Saturday, May 10, 2014

The Good, the Bad and the Opportunity

1000 frank holmes
Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors writes:

With so many headlines, it can be tough to sort through the market news.

The press is demanding the attention of investors more than ever. Whether it was last week’s jobs report or this week’s testimony from Janet Yellen, sorting through the market noise is no easy task. Since the world is so interconnected from Facebook to WhatsApp, a spark of news can ignite unfounded fear in an instant. What’s truly significant when it comes to your investments?

Twice a day, in the morning and at lunch, our investment team sits down together to discuss what’s important and what’s immaterial. This past week, in my opinion, the good outweighed the bad. Much of the economic news was a direct result of government policies, both fiscal and monetary. Here are my findings, which I hope will help you filter through the noise.

Government Policies are a Precursor for Change

What are the challenges?
1. As you probably know by now, the Global Purchasing Managers’ Index (PMI) is one of the key metrics we pay attention to as a gauge of the global economy’s strength. In April, the Global PMI fell from 52.1 to 52.0, and though the drop was small, investors who previously were encouraged by a synchronized growth cycle, lost some confidence. Japan’s services and manufacturing PMI readings dropped precipitously. The services PMI plunged to 46.4 in April and the manufacturing PMI fell to 49.4. Both numbers were above the 50 mark in the previous month.

A Setback From Japan's Prime Minister's Abenomics

The reason for Japan’s slump lies in the consumption tax rate hike, from 5 percent to 8 percent, imposed on the country on April 1. The tax increase was aimed at decreasing the country’s huge public debt, nearly 245 percent of GDP. Just when Japan was finding its economic foothold for recovery, the restrictive fiscal policy caused economic activity to stumble.

Why it matters: The reason for the fall in Global PMI is directly related to Japan’s fall in PMI. Japan has become a drag on global growth. It’s important to recognize the root cause – increased taxes just as monetary stimulus measures were seeing results. This is not good for economic growth and should serve as a cautionary tale for other countries.

Is Japan's Composite Purchasing Managers' Index Dragging Down Global Growth?
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2. Another challenging area of the market is China. China’s manufacturing PMI came in lower at 48.1 in April, contracting for the fourth month in a row, and the country also saw a decline of 0.3 percent in its consumer price index (CPI). Employment in the Asian nation is also at a seven-month low, adding growth concerns for the country.

Why it matters: This negative data means there is potential for fiscal policy easing, allowing China to boost the economy in the coming months.

Focus on the strong points.
1. The rate of change of global industrial production (IP) was slowing until the close of 2013. Now, however, the global growth outlook is improving. You can see that an inflection point was hit in mid-2013, reaccelerating IP and coinciding with the global GDP outlook for 2014.

Global Industrial Production is Rising
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Europe is also doing well. The eurozone composite PMI, a good indication of growth, rose to 54.0 in April. In addition, Spain and the U.K. saw increases in GDP in the first quarter and Spanish banks are seeing a decline in bad debts.

Eurozone Composite PMI Sees a Boost
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Why it matters: When global IP moves up, this is a sign that momentum in the global economy has changed – for the better. This is good for commodities such as oil, gas and copper, but also for cyclical areas like energy and industrials. There is no doubt that people in every country want upward mobility for their families, and as the demand for better education, cars, etc. continues, commodities and cyclicals should benefit.

As wages begin to rise, workers have more money to spend, boosting the economy.

2. In a recent report, ISI also highlights that minimum wages are going up in the U.S., citing examples of multi-year wage increases for those who had not received pay increases for the last several years. Various groups who received no increase before will now see a 4 percent rise per year, a leading indicator of wage growth trends. Consumer net worth is also expected to rise by $7.1 trillion in the second quarter, taking it to $82.5 trillion.

Why it matters: Real incomes are expected to rise as wage increases outpace inflation. With the uptick in consumer net worth and steady job growth, consumers will feel more comfortable spending.

3. Bank loans have seen an increase of 10.4 percent annualized over the last 14 weeks. As you can see in the chart below, the number of loans continues to increase. According to the Wall Street Journal, one area where bank lending has accelerated is to commercial businesses.

U.S. Bank Loans Continue to Increase in 2014
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Why it matters: This positive trend is a potential inflection point for the economy because it indicates economic acceleration. Not only are banks making it easier to borrow by relaxing lending standards, companies are confident enough about the economy to want more money to grow and invest. The WSJ goes on to say that earnings in April from the six largest banks in the U.S. pointed to an increase in commercial loans of 8.3 percent in the first quarter from last year.

Economic data around the globe continues to remain supportive. Even among challenges, there are opportunities to be found. For example, yesterday we heard that the European Central Bank is likely to ease interest rates in June. This could be another catalyst for Europe, which is already showing improving economic activity.

Keep Calm and Invest On

Similarly, China’s inflation is at an 18-month low as of yesterday, which could increase the odds of a policy response, a positive stimulus for the economy. Japan is dealing with the same thing; the country committed to Abenomics and will likely respond with additional policy support to get back on the recovery track. Don’t let negative news overshadow good news and keep in mind that bad news tells you where the opportunities are.

I am excited to be speaking on Monday at the Metals and Minerals Investment Conference in New York, and I will also be launching another episode of Gold Game Film with Kitco News that day. If you have the opportunity to view either of these, I encourage you to do so. Happy Investing!

Gold Market

For the week, spot gold closed at $1,289.10, down $10.52 per ounce, or 0.81 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 2.37 percent. The U.S. Trade-Weighted Dollar Index rose 0.43 percent for the week.

May 8 Bank of England Bank Rate 0.5% 0.5% 0.5%
May 8 ECB Rate Announcement 0.25% 0.25% 0.25%
May 9 Japan Leading Index CI 106.7 106.5 108.7
May 9 China Consumer Price Index 2.1% 1.8% 2.4%
May 9 - 15 China Money Supply M2 12.2% - 12.1%
May 14 Japan GDP 1Q Preliminary 4.2% - 0.7%
May 14 Germany Consumer Price Index 1.3% - 1.3%
May 15 U.S. Consumer Price Index 2.0% - 1.5%


  • The People’s Bank of China has approved the bourse to set up an international board in the Shanghai free-trade zone, thus allowing foreign institutions and individuals to trade gold on the exchange. The measure is expected to make it easier to bring gold into the country, where strong physical demand remains robust, as evidenced by gold consumption in China increasing slightly from last year. However, jewelry purchases rose 30.2 percent over the same period, highlighting the importance of what we call the “love trade,” which represents nearly 80 percent of all Chinese demand for gold.
  • Global open interest for palladium is up 401 thousand ounces year to date, or 18.4 percent, leading to a spike in palladium ETF holdings to an all-time high. This is particularly significant, since the market is set to record a major deficit this year, which has sent prices up 16 percent from the lows in early February to new 32-month highs above $800 per ounce. In addition, Impala Platinum announced it may reduce its PGM supply by 60 percent over the next three months as it remains unclear how long the platinum strike might last.

Palladium ETF Holdings Spike to New All-Time High
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  • Mandalay Resources reported higher first-quarter production and lower costs, reflecting the rapid scaling up of the mines. The company also reported planned expansions at both mines are on time and on budget, and declared a quarterly dividend. Roxgold encountered high grade mineralization as part of its ongoing drilling program at Bagassi South in Burkina Faso, with intercepts as high as 226.76 gram per tonne gold over 3.1 meters. Trevali Mining reported newly discovered mineralization approximately 450 meters below the currently defined resource at the Caribou project in New Brunswick.


  • UBS recommends selling gold on any price rallies, arguing bullion lacks the incentives to push higher, and more importantly, to maintain its “elevated perch.” The bank’s analysts added that recent gains were aided by “nervous shorts.” Similarly, Goldman Sachs argues gold’s recent gains are a result of transient factors, implying prices are expected to grind down from here.
  • Gold prices slid this week as signs of an improving global economy reduced the appeal of haven assets, according to a Bloomberg report. The U.S. trade deficit narrowed in March, with exports growing the most in nine months, while the Purchasers Managers’ Index for the eurozone climbed to 53.1 in April from 52.2 the previous month.
  • Dick Poon, general manager at Heraeus Metals in Hong Kong, expects China’s gold demand to be muted in the coming months, thus keeping prices at current levels. In Poon’s view, 2013 was an exceptional year, evidenced by large physical delivery premiums, which have subsided in 2014. Poon argues the level of buying last year will not be repeated as consumers bought forward in 2013 after the price drop.


  • The downturn in gold exploration will hit future gold production. Michael Chender of Chender’s Metals Economics Group, one of the foremost researchers into mineral exploration trends, has presented gold exploration statistics that are likely to impact gold supply going forward. According to Chender, not only have exploration expenditures declined 33 percent year-over-year, but exploration activity by juniors was hit harder as funding dried up. Overall, Chender expects exploration spending to drop an additional 20 percent this year, with most of the decline coming from cuts to grassroots exploration.
  • Kevin Kerr, editor of, is of the opinion that a downside in gold bullion is very limited, and not taking a long position at this stage is “somewhat foolish.” It would appear that Dundee Capital Markets’ chief economist Martin Murenbeeld agrees. According to Murenbeeld, one of the more prescient gold forecasters, gold is likely to end 2014 at $1,367 per ounce, before climbing to $1,438 in 2015.
  • De Beers, the largest diamond supplier, has announced its plans to raise diamond prices 5 percent per annum until 2016, as it projects a return on capital of 15 percent for its operations. On a related note, Lucara Diamonds reported first-quarter results, beating analysts’ profitability expectations, and closing the quarter with a large net cash position of $56.8 million. In addition, the company announced its maiden semi-annual dividend.


  • Gold traders are the most bearish in seven weeks as we head into next week, with the majority of them citing the developments in Ukraine and the continued cuts in U.S. stimulus as reasons to hold or sell bullion. Similarly, speculators have argued mounting confidence in the U.S. economy as a reason to lighten their long gold bets.
  • Randgold CEO Mark Bristow has criticized the proposed mine code change in the Democratic Republic of the Congo (DRC) as it may curb investment. The proposed changes seek to raise taxes and royalties from miners, cut exemptions and institute a windfall-profit tax. Miners in the country stated they could consider a tax increase as long as the country provides them with reliable power to run their operations. The DRC is currently in an electricity-rationing program amid a power shortage that is unlikely to be reversed in the short term.
  • The Office of the Inspector General announced it will commence a preliminary investigation to determine whether the U.S. Environmental Protection Agency (EPA) violated laws, regulations, policies and procedures in its assessment of mining impacts in Alaska. A pre-emptive veto by the EPA against the Bristol Bay Watershed has raised serious questions over its independence. Previous, numerous controversies have surrounded the EPA, especially those where green group lawsuits against the EPA have resulted in changes to regulations. This strategy has been criticized as a go-around process to circumvent the legislative process and enact regulations that would have otherwise failed in congress.

May 9, 2014 (Source: U. S. Global Investors)


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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