Oct 31

King Dollar in a Bull Market

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But change your goggles and hey! Commodities in AUD not too bad…!
 

BORING as it sounds, I want to talk a bit about the end of US QE today, writes Greg Canavan in The Daily Reckoning Australia.
 
Because it’s very important to how markets are going to behave over the next few months.
 
As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.
 
On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.
 
And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.
 
But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.
 
Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.
 
That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.
 
This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.
 
It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.
 
Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.
 
Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.
 
All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.
 
The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.
 
But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.
 
 
The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.
 
Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.
 
You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…
 
That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.
 
You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.
 
Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.
 
It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.
 
That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.
 
That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.
 
This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.
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Feb 12

Turkey’s Gold Imports Blamed for Record Trade Deficit

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Gold imports “account for much of” yawning trade deficit as Lira sinks…
 

GOLD IMPORTS to Turkey rose some 150% in 2013 to more than 300 tonnes, confirming its place as the world’s fourth-largest consumer market but sparking claims that the country’s affinity for gold is denting its economy, by worsening the trade deficit.
 
With the Lira sinking to record lows against the US Dollar, the head of Turkey’s central bank stated last month that exchange controls are not being discussed.
 
But in comments reminiscent of India shortly before its central bank started hiking gold import duty – and then imposed strict rules which effectively shut off flows to the world’s No.1 consumer market in 2013 – “Turkey’s gold imports last year boomed by 150% to reach a record level,” says the Hürriyet Daily News, “accounting for a considerable portion of the deficit.”
 
With international gold prices slumping 30% in 2013, “It looks like the sharp rise in imports caused the foreign trade deficit data which came remarkably overexpectations,” the newspaper quotes senior investment strategist Ali Çakıroğlu at HSBC bank.
 
Turkey’s so-called “gold for oil” trade with Iran, enabling its neighbor to raise foreign currency by side-stepping US-led sanctions over its nuclear development program, continued in 2013.
 
“Turkey’s government has [also] attempted to persuade its citizens into storing their vast gold holdings in the nation’s banking system,” adds an Anadolu Agency article.
 
Gold reserves quadrupled at the Central Bank of the Republic of Turkey in the two years starting autumn 2011, when it invited commercial banks to hold a portion of their required reserves in the form of gold deposits – gold typically deposited with them by their own clients in return for a rate of interest.
 
Referring to Turkey’s estimated 5,000 tonnes of private jewelry, bar and gold coin holdings as being “out of the banking system,” the Anadolu news agency adds that “If only 20% of this “investment” was added back into the economy, it would amount to a financial resource of about $36 billion.”
 
So far in 2014, gold bullion imports to Turkey fell over 80% in January from December, latest data show, dropping by almost one-half from the same month last year.
 
Because “among the major gold consuming emerging markets,” notes London-based consultancy Metals Focus, “Turkey is the only one where currency effects sufficiently offset [end-2013’s] weakness in Dollar gold” to push prices higher.
 
“Lira depreciation has made gold more expensive,” Reuters quotes Mehmet Ali Yildirimturk, head of Istanbul’s Chamber of Jewelers. “The Fed’s steps have caused world gold prices to rise. These have all negatively affected gold demand.”
 
Furthermore, says Metals Focus, new credit-card rules starting 1st February may also have crimped gold demand in Turkey. Because “in an effort to reduce debt and help cool the economy, consumers will no longer be able to part-pay for goods.”
 
The consultancy’s Turkish contacts suggest part-payment could account for some 20-30% of gold jewelry retail sales.
 
The Lira has so far stabilized in February, rallying more than 6% vs. the Dollar and outpacing this month’s rise in world gold prices.
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May 12

Gold Bull Peter Schiff On CNBC

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Peter Schiff put’s gold in perspective amid the current European crisis.

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Mar 18

Gold Group’s John March On Physical Gold

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Gold Group’s John March lays out the chances of hyperinflation and that physical gold is a good way to protect against it. He predicts $1,500 – $1,600 gold by year end.

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Mar 18

Wouldn’t This Be Nice Or Not?

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What if the purchasing power of the dollar falls dramatically? What if the relationship between gold and the USD re-calibrates to the ratio of 1980? Here is an interesting video that looks at this in detail. It’s actually quite scary but the points are well argued.

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Feb 27

Will There be a Flight to Gold if the Economy Gets Worse?

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Jim Rogers gives his thoughts on what is likely to happen by the end of 2010/start of 2011. It’s quite interesting and some great points are made. This indicates that commodities and gold could be a safe place to be if global currencies collapse.

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Jan 19

More Commentators Predicting $5,000 Gold

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How high can gold go? Most believe this depends on the effect of inflation. However, we are not likely to see this for at least another 2-3 years. There is no denying that the super low interest rates set by the Federal Reserve, European Central Bank and the Bank of England has dramatically increased the money supply. When you consider the extended period for which these low interest rates have been held, inflation seems a certainty. These central banks need to put the brakes on quick.

Also, central banks worldwide are becoming net buyers of gold as opposed to net sellers. This has put upward pressure on the gold price. Look, globally $12 trillion in stimulus has been created. Most of this is yet to be spent. When it is we are likely to see inflation in most areas. The case for $5,000 gold is looked at in detail in this excellent article on commodityonline.com.

It seems that the fundamentals indicate a bright future for gold.

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