Sunday 1st February 2015
NEWS TICKER FRIDAY, JANUARY 30TH: Morningstar has moved the Morningstar Analyst Rating™ of the Fidelity Japan fund to Neutral. The fund was previously Under Review due to a change in management. Prior to being placed Under Review, the fund was rated Neutral. Management of the fund has passed to Hiroyuki Ito - a proven Japanese equity manager, says Morningstar. Ito recently joined Fidelity from Goldman Sachs, where he successfully ran a Japanese equity fund which was positively rated by Morningstar. “At Fidelity, the manager is backed by a large and reasonably experienced analyst team, who enjoy excellent access to senior company management. While we value Mr Ito’s long experience, we are mindful that he may need some further time to establish effective working relationships with the large team of analysts and develop a suitable way of utilising this valuable resource,” says the Morningstar release - The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in December. No administrative hearings are scheduled for February 2015. The FDIC issued a total of 53 orders and one notice. The orders included: five consent orders; 13 removal and prohibition orders; 11 section 19 orders; 15 civil money penalty; nine orders terminating consent orders and cease and desist orders; and one notice. More details are available on its website - Moody's Investors Service has completed a performance review of the UK non-conforming Residential Mortgage Backed Securities (RMBS) portfolio. The review shows that the performance of the portfolio has improved as a result of domestic recovery, increasing house prices and continued low interest-rates. Post-2009, the low interest rate environment has benefitted non-conforming borrowers, a market segment resilient to the moderate interest rate rise. Moody's also notes that UK non-conforming RMBS exposure to interest-only (IO) loans has recently diminished as the majority of such loans repaid or refinanced ahead of their maturity date - The London office of Deutsche Bank is being investigated by the Financial Conduct Authority (FCA), according to The Times newspaper. Allegedly, the bank has been placed under ‘enhanced supervision’ by the FCA amid concerns about governance and regulatory controls at the bank. The enhanced supervision order was taken out some months ago, says the report, however it has only just been made public - According to Reuters, London Stock Exchange Group will put Russell Investments on the block next month, after purchasing it last year. LSE reportedly wants $1.4bn - Legg Mason, Inc. has reported net income of $77m for Q3 fiscal 2014, compared with $4.9m in the previous quarter, and net income of $81.7m over the period. In the prior quarter, Legg Mason completed a debt refinancing that resulted in a $107.1m pre-tax charge. Adjusted income for Q3 fiscal was $113.1m compared to $40.6m in the previous quarter and $124.6m in Q3 fiscal. For the current quarter, operating revenues were $719.0m, up 2% from $703.9m in the prior quarter, and were relatively flat compared to $720.1m in Q3 fiscal. Operating expenses were $599.6m, up 5% from $573.5m in the prior quarter, and were relatively flat compared to $598.4min Q3 of fiscal 2014. Assets under management were $709.1bn as the end of December, up 4% from $679.5bn as of December 31, 2013. The Legg Mason board of directors says it has approved a new share repurchase authorisation for up to $1bn of common stock and declared a quarterly cash dividend on its common stock in the amount of $0.16 per share. - The EUR faces a couple of major releases today, says Clear Treasury LLP, and while the single currency has traded higher through the week, the prospect of €60bn per month in QE will likely keep the euro at a low ebb. The bigger picture hasn’t changed, yesterday’s run of German data was worse than expected with year on year inflation declining to -.5% (EU harmonised level). Despite the weak reading the EUR was unperturbed - The Singapore Exchange (SGX) is providing more information to companies and investors in a new comprehensive disclosure guide. Companies wanting clarity on specific principles and guidelines on corporate governance can look to the guide, which has been laid out in a question-and-answer format. SGX said listed companies are encouraged to include the new disclosure guide in their annual reports and comply with the 2012 Code of Corporate Governance, and will have to explain any deviations in their reporting collateral. - Cordea Savills on behalf of its European Commercial Fund has sold Camomile Court, 23 Camomile Street, London for £47.97mto a French pension fund, which has entrusted a real estate mandate to AXA Real Estate. The European Commercial Fund completed its initial investment phase in 2014 at total investment volume of more than €750m invested in 20 properties. Active Asset Management in order to secure a stable distribution of circa 5% a year. which has been achieved since inception of the fund is the main focus of the Fund Management now. Gerhard Lehner, head of portfolio management, Germany, at Cordea Savills says “With the sale of this property the fund is realising a value gain of more than 40%. This is the fruit of active Asset Management but does also anticipate future rental growth perspectives. For the reinvestment of the returned equity we have already identified suitable core office properties.” Meantime, Kiran Patel, chief investment officer at Cordea Savills adds: “The sale of Camomile Court adds to the £370m portfolio disposal early in the year. Together with a number of other asset sales, our total UK transaction activity since January stands at £450m. At this stage of the cycle, we believe there is merit in banking performance and taking advantage of some of the strong demand for assets in the market.” - US bourses closed higher last night thanks to much stronger Jobless Claims data (14yr low) which outweighed mixed earnings results. Overnight, Asian bourses taken positive lead from US, even as Bank of Japan data shows that inflation is still falling, consumption in shrinking and manufacturing output is just under expectations. According to Michael van Dulken at Accendo Markets, “Japan’s Nikkei [has been] helped by existing stimulus and weaker JPY. In Australia, the ASX higher as the AUD weakened following producer price inflation adding to expectations of an interest rate cut by the RBA, following other central banks recently reacting to low inflation. Chinese shares down again ahead of a manufacturing report.” - Natixis has just announced the closing of the debt financing for Seabras-1, a new subsea fiber optic cable system between the commercial and financial centers of Brazil and the United States. The global amount of debt at approximately $270m was provided on a fully-underwritten basis by Natixis -
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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