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December 08 2016

Commentary by Eoin Treacy

In mammoth task, BP sends almost three million barrels of U.S. oil to Asia

This article by Florence Tan for Reuters may be of interest to subscribers. Here is a section:

While BP's operations are currently the most sophisticated, others have also begun developing U.S./Asia trade.

China's Unipec, the trading arm of Asia's largest refiner Sinopec (600028.SS), is shipping about 2 million barrels of WTI to China this month, while trading house Trafigura is also exporting some 2 million barrels of U.S. oil to Asia.

Incentives to bring U.S. crude into Asia have risen after the Middle East-led producer club of the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut output, encouraging refiners across the region to seek alternatives to offset potential supply shortfalls.

"OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Bjarne Schieldrop, chief commodity analyst at SEB. He predicted 2017 would be a "shale oil party" with a surge in U.S. exports after the OPEC production cuts.

The operation to send the oil, worth around $150 million, to Asia-Pacific buyers lasted four months and involved BP traders in the United States and Singapore, while colleagues from London were responsible for ship chartering, the sources said and data showed.

BP took advantage of arbitrage between cheaper U.S. West Texas Intermediate (WTI) CLc1 crude and the global benchmark Brent LCOc1.

The deal was aided by cheap tanker rates and a price/time curve, where future oil deliveries are more expensive than those for immediate discharge, making sourcing oil from as far away as North America profitable.

Eoin Treacy's view -

The US has just started exporting crude oil for the first time in decades and if the Keystone pipeline is finally permitted in 2017 if would give Canadian heavy crude an outlet to Texas’s refining and shipping infrastructure that would allow even greater volumes to be exported.

The expanded Panama Canal raises the prospect of a short-cut to Asia from Texas. That is of course once ships have been retrofitted to be tugged through the new canals which is taking somewhat longer than originally anticipated



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December 07 2016

Commentary by Eoin Treacy

Chinese-Korean group to build $2 billion lithium batteries plant in Chile

This article by Cecilia Jamasmie for mining.com may be of interest to subscribers. Here is a section:

Lithium, frequently referred to as "white petroleum," drives much of the modern world, as it has become an irreplaceable component of rechargeable batteries used in high tech devices.

The market, while still relatively small — worth about $1bn a year — is expected to triple in size by 2015, according to analysts at Goldman Sachs

That should be great news for Chile, as the country contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS). It is also the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate.

Chile is essentially “the Saudi Arabia of lithium,” according to Marcelo A. Awad, executive director of the Chilean brand of Wealth Minerals, Canadian company that also has interests in Mexico and Peru.

The country, he noted in a recent interview, is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, which is expected to increase electric vehicles production in years to come. There, lithium is also used to manufacture rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops.

The challenge for foreign investors, particularly the Asian conglomerate, is to persuade Chilean authorities of making the leap from exporting the white metal to producing lithium batteries at the point of extraction.

Estimates from the group’s advisors believe opening the proposed plant would make the value of the product 35 times higher than what it could be obtained by just selling it as lithium carbonate

Eoin Treacy's view -

Elon Musk might be one of the world’s great promotors but there is no denying that he has upended the automotive sector with just about every major auto manufacturer planning to release a range of electric vehicles within the next few years. 



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December 07 2016

Commentary by Eoin Treacy

Outlook for 2017: Better times ahead

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

According to a joint study by Thomson Reuters GFMS and the Silver Institute, the global silver market will record a supply deficit this year for the fifth year in succession. However, at 52.2 million ounces (1,623 tons), this is less than half what it was last year (chart 7). Silver demand should have fallen by 9% to a 4-year low of 1,064.6 million ounces (33,109 tons), while silver supply should fall by “only” 3% to 1,012.4 million ounces (31,486 tons). The biggest drag on the demand side is a 24% decline in demand for coins and bars. Jewellery demand is also expected to dip by nearly 8%. Industrial demand, which accounts for around half of total demand for silver, also declines, albeit only slightly. A steeper fall has been prevented by the rise in photovoltaics which is projected to have risen by 11% to a record level.

On the supply side, 2016 should see the first – albeit slight – fall in global mining production for 13 years (chart 8, page 5). This is because, following the closure of numerous zinc and lead mines, less silver is produced as a by-product. Due to liquidation of hedging positions (dehedging) by mining producers, additional supply has been withdrawn from the market. The supply of scrap silver, however, remained virtually unchanged. Owing to a significant rise in demand for silver ETFs – GFMS assumes net inflows of 71.4 million ounces (2,220.5 tons) for 2016 – and almost as large an increase in exchange-registered stocks, the broader market deficit has increased to 185.5 million ounces (5,769 tons). This is the highest figure since 2008.

The deficit should turn out somewhat lower due to recent large ETF outflows, though.
For 2017, Thomson Reuters GFMS and the Silver Institute except silver demand to decline by a further 3% to 1,035.0 million ounces. The supply of silver on the other hand should rise by around 1% to 1,024.8 million ounces. All demand components apart from jewellery are expected to decrease, with coins and bars once again falling the most, dipping by 9%. Industrial demand should fall by 2%, as demand from the photovoltaic sector – in contrast to the previous year – is also expected to decline, meaning that it can no longer compensate for persistent weakness in other sectors. Industrial demand would thus shrink for the seventh year in a row (chart 9). The increase in the supply of silver is almost entirely due to a larger supply of scrap silver, which should rise by 11% in response to higher prices. This will largely compensate for the accelerated decline in mining production by around 2% compared with the previous year. At the same time, de-hedging by silver producers will decline next year, meaning that less supply will be withdrawn from the market. Consequently, the deficit on the physical silver market is expected shrink to only 10.2 million ounces. This would be the smallest deficit since the last surplus year of 2012. ETFs are expected to record inflows of 40 million ounces. The broader market deficit would thus amount to 50.2 million ounces, a reduction of more than 70% compared with 2016.

Eoin Treacy's view -

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

The bond market has priced in the return of some inflation, at least the kind central banks measure. However it has yet to appear in official statistics with the result that real interest rates have posted a rather large move. Precious metals tend to do best when inflation is outpacing interest rate increases (negative real interest rates) which is not currently the case. There is ample potential for inflation to pick up if fiscal stimulus is implemented next year which suggests there is scope for precious metals to regain some of their lost lustre next year. 



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November 30 2016

Commentary by Eoin Treacy

A China recovery is coming

Thanks to a subscriber for this article by Simon Hunt in copperworldwide.com. here is a section:

China’s economy is recovering. Accommodating monetary policy is being augmented by expanding the fiscal deficit which might include tax cuts. Construction is beginning to recover since total surplus inventory has fallen to the key seven-month level. The NDRC has released 25 infrastructure projects most of which were frozen earlier this year because cases of corruption were detected. Both wages and consumer spending continue to increase. In some key manufacturing sectors inventories have been reduced. Many private sector companies are now managing cash flow appropriately so are improving profitability. Investment will follow in 2017. Against this background real consumption of metals has begun recovering and will gather pace in 2017.

Eoin Treacy's view -

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

One of the reasons China has been going through such a difficult time is because many of the markets it sends exports to have been in difficulty. The US credit crisis, the EU’s sovereign debt and banking crisis and the collapse of commodity prices all hit demand for China’s exports.   



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November 28 2016

Commentary by Eoin Treacy

Fearing tighter U.S. visa regime, Indian IT firms rush to hire, acquire

This article by Sankalp Phartiyal and Euan Rocha for Reuters may be of interest to subscribers. Here is a section: 

Indian companies including Tata Consultancy Services (TCS), Infosys and Wipro have long used H1-B skilled worker visas to fly computer engineers to the U.S., their largest overseas market, temporarily to service clients.

Staff from those three companies accounted for around 86,000 new H1-B workers in 2005-14. The U.S. currently issues close to that number of H1-B visas each year.

President-elect Trump's campaign rhetoric, and his pick for Attorney General of Senator Jeff Sessions, a long-time critic of the visa program, have many expecting a tighter regime.

"The world over, there's a lot of protectionism coming in and push back on immigration. Unfortunately, people are confusing immigration with a high-skilled temporary workforce, because we are really a temporary workforce," said Pravin Rao, chief operating officer at Infosys, India's second-largest information technology firm.

 

Eoin Treacy's view -

India has benefitted enormously from the offshoring of jobs in the customer service, programming, IT and pharmaceuticals sectors. However a number of these large Indian companies are dependent on ready access to their US based customers so they can offer the best possible service which is why India has tended to dominate H1B visa applications. When headlines such as this one highlight how India got 84% of such visas in 2014 there are very real risks that a more protectionist administration could pose a threat to India’s heretofore comfortable access to Silicon Valley. 



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November 15 2016

Commentary by Eoin Treacy

OPEC, Russia Expand Diplomatic Push to Secure Oil-Cuts Deal

This article by Javier Blas, Angelina Rascouet and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

OPEC embarked on a final diplomatic effort to secure an oil-cuts deal, with its top official heading on a tour of member states as Russia scheduled informal talks in Doha this week with nations including Saudi Arabia.

The behind-the-scenes diplomacy follows an unannounced meeting in London between OPEC Secretary-General Mohammed Barkindo and Saudi Minister of Energy and Industry Khalid Al-Falih, said one OPEC delegate. Just two weeks before the group’s Nov. 30 ministerial meeting in Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, said another delegate. 

 

Eoin Treacy's view -

OPEC and Russia have succeeded in talking oil prices up on two separate occasions over the last few months and the announcement of this meeting would appear to be a fresh attempt to jawbone prices higher. The reality is that agreeing to cut production means each country that agrees to comply risks losing market share to those who don’t. In ordinary times securing broad agreement would be difficult but Saudi Arabia, Iran and Iraq do not have the finances to absorb such a risk right now and additionally are all prosecuting wars, which are not cheap. 



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November 14 2016

Commentary by Eoin Treacy

Email of the day on gold

Gold is soft.  It's had some savage moves in the last few days.  Is it possible this due to new currency notes in India?  India is a large market for the jewellery trade.

Thank you for all your good work.

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. When the cash business in gold was clamped down on it marked an important turning point for the jewellery retail sector Los Angeles’ once vibrant jewellery district. The removal of large denomination bank notes in India will probably have an effect on how gold is purchased but is unlikely to have an influence on the cultural important of the metal particularly around wedding season. 



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November 09 2016

Commentary by Eoin Treacy

Investment ramifications of a Trump Presidency

Eoin Treacy's view -

It was a bruising campaign but with control of all three branches of government the Republican Party now has a relatively unfettered path to introducing a broad range of policy options. The one obstacle of course is that the entrenched bureaucracy in Washington and the various unions are totally opposed to just about any change to the status quo. 

Corporate taxation and the tax code more generally could be up for debate. Securing a budget large enough to make a dent in the deferred maintenance of the USA’s infrastructure is perhaps the clearest ambition of a Trump Presidency. Protectionism is also high on the agenda and the responses of NATO and EU spokespeople to the news was a picture of unease at this new source of uncertainty. Immigration is also likely to be a major topic of conversation for this administration. 

 



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November 09 2016

Commentary by Eoin Treacy

November 08 2016

Commentary by Eoin Treacy

Voters could legalize marijuana for quarter of all Americans

This article from Reuters highlights one of the more important decisions to be taken by US voters today. Here is a section:

In California, where medical marijuana has been legal since 1996, a recent poll by the Public Policy Institute of California showed 55 percent of likely voters supported a ballot initiative that would authorize the state to tax and regulate retail cannabis sales much like it does alcoholic beverages.

That was similar to the numbers favoring legalization from opinion polls in Massachusetts and Maine. Slimmer majorities or pluralities also point to legalization in Arizona and Nevada.

Approval by California alone, America's most populous state with 39 million people, would put nearly a fifth of all Americans living in states where recreational marijuana is legal, according to U.S. Census figures. That number grows to more than 23 percent if all five state measures pass.

Backers of legalized marijuana sales have tried for decades to win support at the ballot box, with little success until the past few years, starting with victories in Colorado and Washington state in 2012.

Experts say the latest initiatives include more sophisticated regulatory mechanisms aimed at keeping cannabis away from children and banning the involvement of criminal gangs and drug cartels. Public opinion has rapidly swung toward favoring legalization.

"It's changed in the minds of these voters from being like cocaine to being like beer," said University of Southern California political scientist John Matsusaka.

 

Eoin Treacy's view -

Time and again prohibition has been demonstrated as a failed strategy. There are of course very real side effects that result from smoking cannabis and most particularly for young people. The problem for those campaigning against legalisation is proving cannabis has no health supporting effects. Millions of people have personal experience to the contrary and that has helped drive wider acceptable of the plant’s curative properties. This is especially true for ailments modern medicine is not a good fit for such as chronic pain, migraines and posttraumatic stress.



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November 08 2016

Commentary by Eoin Treacy

Copper Enters Bull Market as Declining Stocks Ease Glut Concerns

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

“We’re getting the idea that these markets are a lot tighter than many people think, particularly as China continues to do pretty well,” Bart Melek, the head of commodity strategy at TD Securities in Toronto, said in a telephone interview. “The PBOC is saying interest rates are in line with fundamentals, meaning they won’t be doing anything new and they see stability there.”

Copper for delivery in three months rose 2.7 percent to settle at $5,235.50 a metric ton in London. That marked a more- than 20 percent gain from a low in January, meeting the common definition of a bull market. The metal touched $5,250.50, the highest since October 2015.

 

Eoin Treacy's view -

Copper held a progression of lower rally highs for five years but had developed type-2 bottom characteristics since January’s mean reversion rally and is now breaking out. 



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November 07 2016

Commentary by Eoin Treacy

What drove the October ferrous rally?

Thanks to a subscriber for this report from Goldman Sachs covering the iron-ore market. Here is a section:

$/CNY was one of the most important market drivers of 2H 2015. When China weakened its currency in August 2015, it sent shockwaves around the globe with the S&P 500 index falling 10%. In the third quarter of 2016, $/CNY stayed range-bound between 6.6 and 6.7. In October, however, the depreciation resumed and $/CNY is now approaching 6.8.

The recent CNY depreciation is different from previous rounds of $/CNY moving higher. It has not generated the same international spillover effects as it did back in 2015. This implies further room for the Chinese government to weaken its currency against the US Dollar without negatively affecting global demand for its exports. On the other hand, the link between $/CNY and capital outflows remains strong. Our China Economics team estimated that FX outflows from China rose to US$78 billion in September and are likely to be even higher in October (Exhibit 7). This implies that there is an underlying desire among onshore investors to move into dollar-linked assets. Such desire may become particularly strong whenever the pace of CNY depreciation picks up. In fact, onshore commodities prices increased across the board on October 25 after the $/CNY moved higher for three consecutive days.

There are reasons why iron ore may be the first in line to benefit from onshore investment flows into commodities amidst renewed CNY depreciation. For example, the iron ore futures curve is almost always backwardated, making long iron ore a positive-carry trade. To the extent that a higher $/CNY also leads to a weaker local currency on a trade-weighted basis, iron ore may benefit from potentially higher Chinese steel exports. Additionally, rebar and iron ore are the most traded commodities in the onshore futures exchanges. Exhibit 8 shows the positive correlation between iron ore futures trading volumes and the $/CNY in recent months. By our estimates, about 60% of the iron ore price rally in October can be explained by the CNY depreciation.

Eoin Treacy's view -

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

If the correlation between the appreciation in iron-ore prices and the deprecation of the Renminbi are indeed causal rather than coincidental that could continue to be positive for commodity prices considering how much a weak currency benefits China’s economy. 



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November 04 2016

Commentary by Eoin Treacy

China Tangshan City Halts Steel Production on Smog

This article by Alfred Cang for Bloomberg may be of interest. Here is a section:

Tangshan, China’s largest steel-making city, orders mills, coking plants, cement and glass industry to halt production because of heavy air pollution, consultant Mysteel says in note Friday.

City halts production in all factories that discharge “volatile organic compounds”

City halts production of coal-fired boilers except ones used for central heating

Suspension starts 3pm local time

City also bans trucks with articulated five axles or more from 6pm. Tangshan is about 180 kilometers east of Beijing

 

Eoin Treacy's view -

It’s that time of year again when Beijing is shrouded in smog and when parents really worry whether that lung infection their only child has is ever going to get better. In winter the prevailing wind generally blows from the Northwest. While Tangshan is a major steel and heavy industry hub, it is unlikely to be the only source of pollution since it lies to the east of the city. 

The gradual rationalisation of heavily polluting, inefficient steel production is good news for the global sector because it helps to reduce the overhang of cheap supply coming from China. Clicking through the constituents of the steel section of the Chart Library there is evidence of some steadying following sharp pullbacks last year. 

 



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November 03 2016

Commentary by Eoin Treacy

The U.S. dollar is a crowded consensus

Thanks to a subscriber for this note by James Paulsen for Wells Fargo Asset Management. Here is a section:

Most anticipate a modest and relatively slow tightening by the Federal Reserve primarily because a consensus believes tightening efforts will lead to a much stronger U.S. dollar. However, we suspect a surprising decline in the U.S. dollar will exacerbate inflation anxieties and accelerate the pace of Fed tightening from what is currently anticipated.

Looking into 2017, we recommend investors position portfolios as a dollar contrarian. Crowded consensus trades are not often fruitful and frequently prove risky. If the consensus is surprised by a falling dollar, many portfolios will need to be adjusted. Surprising dollar weakness will benefit commodity prices and penalize high-quality bond investors. It would also favour international stocks, particularly emerging market equities.

Moreover, it would likely extend the leadership of small and mid-cap stocks evident so far this year. Finally, a weaker dollar would probably focus investors on the materials, industrials, technology and financials sectors within the U.S. stock market.

Eoin Treacy's view -

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

The Dollar Index has been largely rangebound since early 2015 and pulled back this week from the region of the upper side of the congestion area. With such a clear downward dynamic it is now for the bulls to prove their case by posting at least an equally impressive upward dynamic to retake the initiative as the short-term overbought condition is quickly unwound. 

 



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November 02 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 1st 2016

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report for PPHB which may be of interest. Here is a section:

It appears to us that everyone in the energy industry is fixated on whether the OPEC oil ministers meeting in Vienna, Austria on November 30th will produce an agreement to limit the group’s output, and how that production volume will be shared among the group’s 12 members. Also, it will be important to see who among the 12 OPEC members will be exempted from a monthly production quota and what those countries near-term output goals are. Lastly, we need to see some support from Russia for OPEC’s production cap to have much strength. While all these details are important to the outcome of the OPEC meeting and how the energy world reacts to whatever is agreed to, the lack of executive thinking about what happens to energy demand if the U.S. enters a recession could be the pothole everyone steps in. The duration and depth on any recession will determine how much oil demand might be lost due to weaker economic activity. We suggest you should pay attention to this hidden elephant in the OPEC meeting room. 

Eoin Treacy's view -

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

While Allen Brooks is not predicting a recession more than a few analysts have floated the idea. It’s an important consideration that would of course have a significant impact on the energy markets but also on just about every other asset class. Perhaps it would be timely to review some of the leading indicators for recessions to see where we are in the cycle. 



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November 02 2016

Commentary by Eoin Treacy

The World's $49 Trillion Infrastructure Problem May Not Get Solved Anytime Soon

This article Sid Verma may be of interest to subscribers. Here is a section:

An abundance of global savings. Trillions of dollars of negative-yielding bonds. And a bevy of institutional investors hungry for positive, long-dated yields to match their liabilities.

Conditions are ripe for an avalanche of private-sector capital to flow into unlisted infrastructure, turning an industry facing an estimated $49 trillion shortfall into an asset class which, its sponsors say, offers strong cash flows, uncorrelated returns and positive real yields.

58 percent of active investors surveyed in the second quarter of the year by data provider Preqin will invest more than $100 million in unlisted funds over the next 12 months compared to 42 percent who said that in the corresponding period last year, underscoring the increasing allure of alternative assets amid ultra-low yields from more conventional capital-market instruments.

 

Eoin Treacy's view -

It’s been a while since there was dynamism in the case for funding infrastructure spending. Part of the reason of course is that the environmental movement is highly active in demonstrating against any energy infrastructure projects, the case for new roads comes up against similar arguments while water and power suffer more than any from not in my backyard (NIMBY) arguments. Added to that has been the reluctance of governments to commit to big projects when their coffers are empty and unfunded liabilities are a constant bugbear. 



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November 02 2016

Commentary by Eoin Treacy

Aussie dollar's surge may signal good times for global economy

This article by Narayanan Somasundaram for the Sydney Morning Herald may be of interest to subscribers. Here is a section:

Goldman Sachs and the Commonwealth Bank say inflation has bottomed out, while traders are starting to speculate that policy makers are done with cutting interest rates. The world's fifth-most traded currency climbed for a third-straight day on Tuesday after the RBA left its benchmark interest rate unchanged and said consumer-price increases are likely to pick up.

Australia's economy sits astride emerging and developed markets, making the currency a favoured bellwether for worldwide growth. As the biggest iron-ore exporter and a major supplier of coal, wool, gold and liquefied natural gas, the country's fortunes are wedded to those of China.

But it's about more than just raw materials - tourism and education are also major exports - and the Aussie is the highest-yielding AAA currency. That combination helped it lead a resurgence in developed markets in 2009 as the dust settled after the GFC.

 

Eoin Treacy's view -

If inflation has indeed bottomed and there are increasing signs globally that it has then it is unlikely the RBA will cut interest rates further. The Australian Dollar has been ranging with a mild upward bias for nearly four months and firmed again today from the region of the trend mean. A sustained move below 75¢ would be required to question medium-term scope for additional upside. 



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November 01 2016

Commentary by Eoin Treacy

Email of the day on nickel

I am looking for a way of investing in Nickel. David Suggested in 2014 he sold ETF Nickel but I can't find it anywhere - LSE, FT, your library. If it has gone out of business do you have any other suggestions? The good old Canadian company Inco was bought out by Vale, of which it represents on a small part. Wonderful service. Harry Schultz told me it was. He was right.

Eoin Treacy's view -

Thank you for your kind words and we are both delighted you are enjoyed the service courtesy of a recommendation by the inimitable Harry Schultz. In fact since we do not engage in advertising most of our new business comes from word of mouth so please feel free to proselytise. 



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October 31 2016

Commentary by Eoin Treacy

China's Factory to the World Mulls the Unthinkable: Price Hikes

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

China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.

To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.

"There’s just no possibility for me to cut prices any more," says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province.

"Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit."

That push to recover lost margins -- even as demand remains muted -- was shared by exporters of everything from clocks to jacuzzis interviewed in Guangzhou last week at the Canton Fair, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.

For the world economy, decisions from companies like Jiangmen Tissue to stop cutting prices -- and even raise them where demand allows -- removes a source of disinflationary pressure. To be decided is whether China, the factory to the world, swings from becoming a drag on consumer prices to a source of pressure nudging them higher.

Eoin Treacy's view -

Chinese factories have been dealing with margin compression for years. Labour costs have been on a steady upward trajectory while commodity prices have been a mixed blessing. However right now both are increasing and despite the danger of losing their competitive edge the first signs of price hikes are emerging. This article from a couple of weeks ago highlights the first rise in China’s producer price index in nearly five years.  



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October 31 2016

Commentary by Eoin Treacy

Rio Gives Away Giant Iron Ore Field Once Worth Fighting For

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

The writing has been on the wall for a while. The company took a $1.1 billion writedown on Simandou in February. New Rio Chief Executive Officer Jean-Sebastien Jacques said in August “there is no obvious way to take Simandou to the next phase,” and the company hasn’t been able to find a way to finance it.

“It cleans another dead asset off the portfolio,” said Hillcoat, who added that the market doesn’t apply any value to the asset. “In the brave new world we’re in now, you just can’t develop these projects.”

Guinea will want the new owner, also known as Chinalco, to fare better than Rio. The country is counting on the project to double the size of its $6.5 billion economy and turn it into the third-biggest exporter of iron ore. Earlier this year, Guinea blamed project delays on the “ramblings of the technical team in London,” a reference to Rio.

The parties should finalize the deal quickly to establish a new plan for Simandou’s development, Minister of Mines and Geology Abdoulaye Magassouba said in an e-mailed statement.

“This is a very positive event for the project, but we still have many months of work and major challenges ahead,” Magassouba said.

Before the deal was signed on Friday, Simandou was 46.6 percent owned by Rio, 41.3 percent by Chinalco, and 7.5 percent by the government.

 

Eoin Treacy's view -

Investors have lamented the inability of mining executives to conduct successful M&A activity and I’ve even heard more than a few suggest CEOs should be precluded from engaging in mergers as a condition of taking the job. Simandou is another example of a boondoogle project that was initiated when prices were high and abandoned when prices are bottoming. 



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October 28 2016

Commentary by Eoin Treacy

Tocqueville Gold Strategy Third Quarter 2016 Investor Letter

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

Gold is extremely under owned in Western investment portfolios. Because supplies of above ground stocks normally available to satisfy Western investment demand have been severely depleted by flows to Asian investors, the price dynamics could be explosive.

Gold has enjoyed a stealth bull market since the advent of radical monetary policies around 2000. As the chart below shows, gold has been the best performing asset class since then, a fact that is completely unrecognized by main stream media and conventional investors. The painful correction from 2011 to year end 2015 camouflaged gold’s strength and explains why most investors remain complacent as to systemic risk, intellectually understanding the unsustainability of radical monetary policy but unmotivated to seek gold’s protection.

It seems unlikely that the long term erosion of investment confidence, the onset of a secular bear market in financial assets, and further advances in the stealth bull market for gold will take place in a linear fashion. There are bound to be shakeouts and fake outs along the way to camouflage the underlying reality that the global financial system as we know it is in extremis. We also believe that the current sharp correction in the precious metals complex is a setup for another major advance toward new highs in metal and share prices. We therefore recommend taking advantage of current weakness to build or establish new positions.

Eoin Treacy's view -

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

 I often think that the role of gold as a hedge is misunderstood. It did well in the 1970s because investors were worried about inflation and outperformed from the early 2000’s because people were worried about deflation. Therefore it is probably best to think about gold as a hedge against the best efforts of the monetary authorities to debase the currency; regardless of what that currency might be. 



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October 28 2016

Commentary by Eoin Treacy

Iron Ore Surges Amid Coal's Record Rally, Lifting Miners' Shares

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

Iron ore is rallying as coal prices surge, lifting the shares of producers in Australia, the world’s largest shipper. The benchmark spot price in China posted the biggest weekly increase since April after rising for the fourth day in five on Friday.

Ore with 62 percent content rose 1.5 percent to $63.96 a dry ton in Qingdao, the highest price since April, according to Metal Bulletin Ltd. Earlier in Asia, futures in Dalian rose for a seventh day, the longest run since 2013, as Singapore’s SGX AsiaClear most-active contract surged for a third week.

After three years of slumping prices as low-cost mine supply rose and China slowed, iron ore has surged in 2016 as Asia’s top economy boosted stimulus, supporting steel demand. Fortescue Metals Group Ltd.’s Chief Executive Officer Nev Power told reporters this week that the Perth-based company expected prices to hold firm in 2017. Recent advances in iron ore have been supported by gains in coal after a supply crunch in China.

“The price of coking coal continues to rise,” supporting iron ore, said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen. Coking coal, or metallurgical coal, has more than doubled this year, with futures in Dalian hitting a record on Wednesday. Prices rose Friday after sinking a day earlier.

 

Eoin Treacy's view -

China is now at a point in its development where pollution is costing it more money than it was making from the industries causing it. That’s an important tipping point and has been bullish for coking coal and iron-ore prices as some of the most marginal dirtiest Chinese mining operations have been forced to close. 

Iron-ore prices rallied from late last year to break a lengthy progression of lower rally highs and have been forming a first step above the base since April. A sustained move below the trend mean, currently near $56, would be required to question medium-term scope for a successful upward break. 

 



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October 27 2016

Commentary by Eoin Treacy

Swedish Krona Plunges as Riksbank Signals More Easing to Come

This article by Johan Carlstrom and Amanda Billner for Bloomberg may be of interest to subscribers. Here is a section:

Nordea’s chief analyst in Stockholm, Andreas Wallstrom, said he still expects more easing by the Riksbank, "including a rate cut” to minus 0.6 percent in December. “The government bond purchase program is forecast to be expanded by 30 billion kronor ($3.4 billion), equally distributed between government bonds and index-linked bonds,” Wallstrom said.

“The revised repo rate path delivers enough softness to keep the krona on the weak side,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. “It shows a bigger probability of a cut.”

Some analysts had predicted the Riksbank would announce more easing already on Thursday after inflation missed the bank’s forecasts by a wide margin last month. The annual inflation rate slowed to 1.2 percent in September after peaking at 1.6 percent at the start of the year.

The Riksbank also cut its inflation forecast for next year, from 1.8 percent to 1.4 percent, and for 2018, from 2.6 percent to 2.2 percent. It predicted that unemployment will average 6.7 percent next year, while economic growth will slow to 3.3 percent this year and 2 percent in 2017.

“I don’t really see the logic of making monetary policy more expansionary,” since the economy is doing well, Bergqvist said. Still, “it’s a good tactic that the Riksbank keeps the door open,” he said.

 

Eoin Treacy's view -

The video interview within the above article is quite illustrative of the complacency of central banks when married to a narrowly defined measure of inflation. Riksbank Governor Stefan Ingves quite clearly admits that a bubble is expanding in the Swedish property market and in the same breath says it is not within the remit of the central bank to do anything about it. In fact, like other central banks asset price inflation is viewed as a positive despite the fact household debt is at a record and the bubble is still inflating. 



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October 25 2016

Commentary by Eoin Treacy

Pimco Sees Legs on Brazil's Rally as the Real Hits a 2016 High

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

Pimco’s vote of confidence, albeit with a few cautionary caveats, is helping to reinvigorate investor appetite for a currency that has climbed 28 percent this year. It adds to a string of positive developments in recent weeks that has prompted traders to reassess bets that Brazil’s rally may be over, from President Michel Temer’s success in advancing a spending-cap bill to last week’s rating upgrade for the battered state-run oil giant, Petroleo Brasileiro SA. The central bank signaled Tuesday that it’ll be modest in its quest to lower borrowing costs -- the benchmark rate is 14 percent -- which also supports the real.

“A better-than-expected improvement on the fiscal outlook and the slower-than-expected pace for interest-rate cuts both strengthen Brazilian assets,” said Andres Jaime, a strategist in New York at Barclays Plc. Back in September, “we had a less optimistic outlook.”

In a note on Pimco’s website, emerging market portfolio managers Yacov Arnopolin and Lupin Rahman wrote that Brazil’s high interest rates offer a “decent cushion against potential weakness.” Borrowing dollars to lend in reais has returned 40 percent in a so-called carry trade this year, the most among major currencies.

“The country’s fixed-income assets continue to present compelling opportunities,” they wrote. “With confidence in the government returning, Brazil could be set for a comeback -- one that could restore nominal interest rates to single digits and put credit rating upgrades back on the table.”

 

Eoin Treacy's view -

In a world of close to zero interest rates and where a significant quantity of government debt has negative yields it’s hard to find 14% interest rates in an appreciating currency. Brazil still has a lot of challenges but with commodity prices rebounding and a BIDU new administration, intent of squeezing inflation out of the economy, the outlook for both the currency and asset prices remains positive.  



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October 11 2016

Commentary by Eoin Treacy

S. Africa's Gordhan to Be Charged; Rand Plunges Most Since June

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

South African Finance Minister Pravin Gordhan was summonsed to appear in court on fraud charges next month, the latest twist in a struggle with President Jacob Zuma that could cause South Africa’s credit rating to be downgraded to junk. The rand weakened against the dollar by the most in more than three months.

Gordhan Tuesday called the summons politically motivated and said “there is no case,” adding that South Africans need to ask why the prosecutors took the decision to charge him over approving a retirement package, two weeks before the delivery of the mid-term budget. He’s due to appear in court on Nov. 2. Shaun Abrahams, the head of the National Prosecuting Authority, said there had been no political interference.

“Gordhan has done an outstanding job and enjoys an extremely high degree of confidence,” said Anthony Sedgwick, co-founder of Abax Investments (Pty) Ltd. “Obviously, there is extremely deep suspicion as to what the motive behind the move is.”

 

Eoin Treacy's view -

An independent judiciary is one of the most important positive factors that we can use to determine whether standards of governance can be sustained not to mind improve. The fact South Africa’s courts now appear to be subject to political agendas is a serious retrogression and further highlights the increasingly dire consequences of single party rule without a commitment to improving governance. 



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October 07 2016

Commentary by Eoin Treacy

Blockchain: In Search of a business Case

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

A number of financial institutions and private investors have devoted significant time and financial resources to looking at ways to monetize the blockchain technology, but to date only the bitcoin payments system has achieved even modest adoption.

While a number of financial institutions believe that blockchain will evolve into a more efficient medium for transferring value or ownership of assets, in fact the elegance and simplicity of blockchain as illustrated by bitcoin may also be the most daunting obstacle to broader adoption.

Despite an enormous amount of hype and investment going back nearly a decade, blockchain remains an elegant but costly technology in search of real world relevance beyond the initial application of digital cash exchange.

 

Eoin Treacy's view -

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

Anyone with even a modicum of libertarian spirit will appreciate blockchain for dispensing with third parties by allowing peer to peer transactions on a global basis that occur outside the ability of governments to tax, or banks to charge commissions on. However the challenge faced by the technology is in delivering scale and utility to the wider financial system. It is looking increasingly likely that the original blockchain decentralised architecture may be swept away in favour of a system created exclusively to cater the needs of the global financial system. 



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October 06 2016

Commentary by Eoin Treacy

Investors Covet Gold Miners Once More in Search for Yield

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

The spread between the estimated dividend yield of companies on the S&P 500 Index and the BI Global Senior Gold Valuation Peers narrowed to 1.1 percent, from 1.61 percent in February, according to data compiled by Bloomberg. Meanwhile, both Goldman and Credit Suisse over the past two weeks have flagged prospects for higher dividends among gold-mining companies.

“Investors are hungry for yield,” and an increase in dividends may provide the catalyst for shares to move higher, Goldman analysts said in a Sept. 21 report.

And

Still, even with the cost cuts, miners’ prospects depend heavily on the outlook for gold prices, and a continued decline would hurt the companies’ balance sheets and drag valuations lower, said Dan Denbow, a portfolio manager at the $782 million USAA Precious Metals & Minerals Fund in San Antonio.

“If gold goes down, you’re going to lose more than just the dividend,” Denbow said in a phone interview. “When they’re buying gold miners, they’re thinking it’s going to go higher. That could be the only bet.”

 

Eoin Treacy's view -

Precious metals extended their decline today into an even more oversold condition but against the background of a Dollar which has been quite firm of late. Market participants are now probably waiting for a bullish catalyst in the form of a weaker Dollar or clear uptick in investment demand/safe haven buying to check the slide and pressure shorts not least as prices are still trading in the region of the trend mean. 



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October 06 2016

Commentary by Eoin Treacy

BHP Billiton: Oil a benefit not a drag

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

The world isn’t ending after all
BHP’s share price has risen 28% so far in 2016, versus a broader market that has largely stalled (ASX 200 up 3%). Although sizeable gains have already been posted, we expect we are still in the early stages of a significant upgrade cycle for the resource sector. For the majority of the year we have been at the top of consensus on BHP, on the belief that expectations had become unrealistically pessimistic on commodities/miners. This thematic of an impending ‘relief rally’ across commodities continues to play out, with oil and bulk resources (coal and iron ore) the key gainers.

Oil adds x-factor to cash flow upside
While we have already seen a significant recovery in oil prices so far in 2016, we expect there is still further upside potential. OPEC’s decision to announce an output cut of 750kbopd is important fundamentally for oil given it indicates that OPEC’s strategy to defend market share by squashing oil prices has essentially been accomplished and the cartel is returning to its traditional role of supporting oil prices as a swing producer. We expect the downturn has caused permanent damage to US shale’s ultimate potential. 

Petroleum investor briefing
BHP’s petroleum team is conducting an investor briefing in London on 5 October and Sydney on 10 October. The briefing will provide significant detail on BHP’s petroleum strategy (both conventional and onshore), which has been in a state of transition from gas to liquids. In particular, we expect a lot of focus to remain on BHP’s US onshore assets, where its cash flow performance has been pressured by depressed oil and gas prices.

Good mix of exposures to ongoing recovery
Our preference for BHP amongst our large-cap Australian resources coverage is driven primarily by the cash flow upside potential it holds from recovering volumes and commodity prices in FY17. We see the big miner as being ideally positioned to pursue growth at the low point in the cycle while supported by a strong balance sheet and the potential for additional upside in near-term cash flow. We maintain our Add recommendation with an unchanged A$25.30 price target. The key risk to our call is commodity price risk.

Eoin Treacy's view -

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

The performance of the FTSE-350 Mining Index and the S&P/ASX 300 Resources Index has been broadly similar highlighting the broad based appeal of the mining sector this year. It is also notable that the performance of the industrial metals has been considerably less volatile of late than the precious metals, which highlights the quiet different internal dynamics of the respective markets. 

 

 

 



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October 05 2016

Commentary by Eoin Treacy

Email of the day on the differences between moving average calculations

Reading your last comments on precious metals, I noticed that you are using 200-day exponential moving average. And I thought that the talk was always about simple MA, I even remember David stressing using it and not EMA a number of years ago. I looked through the charts mentioned recently; both by you and David, and they all have EMA. Can you please comment on this and explain your choice, because two measures can be quite different. For example, simple MA on the silver chart is at $17, while EMA, is at $18 where the price currently is. 

Eoin Treacy's view -

Thank you for this email which may be of interest to other subscribers. I have always favoured the exponential moving average because I believe that giving more recent data some additional weighting in the calculation is the most appropriate policy. However as you highlight there is some debate, which is unlikely to ever be resolved, between what are the best moving average calculations to use. 



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October 05 2016

Commentary by Eoin Treacy

All eyes on the spending cap

Thanks to a subscriber for this note from Deutsche Bank focusing on the Brazilian market. Here is a section:

Speaking at the Senate Economic Committee on Tuesday, BCB President Ilan Goldfajn. Goldfajn repeated several statements that had already been published in the central bank’s Inflation Report last week, reaffirming the intention of making inflation converge to the 4.5% target in 2017. Goldfajn also repeated the remarks published in the Inflation Report about the three conditions for the authorities to initiate an easing cycle (namely limited persistence of food price shock, disinflation of IPCA components, and lower uncertainty about the fiscal adjustment implementation). The Goldfajn, however, added that the BCB “does not have a pre-established timetable for monetary easing,” as the COPOM decision will depend on several factors, including inflation expectations and forecasts. This comment suggests that the BCB has not yet made a final decision to cut rates, perhaps because market inflation expectations for 2017 have not converged to the 4.1% target yet. Despite Goldfajn’s cautious remarks, we still expect the COPOM to cut the SELIC rate by 25bps at the next meeting later this month.

Eoin Treacy's view -

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

Brazil has a number of challenges facing the economy not least corruption and the low standards of governance in its state institutions which have contributed to low approval ratings for the government regardless of who is in power. Controlling inflation will be one of the key tests from an international perspective because of the impact that would have on the currency. 



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October 04 2016

Commentary by Eoin Treacy

September 30 2016

Commentary by Eoin Treacy

Extreme pollution forces China to shut down hundreds of coal, steel operations

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

The country’s state planner said that after inspecting more than 4,600 coal mines it decided to revoke safety certificates for 28 of them and shut another 286 operations for not complying with environmental and safety regulations.

The National Development and Reform Commission (NDRC) also ordered two steel firms to close permanently, 29 companies to suspend output and another 23 to reduce production, it said in the statement.

China will also set up a no-coal zone in cities around Beijing in 2017 to try reducing the capital's hazardous smog levels. As an additional measure, the government will ban factories and households in 18 districts and towns of the Hebei province from both burning coal and building new power generators powered by petroleum coke, Xinhua News Agency reported.

A study by Chinese and American researchers published last month blamed burning coal as the cause of premature death for about 366,000 people in 2013.

 

Eoin Treacy's view -

The fact that China is taking action to at least partially rationalise its coal and steel sector is good news for the global steel sector overall which has been struggling to compete with China’s massive oversupply of cheap product. 

 



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September 28 2016

Commentary by Eoin Treacy

Stunning coking coal rally wreaks havoc in steel, iron ore

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

In a new research note Adrian Lunt of the Singapore Exchange says margins for steelmakers in China, which forges almost as much steel as the rest of the world combined have come under pressure again and the tight conditions may continue:

"The recent spike in coking coal prices has sent spot steelmaker margins plummeting back to around their lows last seen in Q4 2015. And unless coking coal prices reverse course soon, this is likely to weigh on steelmaker earnings through the course of Q4 2016, particularly as restocking needs have provided some support to iron ore prices

"With Chinese steel output remaining strong and demand sentiment relatively robust (with continued support from both real estate and infrastructure in particular), steelmaker margin pressures appear likely to persist over the coming months."

While the price of iron ore has also recovered this year – up 31.5% year to date holding above $55 a tonne on Monday – the iron ore/coking coal ratio is now at its lowest level this century according the SGX calculations.

 

Eoin Treacy's view -

Coking coal prices have been rallying all year but the recent surge is a clear acceleration of that trend and suggests there is at least a near-term supply deficit. Many investors have been switched off from investing in coal because of tighter environmental regulations but there is no getting around the fact that coking coal is essential in producing steel at a competitive price and is very different market from steaming coal.   



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September 27 2016

Commentary by Eoin Treacy

Denver Gold Forum Highlights Trends Reinforce Focus on 'Walk Before Run' Strategies

Thanks to a subscriber for this report from National Bank focusing on gold miners. Here is a section:

Exploration budgets getting a lift. With balance sheets in better shape from non-core asset sales, higher metal prices, and, in cases, financings, senior and junior companies alike are ramping up exploration budgets and project evaluation programs. 

For the juniors and intermediates this could generate discoveries of a size that is material to production. Recent exploration and project examples include Newmarket Gold (Fosterville), OceanaGold (Macraes, Waihi, Haile), Richmont (Island Deep), Alamos (La Yaqui) and Alacer Gold (Gediktepe).

For seniors, exploration spending remains disproportionately focused on near-mine and Brownfield targets (Figure 2) as they look to add and upgrade ounces proximal to existing mine infrastructure. This focus also seems appropriate in the context of recent trends that show a declining discovery rate despite higher-than-average exploration Page 2 expenditures. For example, from 2006 to 2015 some US$54 bln was earmarked for discovery-oriented exploration budgets (69% of total spending from 1990 to 2015), yet gold in major discoveries dropped every year except in 2015. Refer to Figure 3. Thus, in our view, it is unlikely that the recent uptick in exploration spending will generate a different result, specifically new discoveries of a size that can thwart the outlook for production declines. Recognizing that the odds are stacked against them, we view as prudent senior company’s focus on near-mine and Brownfields exploration.

Benign cost pressures bode well for continuing balance sheet improvements and FCF – conditions that appear to buoy the interest of generalist investors. With currency one of the principal drivers of cash cost trends and FX rates in key mining jurisdictions still generally weak vis-à-vis 2014 and 2015 levels, the backdrop remains constructive for lower costs year-on-year (Figure 4). With that, we expect operating margins to remain robust and be of a magnitude sufficient to maintain investor interest in gold equities. In fact, in speaking with several generalist investors, arguably, this was one of the main takeaway from the DGF.

 

Eoin Treacy's view -

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

Mines are depleting assets by definition so management teams have to make tactical decisions about when to spend, what is often significant capital, on increasing their potential supply options. After a generational long bear market the gold mining sector had been unable to address their declining mine life problem so when gold prices began to pick up they poured every available cent into increasing supply. That resulted in their shares underperforming the gold price and represented a serious headwind for the sector when gold prices rolled over. 



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September 22 2016

Commentary by Eoin Treacy

Email of the day on the Dollar Index

Do you think the Fed announcement will change the trajectory for the USD (DXY) heading into year end? and in turn potential provide some strength to the commodities?

Eoin Treacy's view -

Thank you for this question which may also be of interest to other subscribers. The Fed’s announcement that the economic activity is moderating suggests that the interest rate differential between the US Dollar and other major currencies like the Euro is unlikely to expand rapidly. That would suggest the rangey environment overall for the Dollar Index may continue a while longer, subject to what happens in Europe and Japan. 



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September 22 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 21 2016

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 21 2016

Commentary by Eoin Treacy

September 20 2016

Commentary by Eoin Treacy

Performance and valuations of junior gold companies

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

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

Eoin Treacy's view -

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

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



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September 16 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 14 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 14 2016

Commentary by Eoin Treacy

September 13 2016

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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September 09 2016

Commentary by Eoin Treacy

Gold Investors Brace for Lower Prices on Interest-Rate Outlook

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 08 2016

Commentary by Eoin Treacy

GW Pharmaceuticals Jumps on Report It May Be Acquisition Target

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 07 2016

Commentary by Eoin Treacy

September 02 2016

Commentary by Eoin Treacy

Solid Hiring Without Wage Jump Tests Fed Hopes for Inflation

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 02 2016

Commentary by Eoin Treacy

August 30 2016

Commentary by Eoin Treacy

The Frozen Concentrated Orange-Juice Market Has Virtually Disappeared

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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August 25 2016

Commentary by Eoin Treacy

August 16 2016

Commentary by Eoin Treacy

Gas Glut Upends Global Trade Flows as Buyers Find Leverage

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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August 16 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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August 10 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 9th 2016

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

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

And

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

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

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

Eoin Treacy's view -

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

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



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August 10 2016

Commentary by Eoin Treacy

Palladium at Year High, Driving Precious Metals on Chinese Cars

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

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

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

 

Eoin Treacy's view -

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



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August 10 2016

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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August 09 2016

Commentary by Eoin Treacy

Email of the day- on financial repression

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

Eoin Treacy's view -

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



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August 08 2016

Commentary by Eoin Treacy

The surplus cash will go to shareholders

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

Eoin Treacy's view -

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



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August 04 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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August 04 2016

Commentary by Eoin Treacy

August 02 2016

Commentary by Eoin Treacy

Email of the day on gold share benchmarks

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

Eoin Treacy's view -

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

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

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

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

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

 



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July 29 2016

Commentary by Eoin Treacy

Platinum takes limelight from gold with best month in four years

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 28 2016

Commentary by Eoin Treacy

3 Trends in Wastewater Treatment

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

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

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

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

Eoin Treacy's view -

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



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July 26 2016

Commentary by Eoin Treacy

Gold miners back in the game

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

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

Challenging global economic growth;

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

Lingering uncertainty in the Eurozone since the Brexit vote;

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

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

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

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

Eoin Treacy's view -

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

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



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July 21 2016

Commentary by Eoin Treacy

Komatsu Signals Mining Optimism in $2.9 Billion Joy Takeover

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 20 2016

Commentary by Eoin Treacy

July 13 2016

Commentary by Eoin Treacy

Jeffrey Gundlach on Stocks, Trump, and Gold

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

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

Such as? 

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

That doesn’t make for a very exciting portfolio. 

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

Eoin Treacy's view -

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



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July 11 2016

Commentary by Eoin Treacy

South Africa girding for another platinum strike

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

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

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

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

 

Eoin Treacy's view -

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



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July 08 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 06 2016

Commentary by Eoin Treacy

UK listed gold miners

Eoin Treacy's view -

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

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

 



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July 05 2016

Commentary by Eoin Treacy

What Really Drives White Metals Prices

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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June 30 2016

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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



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June 24 2016

Commentary by Eoin Treacy

Apres le vote, le deluge

Eoin Treacy's view -

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

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

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

 



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June 23 2016

Commentary by Eoin Treacy

June 21 2016

Commentary by Eoin Treacy

RBA Sees Positive Economic Data Outweighing CPI for Now

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

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

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

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

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

Eoin Treacy's view -

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



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June 14 2016

Commentary by Eoin Treacy

June 10 2016

Commentary by Eoin Treacy

A Guide to Helicopter Money

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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June 09 2016

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 08 2016

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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

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



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June 08 2016

Commentary by Eoin Treacy

Unconventional future: man vs. machine

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

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

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

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

 

Eoin Treacy's view -

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

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



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June 03 2016

Commentary by Eoin Treacy

June 03 2016

Commentary by Eoin Treacy

Email of the day on corn

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

Eoin Treacy's view -

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



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June 02 2016

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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May 26 2016

Commentary by Eoin Treacy

Miner Sees Silver Price Surging Ninefold as Global Gadgets Boom

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 18 2016

Commentary by Eoin Treacy

Death of the Gold Market

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

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

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

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

Eoin Treacy's view -

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

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



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May 17 2016

Commentary by Eoin Treacy

El Nino-Hit Brazil Doubles Cocoa Imports as Harvest Tumbles

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

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

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

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

 

Eoin Treacy's view -

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



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May 16 2016

Commentary by Eoin Treacy

California is poised to become the center of cannabis culture

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 13 2016

Commentary by Eoin Treacy

Email of the day on intermarket correlations

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

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

 

Eoin Treacy's view -

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



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May 11 2016

Commentary by Eoin Treacy

Email of the day on Chinese commodity trading

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

Eoin Treacy's view -

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



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May 11 2016

Commentary by Eoin Treacy

Crop Prices Rally as Report Points to Easing of Glut

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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May 09 2016

Commentary by Eoin Treacy

Lithium 101

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

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

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

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

 

Eoin Treacy's view -

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

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



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May 09 2016

Commentary by Eoin Treacy

Dollar Extends Best Streak Since March on Fed Speculation, China

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 05 2016

Commentary by Eoin Treacy

The Value of Gold

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

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

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

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

 

Eoin Treacy's view -

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

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



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

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

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

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

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

 

Eoin Treacy's view -

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



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April 27 2016

Commentary by Eoin Treacy

Email of the day on inflation expectations and rates

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

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

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

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

 

 

Eoin Treacy's view -

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



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April 21 2016

Commentary by Eoin Treacy

As prices surge, Vale joins iron ore production guidance cuts

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

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

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

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

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

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

Eoin Treacy's view -

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



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April 20 2016

Commentary by Eoin Treacy

Mining the balance sheets

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

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

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

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

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

Eoin Treacy's view -

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



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April 19 2016

Commentary by Eoin Treacy

Australia's Stevens Posits Whether Policy Has Reached Its Limits

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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April 15 2016

Commentary by Eoin Treacy

Brazil Is Throwing a Big Impeachment Party

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

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

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

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

 

Eoin Treacy's view -

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



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April 15 2016

Commentary by Eoin Treacy

Has Dr Copper gone on sabbatical?

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

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

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

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

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

Eoin Treacy's view -

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

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



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April 15 2016

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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