Thursday 18th December 2014
NEWS TICKER: WEDNESDAY, DECEMBER 16TH 2014: GEA Group Aktiengesellschaft is one of the largest suppliers for the food processing industry, following the sale of the Heat Exchangers Segment at the end of October this year, Klaus Hunger, chairman of the General Works Council of the former GEA Heat Exchangers Segment, has announced his retirement from the GEA Group Supervisory Board. By order of the local court of Düsseldorf, Brigitte Krönchen, deputy chair of the GEA Farm Technologies Works Council, was appointed to the as the new employee representative. - On a seasonally adjusted basis, the US Consumer Price Index for All Urban Consumers declined 0.3% in November after being unchanged in October, according to the Bureau of Labor. The index for all items less food and energy increased 0.1% last month after rising 0.2%in October - Methorios Capital, an Italian based independent financial services company, has listed on the Alternext market in Paris, with the direct listing of the existing 133,436,181 shares. The admission price of Methorios Capital shares was set at €0.63 per share. Market capitalisation was €84.1mon on its debut. Fabio Palumbo, Chairman of Methorios Capital, says “This listing allows the company to increase its international visibility, the share liquidity and guarantee new capital raising opportunities to finance its growth.” - Nasdaq today announced that LifeSci Index Partners, LLC, will list two new exchange-traded funds, the BioSharesTM Biotechnology Clinical Trials Fund (Symbol: BBC) and the BioSharesTM Biotechnology Products Fund (Symbol: BBP), on The Nasdaq Stock Market. BBC and BBP will begin trading today. "The landscape of the biotechnology sector has experienced dramatic shifts since the initial public offerings of Cetus and Genentech in the early 1980s," says Paul Yook, co-founder of LifeSci Index Partners. "Our BioShares funds are designed with the current biotechnology market in mind and offer investors unique and diversified portfolios of entrepreneurial biotechnology stocks by applying our rules-based index methodology." Both funds employ an equal weighting approach that allows each security's performance to affect the ETF equally, regardless of the size of the company. In this way, a relatively small firm enjoying a major breakthrough can have a meaningful impact on the ETF. An equal weighting also serves to minimize the outsize impact that a handful of mega-cap biotech companies can have on more traditional, market-cap weighted indexes. - According to Platon Monokroussos, head of research at Eurobank, “Taking their cue from the negative tone in Asia earlier today, major European stock markets stood in a negative territory in early trade on Wednesday pressured by persisting Russia jitters and the continued downtrend in oil prices amid oversupply concerns. The FOMC holds its final meeting of the year today. The policy announcement is scheduled for 20:00 CET and market focus is on whether the FOMC will drop its commitment “to maintain the 0 to ¼% target range for the federal funds rate for a considerable time following the end of its asset purchase program” - The first round of voting for the election of the new President of the Hellenic Republic in the 300-seat Parliament is scheduled to take place this evening at 19:00 Athens time (EET). As per Article 32 of the Constitution of Greece, a 2/3rd majority of the number of seats is required for the election of the new President i.e., 200 in-favour votes. Recall that Greece’s two-party coalition government currently enjoys the support of 155 lawmakers; center-right New Democracy controls 127 seats and PASOK 28. The coalition government has nominated former EU Commissioner Stavros Dimas for the presidential post – The UK’s Water Services Regulation Authority's (Ofwat’s) final determination on price limits for UK water companies over the forthcoming five-year control period 2015-20, which was announced on December 12th, remains challenging but in line with expectations, says Moody's in a report published today. The main difference is a further 10 basis-point reduction in the allowed wholesale return, resulting in an overall allowed return for the business as a whole (including wholesale and retail activities) of 3.74%, compared with 3.85% in the draft determination and 5.1% in the current period. However, the ratings agency says negative implications of the additional 10 basis-point reduction are somewhat offset by other positive changes from the draft determination stage, including an adjustment for cost inflation on retail cost allowances from 2012-13 to 2013-14. Moody's notes that United Utilities Water Limited (A3 stable) and Thames Water Utilities Ltd (Baa1 negative) benefitted from significant changes to their overall total expenditure allowances between draft and final determination, and, in the case of Thames Water, a company-specific uncertainty mechanism related to the Thames Tideway Tunnel project. Similarly, Moody’s says Southern Water Services Limited (Baa2 negative) achieved a significant improvement in the legacy adjustment related to its performance in the current regulatory period. Conversely, Bristol Water plc (Baa1 stable) remains the relative loser of the final determination, as it faces the largest relative reduction in wholesale total expenditure allowance compared with the company's plan. The gap between Bristol Water's proposed wholesale total expenditure versus Ofwat's final determination allowances is 32%, making a referral to the Competition and Markets Authority likely – Bloomberg reports that Jefferies Group is moving to shed the commodities and financial-derivatives business that it bought from Prudential Bache in 2011. Jefferies says it's getting out of the business because of high costs and dwindling fees – California’s SunEdison, Inc says it has closed its second fund for distributed solar photovoltaic (PV) generation projects in the United States with Barclays and Citi. The lease pass-through fund is valued at $117m, and follows on the Barclays and Citi fund closed earlier this year. This brings the aggregate value of funds closed this year with Barclays and Citi for SunEdison and TerraForm Power's distributed generation projects to $290m. The fund will provide financing for a portfolio of distributed generation PV projects in 12 states across the West Coast, mid-Atlantic, New England, Hawaii and Puerto Rico. The projects are expected to be operational in the fourth quarter of 2014 through the first half of 2015. Upon mechanical completion, the projects will be sold to TerraForm Power – Emolument.com, the salary benchmarking site has examined bonus data from 322 VPs working in front office in Asset Management in Europe. It finds London’s salaries are the highest –with a strong culture of incentivising staff, “bonuses in London are the chunkiest in Europe” says the firm. However, salaries are higher in Geneva (at a 23% premium to London). VPs in Amsterdam earn as much as those in Paris says the firm - According Sino news service Red Pulse, Baidu will invest $600m in the taxi start-up, marking the tech giant’s official entry into the taxi app space, a year after Tencent and Alibaba announced their investments in taxi apps DidiTaxi and Kuaidi Taxi respectively. This recent acquisition marks yet another push from Baidu to compete in the mobile payment and O2O market sectors. Baidu launched its third-party payment platform, Baidu Wallet, in April 2014, competing with Alibaba’s Alipay and Tencent’s Tenpay platforms. Baidu also has an investment in the travel website Qunar, which in addition to Baidu Wallet, also offers the option for payment through other platforms. Some industry sources believe that this new investment will be no different and that Uber will likely remain open to other payment channels. Even if this is not the case, Baidu Wallet will continue to face considerable hurdles. While the company has grown a strong client base through its mapping app, it has yet to prove that it can transform passive consumers to active ones, willing to make a purchase through its platform - Russia continues to take a beating in the FX trading markets. The depreciation of the Ruble this year is unprecedented and while it has also put pressure on other emerging market currencies, Russia is the fall guy in today’s markets, while the USD and JPY are both benefactors of safe haven investment flows. The euro found its footing as it attempted to rally back above 1.2500 following better than expected PMI readings and a huge jump in the German ZEW economic sentiment survey, though it is looking toppy and selling is now expected - UK economic news flow has tended to be better than analysts expect over the last couple of months and aside from a very downbeat inflation report and inflation expectations, the rest of the economy is maintaining a firm pace of growth. The issue however is the role inflation plays in the BOE’s policy outlook, currently inflation at 1% is well below the BOE’s target of 2%, and concerns are inflation will decline further before recovering, this is likely to impact the BOE’s progression to raising interest rates and as such will have ongoing implication on the value of GBP. For now GBP is marginally firmer on the morning.
Is another drop in gold prices likely? Photograph © Daniel Budiman/Dreamstime.com, supplied May 2013.

Is another drop in gold prices likely?

Monday, 10 June 2013
Is another drop in gold prices likely? There was plenty of speculation in the media earlier this year that the gold price was being driven down by fears of a sell-off by the central banks of struggling Eurozone economies like Cyprus. Desperate to raise money (so the story goes) central bankers in Italy, Spain and Greece might also plunder their vaults, constituting a far more substantial combined holding than Cyprus, with dire consequences for the gold price. By Vanya Dragomanovich. http://www.ftseglobalmarkets.com/media/k2/items/cache/ecccccc1b95c6b4158d629f0bc134b76_XL.jpg

There was plenty of speculation in the media earlier this year that the gold price was being driven down by fears of a sell-off by the central banks of struggling Eurozone economies like Cyprus. Desperate to raise money (so the story goes) central bankers in Italy, Spain and Greece might also plunder their vaults, constituting a far more substantial combined holding than Cyprus, with dire consequences for the gold price. By Vanya Dragomanovich.

The eurozone’s crisis can be blamed for many things but the recent sell-off in gold which saw over $250 taken off prices in the space of a month is probably not one of them. Instead, investors should look to the recovery in US stocks and the US economy in general, which seems to have had more to do with gold prices spectacularly dropping by around 22% since the beginning of the year. More intriguing still, 15% of that fall came in the space of two trading days in mid-April. It points to the end of a long love affair with gold on the part of institutional investors, and opens a big debate on gold’s future as an institutional portfolio component, and its true value in a more benign global economic environment.


“Speculative traders such as hedge funds, which tend to be quick on the trigger when changes are looming, begun losing faith back in September, from a peak net-long futures and options positions of almost 20 million ounces they started a gradual reduction that by mid-April had seen their positions dwindle to just 5.6 million ounces,” says Ole Hansen, head of commodity strategy at Saxo Bank.




Hedge funds, the nimblest market players when it comes to picking up on trend reversals, started selling their gold positions last autumn. The sell off happened as US markets were beginning to exhibit the first signs of recovery and the Dow Jones Industrial Average had begun rising steadily, with the characteristics of an ebullient macro trend, rather than its previous more erratic behaviour.


Institutional investors with large positions in gold ETFs began to realise that the tide was moving against gold after the minutes of a Federal Reserve meeting in January which clearly showed that the Fed was thinking of slowing down or entirely stopping its program of bond purchases. The implication for investors was that the US economy was doing better and that the dollar would become stronger, both of which would be bad news for gold, a safe haven asset at times of financial crisis.


The sale of gold has accelerated since then and has showed no sign of stopping. Investors have sold the equivalent of over 350 tonnes of gold in ETF holdings since the beginning of the year, of that more than 260 tonnes from the world’s largest ETF SPDR Gold Trust run by State Street Global Advisors. SPDR Gold Shares still holds about 1,023 metric tonnes of gold valued at $44.7bn.


The bulk of the sale came from large US investors. Looking at the filings submitted to the US Securities and Exchange Commission over the last few months Northern Trust, BlackRock and Soros Fund Management are among the biggest players who have been pulling out of gold ETFs. These vehicles are also popular with institutional investors like pension funds, who see them as a cost-effective way to gain exposure to commodities prices.


However, the market (that is, speculators on the price of SPDR Gold Shares) were anticipating this fall; a number of market participant bought a large number of put options on the ETF that would not have come into the money had the market not dropped so spectacularly on April 12th.


Once the selling frenzy started in the US it was replicated in Europe, just on a smaller scale. Nicholas Brooks, head of research at ETF Securities, says that the total outflow of assets from ETF Securities’ gold ETFs this year has been $1.9bn, with $14.3bn still remaining in the company’s gold ETFs. Investors have also built up positions in ETF Securities Short Gold ETFs, but much smaller ones compared with long gold positions.  


Brooks notes that of the three key types of investors with positions in gold ETFs; retail investors, medium to long term investors with a strategic view of the market and tactical investors, the first two groups have mostly held on to their gold ETF positions or have added to their existing holdings. “Most of the selling came from tactical investors, asset allocators with a three to 12 month view of the market who react to changes in the market,” says Brooks. The move down was prompted by the fact that bond yields have been rising, as have stocks, and investors have started pulling out of gold and investing in higher-yielding assets.


In addition to the sale of gold ETF share, the futures markets also witnessed a spectacular fall over two trading sessions on April 12th and April 15th. On paper, the move was prompted by two factors, a downgrade of gold by Goldman Sachs analysts and the rumour that Cyprus might sell its gold reserves to repay the country’s debt. Cyprus itself was less of a worry but market participants were concerned that other Eurozone economies might follow suit. Italy alone holds 2452 tonnes of gold and in Europe only Germany has more gold reserves. A major sell off by Eurozone central banks would have serious consequences for the gold price.


Any predictions that Italy, Greece or Spain would sell their gold “are, frankly, ridiculous,” say Carsten Fritsch, analyst at Commerzbank. “If those countries are at all thinking about leaving the euro selling their gold would leave them with their hands tied behind their back because they would have fewer reserves to back their own currencies.”


Whether those were the real reasons for the bearish sentiments, and not pure speculative market play, is another matter. CME Clearing House delivery notices for COMEX gold futures around those days show that JP Morgan was behind 90% of the selling, some of it from their client account and majority from a house account. Moreover, once this one horse had bolted, the rest of the herd was not far behind.


Technical levels were breached, prompting stop-loss sales and automated selling from program-based trading schemes. “The course was set and once the 1525 USD/oz support level was reached and breached, as if it did not exist, waves of selling orders from both the spot and futures market sent the price into a tailspin,” says Saxo’s Hansen. “During the initial hour of carnage on the Friday [April 13th], almost 9m ounces of gold futures had swapped owners.”

Predictions that Italy, Greece or Spain would sell their gold “are, frankly, ridiculous,” say Carsten Fritsch, analyst at Commerzbank. “If those countries are at all thinking about leaving the euro selling their gold would leave them with their hands tied behind their back ...”


Gold then see-sawed for the rest of April, initially recovering but plunging back to $1,350/oz by mid May. In the meantime all the major banks have lowered their forecasts to an average for this year and are saying that in the short term prices are more likely to head towards $1,100/oz.


To put it all into perspective, Gordon Brown sold a portion of UK gold reserves in 1999 for $275/oz. Though it may look shockingly low now, this was a reasonable price at the time. Throughout the last decade prices have climbed steadily, reaching an all-time high of $1,920/oz in 2011. Mining output of gold has not significantly changed over the last decade and although there is an argument that it became more expensive, an increase in labour costs, electricity and transport still doesn’t explain an eight-fold rise in prices.


The price of gold started rising when first gold ETFs were launched in the early noughties and then accelerated during the financial crisis as gold ETFs became the safe-haven investment option. Initially, institutional money started flowing into commodity ETFs because of interest in the convenient way they offered access to commodities market diversification opportunities, and the strong case being made by commodities bulls. Subsequently, with the onset of the financial crisis, there were also considerable fears about inflation and precious metals holdings were viewed as one of the principal means for institutions to hedge against this threat.


While inflation in the UK and other developed markets has declined in recent months, from a global perspective it still remains a key consideration for long term investors, who will be less keen to reduce gold exposure. For major growing economies like Brazil for example, inflation has remained a key theme in the last six months.


Analysts have now almost universally lowered their gold price forecasts for the year to around $1,550-$1500/oz. Even so, the game has not been played through yet. It is becoming increasingly obvious that when trying to assess what the gold price will do next, the main movement to gauge is that of ETF investors. This is the case, even though cheaper prices will make the metal much more attractive to retail buyers who either buy jewellery, as is mainly the case in China and India, or bars and coins, as in Europe, the US and Australia.


In fact, since gold prices fell to around $1,400/oz or at times below that level there has been massive buying in China and India. Indian buyers have enthusiastically come back into the market particularly because late last year gold prices reached historically high levels in rupees terms; now that prices have dropped, several hundred dollars for gold is considered relatively cheap. It should also not be forgotten that both China and India are home to a large and increasingly affluent middle class demographic, and their buying will have more impact on the price at the cheaper end of the chart than ten years ago. Similarly, gold bars and coins remain a favourite investment among more affluent Europeans, particularly in Germany, where gold is still regarded as a solid store of value.


In the latest issue of its paper Gold Demand Trends the World Gold Council noted that the net outflows from ETFs obscured the strong rise in investment for gold bars and coins in the first quarter this year which stood at 377 metric tonnes, up from 342t last year in the same period last year, and gold jewellery buying which rose to 551t from 491t in the same quarter last year. This could create a fairly solid floor for the gold price, despite the insti-tutional selling.


According to Saxo Bank, while the technical picture for gold points towards a target of $1,150/oz, “we look for support to emerge towards $1,300/oz while any recovery from here will be met with fierce resistance at the old floor of $1,525oz,” says Hansen.


For the active investor, the sudden price moves represent a range of opportunities. For example, Société Générale’s Patrick Legland says that investors could sell a one year call option with a $1,800 strike and use the received premium to buy a one year gold put with a $1,440 strike. An alternative zero net premium option structure would be too short a one year gold call at a $1,700 strike and buy a one year put at a $1,550 strike.


The bottom line is that after all these moves the gold market is unstable. Most analysts expect that prices will initially drop some more before starting to recover later in the year, an expectation based on the fact that stock markets have moved up too far too fast and on the fact that the US has not yet left its economic problems behind.


“Tactical investors will remain bearish on gold until the interest rate cycle has peaked and the dollar has stopped rising. However, the underlying economic situation in the US has not dramatically changed, the US still has fiscal and debt problems and some investors may have over-anticipated a recovery,” says Brooks. Unlike tactical investors, other longer term investors are likely to stick with gold under those circumstances, he adds.


Also, there is currently a large build-up of hedge fund short positions in the market at present. All it would take is another sovereign debt crisis and the gold market would move against them. This is likely to keep the market volatile and without a clear trend in the near future, but unlikely to continue declining over the three-to-six month horizon.

 Diverse global demand for gold
The latest World Gold Council Gold Demand Trends report, which reports on the period January-March 2013, shows a market driven by diverse global demand, though overall total global demand for gold in the quarter was 963t, down 19% from Q4 2012, though in value terms demand fell 23% to $15bn. The average gold price over the period fell 3% to $1,632/oz.
Demand for gold in China and India led trends, with demand related to jewellery up 12% for the quarter year on year. In addition there was a notable increase in bar and coin sales, which rose 22% year-on-year in China and 52% in India. Central banks remained significant acquirers of gold, making purchases in excess of 100t (109t) for the seventh consecutive quarter. In the US demand for bars and coins was up 43% compared with the same quarter in 2012. Globally, bar investment was up 8% while official coins (such as American Eagles and Canadian Maple Leafs) were up 18%. Gold held by gold-backed ETFs, which in 2012 accounted for 6% of the world’s gold demand, fell by 177t. That fall pushed the sum of ETF and total bar and coin demand to just below 201t. Total investment demand was 320t in Q1 2013, flat compared with a year ago. “Gold-backed ETFs, which made up 6% of gold demand in 2012, have seen some holders, primarily in the US, collect profits and move into equities. While gold ETF holdings are down, this has been balanced by 378t of investment in bars and coins, an increase of 10% on the same period last year, and up 12% on Q4 2012,” explains Marcus Grubb, managing director, Investment at the World Gold Council.
“The price drop in April, fuelled by non-physical moves in the market, proved to be the catalyst for a surge of buying that has left many retailers short of stock and refineries introducing waiting lists for deliveries. Putting this into context, sales of bars and coins, jewellery and consumption in the technology sector still make up 81% of the market,” says Grubb.

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