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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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January 19 2016

Commentary by Eoin Treacy

Email of the day on lithium and miners

Following up on your 12th Dec piece on the lithium production from Elementis' hectorite mining in the US the consensus amongst those who know appears to be that we have adequate globally and in the West. The person to speak to (as Elementis doesn't answer emails!) is R Keith Evans who is globally the world expert. A Google search will show up previous articles from this gentleman on the same theme. There's probably a reason why Elementis aren't making a song and dance about it! 

Eoin Treacy's view -

Thank you for this informative email and for the link to R.Keith Evans’ article which it should be noted is dated 2008. Lithium prices have been static for approximately four years suggesting that supply and demand are in relative equilibrium, that the market is dominated by long-term contracts and is not very liquid. 



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January 19 2016

Commentary by Eoin Treacy

Top Forecaster Sees Aussie Demons Capping Gains as Bottom Near

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

Bialas estimates that a “big chunk” of Aussie underperformance came from the unraveling of carry trades that involved, in particular, borrowing euros at near zero percent to buy a currency linked to a higher benchmark rate. The Reserve Bank of Australia cash rate currently stands at 2 percent and policy makers have signaled a reluctance to take it any lower.

Australia last month capped its strongest year for job growth since 2006, with the country’s services sector propelling gains as the mining industry cooled.

“I expect the Aussie-U.S. dollar to bottom sometime in the second quarter,” Bialas said, “as improved competitiveness of sectors unrelated to mining, a strong labor market and a recovery in inflation will give rise to speculation about the return of the RBA to raise interest rates later this year.”

 

Eoin Treacy's view -

Few developed markets are as exposed to China as Australia so the relative weakness of the Australian Dollar has been a reflection of stress in its largest export market. With Chinese government yields testing the lows seen in 2008 the potential for measures to support economic growth to be announced is growing and that may act to stem the Aussie’s decline.  



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January 13 2016

Commentary by Eoin Treacy

Gundlach to Summers Side With Bond Market Against Fed Rate Path

This article by Susanne Walker Barton for Bloomberg may be of interest to subscribers. Here is a section: 

Traders are pricing in about a 39 percent chance the Fed will raise interest rates at or before its March meeting, down from 51 percent at the end of last year. The probability is based on the assumption that the effective Fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.
     
“We could be looking at a really ugly situation during the first quarter of 2016,” Gundlach said during a market outlook webcast Tuesday. “It’s particularly more likely to happen if the Fed keeps banging this drum of raising interest rates against falling inflation.”

And

Policy makers this week have offered conflicting views about the central bank’s rate path amid tumbling oil prices and global market volatility. Boston Fed President Eric Rosengren said Wednesday that estimates for U.S. economic growth are falling, putting the central bank’s projected path for rate increases at risk.

By contrast, Richmond Fed President Jeffery Lacker said Tuesday that the U.S. and China’s economies are linked "less than you would think" and the Fed is likely to need at least four rate rises this year. 

Dallas Fed President Robert Kaplan said he "would have a bias to want to move toward normalization” in an interview with Bloomberg TV on Wednesday. "It comes with some risk,” he said.

“Every time we increase the federal funds rate, we’re going to have to watch and see what the impact is.”

Eoin Treacy's view -

In very simple terms the Fed altered the status quo by choosing to raise interest rates and market participants are still pricing in the effect rising interest rates will have on leverage, buybacks, position sizing and the relative performance of various asset classes. 

2-year yields are rapidly unwinding the short-term oversold condition but a sustained move below the trend mean, currently near 75 basis points would be required to question medium-term supply dominance. 

 



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January 13 2016

Commentary by Eoin Treacy

Email of the day on sugar companies

What are the implications for Tate and Lyle of a secular bull market in sugar?

Eoin Treacy's view -

I agree there is a secular demand growth story for sugar but that does not mean there is a secular uptrend in sugar prices considering the ability of farmers to increase supply over the medium term. Nevertheless, the current outlook is for additional strength is sugar prices following the break of the five-year downtrend. 



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January 07 2016

Commentary by Eoin Treacy

China Sugar Demand Spurs Sweet Surge in Futures Premium

This note by Marvin G. Perez and Melissa Mittelman for Bloomberg may be of interest to subscribers. 

China’s increasing appetite for sugar imports has jolted the spread between futures prices for the raw and processed products.

“There has been poor weather, but there’s also been an exodus out of sugar production” in China, Michael McDougall, a broker at Societe Generale in New York, said in a telephone interview. “They’ve steadily reduced the cane price for the farmer, so he’s basically planting something else.”

China will import a record 5.5 million metric tons in 2015-16, up 8.7% from a year earlier, as domestic production tumbles, the U.S. Department of Agriculture estimates. That will drive demand for supplies from Thailand and India, McDougall said.

 

Eoin Treacy's view -

Sugar is addictive so demand growth tends to remain on a steady upward trajectory. Supply is the major variable and that is true of all commodities not just sugar. Prices trended lower for five years and that means farmers were getting less money every year for the same work. Little wonder then that they decided to plant something with better prospects for a profit. 



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January 06 2016

Commentary by Eoin Treacy

Gold Standard Ventures Is Uncovering Bonanza Grade in Nevada's Carlin Trend

Thanks to a subscriber for this interview from The Gold Report which may be of interest. Here is a section:

TGR: You have released test results on Dark Star that Bob Moriarty called "obscene" in a good way. What's your strategy for moving that discovery forward?

JA: The Dark Star project is something that we're very excited about. To hit 150-plus meters of 1.5 grams per ton oxide in the Carlin Trend has historically meant you were in a large, robust system. This is our second blind discovery on the project. This just goes to show that our exploration team is very good. This was a systematic, methodical model-driven exploration process. Our strategy is to hit this whole corridor, which from north to south is about 10 miles long. On the southern end is Dark Star, and on the northern end is Newmont Mining Corp.'s (NEM:NYSE) producing Emigrant mine. We think there is a lot of exploration potential along the structural corridor. A lot of that has been made possible because of the consolidation work that Gold Standard has been able to do.

TGR: As you mentioned, you have some majors as operating neighbors. Are there some models in Nevada that investors are using to compare your possible future prospects?

JA: For Pinion, I think the closest model is Emigrant, a producing mine that belongs to Newmont. It was built in 2012. It's a run-of-mine, heap-leach operation. It has similar grade and characteristics. I think the market wants to see what the metallurgy will look like at Pinion because that is key to the economic model for a heap-leach project. We're doing a lot of that work in that area right now and should have a much better picture in January/February of 2016.

 

Eoin Treacy's view -

Gold shares are trading at their lowest level relative to the gold price in at least 25 years. 

In absolute terms the NYSE Arca Gold Miners Index is not quite as low as it was in 2000 but it has definitely already fallen a long way. 



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January 06 2016

Commentary by Eoin Treacy

January 05 2016

Commentary by Eoin Treacy

How are traditional Safe Haven assets performing?

Eoin Treacy's view -

Following yesterday’s disappointing start to the year and against a background of heightened geopolitical tension, weakening performance in emerging markets and fears about a paucity of earnings growth I thought it would be an interesting time to look at the performance of what have traditionally been viewed as safe haven assets. 



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January 04 2016

Commentary by Eoin Treacy

8 Tech Breakthroughs of 2015 That Could Help Power the World

Thanks to a subscriber for this article by Wendy Koch for National Geographic which may be of interest. Here is a section: 

7. Better Batteries
Solar and wind power have seemingly limitless potential, but since they're intermittent sources of energy, they need to be stored. That’s why there’s a race to build a better battery. The lithium-ion standard bearer, introduced by Sony two-plus decades ago for personal electronics, can be pricey—especially for large uses—and flammable. So every few weeks comes an announcement of a new idea.

Harvard researchers unveiled a flow battery made with cheap, non-toxic, high-performance materials that they say won’t catch fire. “It is a huge step forward. It opens this up for anyone to use,” says Michael Aziz, Harvard University engineering professor and co-author of a study in the journal Science. (Find out how this flow battery works.) Also this year, MIT and DOE announced promising advances that could make batteries better and cheaper.

The battery push has gone beyond the lab. In May, Tesla’s Musk unveiled battery products that he plans to mass-produce in his $5 billion Gigafactory in Nevada. The products include the sleek, mountable Powerwall unit that SolarCity, a company he chairs, is putting in homes. This month, in the first such offering from a U.S. utility, Vermont’s Green Mountain Power began selling or leasing the Powerwall to customers. (Here are five reasons this battery is a big deal.)

Other companies are challenging Musk. Pittsburgh-based Aquion Energy, a spinoff from Carnegie Mellon University, began selling its saltwater battery stacks last year. German storage developer Sonnen said this month that it’s ramping up production of its lithium-ion battery at its facility in San Jose, California, for use in U.S. homes.

 

Eoin Treacy's view -

Symbiosis is popular in nature but it is becoming increasingly clear that it also has a role to play in sustaining the pace of technological innovation. Renewable energy technologies such as wind and solar are progressing rapidly but they will always suffer from intermittency without corresponding innovation in storage for both consumer and industrial uses. This has been painfully slow to follow because it takes time for capital invested in research to deliver results and yet the signs are promising that the next really big enabler with occur among chemical companies. 



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December 31 2015

Commentary by Eoin Treacy

Forget El Nini: La Nina Poised to Storm the Markets

This article by Lucy Cramer for the Wall Street Journal on the 23rd may be of interest to subscribers. Here is a section: 

“The likelihood that the current El Niño peaks soon and turns into a potentially strong La Niña by late 2016 or early 2017 is something that participants in agricultural markets should track closely,” Mr. Norland said.  

And

“El Niño gets all the buzz, but La Niña does not get enough credit,” said David Ubilava, a lecturer at the University of Sydney’s School of Economics, who has written on the correlation between climate anomalies and commodity prices. For example, Canada and the U.S. are more likely to get more droughts in La Niña years than during an El Niño year, which can tighten food supplies and push up prices, Mr. Ubilava said.  

 

Eoin Treacy's view -

With floods across much of the Mid West USA and Europe snowless talk of climate change and its effects on weather is widespread. Crops don’t care if the extremity of the current El Nino is influenced by climate change but we do know that volatile weather makes for volatile pricing. 



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December 24 2015

Commentary by Eoin Treacy

Thin markets

Eoin Treacy's view -

Over the period between Christmas Eve and New Year a lot of people take some time off with the result there are fewer traders around to execute orders. Market liquidity tends to dry up. We occasionally see enterprising traders take this as an opportunity to pressure stops in an attempt to reverse short-term overbought or oversold conditions. 



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December 23 2015

Commentary by Eoin Treacy

Who's on Board?

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on insider sales and purchases at the largest US listed mining companies. Here is a section: 

As an end of year wrap, we have collated data for the miners under our coverage to track when directors and management bought and sold their companies’ shares voluntarily throughout 2015. We have not included transactions involving (i) vesting of shares or options, (ii) sales to cover tax obligations linked to share/option vesting, (iii) purchases under monthly share schemes, (iv) shares issued in lieu of director fees.

Kaz Minerals most frequent buyer, Randgold most frequent seller
Kaz Minerals tops the leader board for the highest number of discretionary purchases, net of sales, with nine throughout 2015. The top three buyers were Kaz (9), South32 (8) and Anglo American (7). The top three sellers were Randgold (-2), Ferrexpo (-1) and Rio Tinto (-1). Of the big four miners, Anglo’s directors made the most net purchases (7), followed by Glencore (5), BHP (1) and Rio was a net seller (-1). There were no insider transactions at Acacia Mining, Antofagasta, Fresnillo, Lonmin and Nyrstar

 

Eoin Treacy's view -

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

2015 has been a trying period for mining executives as they have dealt with shuttering expansion plans, reducing headcount amid low prices for their products and shares prices that have, in many cases, accelerated lower. Against that background it is perhaps understandable that some might wish to diversify their holdings. Yet it is interesting that the selling is not universal and that some companies’ board members increased their stakes on a buy-low-sell-high basis. 



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December 23 2015

Commentary by Eoin Treacy

U.S. Calls for 256% Tariff on Imports of Steel From China

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

Corrosion-resistant steel imports from China were sold at unfairly low prices and will be taxed at 256 percent, according to a preliminary finding of the U.S. Department of Commerce.

Imports from India, South Korea and Italy will be taxed at lower rates, the agency said Tuesday in a statement. Imports from Taiwan and Italy’s Marcegaglia SpA will not face anti-dumping tariffs. The government found dumping margins of 3.25 percent for most South Korean steel imports, with Hyundai Steel Co.’s shipments subject to duties of 3.5 percent. Imports from Italian companies excluding Marcegaglia will be taxed at 3.1 percent. Indian imports are subject to duties from 6.6 percent to 6.9 percent.

“We’re concerned that the dumping that’s occurring is at higher levels than these determinations reflect,” Tim Brightbill, a partner at Wiley Rein LLP, a law firm representing U.S. steelmaker Nucor Corp., said Tuesday in an interview. “We have serious concerns that these preliminary duties are not enough at a time when unfairly priced imports continue to surge into the U.S. market at unprecedented rates.”

 

Eoin Treacy's view -

With enormous overcapacity in basic resources China has little choice but to sell its production on the global market at a significant discount. This has represented a significant headwind for the global steel sector and today’s news may prove a catalyst to stem short-term selling pressure. 



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December 21 2015

Commentary by Eoin Treacy

Incrementum AG Investors Letter

Thanks to a subscriber for this letter by Ronald Peter Stoferle and Mark Valek which may be of interest. Here is a section:

That the Fed is walking on eggshells has become obvious from the complications related to hike rates for the first time in 10 years. This impressively demonstrates that the market is highly dependent on low interest rates. It seems as if the market participants would be conditioned on ever increasing money stimuli like Pavlovian dogs.

Regarding commodities, the fear of the first rate hike could turn out to be a huge “buy the rumor, sell the fact”. Contrary to the common assessment, commodities are the best performers after historical rate hikes of the Fed when comparing different asset classes.

On the other hand, the US dollar tends significantly lower after the first 100 days after the first rate hike. 

Even though confidence in the equity markets continues to be exceptionally high, the actual performance is anything but formidable. While European stock indices were outperforming American titles, this primarily results from a significantly weaker euro. The term “devaluation boom” hits the bull’s-eye in this context.

With regard to the broad stock market, we think the party is pretty nearly over.

Eoin Treacy's view -

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

A point made earlier by Allen Brooks’ is that the US Dollar does not tend to do well in the first three months following the first hike after an easing cycle. This is an important consideration because the majority of investors now seem to adhere to the medium-term Dollar bull story. We were early in identifying the relative strength of the Dollar and continue to believe that its secular decline is over not least because of widening interest rate differentials. However it is also worth considering the US administration does not want to have a currency which is appreciating against its international competitors in a linear fashion. 



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December 18 2015

Commentary by Eoin Treacy

Wheat Set for Third Weekly Gain on Signs of Higher World Demand

This note by Megan Durisin for Bloomberg may be of interest to subscribers. Here it is in full: 

Prices head for third straight weekly gain, longest rally since Oct. 2

NOTE: Argentina Devalues Peso With Grain Exporters’ Backing “Argentina is not going to be a heavy exporter of wheat in the short term, like they are for corn and beans,” Terry Reilly, senior commodity analyst at Futures International in Chicago, says in telephone interview.

NOTE: Morocco Issues Tender for 360,000 Tons of U.S. Soft Wheat: ONICL

NOTE: Jordan Buys 50k MT of Wheat at $229/MT From Ukraine

Jordan tender bolsters global market and “Morocco coming in for U.S. wheat is supportive,” Reilly says

Some traders are re-entering market following U.S. interest-rate increase and Argentina devaluation, Reilly says

Corn futures for March delivery climb 1.1% to $3.78 1/2 a bushel

 

Eoin Treacy's view -

This is an El Nino year so we can expect volatility in agricultural commodity prices and this is particularly true considering how powerful this event is and how volatile recent weather patterns have been. 



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December 16 2015

Commentary by Eoin Treacy

Email of the day on the impact of currency market volatility on returns

In your piece today [Ed. Yesterday] on bonds the foreign exchange rate aspect was not mentioned. Several years ago many international investors were tempted by the relatively high yields on Australian bonds. Non-Australian investors have lost out on the fall in the value of the Australian dollar.

Eoin Treacy's view -

Thank you for highlighting this issue which has been a topic covered in the Friday audio commentaries for at least the last 18 months. While the Dollar was trending lower, investors in emerging markets and commodity producers had the luxury of capital and currency market appreciation as well as being able to pick up a competitive yield. 

With a resurgent Dollar the status quo has been shaken up and that is creating both risks and opportunities across a number of assets. Since foreign issuers of US Dollar debt represent significant weightings in bond indices, the strength of the Dollar is a potential headache for investors in bond ETFs. 

 



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December 16 2015

Commentary by Eoin Treacy

Global Metals Playbook: 1Q 2016

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

Back to fundamentals: We continue to see only a modest abatement in China-led commodity demand growth, not the capitulation that year-to-date price performances imply. The fact that economic activity everywhere remains buoyant, commodity trade flows are intact, and that producers are rapidly rebalancing their trades in reply to shock-low prices – tells us that downside price risk is limited. Historical benchmarks confirm this view. So after the investor exodus and speculative selling is done, robust fundamentals of Commodity World will again matter to its prices.

Likely catalysts for price recovery: Q1’s typically reliable seasonal restock alone has the capacity to terminate ongoing short-selling strategies. Other potential price supports include a demand-led recovery in the oil price (inflationary); resolution over the scale/duration of the US rate hike cycle (generally supportive within 12 months of the cycle’s start); and government backing for industrial activity in China (project approvals, funding, macro).

 

Eoin Treacy's view -

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

The Continuous Commodity Index, which is unweighted, remains in a consistent, albeit short-term overextended downtrend. However since this has been ongoing for nearly 4 years it tells us a good deal of the bad news has already been priced in. That does not mean the downtrend has ended but suggests the news will need to get progressively worse to expect the decline to persist.  



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December 08 2015

Commentary by Eoin Treacy

JAB Trio Creates Global Coffee Empire for Billionaire Backers

This article by David de Jong for Bloomberg may be of interest to subscribers. Here is a section:

The Luxembourg-based group, known as JAB, has spent more than $30 billion in the past four years acquiring coffee companies in the U.S. and Europe to challenge global leader Nestle SA. Run by a trio of well-connected executives with decades of experience in food and beverage, JAB has bought assets including D.E Master Blenders 1753 NV, Mondelez International Inc.’s coffee unit and high-end chain Peet’s Coffee & Tea.

“This is part of a much, much bigger strategy. JAB wants to be the Budweiser of the coffee space,” Pablo Zuanic, a Susquehanna Financial Group analyst, said, referring to Anheuser-Busch InBev NV, the world’s biggest brewer. “Just as you’ve seen Bud consolidate beer, they want to consolidate coffee.”

 

Eoin Treacy's view -

Coffee is big business and with approximately 20-25 espressos from a pound of beans it is a high margin business. Little wonder then that the bulk of spending from coffee companies goes in the form of marketing and physical locations. Coffee also represents a growth market since it is considered a bourgeois drink in China and for many exemplifies modern living.  

Another way of thinking about coffee is that consumption tends to trend higher as the pace of everyday life increases. People with busy work, family and social commitments tend to get less sleep either because of time or worry and need a pick-me-up in the morning. As the pace of economic development continues to trend towards urbanisation the pace of life inevitably picks up. That’s good news for coffee producers and helps to explain the race to dominate the market.

 



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December 04 2015

Commentary by Eoin Treacy

Australia Materials - The Big Golden Book

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

The 6th Edition of our Big Golden Book, covering a suite of 25 ASX listed gold producers and developers, with 7 stocks under MS coverage (AQG, EVN, MML, NCM, PRU, RRL, RSG) and broad detail on another 18 mid small cap gold miners, provides a sector snapshot in which to identify relative strengths and weaknesses amongst the ASX gold space. Our 6th Edition arrives at a time of relatively buoyant AUD gold price - a key beneficiary of the weakened Aussie dollar.

Australian gold miners are up ~15% YTD, as represented by the S&P ASX All Ords Gold Index, significantly outperforming US$ spot gold (down ~9% YTD), the ASX 300 Resources Index (-26% YTD), the ASX Small Resources Index (-20% YTD) and the ASX All Ordinaries (-2% YTD). Currency has been a key driver, pushing AUD Spot gold ~2% higher against the backdrop of a falling USD gold price (down ~9% YTD).

 

Eoin Treacy's view -

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

At The Chart Seminar in Sydney in 2010 a delegate asked what all the fuss was about in the gold market because prices had not moved for more than a year when redenominated to Australian Dollars. I was reminded of that today because prices today are no different from where they were in 2010 and are about 23% of the 2011 peak which represents significant outperformance relative to the US Dollar quoted price. 

As the above report highlights, Australian gold miners have benefitted from the relative weakness of the currency. This also speaks to the broader point that gold is a monetary metal and tends to hold its value better than fiat alternatives in a depreciating currency environment. As a result it outperformed spectacularly while the US Dollar was in a decade long downtrend and is likely to remain a relatively sound store of value for other countries when their respective currencies fall. 

 



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December 04 2015

Commentary by Eoin Treacy

December 03 2015

Commentary by Eoin Treacy

Draghi Braves QE Hype With Boost That Leaves ECB Room to Do More

This article by Jeff Black and Maria Tadeo may be of interest to subscribers. Here is a section: 

The fresh stimulus coincides with a shift in global monetary policy, with the ECB adding stimulus as the U.S. Federal Reserve prepares to start its process of normalization. Even so, financial markets reacted with skepticism, sending the euro up as much as 2.6 percent and equities and government bonds down in a sign that Draghi’s measures fell short of expectations.

“The expectations were too high, and this was the minimum he could do,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “I think this was a mix of Draghi being held back by the conservatives, but also him wanting to keep some powder dry in case more is needed.”

 

Eoin Treacy's view -

The ECB’s balance sheet is currently in the region of €2.7 trillion. At €60 billion a month until March 2017 they will add an additional €960 billion which will take the total to well in excess of the previous peak in largesse; reached during its previous expansionary program. With the announcement that they will continue to reinvest maturing issues the prospect of the balance sheet contracting is almost zero. Meanwhile they leave the door open to additional easing should the need arise.   



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December 03 2015

Commentary by Eoin Treacy

Brazil Assets Surge as Impeachment Move Brings Resolution Closer

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

While investors in the past have been split about whether impeachment would be positive for Brazil, some now say that the decision could finally lead to a resolution of a months-long political stalemate. Rousseff’s administration has struggled to push through fiscal changes she says are needed to reverse the biggest budget deficit in more than two decades and ward off further credit-rating cuts for Latin America’s largest economy.

"This euphoric reaction of the stock market today shows how much investors are eager for some kind of solution that ends this turmoil and paves the way for the country to get back on track," Alvaro Bandeira, an economist at Banco Modal, said from Rio de Janeiro. "There’s still a lot to happen before a final settling, so we should be prepared for more volatility in the coming weeks."

The president, who started her second term in January, has been fighting for her political survival for months, leaving Congress in disarray, rattling financial markets and deepening an economic slump poised to be the worst since the Great Depression. The political crisis has made the real the worst-performing major currency in the world this year, and set stocks on pace for a third year of losses.

Eoin Treacy's view -

At first blush the surge in Brazil’s stock market today could have been related to the Dollar’s weakness against the Euro or the fact that oil prices steadied. However if one looks at the performance of a range of other Latin American commodity exporters there is no confirming evidence for this contention. 

The impeachment of Dilma Rousseff on the other hand is a decidedly Brazilian affair and has been overhanging the market since she won the election last year. Since she was a senior executive at Petrobras during a time when avarice was consuming revenues at a depressing rate and is now the President, the obvious conflict of interest represented by her administration represents a major headwind to governance improving.

 



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December 01 2015

Commentary by Eoin Treacy

Stevens Rate 'Chill Out' Rattled as Australia Easing Case Builds

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

Yet the economy and wages are in the weakest stretch of growth since the country’s last recession in 1991. The Treasury last week bowed to reality and lowered the economy’s speed limit -- the level at which it begins to generate inflation -- to 2.75 percent from 3 percent estimated in its May budget.

Deloitte Access Economics forecast in a report Monday, ahead of the government’s mid-year budget update due next month, that fiscal deficits over the next four years will be A$38 billion worse than predicted in May.

“What the Deloitte report shows today is the stresses and the pressures on the budget,” Treasurer Scott Morrison said Monday. “They note particularly in terms of the global situation commodity prices, changes in China.”

Indeed, only a surge in the volume of resource exports is likely to cover the drag on growth from weak investment by companies last quarter. Economists are predicting ahead of data due Wednesday the economy grew 0.7 percent in the three months through September from the prior quarter and 2.3 percent from a year earlier.

 

Eoin Treacy's view -

With Sydney and Melbourne housing prices off their highs there is no prospect of the RBA raising rates and with resources’ sector capex close to an all-time low, the prospect of an interest rate cut next year is looking more likely than not. Australia successfully avoided the majority of the ill effects of the credit crisis not least because it was such a beneficiary of China’s stimulus program, through commodity exports. China’s moderating consumption rate for Australia’s exports represents a headwind and suggests the outlook for inflation will be closely tied to what happens in the commodity sector. 



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November 24 2015

Commentary by Eoin Treacy

Global Insight: Stability opens a window of opportunity

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

Lessons from history: The 'size at all costs' strategy, as gold prices lifted to unprecedented levels between 2000-2012 (real), left the Gold industry ill prepared for the sharp pullback, limiting the post-capex 'harvest' period and almost complete capital destruction for the global seniors. Understandably, gold equity values pulled back sharply – Morgan Stanley Global coverage down ~35% 2014 to-date, while the bullion price fell 10%. Our coverage now trades on 20yr low trailing P/CF and EBITDA multiples, creating a window of opportunity for select gold exposures – those finally moving to 'harvest' and those exposed to industry cost tail winds.

Capital allocation discipline emerging – who is moving to 'harvest': A shift in focus from adding ounces to financial returns has driven reductions in capital spending. Global capex is declining about 6%-10% p.a. on aggregate, allowing miners to focus on cash flow and enter the 'harvest' phase.

 

Eoin Treacy's view -

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

A great deal of bad news has already been priced into gold equities but with capex budgets virtually eliminated from balance sheets there is potential for profit growth as some of the investment in new supply pays off. 

It is worth considering that while the NYSE Arca Gold BUGS Index underperformed the gold price by a wide margin from 2011 that has not been the case more recently. Gold hit a new reaction low a week ago but golds shares have mostly held within their ranges. This is particularly noteworthy since gold shares have already fallen so much versus the metal price and are at historic relative lows. 

 



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November 23 2015

Commentary by Eoin Treacy

Argentina Macri Said to Consider Suspending Soybean Tax

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

The policy will be decided on Dec. 10, as only on that day will Macri know with certainty how much money the Central Bank has, the second person said. If approved, the window would close once the new soybean crop arrives in March. That crop would pay exports taxes of 30 percent.

“The plan will be successful if farmers are allowed to buy dollars after selling their crops.” Gabriel De Raedemaker, vice president of the Argentine Rural Confederation, said from the town of Oliva in Cordoba province. “A few will feel tempted to sell just to get pesos under a threat of devaluation.”

Macri has also vowed to lift currency controls as soon as he takes office Dec. 10, a move that investors see leading to a devaluation of as much as 35 percent for the peso, which would further help farmers trying to sell abroad.

Eoin Treacy's view -

The Kircheners are out and a new potentially reform minded administration is in. Macri will face a great deal of opposition in attempting to upset the status quo so it is too early to speculate on how successful he will be. Some early milestones which may offer an indication of how serious he is about reform will be whether he follows through on floating the currency, how he deals with the nation’s creditors and how successfully he can reignite the export sector not least agriculture. 



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November 17 2015

Commentary by Eoin Treacy

Copper Tumbles to Six-Year Low as Industrial Metals Extend Slump

This article by Martin Ritchie may be of interest to subscribers. Here is a section: 

“There is a sense that this move is a little bit China-related,” Ric Spooner, a chief market strategist at CMC Markets Asia Pacific Pty, said from Sydney. “There has been a trend towards destocking of inventory in recent times and that appears to be creating downward momentum, particularly in copper.”

Metals are being battered by a stronger dollar. The greenback is buoyed by expectations for the first U.S. interest-rate increase since 2006 in December and by heightened geopolitical risk after the terror attacks in Paris. The Bloomberg Dollar Spot Index rose 0.2 percent on Tuesday, making assets denominated in the currency more expensive.

Eoin Treacy's view -

We saw a lot of evidence of businesses under pressure when in China earlier this month. The low oil price is a benefit for China’s energy consumers but for its exporters the loss of Russian and Middle Eastern customers is a headache and is contributing to the economic slowdown. The domestic market continues to transition from an infrastructure investment led model to consumerism. This means the while demand is likely to continue to trend higher it will do so at a considerably slower pace. This is weighing on resources companies. 



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November 12 2015

Commentary by Eoin Treacy

Which currencies have made new lows?

Eoin Treacy's view -

The Dollar has been firm, that’s not news, but it experienced a sharp pullback against most currencies following the market low in risk assets from early September. This rebound has not influenced every currency equally and while most have held their gains, a number posted new lows.  These are the Philippine Peso, South African Rand, Norwegian Krone, Peruvian Sol and the Canadian Dollar is testing its low. 



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November 12 2015

Commentary by Eoin Treacy

BHP, Vale CEOs Committed to Restoring Brazil Iron-Ore Mine

This article by Yasmine Batista, Andrew Willis and David Stringer for Bloomberg may be of interest to subscribers. Here is a section: 

A 2013 report by the Minas Gerais University-linked Instituto Pristino, commissioned by the state environment ministry, warned about the risk of dams bursting and recommended putting in place a plan to monitor the structural integrity more closely and frequently.

“As you will appreciate, an issue like this will be relevant to any investigations that follow this tragic incident,” BHP said in an e-mailed response to questions. “In those circumstances we need to let those investigations take their course. So it’s just not appropriate to comment any further.”

Samarco said it’s too early to say what caused the accident and that the dams were deemed to be in compliance with safety standards in a July inspection.

Samarco’s insurance coverage totaled more than $1 billion as of mid-2014. A large-scale disaster such as the one it experienced last week is likely to lead to lawsuits and other actions that may take years to resolve, according to Bloomberg Intelligence analyst Kenneth Hoffman. Its structure as a stand- alone company may shield joint owners BHP and Vale from deep losses related to the dam collapse, Hoffman said.

 

Eoin Treacy's view -

The BRL250 million ($66million) initial fine announced by Dilma Rousseff today is quite a bit larger than what was expected but for companies like BHP Billiton and Vale this is not the same kind of fine that has rocked Volkswagen. The weak oil price and moribund market for iron-ore are more important influences. 



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November 11 2015

Commentary by Eoin Treacy

Hedge Funds Load Up on Sugar

This article by Christian Berthelsen and Carolyn Cui for the Wall Street Journal may be of interest to subscribers. Here is a section: 

“We have seen the longest bear market in sugar for quite some time,” said Michael McDougall, director of commodities for Société Générale in New York. “It’s like a large ship that takes a lot to turn. But it looks like it’s finally beginning to turn.”

Sugar mills in Brazil are directing more cane production to ethanol for fuel blending, thanks to government incentives that make prices more attractive compared with sugar.

After a weak domestic crop season, import demand from China has been strong, jumping 55% to 3.75 million tons in the first nine months of the year.

Singapore-based trading house Wilmar International Ltd. took physical delivery of $1 billion worth of sugar through the financial market so far this year, fanning speculation about increased Asian appetite for the sweetener.

But in a sign that gives some investors pause, sugar producers and processors are placing the largest bets in two years that prices will fall.

“Demand is just not there,” said Bruno Lima, head of sugar and ethanol at brokerage INTL FCStone in Brazil, who found raw sugar offered at a deep discount to the futures prices traded in New York during a recent tour of mills in Santos.

 

Eoin Treacy's view -

Commodities don’t go to zero but sugar prices trended consistently lower for 5 years, dropping over 60% in the process. That is ample time to create a supply response and Brazil’s decision to mandate greater ethanol production is a sign low prices are also creating a demand response. 



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October 26 2015

Commentary by Eoin Treacy

Africa: The next frontier

Thanks to a subscriber for this report from Deutsche Bank focusing on Africa’s potential as a commodity exporter and consumer. Here is a section focusing on copper:

The world will need an estimated 5mt of additional mined copper by 2025

Copper demand has grown 3.2% each year since the end of WWII. However, we estimate that this growth rate will drop over the next 15 years to be below trend at 3%. This takes into account our GDP expectations, ongoing industrialisation of the emerging market economies and further substitution.

Despite the strong growth in copper demand in China over the past decade (2000-2010, near 15% CAGR), global copper demand was a more muted 2.4% The high price environment of 2005-2008 led to demand destruction of around 2.2mtpa, with widespread substitution.

Taking into account increased secondary supply (+3% pa), mine depletion from falling grades (see Figure 29) and supply additions already underway, we estimate the world will need an additional 5Mtpa of mined copper by 2025, or around 500kt each year. This is more than a Collahuasi-sized mine each year (445kt in 2014) or two Andina-sized mines (232kt in 2014).

Time to first production is now at least 12 years
As shown here, for a typical Greenfield copper mine, the time to first production is at least 12 years. For diamond mines, the time frame has extended to an average of 22 years. For gold mines, the average time frame for the mines currently producing in Cote d’Ivoire was 15 years to get to first production (see Figure 32).

And 

Most major known deposits are currently exploited across Chile, Australia, North American, Russia and China. As shown earlier (in Figure 1 on page 4), Africa has a wealth of mineral resources, hosting 95% of the world’s known platinum, 65% of its manganese, 50% of its diamonds and cobalt, 40% of its gold, 30% of the world’s bauxite, and approximately 10% of the world’s known copper sits in the Central African Copperbelt. Yet today, Africa supplies only 11% and 12% of the world’s copper and gold respectively, plus just 9% of its thermal coal.

 

Eoin Treacy's view -

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

This report carries a very interesting graphic illustrating the number of conflicts that occurred in the 1990s compared with the last decade. Relative peace has broken out across the continent despite some high profile trouble spots grabbing attention. The question then is to what extent higher commodity prices contributed to this easing of tensions? 

In an environment characterised by a dearth of capital, the potential for armed conflict increases as access to basic resources such as food, energy and shelter is inhibited. The commodity bull market meant revenues increased and reduced the incentive for conflict. The question now is how many of the gains achieved in the last decade can be held onto and improved upon. Standards of governance are integral to this question because without improvement the potential for a number of major African countries to miss out on development over the next decade increases. 

 



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October 19 2015

Commentary by Eoin Treacy

Sugar Bulls Rewarded With Best Rally Since 2013 on Tight Supply

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

“Much of this move has come on the back of a tightening market,” said Harish Sundaresh, a portfolio manager and commodities analyst in Boston for the Loomis Sayles Alpha Strategies team, which oversees $5 billion. “There seems to be weather problems in Brazil, in certain parts of the country’s Center South region, and India is also worried about the monsoon effect on crops.”

Sugar futures in New York climbed 16 percent over the past three months, the biggest such gain since 2013. Prices are rebounding after reaching a seven-year low in August, spurred by declines for Brazil’s real that encourage exporters to increase shipments that fetch dollars in return. Since then, declines for the South American currency have eased, while dry weather is posing risks to the nation’s crop.

 

Eoin Treacy's view -

White Sugar trended lower for five years which has had an effect on supply as other cash commodity prices held up better. The question for bulls is now how much remains in Brazilian and Indian reserves that were built over the course of record crops of the last few years. 



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October 16 2015

Commentary by Eoin Treacy

Rare Platinum Discount to Gold Inspires Bulls Seeing Slump End

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

“It all depends upon whether one believes that the VW scandal marks the beginning of the death of diesel or if the eventual outcome will be a lot less radical for platinum autocatalyst demand,” Philip Klapwijk, managing director of Precious Metals Insights Ltd., said by e-mail. “Arguably the bad news is already in the platinum price.”

Platinum slumped as low as $892.50 an ounce on Oct. 2, only enough to buy 0.7924 of an ounce of gold, data compiled by Bloomberg show. That day, the ratio of gold to platinum reached a record 1.26. The drop in platinum will attract interest from financial traders and spur jewelry demand, Ole Hansen, an analyst at Saxo Bank, said by phone.

Gold may stay weak into next year as economic prospects improve and the Federal Reserve increases interest rates from near zero, dulling bullion’s appeal as a safe haven, according to Singapore-based Oversea-Chinese Banking Corp. The yellow metal will average $950 an ounce in the fourth quarter of 2016 while platinum is seen at $905, said Barnabas Gan, the most accurate gold forecaster based on data compiled by Bloomberg.

The estimates are subject to revision if the Fed doesn’t raise rates this year, he said.

Platinum has been rallying the past two weeks, trading Thursday at $1,004.80. In a Bloomberg survey of analysts, platinum was forecast to reach $1,150 next year, and will extend that gain over the following three years to $1,400 in 2019.

"Platinum is at unsustainable low levels relative to gold, relative to vehicle sales in Europe and relative to the trends we’re seeing in jewelry demand in China," Mike McGlone, director of research at ETF Securities LLC, said by phone from New York.

“We’re getting all the signals you would expect to see from a market putting in a bottom.” 

Eoin Treacy's view -

The Volkswagen scandal represents a significant blow for diesel as a fuel in passenger vehicles but there is little chance of it being displaced in the haulage sector any time soon. Pulling heavy loads requires torque and diesel engines provide it cheaply. Electric vehicles have the capacity to displace diesel over the medium-term but costs will have to come down substantially first. In the meantime auto-catalyst demand in unlikely to disappear but it will decrease.   



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October 15 2015

Commentary by Eoin Treacy

Zinc turning bull?

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

She responds, “Glencore’s cuts do matter.”

To give perspective, she puts the zinc cut in copper terms. “Another way I have been explaining the impact of these cuts is that if this were announced in the copper market, it would be equivalent to 1 million tonnes of mine supply, which would be a very big cut from a copper miner.”

So, with a sizeable cut to zinc output in mind, Fung now forecasts a market that looks set to get tight – finally some might add.

“We were forecasting a 74kt surplus next year (pre-Glencore cuts) assuming 2.8% demand growth,” she writes in an email. “If we assume zero growth, it’s about 400kt that we remove from the demand side of the equation. But Glencore’s cuts more than offset this assumption, so at worst (assuming zero-growth is worst case) we still have a tight market next year, which should be positive for prices, given how far they’ve fallen in response to demand concerns this year.”

Already near-delivery prices have jumped from the mid-70 cent range to over 80 cents.

 

Eoin Treacy's view -

There has been a lot of loose talk about the inevitability of a deflationary outcome which the falling price of oil has contributed to. However we have been at pains to point out in the audio commentaries that there is the world of difference between deflation and disinflation. After all commodity prices went up a lot and have subsequently come done a lot not least due to supply factors. 



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October 15 2015

Commentary by Eoin Treacy

Gemfields recalibrating supply for a softer market

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

Production at the company’s 75% owned Montepuez ruby mine rose by 29% to 8.4m carats of ruby and corundum. A maiden JORC statement for Montepuez was published in July 2015 indicating probable ore reserves of 432m carats with an NPV of $996m.

Further steps were taken post reporting period, with the company entering into two transactions to source supply of gemstones in Colombia – a country with a 500-year history of producing world renowned emeralds. “The results speak for themselves – I am extremely proud of what we have been able to do,” says Harebottle.

But it’s the work on the demand side that really sets Gemfields apart from its competitors and other mining companies. “Gemfields is the only company taking a leadership role [in this regard] – so we are price makers, not price takers. We the have potential to ramp up production, but we prefer to do so slowly and steadily, and in conjunction with the needs of our sightholders,” says Harebottle.

Faberge’ produced a “Pearl Egg,” the first such created in the Imperial Class since 1917. The egg was sold within hours of unveiling at the Doha Jewellery and Watches expo. Faberge’ also launched four new timepiece collections during the year, something that will be supported by the addition of eight more retail outlets.

 

Eoin Treacy's view -

The diamond market has become a lot more efficient with the introduction of Rapaport pricing models for both rough and polished stones. This has for the first time allowed consumers to price check on a carat for carat basis between suppliers and the jewellery sector has been rocked as a result. Prices for 1 carat stones are now back at lows not seen since 2009. 



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October 13 2015

Commentary by Eoin Treacy

Weaker USD, Commodity Rally A Mar/Apr Redux?

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section on sugar: 

Investment Thesis 
After more than a year of low prices, a shrinking global surplus, coupled with limited reinvestment in cane plantings, should conspire to lift prices YoY in 15/16.

Supply
In Brazil, above-normal rain and limited reinvestment in cane fields have lowered the cumulative ATR, the amount of sugar produced per unit of cane crushed, to the lowest in at least 10 years.

Demand
Falling sugar prices and increased gasoline taxes have lifted Brazilian hydrous demand to record levels, pulling more of the cane crush away from sugar and toward ethanol production. The sugar mix should fall to the lowest since 2008.

Chinese import demand has exceeded expectations over the past year, as falling prices have led to sharp production declines. China’s internal debate on the future of its minimum support price policies should shape import demand in the long term.

Eoin Treacy's view -

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

The removal of subsidies for European sugar production, concurrent demand growth for ethanol in gasoline production and demand for sweet treats among the global middle class created the conditions for sugar prices to rally impressively in the last decade. The ensuing boom in planting, particularly in Brazil and India resulted in supply overwhelming even the most ambitious demand forecasts and prices have trended lower for nearly 5 years. 



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October 07 2015

Commentary by Eoin Treacy

Sibanye brisk march

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

“It’s similar to the removal of mine boundaries in the gold industry 10-15 years ago,” says Froneman. “There are things like concentrators, surface infrastructure, and surface tailings that are not being optimised. Group overhead can be shared. So there are numerous ways to achieve economies of scale in terms of being able to reach the R800m a year in savings.”

Stakeholders will be pleased to hear that this will not involve cutting jobs. “Where we find ourselves today [in South Africa] it is all about saving jobs. No jobs will be lost at the lower end of the organisation. So it’s important in terms of what’s right for South Africa,” says Froneman.

Nor does it deviate or affect Sibanye’s declared strategy of paying returns to investors via dividends. “This deal is synergistic, it is value accretive, and it is consistent with our dividend strategy,” says Froneman, who was very complementary of the Aquarius management team led by CEO Jean Nel. “All-in-all it’s an attractive, cash generative business, and Jean and his team have been ahead of the game.”

 

Eoin Treacy's view -

Buy low and sell high is easy in theory and difficult in practice. The siren call to pay record high prices for assets when prices are surging often leaves companies unable to make the same purchases when prices are depressed. In fact many find themselves in the opposite situation and end up selling once expensive assets at deep discounts. The Chinese were highly active in 2009 and were major contributors in the subsequent recovery but on this occasion have been largely absent as domestic factors have led to a change of emphasis. 



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September 24 2015

Commentary by Eoin Treacy

Interesting charts September 24th 2015

Eoin Treacy's view -

Gold has held a short-term progression of higher reaction lows since its July low and is now closing in on the region of the 200-day MA as some safe haven buying lifts prices. A sustained move above 1175 will be required to break the medium-term progression of lower rally highs and signal a return to demand dominance beyond some steadying. 



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September 18 2015

Commentary by Eoin Treacy

Quartermain gets it done

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

In this, it may be Pretium will go back to the market in the coming year or so, if that capital cost figure proves close to reality. Or, maybe Pretium closes the gap between what it has raised and spent to what it needs in full. Either way it wouldn’t be surprising to see it go back to markets for more cash or seek additional debt resources to give it a bit more breathing room.

In production, Pretium plans Brucejack as one of the more important gold mines – certainly one of its highest grade gold mines – to come online in recent years in Canada and beyond.

Pretium targets 2017 for first production from a deposit that contains swarms of very narrow veins with extremely high-grade (and difficult to model) gold often counted in the kilogram/tonne range over sub-meter intervals. In all, Pretium estimates 13.6 million tonnes proven and probable resources at a whopping 15.7 g/t Au for just under 7 million ounces gold.

That gives the project a mine life near two decades with annual production around 500,000 ounces gold a year for most of the first decade of production. It is, if it all goes according to plan and bulk underground mining captures that gold at forecast costs and values, the kind of mine majors will want to buy. Notably, Zijin Mining, is already a key Pretium shareholder through recent private placements.

 

Eoin Treacy's view -

A veteran subscriber has been to the Pretium claim and testifies that it is the real deal. Against a background where mining ore grades have been declining for years the prospect of bringing a high grade project on stream has insulated the share price from the selling pressure that has prevailed across the majority of the gold mining sector. 



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September 17 2015

Commentary by Eoin Treacy

Iron Ore Seen at $50 in Last Quarter as Majors Gain Control

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

Iron ore may average about $50 a metric ton in the final quarter of the year after low prices forced many high-cost producers to quit the market and the world’s biggest mining companies completed a round of expansions, according to UBS Group AG.

The supply surge from the largest producers has been delivered, with output stable for several months now, and there’s been a widespread exit of smaller players, Daniel Morgan, an analyst in Sydney, said in an e-mailed response to questions. Benchmark prices in Qingdao were at $57.37 a dry ton on Thursday, and averaged $54.69 so far this quarter.

Expansions by BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA helped to drag prices to the lowest level in at least six years in July, prompting the closure of less efficient miners while increasing the clout of the largest producers. Brazil and Australia were gaining market share in China, the world’s biggest consumer, Vale Chief Executive Officer Murilo Ferreira told reporters this week.

“The majors have just regained control of the iron ore market and can, if they wish, curtail supply to support the price,” said Morgan. “Under $50, we look for supply factors to support the price.”

 

Eoin Treacy's view -

The iron-ore oligarchy have been flexing their muscles over the last couple of years by increasing supply into a falling market. More than a few UK and Australian listed juniors have gone to the wall and Chinese domestic supply has been heavily impacted. 

Iron-ore prices have stabilised following an accelerated decline and are currently testing the region of the 200-day MA. A sustained move above $60 would begin to suggest a return to demand dominance beyond short-term steadying. 

 



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September 17 2015

Commentary by Eoin Treacy

Pure Energy Minerals drops the next lithium bombshell As Tesla seeks supply for its Gigafactory

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

Stepping back for a moment, on September 3rd, Tesla’s Founder Elon Musk reiterated his commitment to source materials from Nevada. However, that pledge did not necessarily mean another sourcing deal, announced so soon, or that it would be for lithium. Other materials besides lithium will be required. Cobalt and graphite, (among others), will also be needed to feed Tesla’s massive giga-factory in Nevada. I find this agreement to be highly noteworthy in the sense that Tesla’s growing need for lithium, perhaps more so than that for cobalt and graphite, represents the single most important raw material need. I imagine that other lithium agreements will be signed in coming months. Without question, Nevada wants further lithium deals to come from Nevada.

Eoin Treacy's view -

The fall in oil prices has had a knock-on effect on most energy related sectors as the relative economics of various alternatives have changed. Lithium miners have been no exception and this has been despite the fact lithium prices have not fallen. Demand for lithium-ion batteries in everything from consumer goods to cars and planes has helped fuel major investment and a large number of explorers are now listed. However securing an agreement to supply Tesla’s factory is a major coup for Pure Energy.



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September 14 2015

Commentary by Eoin Treacy

Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover

This article by Cristiane Lucchesi and Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section: 

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk.
     
The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms.

“Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in an interview in Sao Paulo. “Now many of them are facing the consequences.”

Standard & Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment.

Eoin Treacy's view -

Dilma Rousseff rode to power on the coattails of President Lula’s endorsement but she was never the best candidate from a governance perspective and the currency has collapsed under her watch. An ability to ignore contradiction is characteristic of every crowd. It is not until the cohesion of the crowd deteriorates that these contradictions regain their importance for participants. 



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September 10 2015

Commentary by Eoin Treacy

Interesting charts September 10th 2015

Eoin Treacy's view -

Onshore/Offshore Renminbi – Today’s announcement that the Chinese government is going to permit foreign central banks greater access to the Yuan market, so they can hold the Chinese currency as part of their reserves had a marked effect on the offshore renminbi. The ratio between the onshore and offshore versions of the currency compressed sharply and helps put a lid on fears that capital flight was fuelling the arbitrage. 



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September 10 2015

Commentary by Eoin Treacy

Welcome to Rustenburg, Mr. Froneman

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

Speaking at the announcement of the deal yesterday, Froneman said, “we were very disciplined and structured. We had to make sure our first entry into platinum was significant, but we haven’t rushed into it.” Froneman demonstrated that discipline when he walked away from a deal with Amplats in October last year with those immortal words, “Well if they [the assets up for sale] are so good, they should keep them.”

In response to a question from an analyst on how the two parties came to agree on the price the second time around, Froneman revealed why he has a reputation as a skilled dealmaker. “Initially we had very different ideas of value [for the assets]. But when we took a different view in terms of sharing the risk, it allowed us to come together on getting the deal done.”

That last part of his statement around “sharing the risk” is the nub. By convincing Amplats to share the risk, he turned the haggle over price into a more cordial engagement involving mutual benefit. And by doing so, Froneman could then – with a little more maneuvering – take a potentially large and risk-fraught transaction for Sibanye, and make it congruent with the company’s strategy of delivering returns to shareholders via dividends.

Eoin Treacy's view -

Sibanye announced more than a year ago they were seeking to enter the platinum business and this is the realisation of that goal. In doing so they hope to achieve the efficiency gains with the Rustenburg assets they achieved with the legacy assets at the Beatrix gold mines. They have a solid record but the big question is going to be how they handle relations with the unions they are inheriting. 



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September 04 2015

Commentary by Eoin Treacy

Norilsk raises nickel deficit forecast for 2016 as price slumps

This article by Yuliya Fedorinova appeared in Mineweb and may be of interest. Here is a section: 

China’s nickel pig iron output, a cheaper substitute for refined nickel, should fall as ore supplies from the Philippines are depleted, the Russian company said on Monday. Outside China, “we see an increasing pressure on high cost producers to cut production,” Norilsk said.

The global nickel deficit will be at 60,000 metric tons in 2016 and the market will likely be balanced in 2015, according to Norilsk. In its previous market update in March, the producer saw a deficit of 20,000 tons this year that would widen to 55,000 tons in 2016.

Nickel prices are near a six-year low after China’s economic growth slowed and London Metal Exchange inventories reached an all-time high of 470,000 tons in early June. They have since declined to about 455,000 tons. The chance of nickel prices continuing to fall is small because more than 60 percent of producers are already losing money, according to the company.

“A sizable reduction of LME inventory is widely recognized as a major signal of improved nickel market fundamentals,” Norilsk said.

Eoin Treacy's view -

Sentiment towards the industrial metals market has become increasingly bearish as prices have fallen and commodity led economies have come under pressure. The question then is to what extent this bad news is already in the price. 



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September 02 2015

Commentary by Eoin Treacy

Brazil's Epic Era of Splurging Is Over

This article by Matthew Malinowski Dominic Carey for Bloomberg may be of interest to subscribers. Here is a section:

1. No work
Brazil’s economy bled almost 900,000 jobs over the last year. That's unheard of, even in the aftermath of the 2008 Lehman Brother’s crisis.

2. Less money
For those who still have a job, real wages contracted as much as 5 percent in May from a year ago, before easing to a 2.4 percent annual drop in July. Annual real wages, as well as moving averages for retail sales and formal job creation have all contracted this year, according to government statistics. The declines are all worse than in 2009 when the economy also shrank, as the charts illustrate.

3. No more retail therapy
As the labor market deteriorates, Brazilians have cut back the most on shopping since the start of the century. Retail sales in June dropped for the fifth straight month, the longest declining streak since 2001, data from the national statistics agency show.

Eoin Treacy's view -

During the boom in the balance of payments associated with surging commodity exports, Brazil went from being a serial defaulter to a creditor to the World Bank. However, the economic effect of the collapse in commodity prices has been exacerbated by the failure of successive administrations to improve governance. As a result the boom from massive surpluses has been wasted on corruption, vanity sports projects and inefficiency. 



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September 02 2015

Commentary by Eoin Treacy

September 01 2015

Commentary by Eoin Treacy

Australia as China's Canary Means World Watching RBA's Heartbeat

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

“Of most interest will be any comments regarding recent financial market turbulence in relation to China and emerging-market driven worries and in particular whether this suggests a strengthened easing bias,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “My view remains that the probabilities are skewed towards the RBA having to cut rates again at some point.”

The stock market rout in China threatens not only Australian exports but also a fresh slump in confidence among consumers and businesses Down Under.

Company profits fell in the second quarter for the fifth time in a row, the longest stretch of declines for at least two decades, according to data released Monday by the Australian Bureau of Statistics. Firms are forecasting a 23 percent drop in investment in the fiscal year that began July 1, little changed from the 25 percent reduction they estimated three months ago, a government report last Thursday showed.

Eoin Treacy's view -

The Australian Dollar is perhaps the greatest arbiter of the effect the decline in commodity prices has had on the economy. The inability of Chinese demand to meet exaggerated expectations has been a headwind for the mining sector as new supply has reached market. So far the major producers have sacrificed profits for market share and there is no sign just yet that this has ended. 



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August 28 2015

Commentary by Eoin Treacy

A Currency Drop is Inflationary, Right?

This article by Jeff Black and Jennifer Ryan for Bloomberg may be of interest to subscribers. Here is a section:

The central banker's task of keeping inflation just right has become a permanent tussle with the global currency markets. Too weak a currency equals too rapid price gains. Too strong, and disinflation looms.

That's the well-worn argument under the microscope Friday at the Jackson Hole Symposium, the U.S. Federal Reserve's annual policy getaway. Gita Gopinath, a scholar at Harvard University, says that it just isn't that simple.

"The greater the fraction of a country's imports invoiced in a foreign currency, the greater its inflation sensitivity to exchange rate fluctuations at both short and long horizons,'' she says. Because the dollar is by far the dominant currency in world trade, "U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it.''

Eoin Treacy's view -

The strength of the US Dollar is a much bigger headache for emerging markets that from the USA. There is both a push and pull to this argument with a weak Dollar encouraging capital to migrate and allowing borrowers to increase leverage to lower costs. The reversal of the trend sees capital flight from emerging markets and increases the risk of default among the most leveraged debtors. 



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August 20 2015

Commentary by Eoin Treacy

Gold-gold matters

Thanks to a subscriber for this note by Douglas Pollitt which may be of interest. Here is a section:

If the surface float is less than we think it is, then inground stocks, (otherwise known as reserves), are also showing signs of depletion. On the cusp of the last boom, the reserves of senior producers¡¯, as measured in years of mine life, would be ballpark twice what they are today. And moreover these stocks here have been shown to be highly inelastic ¡°tens upon tens of billions of exogenous capital poured into the sector and very, very little was found. Unlike the frackers or, say, the zinc industry, a rally in gold will not see more metal get coughed up from the primary producers; indeed, gold production will almost certainly fall for the next twenty years no matter what the gold price does.

Investors in gold equities can gnash their teeth at the shenanigans on the Comex, and that¡¯s fair enough. The current price makes no sense at all in terms of gold-gold economics. It should nonetheless be borne in mind that the last boom was largely a paper gold boom, where punters, suffuse with visions of geopolitical and monetary overreach, piled willy-nilly into long positions. The next boom, however, if the float is as thin as we think it is, may well be driven by physical scarcity, something a gold exploration geologist knows something about, be they in the jungle or on the tundra.

 

Eoin Treacy's view -

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

Gold ore grades have been deteriorating for some time which has been a contributing factor in the rising marginal cost of production for the mining sector. Rather than classify the bull market in gold prices being solely as a result of a rise in demand for paper gold over physical supply, it is more reasonable to conclude that price represents the point at which the two different portions of the market converge. 



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August 19 2015

Commentary by Eoin Treacy

Gold, Silver Climb as Equity Retreat Spurs Demand for Safe Haven

This article by Eddie van der Walt and Debarati Roy for Bloomberg may be of interest to subscribers. Here is a section:

"The selloff in equity markets reflects economic concern, which is supportive of gold," James Cordier, the founder of Optionsellers.com in Tampa, Florida, said in a telephone interview. "With so many problems globally, people think the Fed will have to wait to raise rates."

Eoin Treacy's view -

It is interesting how the motivations of the Fed can be used to rationalise just about any market move. For example, I have also heard a number of commentators suggest the PBOC devalued the Yuan in anticipation of the Fed hiking rates in September. Leaving the Fed out of the picture for the moment let's look at the precious metals sector with fresh eyes.



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August 14 2015

Commentary by Eoin Treacy

Tin Prices Rise Despite Metals Rout

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

More than half of all demand for tin is accounted for by the solder which is used to assemble electronics devices such as smartphones and televisions, according to Fastmarkets, a metal research group.

China’s appetite for tin hasn’t fallen away in the way that it has for other base metals, such as iron ore, and China is tin’s biggest importer. Although this week’s devaluation of the yuan will make the metal more expensive in the Chinese market, electronics manufacturers are likely to be well-hedged and able to absorb price rises, said Ms. Bain.

Analysts see the biggest impact on prices coming from the supply side. Indonesia is the world’s largest tin exporter, with up to 35% of the global trade. New regulation this month bans all but refined products from legal mines leaving the country.

Myanmar, whose exports took off around 2011 after the fall of the ruling military junta led to the lifting of some sanctions, is a recent entrant into the tin market.

Now, though, output from Myanmar’s main tin mine is declining due to falling ore grades, and the challenges posed by the ethnic conflict raging nearby. The recent fall in tin prices also stymied investment in current and prospective tin mines, analysts say.

Eoin Treacy's view -

More than half of all demand for tin is accounted for by the solder which is used to assemble electronics devices such as smartphones and televisions, according to Fastmarkets, a metal research group.

China’s appetite for tin hasn’t fallen away in the way that it has for other base metals, such as iron ore, and China is tin’s biggest importer. Although this week’s devaluation of the yuan will make the metal more expensive in the Chinese market, electronics manufacturers are likely to be well-hedged and able to absorb price rises, said Ms. Bain.

Analysts see the biggest impact on prices coming from the supply side. Indonesia is the world’s largest tin exporter, with up to 35% of the global trade. New regulation this month bans all but refined products from legal mines leaving the country.

Myanmar, whose exports took off around 2011 after the fall of the ruling military junta led to the lifting of some sanctions, is a recent entrant into the tin market.

Now, though, output from Myanmar’s main tin mine is declining due to falling ore grades, and the challenges posed by the ethnic conflict raging nearby. The recent fall in tin prices also stymied investment in current and prospective tin mines, analysts say.



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August 13 2015

Commentary by Eoin Treacy

Cotton Jumps Most in Three Years on Surprise U.S. Crop Estimate

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

Yields will average 795 pounds an acre, down from 819 pounds projected in July, the USDA said. Inventories in the 12 months ending July 31 will be 3.1 million bales, down 26 percent from last month’s forecast and a two-year low.

The USDA cut its estimate for global reserves by 2.7 percent to 105.19 million bales from last month’s forecast.

The report “was quite the surprise,” Keith Brown, president of Keith Brown & Co. in Moultrie, Georgia, said in a telephone interview. “They cut the U.S. crop. The real clincher was lowering the global carryout by 3 million bales, because that had been ascending every month.”

 

Eoin Treacy's view -

Yesterday’s USDA report set off fireworks in the agricultural futures markets. Upgrades to expectations for corn and soy sent prices lower while the downgrade to cotton expectations have resulted in prices leaping higher. This is an El Nino year with extreme weather already recorded with probably more to come, suggesting volatility in agriculture prices is more likely than not. 



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August 10 2015

Commentary by Eoin Treacy

Farm machinery

Eoin Treacy's view -

Against a background where commodity related businesses have been under rather extreme pressure, farm machinery shares have exhibited relative strength. Crops have generally been favourable which has contributed to falling prices and the strength of the US Dollar has contributed to weakness. However as potential that agriculture prices have found at least a near-term low improves, the farm machinery sector may be worth studying in great detail. 



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August 07 2015

Commentary by Eoin Treacy

Randgold riding gold price fall well as it bucks the peer trend

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

Bristow was preceded at the presentation by Randgold Chairman, Chris Coleman, who reminded those present that Randgold was formed almost exactly 20 years ago when the gold price was at a virtual all-time low. The point here being that the current low gold price is not as bad as it was back then, and Randgold has thrived since its very beginnings, in both lower and higher gold price environments.

Bristow continued on the same theme, saying that in terms of the gold price in real terms, Randgold was nearly back where it started! He re-iterated the company has always followed a basic strategy that allowed it to be able to continue to build, while many of its peers were still trying to figure out how to survive in the current gold price environment. “I’ve always tried to do the opposite to the industry and grow in the troughs,” Bristow said to Richard Quest of CNN. Randgold has not wavered from its strategy of only developing good-sized projects offering strong returns at $1000 gold and this policy has held it in good stead.

As far as the Q2 figures were concerned, not surprisingly, Bristow tended to dwell more on the positive aspects of the results. These included a solid all-round performance from its operations, with improvements in grade, throughput and recovery, leading to a new gold production record and a higher profit compared with Q1 in the face of a declining gold price. 

 

Eoin Treacy's view -

Gold miners are now trading at around the same levels relative to the gold price as they did before the commodity bull market. This highlights just how unsuccessful the sector on aggregate has been in controlling cost inflation. However as energy prices pull back and wage inflation moderates, or even contracts, the ability of miners with reasonable debt loads to prosper should improve. This means we can expect some wide variation in returns between miners. 



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August 06 2015

Commentary by Eoin Treacy

U.S. Wheat Exports Jump to 2-Year High; Soy Cancellations Soar

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

Sales of wheat jumped to highest since July 2013 last week after prices fell to lowest in five weeks, government said Thursday in report.

Sales for delivery by May 31 rose to 838,463 mt in week ended July 30 from 699,418 week earlier, up from 590,871 year ago, USDA reported

Sales last week included 394,600 t purchased for delivery to unknown destinations; other major buyers included Dominican Republic, Japan, Philippines and Yemen

“The sales to unknown are a little surprising, but not a sign of improved demand given the premium U.S. wheat is trading to the rest of the world,” Roy Huckabay, exec. Vp for Linn & Associates in Chicago, says in phone interview.

NOTE: Total sales for delivery before May 31 down 17% from yr ago, USDA data show

NOTE: USDA reported net sales reductions of 447,307 t of soybeans in marketing year that ends Aug. 31; biggest weekly cancellation since government began collecting data in 1990
China canceled 500,000 t, rolling 300,000 for delivery after Sept. 1, start of new marketing year: USDA

“The China bean sales the prior week was an obvious error” of reporting the timing of the delivery, says Huckabay.

 

Eoin Treacy's view -

Soft commodities have been subject to a great deal of volatility over the last few years as commonality in the sector has been squeezed out by record crops. Individual commodities are now trading much more on their individual fundamentals than over the last decade which has led to increased variability in returns. 



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August 05 2015

Commentary by Eoin Treacy

Email of the day on redenominating US Dollar instruments to Australian Dollars

Could you advise me again how to get access to the commodities in AUD? e.g. Copper price CMX in AUD? 

Eoin Treacy's view -

Thank you for this question and you may be interested in this video   explaining how to create your own Preset template which will allow you to redenominate any US Dollar instrument to Australian Dollars.

For example here is copper redenominated to Australian Dollars. 



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August 05 2015

Commentary by Eoin Treacy

Citigroup Sounding Alarm on $13 Billion of Bank Bonds in Brazil

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

Speculation is mounting that Moody’s will be the second rating company to lower Brazil’s grade to the precipice of junk as the economy suffers its biggest contraction in a quarter century and a bribery scandal frustrates the government’s efforts to restore its finances.

Moody’s, which met with officials in Brazil last month, cited the country’s economic woes and deteriorating finances when it put the Baa2 rating on negative outlook in September.

Things have only gotten worse since then, with Moody’s predicting in a July 16 report that gross domestic product will shrink 1.8 percent this year.

Brazil’s real declined 0.7 percent to 3.4943 per U.S.dollar at 11:51 a.m. in New York. The currency declined 24 percent this year.

Just last week, Standard & Poor’s also revised its outlook on Brazil’s rating to negative. An S&P downgrade would plunge Brazil back into junk since the company rates Brazil BBB-, one level below Moody’s.

“Banks are a leveraged macro play and as such, given the recession, I see the bonds expensive,” Jorge Piedrahita, the chief executive officer of New York-based brokerage Torino Capital LLC, said in an e-mail.

Eoin Treacy's view -

The economic pressure Brazil is experiencing is perhaps most evident in the collapse of the Real which has almost completely unwound the bull market associated with the commodity bull market. The great tragedy is that the country squandered the economic dividend of an almost decade long commodity bull market by failing to introduce regulatory reform, build critical infrastructure and combat corruption. As Warren Buffett says “You don’t know who’s been swimming naked until the tide goes out” On the plus side the Olympics next year and World Cup in 2018 will be fun but are hardly relevant for investors. 



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July 31 2015

Commentary by Eoin Treacy

Diageo Expects Return to Sales Growth After Two-Year Slump

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

The outlook reflects the prospect of stronger growth in selling volumes in the 12 months through June 2016, Chief Executive Officer Ivan Menezes said in a statement Thursday. He forecast “mid-single-digit” organic sales growth in the following financial years and a 1 percentage-point improvement in the operating margin within three years.

The guidance is “conservative and undemanding,” said Eddy Hargreaves, an analyst at Canaccord Genuity in London. “It’s below what we already have in our model and it’s a positive that they have reinstated guidance.”

As he starts his third year as CEO, Menezes has tried to gain more control over his sprawling liquor empire and restore sales growth after a two-year slump. He’s bought out India’s United Spirits Ltd., taken full ownership of Don Julio tequila and dissolved a South African joint venture. Diageo is also shifting to a model focused on purchases by consumers, rather than the amount of bottles it ships to distributors.

 

Eoin Treacy's view -

Premium distillers such as Diageo trended higher in 2010 and 2011 as Chinese demand surged not least on the back of Communist Party cadre largesse. They have subsequently had a more difficult time repeating those growth figures following Xi Jinping’s anti-corruption drive, contraction of the European economy and stagnant North American sales. Diageo is betting that India and Africa will represent its primary growth engines in future but it will take time to generate results large enough to move the needle in terms of earnings growth. 



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July 31 2015

Commentary by Eoin Treacy

Noble Group Extends Worst Rout Since 1999 Amid SGX Warning

This article by Yuriy Humber and Jonathan Burgos for Bloomberg may be of interest to subscribers. Here is a section:

Noble has bought back its stock at least 11 times since last month and built up a 2.8 percent stake from zero. Companies listed in the city-state aren’t allowed to repurchase their shares two weeks before reporting earnings, according to Singapore trading rules. The company is due to announce its quarterly results on Aug. 13.

“The share buybacks so far have been relatively limited so we don’t expect immediate impact on the company’s liquidity or financial leverage,” Cindy Huang, an analyst at credit-rating agency Standard & Poor’s, said by e-mail.

Noble’s stock declines do not in themselves impact the trading company’s credit position, Huang said.

“The larger issue would be if confidence is affected or lenders’ sentiment is significantly affected,” Huang said.

 

Eoin Treacy's view -

Noble Group is currently trading on a Price to Book of 0.51 not least because its primary business is in coal, coke and petrochemical supply chains which have been under pressure as commodity prices have declined. With a forward P/E of 4 and a yield of 2.12% traders are pricing in either a major write down of their assets or are simply using the share as a vehicle for expressing a bearish view on commodities generally. 



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July 30 2015

Commentary by Eoin Treacy

Pariah status

Eoin Treacy's view -

This has been an extremely difficult period for mining companies, not least as the major iron-ore and diversified mega-cap companies have ramped up supply into a falling market in order recapture market share. From an investor’s perspective, one is left with a dilemma. Many are asking whether it is better to hold on in the hope prices will recover. Others have been disappointed in their attempts to buy only to see prices fall even further. Against a background where technology shares such as Apple, Google, Amazon and Facebook have accounted for the majority of stock market returns this year, underperforming sectors such as commodities have fallen into relative obscurity. 



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July 30 2015

Commentary by Eoin Treacy

Coffee drinkers beware: Brazil coffee harvest set to decline again

This article by Vladimir Pekic for Beverage Daily.com may be of interest to subscribers. Here is a section: 

Brazilian coffee growers will collect just 44.28m sacks (60Kg) of coffer in 2015, the second lacklustre harvest in a row for the world’s largest coffee producer and exporter. 

The result was unveiled this month in the second annual coffee crop forecast for 2015 published by Brazil’s National Supply Company (Conab). The state-run institution warned that the 2015 harvest would be 2.3% lower than the 45.34m sacks harvested in 2014. 

“If the latest forecast announced by Conab proves correct, this will be the third consecutive season in which coffee production in Brazil drops” warned Brazil’s Advanced Research Centre in Applied Economics (CAPEA) in a June 11 release. 

Nonetheless, the international Coffee Organization said that coffee prices continued their decline even after the latest Conab forecast – as speculation over the current 2015/16 Brazilian crop suggests that the market has no immediate supply concerns. Indeed, one major trading house has already forecast a global supply surplus for 2015/16. 

 

Eoin Treacy's view -

This is an El Nino year and it has certainly been hotter and muggier in Los Angeles this year than last as a result of the weather phenomenon. This graphic of Pacific Ocean temperature comparing this year to the strong 1997 event suggest that we can anticipate additional extreme weather events through the end of the year. This has the potential to act as catalyst for agricultural commodity prices so they are worth watching. 



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July 28 2015

Commentary by Eoin Treacy

JPMorgan Just Cornered The Commodity Derivative Market, And This Time There Is Proof

Thanks to a subscriber for this article from Zero Hedge which may be of interest. Here is a section:

So in summary, this is what we do know:

In Q1, JPM cornered the commodity derivative market, with a total derivative exposure of just over of $4 trillion, an increase of 1,691% from just $226 billion in one quarter!

What we don't know is:
why did the OCC decide to effectively eliminate its gold derivative breakdown by lumping it with FX,

why there was a 237% increase in the total amount of precious metals (which include gold) contracts in the quarter, from $22.4 billion to $75.6 billion

We have sent an email requesting much needed clarification from the Office of the Currency Comptroller, although we are not holding our breath.

 

Eoin Treacy's view -

A large number of investment banks have closed or sold their commodity trading operations as prices declined and speculative interest migrated. JPMorgan and Citigroup have stepped into that void and now occupy outsized positions in the commodities derivatives market. 



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July 22 2015

Commentary by Eoin Treacy

NA Gold & Silver Equities: Stress Testing the Balance Sheets

Thanks to a subscriber for this report from RBC Capital Markets focusing on North American gold miners. Here is a section:

Stress test highlights $1,100/oz as a critical level
At $1,100/oz gold and $14.50/oz silver, the North American gold sector remains ex-growth. In addition to the cost-cutting measures that have occurred to date, producers will need to place their higher cost mines in harvest and accelerated closure mode or on care and maintenance. We would expect to see a reduction in management and board compensation and the use of private aircraft travel curtained. And below $1,100/oz, we believe some companies could see their lines of credit reduced or withdrawn, and companies with elevated levels of debt may be forced to hedge revenues, sell streams on mining assets, and/or raise distressed equity. At $1,100/oz, companies that would need to continue making cuts to discretionary and fixed costs to improve their balance sheets include AngloGold, Barrick Gold, Hochschild, IAMGOLD, Kinross, Pan American, Primero, Teranga, and Timmins.

At $1,000/oz gold and $13.25/oz silver, we would expect mine production to begin to contract as mines are placed on care and maintenance or moved into accelerated closure. In addition to the cost-cutting measures mentioned above, we believe a number of the gold producers would need to consider mergers to capture operating synergies or other financial benefits. At $1,000/oz, all of the gold/silver producers in our coverage universe would continue to make cuts to operating and discretionary costs and the most leveraged companies would seek alternative sources of equity.

At $1,200/oz gold and $15.75/oz silver, we believe most of the sector can sustain their current operating mines, but mines with AISC above $1,100/oz would likely go into “harvest mode” with significant development capital spending deferred. In addition, at $1,200/oz the producers can still implement cash-saving measures, with further cuts to G&A, exploration, and sustaining capital.

 

Eoin Treacy's view -

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

Chinese central bank buying of gold is an important source of demand and has garnered a great deal of attention in the media following last week’s announcement. However that is not the only source of Chinese demand. Domestic Chinese investors are also large consumers of gold and it is plausible that with the volatility on the stock market retail investors have stopped buying or liquidated holdings to meet margin calls. 



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July 17 2015

Commentary by Eoin Treacy

Gold Reaches Lowest Since 2010 as Traders Shrug Off China Hoard

This article by Eddie van der Walt, Joe Deaux and Laura Clarke for Bloomberg may be of interest to subscribers. Here is a section: 

China said it boosted bullion assets to about 1,658 metric tons, less than brokers at GoldCore Ltd and Sharps Pixley Ltd. expected. Futures dropped to the lowest since 2010 on Friday as signs of improving U.S. economic growth further diminished the metal’s appeal as a haven.

With investors in the U.S. scoffing at the precious metal, bulls were holding out hope that buying from China could help to buoy demand. The Asian country vies with India as the world’s top consumer.

“I’m shocked by how small the figure is,” Ross Norman, chief executive officer of dealer Sharps Pixley, said by telephone from London, referring to China’s gold reserves. “I don’t think I was alone in thinking they have accumulated three times as much.”

 

Eoin Treacy's view -

A clue to the fact that the Chinese government has not been accumulating vast quantities of the metal is in the fact that prices have held a sequence of lower highs since 2011. Generally speaking if on aggregate the metal had been under accumulation a progression of higher reaction lows would have been evident within the ranging phase of the last two years. 



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July 16 2015

Commentary by Eoin Treacy

Glasenberg of Glencore to Rio Tinto, other miners: stop digging

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

Take iron ore, which is responsible for almost half of Rio Tinto’s revenue and more than two-thirds of its pretax profit. Global yearly output for all miners increased more than 25 percent from 2010 through 2014. Over the same period, the price of Australian iron ore exports to China declined 60 percent. That’s not a coincidence, Glasenberg says.

Yet the world’s miners—including Rio, BHP Billiton, and Vale—plan to increase production by an additional 16 percent by the end of 2018. “That’s what’s killing the supercycle,” Glasenberg said on Glencore’s August 2014 earnings call, referring to the idea that commodities prices had been on a decades-long climb due to surging demand from emerging markets, particularly China.

Glasenberg’s message to the mining industry is simple: You’re in a hole; stop digging. The problem is, mining execs think they’re in the business of digging. “There’s too much focus on big holes in the ground and not enough focus on return for capital,” says Paul Gait, a mining analyst at Sanford C. Bernstein & Co.

 

Eoin Treacy's view -

Iron-ore prices have paused in the region of $45 but will need to continue to hold the recent lows if we are to conclude that more than temporary support has been found.

Despite the fact that industrial metals prices have at least paused in their declines over the last week, the CRB Metals Index shows little evidence that support has been found. A sustained move above the 200-day MA currently near 760 would be required to question the consistency of the medium-term decline. 

 



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July 14 2015

Commentary by Eoin Treacy

Lindt CEO Says Cocoa Prices Should Decline to Reflect Reality

This note by Thomas Mulier for Bloomberg may be of interest to subscribers. Here it is in full:

Ernst Tanner says in phone interview that speculation has driven cocoa prices up too much.

Supply of beans in market is greater than demand, grindings going down, rather than up: Tanner

Arguments about Ebola have been used to justify higher cocoa prices, though outbreak hasn’t affected industry

Easier to raise prices in U.S. than in Europe

Lindt, Ghirardelli brands gaining share in U.S., integration of Russell Stover on track

 

Eoin Treacy's view -

Cocoa is trading in mild backwardation suggesting there is more to the recent run in prices than pure speculation as the above quotes would indicate. US Cocoa prices are currently testing the 2014 peak near 3400¢. On the run up from 2700 reactions have been limited to approximately 100¢ so a pullback larger than that would be required to signal more than temporary resistance in the current area. 



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July 10 2015

Commentary by Eoin Treacy

Email of the day on mining shares:

Anglo-American, BHP and RTZ all seem to be breaking below the bases of their ranging zones. Commonalty. The dividend yields look attractive. Buy or sell?

Eoin Treacy's view -

Thank you for this question which I believe is of general interest to subscribers. Mining shares and metal prices did not respond particularly favourably to the run-up in China’s stock market earlier in the year but have been influenced by its recent decline because of fears the economy is slowing. If there is commonality in the mining shares it is because there has been such commonality in the commodity prices for their major products. Iron-ore, coal, oil, copper and aluminium prices are all at depressed levels. 



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July 07 2015

Commentary by Eoin Treacy

July 03 2015

Commentary by Eoin Treacy

Platinum into the next decade

Thanks to a subscriber for this detailed report offering a nuanced view on the platinum market which may be of interest. Here is a section: 

The world still needs more platinum despite the fall in Autocat loadings
The rise in electric vehicles (EV’s with very low or no PGM’s) will reduce the average vehicle platinum loading and contribute to lower demand growth than we have seen historically. Importantly however, under what we consider reasonable (2.6% CAGR) vehicle demand growth, we still forecast growth in gross Autocat demand. A modest increase in fuel cell vehicles (with high platinum loadings) is likely to offset some of the platinum demand destruction from EV’s. Furthermore a “catch-up” in emission standards in the emerging markets such as India and China should also offset the general trend in declining loadings. We outline our forecasts for platinum. Under our base case, we forecast that an additional 1.5Moz will be required by 2030.

The Auto sector is nearly self sufficient due to recycling.
We forecast a continuation in the trend of the increasing metal units being returned to the market over the next fifteen years. The three major Autocat producers (BASF, Johnson Matthey and Umicore) are all adding recycling refining capacity, specifically targeting recycled material. Furthermore, the tranches of Autocats being returned to the market over the next few years all have higher PGM loadings, especially in platinum. We forecast Autocat platinum volumes to double by 2030, which equates to a CAGR of 4%. 

However, the CAGR between 2014 and 2021 is likely to be closer to 8%.
We estimate that the Autocat industry will be a net supplier to the market up until 2020, whilst the additional new ounces required by 2025 will be negligible. By 2030, the additional requirement should be 300koz, equivalent to a large platinum mine, or a two mid-sized mines. The net result is that Platinum demand (post recycling) growth should be slower over the next fifteen years, compared to the historical trend. We estimate a CAGR of 1.1% versus the trend (1975 – 2014) of 2.2%.

Enough replacement ounces from the existing supply base until 2021
The amount of new platinum ounces required from the Southern African mining industry is limited, especially over the next seven years. The existing fleet of development and replacement projects should be sufficient to offset the endemic grade decline and mine depletion (see Figure 6). Furthermore, these projects have favourable economics relative to the current production base, as most projects have also sunk significant capex, lowering the return requirement as a result.

 

Eoin Treacy's view -

The automotive sector is in a process of evolution with China mandating greater use of electric vehicles and tighter emission control while Tesla represents the cool side of the sector. Toyota, Linde, among others, and the platinum miners are championing the build out of hydrogen fuel cells. Both represent corollaries to innovation of solar and wind technology that is making distributed electricity production possible. Sergio Marchionne at Fiat is arguing for fabless manufacturing in the automotive sector which has the potential to act as an additional catalyst for the sector. 



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July 02 2015

Commentary by Eoin Treacy

Corn Market Seen Tighter as Pigs Erode Reserves at 27-Year High

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

“It’s probably a combination of more pigs, chickens and cows eating corn, and USDA overestimating last year’s production,” said Dale Durchholz, the senior market analyst at AgriVisor in Bloomington, Illinois. “Supplies are tighter, and God forbid we have any hot, dry weather in July that damages this year’s crop.”

Feed and residual use for the grain in the three months ended in May climbed 31 percent, according to AgriVisor. The inventory of broilers, dairy cows and hogs suggests that such demand could be as much as 200 million bushels larger than the 5.25 billion bushels projected by the USDA, said Durchholz.

As of Sunday, 68 percent of the corn crop was rated in good or excellent condition in the top 18 producing states, down from 75 percent a year earlier.

Wet fields and declining crop conditions suggest a national yield at 162 bushels an acre, below the USDA’s estimate of 166.8 bushels,  Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said Tuesday. That would leave a carryover next year of 1.2 billion bushels, below the 1.771 billion that the USDA forecast on June 10.

“The tightening supply and deteriorating crops in the field are a big change from the outlook a month ago,” Schultz said. “Most livestock producers were waiting for lower prices into the harvest, and now they will be scrambling to extend purchases.”

 

Eoin Treacy's view -

El Nino is a major weather phenomenon and this year’s event is expected to be stronger than normal. With droughts in some parts and floods elsewhere the potential for crop yields to undershoot is being priced into agricultural commodities. There has been a significant rally in corn, wheat and soybean prices which is a little overbought in the short term. There is room for some consolidation but clear downward dynamics would be required to question potential for some additional upside. 



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July 01 2015

Commentary by Eoin Treacy

In Gold we Trust 2015

Thanks to a subscriber for this detailed heavyweight report from Ronald Peter Stoeferle at Incrementum AG which may be of interest. Here is section: 

Let us draw a comparison: if you were sitting in a rowboat in stormy seas, would you say that the lighthouse is moving from side to side and up and down? Or would you employ a rubber band as a tape measure? Certainly not, and for good reasons, as the lighthouse and steel are stable, and waves and rubber bands are not. The relationship between gold and paper currencies is roughly analogous.

This is not to say that the exchange value of gold would be perfectly stable. It would change over time, depending on the growth in the supply of gold, the change in the demand to hold cash balances, and the growth in goods and services on the market. However, given its much lower as well as easily foreseeable annual supply growth rate, it would be far more stable than paper currencies.

Ludwig von Mises always argued that money is a good like any other. It differentiates itself by one important characteristic: Money is the generally accepted medium of exchange, because it is the most marketable good. According to Mises, money's function as a medium of exchange is thus the central one, while its store of value and unit of account functions are merely subordinate functions (they are derived from, or implied by the central function). This also implies that a rising money supply must lower the exchange value of money.35

In 1913, the population of the US was 97 million. The monetary aggregate M3 at the time amounted to approx. USD 20 billion, i.e., USD 210 per capita. Currently the population of the US is 318.9 million, while the monetary aggregate M3 has increased to USD. 17.8 trillion. This translates into a money stock of USD 55,817 per capita.

Eoin Treacy's view -

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

Many of the arguments that speak to gold’s appeal as a financial resource resemble the arguments for the existence of Platonic ideals. Gold will hold its purchasing power over the long haul, gold does not represent a debt or reliance on cash flows, gold is immutable, has historic appeal, was the original money and cannot simply be printed or lent into existence. All of this is true.



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June 29 2015

Commentary by Eoin Treacy

Coal Shares Jump After Supreme Court Strikes Down Mercury Rule

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

U.S. coal shares jumped after the Supreme Court struck down the Obama administration’s mercury and acid gases power plant rule, saying it hadn’t considered the billions of dollars in costs before issuing the rule.

Arch Coal Inc. jumped as much as 19 percent, Peabody Energy Corp. climbed 15 percent and Alpha Natural Resources Inc. was up 14 percent in intraday trading after the ruling was announced Monday.

The court’s decision calls into question an Environmental Protection Agency rule that targets mercury and acid gases. The rule has led to the closing of dozens of coal-fired power plants over the last two years.

 

Eoin Treacy's view -

It’s been a long time since coal caught a break and a great deal of bad news is already in the price. Coal is dirty, antiquarian, low tech and contributes to pollution but is cheap and abundant.  Over the last few years investors and regulators have concentrated on the former points and forgot the latter ones. Coal is the feed stock for a substantial portion of electricity production and today’s decision will mean that fewer power stations in the USA will need to be closed as a result of stringent regulations. 



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June 25 2015

Commentary by Eoin Treacy

Brazil Bank Stock Goes From Worst to First After Investors Bail

This article by Francisco Marcelino and Ney Hayashi for Bloomberg may be of interest to subscribers. Here is a section: 

Among the largest Brazilian banks, Santander is the one with the highest capital ratios, Victor Martins, an analyst at Planner Corretora de Valores, said by phone from Sao Paulo.

“If the economy picks up, they’ll be in a better position to take advantage of that,” Martins said. “It’s all in their hands to do it.”

Santander Brasil’s capital ratio of 16 percent compares with 16.02 percent at Banco do Brasil SA at the end of the first quarter. It exceeded Itau’s 15.3 percent and Banco Bradesco SA’s 15.2 percent.
Santander declined to comment on its performance since the share-swap offer, which began in April 2014. That’s when the bank offered to buy back the 25 percent stake in the Brazil unit it didn’t already own at a price 20 percent above where it was trading at the time. The deal was to exchange shares of the local unit for those of the parent.

The majority of analysts covering the company recommended investors accept the offer, citing what they saw as a fair price and the risk of holding a stock with low liquidity.

“The market doesn’t believe in our franchise, but we do,” Javier Marin, Banco Santander’s chief executive officer when the deal was announced, told reporters at the time. “That’s why we’re carrying out this transaction.”

 

Eoin Treacy's view -

Brazil remains mired in a political scandal which throws light on the inadequate standards of governance that prevailed over the last decade. Now that commodity prices have fallen and excess capital from exports has dried up, the ability of the economy to thrive without reform in how the country is administered is in question. The Real offers a powerful representation of just how much stress the economy is under. It has more than halved since 2011. Some additional evidence of steadying would be a welcome development from the perspective of foreign investors. 



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June 24 2015

Commentary by Eoin Treacy

White-Sugar Premium at Nine-Month High as Demand Advances

The premium for white sugar over the raw variety has climbed 41% this yr, touching the highest since Sept. on Wednesday, as demand for the refined sweetener picks up after an earlier drop in prices.

White-sugar futures on ICE Futures Europe in London  have climbed ~6% since reaching a six-yr low on June 17; Raw-sugar futures also fell to six-yr low in N.Y. last week

 “There is still strong demand from West Africa” for the refined product, Claudiu Covrig, senior agricultural analyst at Platts Kingsman in Lausanne, Switzerland, says by e-mail

Demand associated with Islamic Ramadan holiday that started this mo. also supporting price, he says

Better-than-expected refined imports in China in April and May from Thai and Guatemalan suppliers “have contributed”

Perception in mkt of lower availability of white sugar for Aug. delivery on ICE Futures Europe, he says

NOTE: Brazil’s Center-South produced 6.75m mt of sugar this season, down from 7.76m yr earlier, industry data showed  Tuesday

Eoin Treacy's view -

White sugar has one of the most consistent downtrends in the commodity sector so it will be clear when the supply dominant environment changes. It has stabilised in the region of $350 over the last couple of weeks but a sustained move above $380 will be required to begin to question the consistency of the medium-term decline. 



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June 22 2015

Commentary by Eoin Treacy

Golds (OW): Debunking the Bearish Case for Gold(s)

Thanks to a subscriber for this report from Canaccord Genuity. Here is a section: 

Gold(s) perform poorly before/after the first Fed hike. This was true over the last three tightening cycles of 1994-95, 1999-2000 and 2004-2006 (Figure 1) where rate hikes were ¡§mechanical¡¨ in nature, that is, the Fed raising rates by a 25bp increment at each meeting. But as Fed Chair Yellen repeated yesterday through the Q&A session, contrary to these episodes, the Fed does not intend to follow a pre-determined path to higher interest rates. Rather, a ¡§gradual¡¨ or “wait-and-see” approach was reiterated. Therefore, the next few months may well look like the 1986-87 tightening cycle where golds outperformed before and after the first Fed hike (Figure 1, fourth panel). Interestingly, the 1986-87 experience teaches us that despite a Fed hike in December 1986, gold equities surged until the second Fed hike which occurred in April 1986. So, if the Fed were to pre-emptively hike rates in September, the Fed could take a pass in December and the second hike could only happen next year if a “gradual” approach is implemented. This scenario could maintain or open the door to a cyclical rally in gold and gold equities.

Inflation is low and years away. Inflation went down to a multi-year low of 2.3% in 1993 and the gold sector rose 115%. Back to the 1986-87 episode, who would have said that in December 1986, US headline CPI would bottom at 1.2% and boom to 3.7% four months later? Interestingly, like today, the third panel of Figure 2 shows that wage inflation was running ~2%. The bulk of the inflation increase in 1987 came from the rebound in oil prices. We calculated that if oil prices reach $70/bbl next spring, US headline CPI would be near 2%. But like in early 1987, by moving progressively, the Fed runs the risk of allowing inflation expectations to build as headline CPI catches up to core CPI, hence the “inflation” trade on gold(s). The key points to remember here are the trend in inflation and expectations. Figure 3 shows that no matter the starting point in inflation, gold equities historically are strong outperformers (+18%>TSX over 12 months) from historical bottoms in US headline inflation. Yesterday’s headline CPI suggests the disinflation cycle is over.

 

Eoin Treacy's view -

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

The range of opinions on the outlook for gold remains varied. The majority of commentary focuses on the “what ifs” of how gold will respond to different stimuli not least the Greek drama and potential Fed tightening, but what it really needs is a good argument for why it should rally independently of other factors. Gold has been ranging with a mild downward bias for nearly two years so it is reasonable that investors are looking for a bullish catalyst to galvinise support beyond short-term steadying. 



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June 18 2015

Commentary by Eoin Treacy

Piercing the gloom

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

China is decelerating – (a fairly consensual view) and this is coinciding with additional production ramp-up as projects started years ago come to fruition. The net outcome is over supply (again, a consensual view) and prices should fall (as they have done). A risk is to use pre China boom commodity prices as a guide to the future, because this is too bearish as many commodity prices hit century lows in the early 2000’s. Iron ore hit an annual low in 2002 for instance at US$36/t (real CIF) – so market fears of sustained iron ore prices of US$30-40/t would require iron ore to retrace to century low levels, into perpetuity. We do not think this is likely. Meanwhile, a number of the miners offer good value on their existing assets alone at normalised prices, the potential growth upside and high yields justify buying them – on top of that, dividends are both attractive and maintainable into the foreseeable future. Now is a good time to selectively pick up some value, in our view.

Eoin Treacy's view -

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

Investment in new green field projects has stopped and is unlikely to become a significant factor until there is evidence metal prices are tending higher. Having embarked on developing new mines, companies have little choice but to complete the projects and these sources of supply continue to come to market. This situation favours lower cost, more established companies. 

There is an important difference between Chinese demand growth and absolute demand. As a major economy, per capita demand has increased substantially over the last decade. A great deal of mine expansion was predicated on the trend of demand growth persisting indefinitely. The pace of growth has moderated considerably but there is no evidence it has reversed. Any major economy has an annual consumption rate for industrial resources. Generally speaking, commodity bull markets don’t end because demand decreases. Rather supply increases to overwhelm demand. This is exactly what we have seen happen and a new demand growth model will have to evolve in order to change the environment. 

 



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