Gold Report 2012: Erste's Comprehensive Summary Of The Gold Space And Where The Yellow Metal Is GoingSubmitted by Tyler Durden on 07/11/2012 11:21 -0500
Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report: "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."
We believe that we are in the early stages of what will happen with LIBOR. As we wrote yesterday, we believe there are two distinct phases the pre-crisis phase which saw potential manipulation of small amounts in both directions, and the crisis phase where LIBOR was allegedly much lower than the rate at which banks would realistically lend to each other. Much of this is supported by the FSA case against Barclays. If lawsuits start, banks have a few hopes, including "The 'central bank' made me do it" but banks will have to do everything they can to prevent being sued by 3rd parties. If they cannot prevent that, this could get very ugly in a hurry for some banks.
A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact. It will then – belatedly - become accepted wisdom among 'experts.' Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.” Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
- EU talks up Spanish banks package, markets skeptical (Reuters)
- China’s Import Growth Misses Estimates For June (Bloomberg)
- The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
- Draghi pledges further action if needed (FT)
- JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
- Norway's Statoil to restart production after govt stops strike (Reuters)
- Top Fed officials set table for more easing (Reuters)
- Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
- Obama Intensifies Tax Fight (WSJ)
- Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
- Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
- Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)
The sole driver of risk in the past 3 years has been nothing but continued pumping of liquidity into markets by central banks: aka the Global Central Bank Put. How does this look visually? The below summary charts showing global balance sheet expansions should blow everyone's minds.
European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.
Central Banks came, stood and delivered… just not much more, although the (nightly) POBC cut (1 YRS by 31 to 6% and deposits by 25bp to 3%) had not really been foreseen. Second Chinese cut in as many month, the last one having been on 07 Jun (as well just ahead of the ECB meeting, then by 25 basis points to 3.25% and 6.31%). The Chinese move was good for a small uptick, rapidly squashed by the European serving.
ECB quarter cut and BoE GBP 50bn additional QE to GBP 375bn both already in the valuation ramp-out of late.
Then came the ECB press conference…
With the US closed, the afternoon simply dragged on with a light ROff feeling as the Periphery drifted slowly wider, France on stand-still and the Core squeezed tighter. Credit weaker with Financials giving back yesterday’s gains and more. Sudden change of mind in equities, paring morning losses loss ahead of tomorrow in very low volume.
Nothing strong, nor concrete, nor very firm, but Core EZ unease with the ESM discussions of last week, as seen by the South, is just seeping through. Opposition parties, Central Bankers, junior government partners, constitutional issues in the Northern part all seem via titbits and comments ready to sand in some of the discussions or to delay the processes. Give it another 2 weeks and everyone will have gone on holiday (despite the ECOFIN claiming to remain on stand-by).
Closing in unconvinced ROff mode and treading water ahead of tomorrow’s Spanish auction, ECB / BOE meetings and US claims numbers. EUR ticking down to low 25s Yet another not especially inspirational day to write about. Libor-gate turning into mudslinging contest, with possible further fall-outs on the industry.
Negative interest rates continue to penalise pensioners and savers in European countries and this will lead to further diversification into gold. Financial markets are already starting to wonder about the solidity of last week's summit measures to tackle the euro zone crisis and soon they may question whether even looser monetary policies will help prevent recessions and sovereign defaults. With Independence Day today (Happy July 4th to all our American followers, clients and friends), the ECB decision tomorrow and NFP on Friday, trading should be quite today but as we know illiquid markets can lead to outsized market moves. We tend to try and avoid predictions in GoldCore as the future is largely unknowable and there are so many variables that drive market action that it is nigh impossible to predict the future price of any asset class. However, our opinion has long been that over the long term all fiat currencies will depreciate and devalue against the finite currency that is gold. For this reason we have long held that gold would reach its inflation adjusted high of $2,400/oz and silver its inflation adjusted high at $140/oz and the equivalent in euros, pounds and other fiat currencies. Gold at just over $1,600/oz today remains 33% below its record nominal high in 1980. Silver at just over $28/oz today remains 80% below its record nominal high in 1980. However, we have tended to focus on the important diversification, store of value and safe haven benefits of owning physical gold (and silver) bullion.
Fundamentals (inflation expectations, longer-term savings and investment objectives) should be driving current demand for gold coins. And, this is exactly what we are seeing. In June 2012, the US Mint sold 54,500oz of coinage gold, up on 53,000 in May 2012. Total for H1 2012, US Mint sales of gold coins in terms of total weight sold are down 41.3% on H1 2011 and it is down 49.8% on H1 2010 and 50.3% on H1 2009. Dramatic? Sure, when one disregards consideration of drivers for 2009-2011 demand for coins being coincident with extreme risks in other markets. Total H1 2012 demand was at 338,000oz still well ahead of H1 average demand for 2000-2007 period when it was 165,679oz, but down on 531,750oz average for H1 2008-2011 crisis period. Exactly the same picture - return to fundamentals - is seen in the number of coins sold. Consistent with still robust demand drivers, H1 2012 average coin sold contained 0.60 oz, while H1 2000-2007 period average was 0.51oz and H1 2008-2011 period average was 0.76oz.
After two days of solid gains, European equities continue the upward trend and are seen higher at the North American crossover, with the Basic Materials sector leading the way, followed by financials. The moves in equities follow overnight reports from Chinese press, once again calling for the PBOC to slash their RRR, as well as expectations that this Thursday both the ECB and the BoE will conduct monetary easing, possibly boosting future commodity demand. In the fixed income markets, the European 2s/30s curve continues to see bear-steepening following last night’s announcement from the Dutch Central Bank that has changed Dutch insurers’ Solvency II interest rate curve; modifying the maturities in which the firms must hold assets towards the longer-end. Today also saw official confirmation from the Irish debt agency that they are to return to capital markets with T-bill issuance on July 5th, their first return to the market since 2010. Investor reaction to this news is evident in the shorter-end of the Irish yield curve, where the 2-yr bond yield spread against their German counterpart is firmly indicating the risk of returning to the market; currently wider by around 20bps.
Earlier we noted that while the rhetoric on a European debacle is particularly negative, it appears positioning for it is actually considerably less bearish in FX markets. From a credit perspective, based on Citi's investor survey, it appears we have a similar picture of breathless anticipation and front-running of some central-planning solution to save the day. As they note, almost all respondents expected spreads, even in USD credit, to widen notably in the event of Spanish and Italian bond yields continuing to crack higher; and yet there was relatively little change in investors' overall net long position - and in USD credit it actually increased. One piece of reality is in European banks where real-money remains notably underweighted, and while leveraged money (hedgies) remains overweight, they have reduced their exposure somewhat recently. Leveraged accounts have reduced their short positions recently in peripheral Europe while real-money accounts are still avoiding it like the plague. The point being that fast money is certainly not going to be the ammo for a short-squeeze in European credit (or FX) that everyone appears to believe it to be.
There are now reports that the Reserve Bank of India (RBI) is likely to clamp down on gold bullion coin sales by banks as the rising bullion imports are adding pressure to the current account deficit and weakening the rupee.
Western central banks and mints will not be clamping down on gold bullion coin sales in the near future as demand for gold and silver bullion coins fell in Q1 2012.
European equities are seen modestly higher at the midpoint of the European session, with the utilities and financials sectors leading the way higher. As such, the Bund is seen lower by around 40 ticks at the North American crossover. The closely-watched Spanish 10-yr government bond yield is seen lower on the day, trading at 6.85% last, as such, the spread between the peripheral 10-yr yields and their German counterpart has been seen tighter throughout the European morning. Issuance of 6-month bills from the Italian treasury passed by smoothly, selling EUR 9bln with a higher yield, but not an increase comparable with yesterday’s auction from the Spanish treasury. The decent selling from Italy today may pave the way for tomorrow’s issuance of 5- and 10-year bonds, which will be closely watched across the asset classes. Data of note has come from Germany, with the state CPIs coming in slightly higher than the previous readings, proving supportive for the expectation of national CPI to come in flat at 0.0% over the last month.