei said in the Sky News Arabia interview in Arabic on Wednesday. “The people who have spent money and have this investment, it’s natural that they won’t make cuts alone unless there is complete cooperation from everybody in that area.”

Eoin Treacy's view -

Oil is cheap right now and many producers are uneconomic at these levels. The question then is only about when this supply will be taken out of the market not if that happens. The lower prices go, the greater the potential is for that to happen. Russia signalled in January that it was willing to discuss cutting supply and now several OPEC members are discussing it which is a confirmation they are not immune to the decline in prices. These prognostications are helping oil prices to steady but substantive action is probably needed to act as a catalyst for a more impressive rebound. A lot will depend on what Saudi Arabia is willing to do. 



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February 09 2016

Commentary by Eoin Treacy

Breaking Through the Zero Lower Bound

Thanks to a subscriber for this report by Ruchir Agarwal and Miles Kimball for the IMF which may be of interest to subscribers. Here is a section:

We show here how the combination of (a) using electronic money as the unit of account and (b) a time-varying paper currency deposit fee can be used to eliminate the option to circumvent the negative rates by withdrawing, storing and, later, redepositing paper currency. The key idea is that a negative interest rate can be accompanied by a time-varying deposit fee that ensures the value of paper money and the value of funds in electronic accounts will move in tandem. Such a deposit fee only needs to be imposed at the central bank’s cash window—the facility through which the central bank and commercial banks interact to bring cash in to and out of circulation—and not on households, firms, or banks. Levying the paper currency deposit fee on net deposits of paper currency allows the central bank to create an exchange rate at the cash window between electronic currency and paper currency, so that in a negative interest environment, the value of paper currency can be caused to depreciate over time relative to electronic money. The objective is a policy at minimum distance from the current monetary system consistent with eliminating the zero lower bound. In particular, such a policy requires no extra regulations or quantity constraints. Instead, its impact on the economy works entirely through the price system.

Eoin Treacy's view -

This is about the best, though unintentional, argument for owning gold and stocks with reliable dividend growth I’ve seen. One of the primary arguments used by fundamental analysts to disparage gold is that it does not pay a dividend and as a result cannot be valued. That’s does not seem to trouble them when it comes to suggesting that fiat currency should be intentionally debased and eroded by negative interest rates. With $7 Trillion in bonds currently in a negative yield environment, gold has a positive carry just by virtue of not paying anything. 



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February 08 2016

Commentary by Eoin Treacy

January 29 2016

Commentary by Eoin Treacy

ETF Holdings of Gold

Eoin Treacy's view -

The gold market has been the subject of considerable conjecture over the last month as prices have stabilised mostly above $1050 and closed an overextension relative to the trend mean in the process. ETF holdings of gold do not represent the same influence on gold prices as they did in 2011, not least because so much selling has taken place. However, it is noteworthy that the total holdings of gold index has also been engaged in a process of mean reversion.



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January 28 2016

Commentary by Eoin Treacy

The Bigger Picture A Global & Australian Economic Perspective

Thanks to a subscriber for this report from National Australia Bank which may be of interest. Here is a section: 

There are signs that the strength in household goods expenditure is losing steam, possibly reflecting the recent cooling of the housing market spearheaded by Sydney. That said, the more recent data on retail spending continues to be relatively resilient, underpinned by improving trading conditions, while a lower AUD has encouraged tourism spending. ABS retail turnover growth for November (0.4%) was slightly below October (0.6%) to be 4.1% y/y, around the trend seen since late 2014. Meanwhile, NAB’s Online Retail Sales Index for November showed a 0.7% m/m rise in online spending. Despite soft wages growth, we expect a modest pick-up in consumer spending growth through to 2016, driven by a gradual reduction in households’ saving ratio and strong employment growth.

The Sydney housing market has clearly cooled, having recorded two consecutive months of price declines, while momentum in the Melbourne market has also slowed -but not as much as Sydney. Other capital cities experienced mixed outcomes in December. Recent property market outcomes are consistent with our view that prices growth will increasingly come under pressure as credit restrictions on investor lending bite, in combination with subdued incomes and slowing population growth/rising supply. We have maintained our previous forecast for much slower house price growth in 2016 (2%), although risks to the downside have escalated even more, especially in the apartment market.

Signs of stronger non-mining investment remain hard to find in the official data (especially the expectations data), while inevitable declines in mining capex continue – and could well become more pronounced given further falls in commodity prices. Despite significant signs of improvement in the business landscape, the NAB Business Survey reports that firms are still apparently gun-shy on investment. A fall in capacity utilisation in the December Monthly business survey has probably not helped, nor would recent financial market uncertainties. That said, we remain hopeful that AUD depreciation will eventually assist investment in trade exposed industries. Dwelling investment has been a little softer than expected in recent quarters, yet record high numbers of dwellings in the construction pipeline suggest the positive contribution to growth is likely to continue – although the cooling housing market will likely stem the flow of new projects.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

A firmer tone on energy markets represents a tailwind for Australia as LNG shipping capacity comes on line. In fact with the rationalisation of China’s steel industry Australia needs energy to play a significant role in exports to make up for the loss of revenue from coal and iron-ore. If we take that a step further it is reasonable to expect the Australian Dollar to be more heavily influenced by moves in the oil price than was previously the case. 



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January 25 2016

Commentary by Eoin Treacy

Plumbing the depths...

Thanks to a subscriber for this report from ICBC Standard Bank which may be of interest. Here is a section:

We would be biased long gold into Chinese New Year but only up to around $1,140 We expect the current rally to fade after that the metal to post a new low for the current down-cycle in Q3, followed by a sluggish recovery into year end.

Silver remains a derivative of gold. Trading opportunities are tactical and technical, not fundamental. We recommend buying silver volatility when one-month implied dips below 23%. We would rather own puts than calls.

In the short-term we expect platinum to trade below $800 and potentially test the global financial crisis low of $744. The medium-term outlook is improving, however, and we think platinum’s long period of underperformance relative to both gold and palladium will begin to reverse during H2.

Relative to spot prices we are most bearish palladium. That’s counter to consensus and recent history. But the demand outlook has deteriorated, supply is inelastic, inventories are large, and investor conviction is shaky. Palladium is more likely to trade in the $300s than $600s this year

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This report is representative of a large number that have crossed our desks recently with the abiding message being that there are short-term risks but medium-term upside potential. In any other circumstances investors would pre-empt a medium-term bullish view by buying now and using further weakness as an opportunity to increase positions. One has to ask why this is not more evident within the commodity complex right now?

 



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January 20 2016

Commentary by Eoin Treacy

Gold and Safe Haven Status

Eoin Treacy's view -

Gold prices are down about 43% in US Dollar terms since the 2011 peak but have been notably quiet over the last few months as volatility has picked up in just about every other asset class. Sometimes just doing nothing is enough to attract attention when the emotionality of the market spikes higher and this has certainly been the case for gold. 



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