Gold & Silver Futures rose sharply higher on a technical bounce after hitting their 20-day moving averages earlier & also on the news that Spain’s Government announced its new budget plan will meet deficit targets this year, which cheered the markets. The 20-day average for Comex Gold was at $1,736.80 & for Silver, its 20-day average stood at 33.435, alerted in previous posts. A big central bank infusion of liquidity into China’s financial system also helped to give Gold Futures & Commodity Markets a boost. Many of the global economic concerns are already factored into prices, such as the sharp slowdown in the European economy and continuing slowdown in China. Hence, the conservative rise in Gold & Silver prices seen till now, unlike the sharp boost seen after the earlier QE1 or QE2. The People’s Bank of China obliged traders and offered another massive wave of stimulus, which can be seen as having a positive impact on commodity prices. News reports say the People’s Bank of China injected $58 billion into the country’s financial system this week. The economic chaos in Europe, which has potential to lead to serious large scale violence over escalating austerity measures, may put a cap & limit all strong upsides.
Labor strife in South Africa is growing. Labor unrest that began in the South African platinum-mining sector last month continues to spill over into the Gold sector. Numerous strikes meanwhile have brought around 39% of South Africa’s entire gold-mining production to a standstill. Workers clearly feel encouraged by the hefty pay rises achieved by their ‘colleagues’ in the platinum industry. The strikes are affecting all of the mines owned by AngloGold Ashanti, the world’s third-largest gold producer. Whereas the company has not yet put a number to the resulting production outages, Gold Fields, the fourth-largest gold producer, is talking of ‘losses’ in the region of 32,000 ounces so far. Media reports have signaled nearly 39% of all Gold production in South Africa has ceased due to the strikes, according to Thomson Reuters GFMS.. Any kind of supply disruption is always going to be supportive for Gold Prices. It’s important, but marginally so. The demand & supply have to be equally tight in opposite directions for a major price move. The demand for physical Gold remains relatively light in comparison to earlier years. With Record high Gold Prices inIndia & a crunching slowdown in China, the world’s biggest two buyers, demand for Gold Bullion or jewelry remains thin. Now with the INR- Indian Rupee rising handsomely against the US Dollar & a huge monetary infusion creating more liquidity in China may have a positive impact on physical Gold demand in both these markets, but that remains to be seen. Moreover, South Africa is recognized more for its vast platinum reserves and production, but the country contributes enough gold production for its price to be somewhat affected. All the above reasons could only supply a bottom to Gold Prices in the eventuality of a decline in Gold Prices but are not strong enough to boost Gold Prices higher. Technically Gold Prices yet have the short term upside advantage & potential towards the strong $1855 resistance, also with the October Gold Futures coming to a close next week. The real & major push for Gold Prices would come only when China starts converting its large Forex reserves of over 3 trillion to Gold, to safe guard against the US Dollars meltdown. Only then would Gold break above the $1855 resistance to rise to fresh lifetime highs above $2000.
MCX Gold Futures for December delivery had shot up to Rs.32,783 per 10 grams when Comex Gold Dec Futures hit $1790 recently after the Fed announced the much awaited QE3. Since then, Comex Gold has declined to $1740, a decline of around $50, whereas MCX Gold Prices have slumped to Rs.31,431, a decline of Rs.1,352 (over $130) on the back of a stronger INR – Indian Rupee. A trend alerted of well in advance, this may continue with the US Dollar weakening further against a basket of major traded currencies globally. Gold prices in India may have limited potential further on. MCX Silver & Base Metals would prove to be a much better bet.
Base Metals are expected to fare better in the coming quarter but the pace of rises is likely to be modest. Multiple & simultaneous Economic stimulus efforts in key nations will mean more demand. Traders will also keenly watch to see whether easing measures actually boost the economy as anticipated. Base Metals have risen sharply since early August along with Equity Markets. Market analysts believe markets to be currently vulnerable to a little bit of profit-taking in the near term & traders could opt to collect profits on the run-up and exit long positions. But I strongly feel that too may have passed on. Metals still could add gains after mild profits taking seen recently, in the short term. Many of the Base Metals are yet near their marginal cost of production, apart from copper. There could be an exponential rise in prices, particularly from Silver & also those metals more supply-constrained commodities like copper, lead & other Base Metals. While much of the focus is on demand prospects, there is also potential for supply issues to impact Base Metals prices. There is huge potential for labor unrest to spread around the world. The Chinese government and its central bank are likely to take massive action to counter any further weakening in the local economy, and launch economic stimulus programs, which should keep demand for Base Metals high. Chinese stimulus efforts are supportive for copper, although the upside could be limited by the ongoing Eurozone debt crisis. Furthermore, rising housing starts and building permits in the U.S. should help the market for the short term. Copper eased down earlier in the week as Futures were in technically overbought conditions.
I say short term & mean it, as I see this Rally based more on Expectations than Strong Fundamentals. The only fundamental supportive of gains in Gold, Silver & Base Metals is the weakening of the US Dollar, which has a long way to go. Equity & Commodity Markets may show swifter recoveries & sharper gains, the bullishness based on a slew of easing programs in the past few weeks. Obviously, the crisis in Europe could resurface again. Things at Eurozone may remain calm only for sometime more & may explode sooner than later in a more deadly form. Markets may, after a couple of months, suddenly pull off on the escalating uncertainty in Europe and the looming so-called “Fiscal Cliff” (Detailed Below) in the US, when automatic tax hikes and budget cuts would be triggered in early 2013 in the absence of action by Congress.
In the past 3 months alone, the price of Silver has risen 25%, while Gold’s recent run up, though impressive, has only been about half as strong. With Gold prices at close to record levels in most markets, Silver is an easier acquisition for the up & rising middle income class. There’s been a huge increase in emerging markets Silver Demand as more & more people move up to the middle class. Ease of access, safety & convenience via ETFs is another reason why Gold & Silver are gaining market share in portfolios. Silver generally outperforms later in the longer run & tends to overshoot in either direction. While Silver is unarguably more volatile, it is yet almost 40% below its highs, while Gold is just 7% beneath its $1,925 peak a year ago. Spain may accept conditions & request for a bailout program & that could help relieve markets as the ECB could then start buying Spanish bonds, thereby reducing sovereign risk premia and in turn boost the Euro. A rise in Euro could turn Gold & Silver more bullish.
The unprecedented belt-tightening known as the “Fiscal Cliff” that looms over the United States could at the very least cut world growth in half in 2013, Fitch Ratings said on Thursday. Read our much earlier given alert: Forecast 2012. The fiscal cliff – a double whammy of tax increases and spending cuts totaling about $600 billion – could tip the United States and possibly the world into recession, Fitch said. “The U.S. fiscal cliff represents the single biggest near-term threat to a global economic recovery,” the ratings agency said a research note released in London. Most of the measures scheduled to take effect at the start of 2013 would reduce U.S. growth by $800 billion, or 5%, on an annualized basis, Fitch said, citing the U.S. Congressional Budget Office. Fitch said a full-scale fiscal tightening was not the most likely scenario. The scale and speed of this action would probably push the U.S. economy into an avoidable recession, slicing about two percentage points off the firm’s growth forecast of 2.3% next year. “We therefore think the cuts will be pared back to a more manageable 1.5% of GDP,” Fitch said.
The Eurozone’s permanent bailout fund will charge only a symbolic fee on top of its costs for loans to troubled sovereigns and only slightly more for loans to recapitalize banks, ESM pricing policy guidelines showed. The guidelines, obtained by Reuters on Thursday, said that while the price of help from the European Stability Mechanism (ESM) would be the same for every Eurozone government, it would differ depending on the instrument chosen, because of different risks the instruments entailed. The ESM is to become operational in October and will replace the temporary European Financial Stability Facility (EFSF) as the euro zone’s main bailout vehicle. It will reach its full lending capacity of 500 billion euros in 2014. The EFSF will co-exist to administer the existing three bailout programs of Greece, Ireland and Portugal, but not engage in new bailouts after mid-2013. In case of loans under a full ESM program, the fund would charge a 10 basis point margin, which the document said would not impact the sustainability of public finances of a beneficiary ESM member. The ESM would charge a higher margin of 30 basis points for money borrowed to recapitalize financial institutions, to reflect the punitive rates charged under EU state aid rules. If Spain, or another euro zone country applied for a precautionary credit line from the ESM, the fund can use money from the credit line to buy bonds of the sovereign at primary auctions. The fund would then charge a margin of 35 bps. If the ESM were to make the same purchases on the primary market for a sovereign that is under a full adjustment program, which means it has no access to the market at reasonable rates, the margin would be 10 basis points. If the ESM were to buy bonds of a country in the secondary market, it would charge a margin of 5 basis points because it may participate in capital gains and receives market rates. The guidelines also said that if the ESM makes a bigger profit than needed to cover its costs and the fee under the primary market support facility, it would return three quarters of the excess to the beneficiary country at the end of the plan.
Crude Oil remains weak on Escalating Eurozone Debt Crisis & Weakening Fuel Demand – Gets Support on Lower than Expected Stockpiles & renewed Supply Disruption Concerns from the Middle East. Weaker Equity Markets and a stronger US Dollar pressured prices early in the day.
Crude Oil slumped to its lowest close in almost eight weeks, but seems to rebound as investors speculated that recent losses were exaggerated. In the past 10 weeks, big speculators and hedge funds had added nearly 100,000 net long positions, equivalent to 100 million barrels, in US Crude Oil options futures contracts. It was one of the biggest and fastest such build-ups since 2010. Last week’s slide in Crude Oil to over 7% was enhanced after a Gulf source said Saudi Arabia would act to lower prices that hit four-month peaks. I hold the view that the huge longs (including Hedge Funds) build up in Crude Oil Futures around the timings of these Quantitative Easing announcements, made them sitting ducks for a sharp & sudden manipulated blow in the opposite direction. Crude Oil has more reasons to rise than to Fall & I expect Crude Oil to soon resume its ideal course, as also explained earlier in the article: Crude Oil Slumps on Stockpile Rise & China Manufacturing Data. Crude Oil for November delivery on the NYMEX – New York Mercantile Exchange yesterday fell $1.39 to $89.98, the lowest close since Aug. 2. Brent Crude Oil for November settlement rose 35 cents, or 0.3%, to $110.39 a barrel on the London-based ICE Futures Europe exchange.
Crude Oil is obviously under pressure as a result of what’s happening in Europe. Uncertainty over a bailout for Spain while Eurozone policymakers still wrangled over Greek’s debt highlighted the difficulty Europe is facing in tackling the crisis, weighing on broader markets, from Asian shares, the Euro to Gold. Crude Oil Prices slid 1.5% yesterday, the seventh decline in eight days, on concern the Eurozone debt crisis will worsen and derail the global economy. Spaniards held protests and Greeks staged a general strike to oppose austerity measures. Prices fell yesterday as protesters in Spain marched for a second night in Madrid, calling on Prime Minister Mariano Rajoy to reverse austerity measures as his nine-month-old government prepared its fifth package of budget cuts. The nation’s 10-year bond yields rose above 6%, approaching the levels seen before European Central Bank President Mario Draghi offered to buy struggling nations’ debt. Schools, hospitals, ferries and government services shut down in Greece yesterday in the first walkout since February. Thousands of protesters streamed into the central Syntagma SquareinAthens, opposite the Parliament House. The government is planning an austerity package that Prime Minister Antonis Samaras says is vital to keep the nation in the euro area.
U.S. fuel demand fell in the past four weeks, an Energy Department report showed. U.S. total fuel use decreased 1.1% to 18.4 million barrels a day, the lowest level since April 6, in the four weeks ended Sept. 21 and crude stockpiles last week were at the highest level for this time of the year since 1990, according to the Energy Department report. U.S. Crude Oil production surged last week to the highest level since January 1997, reducing the country’s dependence on imported fuels as new technology unlocks crude trapped in shale formations. Crude Oil Output rose by 3.7% to 6.509 million barrels a day in the week ended Sept. 21, the Energy Department said. The nation met 83% of its energy needs in the first six months of the year, department data show. Imports have declined 3.2% from the same period a year earlier.
Crude Oil inventory and refined product stockpiles in US – the world’s biggest oil consumer fell unexpectedly last week as crude imports plunged. Crude Oil stockpiles fell 2.45 million barrels to 365.2 million, the report showed. They were forecast to rise 1.9 million, according to a Bloomberg News survey. Gasoline stocks dropped 481,000 barrels last week, the Energy Department said. They were projected to gain 500,000 barrels, according to the median estimate of 11 analysts in the survey. Distillate inventories, a category that includes heating oil and diesel, declined 482,000 barrels compared with a forecast 500,000 barrel increase in the survey.
Crude Oil Futures bounced up after falling to near technical support levels. There is light support around $90 from a technical point of view. WTI Crude Oil in New York is rebounding after approaching technical support at $88.35 a barrel on an Intraday Basis. That’s the 50% Fibonacci retracement of the rise to $99 on Sept. 14 from the 2012 low of $77.69 in June. Crude Oil also gained after settling below its lower Bollinger Band at $90.12 a barrel yesterday. The last time it closed below the band on Sept. 20 it increased 1.1% the next day. Buy orders tend to be clustered near chart-support levels. A weekly close with large volumes & sustained momentum below the psychological level of $90 could lead to further falls towards $79.75. If no further weakness is seen, then Crude Oil could consolidate around $90 level for a fresh bounce up towards its first resistance of $97.30 & then a stronger one at $100. Crude Oil will get highly bullish on a break above $100 for the longer term with immediate resistances seen then at $108.10 & then at $114.50. With so many simultaneous & large Monetary Easing programs announced by several important Central Banks, liquidity is abundant & will sooner than later trigger Inflation. Crude Oil Price rise is generally the biggest contributor towards global inflation rises. Technically, Brent is expected to trade between a low of $109 and a high of $111.50 a barrel in the next (Intraday) 24 hours. U.S. Crude Oil is relatively weaker because it slipped below its 100-day moving average of $90.27 in the previous session. TheU.S. contract may fall to Wednesday’s low of $89, with a possibility of slipping further to $88.50, with an upside capped at $91.50. Crude Oil may trade sideways, with Brent staying within a range of $108-113/bbl near-term.
Brent Crude Oil futures are seen holding steady above $110 on Thursday on renewed worries of supply disruptions from the Middle East. Support for Crude Oil Prices came on comments from Iran about neutralizing all efforts to sabotage its nuclear facilities. The geopolitical worries in the Middle East, while have been around for a long, long time, still continue to support prices. There is about a $20 premium on Brent prices because of the tensions in the Middle East over Iran’s disputed nuclear program. Without that, a fair value for the contract is around $80 – $90 a barrel, reported Reuters. Iran is under threat of military action from “uncivilized Zionists,” a clear reference to Israel, Iranian President Mahmoud Ahmadinejad said in a speech before the U.N. General Assembly. He also said that such threats from big powers are designed to force nations into submission.
Spain is again the centre of focus in the Eurozone debt crisis. Spain’s Prime Minister Mariano Rajoy said “If interest rates on Spain’s debt were “too high for too long,” thus harming the economy and raising the government’s debt burden, “I can assure you 100% that I would ask for this Bailout.” “Europe needs to move toward a banking union now,” he said. “That would be a very good message toward the irreversibility of the Euro. What I do alone is not really going to help Spain get cheaper financing,” he added. “That is where I need support and action from all. I’m in favor of the EU, but I think we should have a lot more union than we have. We need to work hand in hand. We’re a club.”
The Euro slipped against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Protesters clashed with police in the country’s capital as Spain prepared for a new round of austerity measures in the 2013 budget. Equities and commodities as a result lost momentum, while the Euro again started downside movements against the dollar. ECB – European Central Bank President Mario Draghi’s vigorous defense of the bank’s bond-buying plan to a skeptical German audience on Tuesday had earlier underpinned the euro. Trading activity expected to be mostly subdued on Wednesday, ahead of the Jewish Yom Kippur holiday. The ECB will hold its next policy meeting on October 4 andU.S.non-farm payrolls data, a key monthly market driver, is due on October 5. The Euro could remain under pressure if Spain drags its feet over requesting an international bailout. This must happen in order for the ECB to begin buying its bonds and, until it does, the Euro is likely to weaken further. Worries about the size of Greece‘s deficit also weighed on the Euro, with Germany’s Der Spiegel magazine reporting it could be 20 billion euros, nearly double previous estimates. Investors are once again concerned whether the stimulus measures announced by ECB for the Eurozone & the Fed will have the desired effect of boosting the global economy.
Spanish Prime Minister Mariano Rajoy’s dispute with the leader of his country’s richest region erupted into the newest front of Europe’s effort to extinguish the financial crisis. Catalan President Artur Mas yesterday called early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25, saying the time has come to seek “self-determination.” The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to over 25%. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance, reported Bloomberg. Rajoy has a majority in parliament and says he is doing what’s necessary to pullSpain out of the financial crisis. He says he was elected to a four-year term in November and he intends to complete it. Catalan nationalists are pressing for greater autonomy. Austerity is eroding Catalans’ willingness to keep subsidizing poorer parts of the country. The region contributes a fifth of the economy, more than any other. It’s home to some of the largest companies, including CaixaBank and Gas Natural SA. It transfers 15 billion euros, or 8% of its economic output, to the rest of Spain each year.
Spain is at the centre of the Eurozone Debt Crisis on concerns the government can’t control its finances, bitten by its second recession since 2009 which has put one in four workers out of a job and pushed up borrowing costs. Spain will announce another round of the hugely unpopular austerity measures in a 2013 budget on Thursday, already prompting protests from a public battered by attempts to put the country’s finances in order. The conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions “green taxes” on emissions or eliminating tax breaks, reported Reuters. The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. It must persuade Spain’s European partners that it can cut the budget shortfall by more than 60 billion euros by the end of 2014. Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.
Protests against the cuts are gaining pace. More than 1,000 police barricaded Parliament inMadridon Tuesday against protesters who planned to form a human chain around the building later in the evening. Hundreds of demonstrators gathered in different points of the capital before marching to Parliament, saying they were angry that the state has poured public funds into crumbled banks while it is cutting social benefits. Meanwhile, Rajoy is holding back from applying for European aid, which would activate a European Central Bank bond-buying program and bring down Spain’s punishing debt premiums. Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections October 21, pushed short-term yields higher at auction on Tuesday.
After having weighed all possible options of higher taxation hikes & a selective reduction of tax breaks, it seems they aren’t enough to cover the potential shortfall. After slashing civil servants’ wages, raising value added tax by 3% – the main VAT has gone from 16% to 21% since 2010 – and cutting health and education spending, Rajoy is running out of options. More than 60% of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people. Under current rules the government must raise pensions in line with inflation in November. This VAT effect on consumer prices will cost the government an extra 3.5 billion euros in pensions costs, Conde-Ruiz says, wiping out the 2.5 billion euros it hopes to raise this year by increasing the sales tax.
“Its going to be difficult keeping the deficit to around 2% in the second half, when the first half was closer to 4%, especially since traditionally, the second half deficit is higher than the first,” said Juan Ignacio Conde-Ruiz, economist at Madrid’s Complutense University, reported Reuters. For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1% implying further saving needs of up to 10 billion euros for this year alone. Rajoy has been careful to highlight the importance of next year’s deficit target of 4.5% of GDP though any shortfall this year will have to be carried through and will weigh on 2013’s accounts.
The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country’s debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday. In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations. Half-year deficit data indicate national accounts are already on a slippery slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3% of GDP, including transfers to bailed out banks, making meeting the 6.3% target by the end of the year almost impossible.
A firm US Dollar and a shift in investor focus to the Eurozone debt crisis capped gains in Gold. Gold Bullion has rallied after central banks from the U.S. to Japan took steps to boost their economies, driving investor holdings in exchange-traded products to a record. A poor economic backdrop will keep global stimulus measures on the cards for a while and gold is set to profit from that. Spain will announce a new budget and reform plan on Thursday, while Greece will do the same later this week. We had alerted early this week that Gold movements may remain range bound for the week with an overall positive bias – For more read: “Gold Futures in Turbulent Times”. Gold Futures have been seen in a range of $1,753.20 to $1,790 an ounce over the last eight trading days. The consolidation suggests some near-term indecision about short-term direction, but also a preparation for a sharp next zoom upside. December Gold Futures are consolidating just above $1,750 & a move higher suggests that gold prices may have a slight upward bias. Where large Investors are already positioned long, there’s always an appetite to add more on dips. The $1855 upside barrier remains strong while the RSI (Relative Strength Index) remains overbought, suggesting the market may continue to consolidate or, possibly, pull back. Gold has seen a good run up from $1540 to $1787 in around 8 weeks & a loss of further momentum may very well frighten long term investors & fund managers and may give them cause to book some profits. I would suggest to take advantage of dips.
The Euro slipped yesterday against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Gold and Silver backed down yesterday from their day’s highs on some mild profit-taking pressure later in the session. Copper prices saw positive momentum & were lifted by encouraging U.S. economic data on consumer confidence and house prices. U.S. consumer confidence index rose to a seven-month high of 70.3 in September from 61.3 in August. Also, the S&P/Case-Shiller index showed U.S. home prices rose for the fourth straight month in July to their highest level in nearly two years. The go-ahead for infrastructure projects in China & positive development on the U.S. housing market, which among others, reflects the rising number of building permits and housing starts, should also prove stimulative for Base Metals.
Refined Soy Oil futures in NCDEX have witnessed sharp corrections since the last few weeks. Soy oil prices at CBOT have also slumped significantly which have had a strong impact on global market sentiments. Agro Commodities Trading in NCDEX witnessed sharp declines in most commodities for the last few sessions on improved rains in India. NCDEX Turmeric Futures may garner support at lower levels amidst expectations of a strong festive demand. Weak rains in the growing areas of Andhra Pradesh have been pressurizing the market sentiments so far & creating apprehensions of a fall in acreage of Turmeric. With arrivals slowing down and moderate rise in export and domestic demand being noted, this could support the rates in the short to medium term. Though exports are likely to pick up in coming weeks, high levels of existing stocks could keep prices from sharply soaring again as seen 2 years ago. Firmness in Spices over next few months cannot be ruled out with rising exports and a pick up in domestic demand. The NCDEX – National Commodity & Derivatives Exchange Limited as on September 20, reduced the existing special margin of 15% (in cash) on the long side to 5% (in cash) on all the running contracts and yet to be launched contracts of Rape Mustard Seed.
NCDEX Chana futures have been the most bearish & have witnessed heavy selling on improvised rainfall & recovery in Monsoon activities in the North-West and more importantly in the Central parts of India. Short term downslide trend may have been triggered as speculators indulged in profits-booking spree due to increased rains, but lower Pulses production this year could keep the long term trend firmly up, especially with the big Indian festive seasons around the corner. Festive Demand for Chana can be expected to push Chana Prices beyond the recently seen highs of the past few months. The cut in special margin by NCDEX on long contracts to 10% from 20% on running and yet-to-be-launched contracts by exchange authorities, has yet failed to have any immediate impact on the trading. Annually, India consumes more than 20 million tons of beans and pulses. Farmers in India could only produce 17 million tons, even with favorable weather last year. As a result, India needs to import millions of tons per year from Myanmar and other beans and pulses producing countries. But this year import of pulses and seeds by India from Myanmar is likely to be hit by poor rains say traders in the region. Deficiency in rainfall has caused lower production acreage of pulses and seeds in Myanmar. Production of pigeon pea (toor) would be reduced by more than 20%. The production of sesame, toor (pigeon pea) and matpe (black gram) and others have significantly fallen due to lack of rain in upper Myanmar. On the other hand, severe flood has covered the rice growing areas of lower Myanmar.
Selling is likely to continue in Soybean futures on the heels of supplies in domestic mandies along with weak prices of soymeal. The NCDEX Soybean futures shaved off by almost Rs 300 per quintal in the last week. Traders mentioned that the total arrival of new soybean in the mandies of Maharashtra such as Sholapur, Latur and Akola added selling pressure in domestic market. The total arrivals of around 20000-25000 bags were reported in the last trading with the price range of Rs 3000-3400 per quintal, down almost Rs 300 per quintal in the last week.
The oilseeds crop size is estimated at 18.78 million tonnes against 19.38 million tonnes the 5- years Average Production. The oil seeds complex is likely to drift further lower on the back of bearish global cues. CBOT Soy Oil December contract quoted yesterday at $53.99. CBOT November Soybeans finished the last session down 11 3/4 at 1610 cents per bushel and December Soybean Oil finished down 0.66 at $54.17 per pound. November soybeans traded lower into the close and the complex saw double digit losses for most of the day. Soybean meal and oil were also weaker on the day. Negative outside markets and better than expected yields continue to weigh on futures but strong underlying support is coming from a favorable demand outlook over the next 3-6 months. Export inspections for the week ending September 20th were reported at 12.12 million bushels vs. 9.96 the week prior. Cumulative inspections for this crop year are running 3.1% of the USDA estimate vs. the 5 year average of 3.9%. Favorable weather conditions in South America have added ammo to the bear camp to start the week and more rainfall is expected this week and in the 11-15 day period for northernBrazil. It’s being reported that planting has begun inBraziland 2012/13 soy sales held steady at 46% from the previous week following the recent decline in prices. Many traders believe the US Soybean harvest will be near 20% complete as per today’s Harvest Progress report. Good weather this week and a drier long term outlook will continue to keep the harvest pace above historical levels which could be viewed as a short term negative for prices by some.
Buoyancy might continue in Cardamom MCX Futures due to weak production estimates of the current year along with some exporters demand at lower levels. The MCX Cardamom futures spurted by almost Rs 50 per kg in the last two trading day. In the current year, the total production of cardamom production is likely to reach only 14000-14500 tonnes , down almost 8000 tonnes from the last year due to poor weather conditions during the crop formation period. Therefore, poor supplies have encouraged strong bargain buying at the lower levels. The spot prices of cardamom 8 mm and best quality were trading in the range of Rs 750-950 per kg in the last trading, up almost Rs 20 per kg from the previous trading . While the total daily arrivals were reported around 35 tonnes , down 75 tonnes from the last day. The MCX Agro Cardamom October Benchmark contract augmented by almost Rs 37 per kg to close at Rs 1023.20 per kg in the last trading session. The benchmark contract pared 120 contracts in open interest witnessing some short covering. Technically, prices are likely to witness some buying around Rs 1000-1010 per kg while resistances are likely at Rs 1040-1055 per kg.
Bearish trend might continue in chilly futures due to fresh harvesting of chilly crop in Madhya Pradesh Pradesh along with strong carryover stocks in major producing states. The NCDEX Chilly futures pared almost 1% in the last trading. Most of the areas in Madhya Pradesh have reported the harvesting of new chilly crop with the new arrivals of around Rs 100-200 bags. The overall harvesting activity might gain momentum from mid- October. Market sources estimated the total chilly stocks in the range of 55-56 lakh bags in the entire major producing states. The total daily arrivals of chilly reported at around 30 thousand bags at Guntur mandi in the last trading. While the spot prices of chilly S334- quality were trading at Rs 5100-5500 per quintal and Teza New quality at Rs 7100-7400 per quintal , down almost Rs 100 per quintal from the last day. The NCDEX October Chilly contract declined by almost Rs 50 per quintal to settle at Rs 5360 per quintal in the last trading session. The NCDEX Chilly futures wilted almost Rs 150 per quintal in the last three trading days. The contract added 1000 positions in open interest indicating fresh shorts by traders at higher levels. Technically, prices are likely to witness some selling around Rs 5500-5520 per quintal while supports are likely at around Rs 5280-5300 per quintal.
Jeera futures are likely to witness some more selling from higher levels due to weak demand in local mandies along with prospects of strong Jeera production in the coming season. The NCDEX Jeera futures plunged by more than Rs 100 per quintal in the last trading session. With the anticipation of strong price escalation in Jeera in the current season due to strapping export demand prompted the heavy stocking of Jeera during the April- August period. Therefore, not much demand by stockiest and physical traders was reported at current levels. Moreover, heavy rainfall in the major Jeera producing states such as Rajasthan and Gujarat also raised the prospects of bumper Jeera production in the coming year. The total arrivals remained unchanged at 4,000 bags in the last trading session, while demand was seen at around 4,000 bags against 5,000 bags. The spot Jeera prices were trading steady in the range of Rs 13,500-14,000 at Unjha Mandi. Best quality was trading steady in the range of Rs 14,500-15,000 per quintal. The NCDEX October Jeera contract slumped by almost Rs 112 per quintal to settle at Rs 13507 per quintal in the last trading. The NCDEX futures touched the intraday lows of Rs 13250 per quintal and dropped 900 positions in open interest indicating some profit taking by traders. Technically, prices are likely to witness some selling around Rs 13820-13850 per quintal while supports are likely at around Rs 13400-13420 per quintal.
NCDEX Wheat futures are likely to witness some pressure from higher levels due to liquidation of government wheat stocks in domestic market along with dearth of buying interest amongst millers and exporters. The NCDEX Wheat futures slumped by almost Rs 43 per quintal in the last week. As per official sources, the Food Ministry is planning to sell additional 5 million tonne wheat in the open market to bulk consumers like flour millers and biscuit makers in order to upload spiraling domestic prices and also offloading the surplus stock at higher levels. If the current wheat proposal approves by government then the total quantity of wheat to be sold would reach 8 million tonne in the current fiscal year. The base prices of the wheat will be Rs 1285 per quintal as decided by the government in August 2012. This will help the government to curb the domestic price escalation of wheat. The spot prices of were trading in the range of Rs 1450-1600 per quintal in the major mandies of Uttar Pradesh and Gujarat , down almost Rs 50 per quintal in the last week. Consequently, the NCDEX October Delivery pared Rs 43 per quintal in the last week to close at around Rs 1524 per quintal in the last week. Technically, prices are likely to witness some selling around Rs 1535-137 per quintal with the downside target of Rs 1510-1512 per quintal.
Comex December Gold Futures at a high of $1790 have gained over 12% since the August mid. The surge was fueled on expectations of the Federal Reserve’s fresh round of quantitative easing – the QE3, with more gains occurring when the Fed exceeded expectations by announcing open-ended purchases of MBS – Mortgage-backed securities without a specific timeframe. The sagging Housing market may not recover soon enough as you need to have a job to pay for a Housing mortgage payment & unemployment, already a “Grave Concern,” is still rising. With inflation also expected to rise in the bargain, Gold Futures will continue to gain as a safe heaven asset class. To add more to the Gold Futures buying Euphoria, the ECB & Bank of Japan added to huge bond buying programs & China did its part by announcing an Infrastructure related monetary influx.
Riskier assets fell broadly & the US Dollar index measured against a basket of key currencies rose today while also dampening Gold Futures prices. Ample funds added through further monetary easing should underpin markets, but prices of assets tied to economic fundamentals were likely to be capped, such as crude oil and copper. But Gold Futures may draw investors back over the longer term as a re-flationary policy raises future inflationary risks.
European leaders are struggling to overcome a crisis-fighting stalemate as they face discord over a banking union, Greece’s ongoing debate on how to meet bailout commitments and foot-dragging by Spain and Italy on financial aid requests. Chancellor Angela Merkel and President Francois Hollande clashed on a timetable to introduce joint oversight of the region’s banking sector. Markets that surged this month on the back of a European Central Bank rescue plan and clarity over bailout funding may not offer European leaders the time they need as an easing in market pressure raises the risk of policy complacency. Deadlock over the banking union could delay until next year a key building block in resolving the crisis, compounding turmoil that’s so far engulfed five of the Eurozone’s 17 nations, reported Bloomberg. The news triggered a decline in Gold Futures as investors took up long US Dollar positions on expectations that fresh policy snags that could further delay solving of the Eurozone debt crisis. Spanish Prime Minister Mariano Rajoy has displayed reluctance to seek more help after ECB President Mario Draghi unveiled the central bank’s bond-purchase plan, linked to conditions for recipient states, on Sept. 6. Spanish Deputy Prime Minister Soraya Saenz de Santamaria said last week Spain will consider a bailout if conditions are acceptable.
Another uncertainty which persisted as major economies took action is whether China will ease monetary policy, with its economy on course to show slower growth for the seventh straight quarter over the current period. A senior official was quoted by state media on Sunday as saying that China plans to stick to its tight property sector policies, reinforcing officials’ reluctance to ease property market restrictions to bolster the economy.
Spain was considering freezing pensions and speeding up a planned rise in the retirement age, raising hopes for the country applying for a bailout, but uncertainty remained over whether and when such a move would come, reported Reuters. A credit review by ratings agency Moody’s, due by end-September, could prompt such a move if Moody’s downgrades Spanish debt to junk status. A bailout would allow the ECB – European Central Bank to step in and buy Spanish sovereign debt, which would lower borrowing costs in the large European economy. European Union paymaster Germany said on Friday that Spain does not need a European bailout, dousing financial market expectations that Madrid will gain early relief from European Central Bank bond-buying. Spain insisted on Saturday it will not rush to seek a sovereign bailout, even as the country suffers from a high deficit, soaring debts, a banking sector burnt by the bursting of a real estate bubble and a deepening economic contraction.
The unrestricted new US policy for quantitative easing to print more currency and bonds with no limits imposed whatsoever, signals rabid inflation with a huge potential for Hyper-Inflation. This will keep a strong floor supporting Gold Futures on all declines. Inflation will continue to rise as the Fed & the ECB will keep flooding the markets with paper until they are satisfied they have won & brought about a huge change. Higher Taxations, Austerity measures & Inflations will soon hit ceiling, and then – Bang, the great reversal will hit in a huge uncontrollable manner. New and heavier tax burdens will crush individuals and companies, smothering existing potential growth and blocking new start-ups. Banks are loaded with taxpayer cheap money furnished by the federal government. They can just hold it, and earn a small but steady interest income on the rate spread, basically doing nothing. With interest rates at drastically low levels, small savings accounts & other conventional safe money growing vehicles no longer seem enough & the need to overcome the speed of Inflation will lead investors to riskier asset classes. Massive money printing will also demolish the value of the held currency violently. Simple Day trading & not “Long term investments” would be the need for the Future. With so much of insecurity going around, even the most fundamentally strong investment may simply collapse. “Putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or even better said- Gambling. As such, those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual funds, could well be called gamblers. Indeed, given the efficient market hypothesis, which implies that a thorough analysis of stock data is irrational, most rational shareholders are, by definition, not investors, but speculators.”
A lot of funds have lately been buying Gold since mid-August due to the fact that major central banks around the world have increased bond-buying programs and increased stimulus efforts. Gold Futures may witness some mild profits booking as October contracts close to expiry going by the end of the month and with the end of the second quarter also, means potential for profit-taking from fund managers who would want to show they’ve had a good month or quarter. A rise above $1800 may trigger technical buying stops which may lead to a potential resistance of $1855 for Gold Futures.
This week & most of the next week may keep Gold Futures in high turbulence mode as alerted last week: Gold Futures in Turbulent times. All dips in Gold Futures will continue to be bought as market participants remain bullish on Gold Futures Prices, which tend to benefit from easy monetary policy. Bullishness has set in more due to the slew of loose monetary policies announced a the last few weeks. Holdings in the SPDR Gold Trust, the world’s largest Gold ETF – exchange-traded fund, had climbed to 1,317.762 metric tons by Sept 21, its highest level since July 2010. Barring surprise developments in the Eurozone over the ongoing debt crisis or any Middle East tensions, this week would mostly be a quieter one. Key U.S. economic reports include the consumer confidence index on Tuesday, new-home sales Wednesday, then weekly jobless claims, durable-goods orders and gross domestic product on Thursday. Friday brings personal income and spending, the Chicago Purchasing Managers Index and Thomson Reuters/University of Michigan Consumer sentiment index.
Gold Futures saw some selling pressure due to the weak China data yesterday. The much-anticipated HSBC China manufacturing PMI was released Thursday and came in at a reading of 47.8 in the latest month, which was the eleventh straight month of contraction in China’s manufacturing sector. Gold Futures in Indian markets, (MCX) have reversed the gains on the back of a stronger INR- Indian Rupee, whilst Comex Gold Futures hold to the gains of the last 6-8 weeks strongly. The next 10 to 15 days may witness a high level of volatility in Gold Futures trade.
Technical indicators are signaling Comex Gold Futures Prices may be poised to decline after rallying over $200 or 12% in the past two months. Gold is within $20 to reach its 2012 high of $1,790.30 an ounce set on Feb. 29. Gold’s 14-day relative-strength index is at 76.5 today, above the level of 70 that generally indicates a drop in Gold Futures prices may be imminent. But a “Golden cross” formed on spot Gold’s price chart gives bullion investors another reason to increase their bullish bets. On Thursday, Gold’s 50-day moving average (DMA) traded above its 200 DMA, which marked a golden cross in technical analysis, indicating bullion’s intermediate and longer-term momentum is getting increasingly bullish, reported Reuters. Given shorter-term moving averages have all turned higher in recent weeks and the bullish price action recently, this golden cross today is an additional indicator of strength in an already strong Gold Futures market. The previous long-lasting golden cross on bullion charts was formed on Feb. 6, 2009, and Gold Futures prices surged 11% in the following 11 sessions. Technical traders and momentum-driven investors could buy more Gold Futures as the bullish formation will remain in place as long as the current Gold Futures price stays sharply above its 50-day and 200-day moving averages. Gold Futures are currently seen flat at $1,770 an ounce, more than $100 higher than its 50 DMA at $1,650 and its 200 DMA at $1,645. Volatility in Gold Futures may continue till the end of September or further till 5th October as Gold Futures contracts for October delivery expire. Upside movements may get triggered on shifting long positions to the December Gold Futures contracts.
MCX Gold Futures have turned downside in Indian Commodity Markets while Comex Gold Futures trade remains strong at the 6 month highs achieved recently, exactly as alerted several times in the last few days. The strong US Dollar flows lifted the Indian Rupee to a four-and-a-half month high of 53.31 to the US Dollar. The INR – Indian Rupee Sep Futures rose by 1.85% to 53.31 against the US Dollar, which is an indication that the FII – Foreign Institutional Investors find the recently announced FDI for Retail, Aviation & the Diesel rate hike reforms by the Indian Government appealing & may be pumping in loads of cash. Equity benchmarks hit their highest levels in more than 14 months, as investors are now betting that the ruling UPA coalition will be able to push through more economic reforms.
The 30-share Sensex climbed 403.58 points – the second 400-plus point single day gain in five sessions – to close at 18,752.83. The 50-share Nifty hit a high of 5,720 before settling at 5691.15, up 136.90 points or 2.46% over the previous close. With today’s rally, the Nifty has gained 23% so far this year. Experts believe the government will definitely come up with slew of reforms to revive sluggish economic growth. Finance Minister P Chidambaram has announced a lower tax on foreign borrowings by local companies. He said, “Tax will be cut to 5% from 20% and withholding tax liability on Indian companies reduced to 5%.” The reduced tax will apply to borrowings between July 2012 & June 2015. FM also approved Rajiv Gandhi Equity Savings Scheme. ETF and mutual funds brought under Rajiv Gandhi Equity Scheme and investors will get 50% tax rebate on investment. SP – Samajwadi Party chief Mulayam Singh Yadav said his party would support the UPA – United Progressive Alliance from the outside. This could be a major trigger for the market as the government will move further with their other reforms like insurance in FDI, land acquisition bill etc. The market fell more than 200 points in previous two sessions after the Trinamool Congress chief Mamata Banerjee had withdrawn support over FDI approval in retail sector and hike in diesel price by Rs 5 per litre.
Comex Gold Futures remains largely strong till trade maintains momentum above the crucial $1744.3 level & may see bounce ups to $1778.5, $1801, $1825.3 & then $1855. A strong decline below $1742.5 to $1734.4 support range could lead Gold Futures to $1716.4 & then to a strong support level of $1660.6 also. Comex Silver retains strength till above $34.03 & may resume its upside journey to $35.56, $36.28 & then 37.72 for the short term. The first real resistance Silver may face would then be around $44.20. MCX Gold Futures have declined (as repeatedly alerted for Indian Trade) more on the back of the sharply rising INR / US Dollar, than due to corrections in Gold in the International Markets. In fact Gold seems strongly sustaining at higher levels in the International Commodity Markets.I strongly feel that Gold would continue to remain weak in Indian markets till the INR continues its Northward journey. Trade in MCX Silver would provide more handsome returns in comparison to Gold in Indian markets also. The US Dollar fall is what is making Gold Futures prices rise, but at the same time the fall in US Dollar makes the INR stronger which in turn has an adverse effect on Gold prices in Indian Markets. Indian Investors in Gold Bullion may be largely disappointed & Silver would prove a better bet.
A new round of bond buying by the U.S. Federal Reserve last week and loose monetary policies from other major central banks have rekindled the metal’s appeal as a traditional inflation hedge. The Federal Reserve announced a third round of debt-buying Sept. 13 and the Bank of Japan said two days ago it will add 10 trillion yen ($128 billion) to a fund that buys assets. The European Central Bank announced an unlimited bond-purchase program Sept. 6 and China approved a $158 billion plan for subways-to- roads construction. Gold rose 70% as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011. Some investors buy bullion as a hedge against inflation and a weaker dollar. The Fed said it will buy $40 billion a month of mortgage debt to bolster the labor market and probably hold the federal funds rate near zero until at least the middle of 2015. Inflation expectations measured by the break-even rate for five- year Treasury Inflation Protected Securities surged to the highest since May 2011 on Sept. 17, reported Bloomberg. Gold Futures will climb to $2,000 by the second quarter and will reach $2,400 by the end of 2014 if the Fed’s latest easing lasts until then, Bank of America said in a Sept. 18 report. Gold Futures Prices will exceed $2,000 in the first half of next year, Deutsche Bank wrote that day. Morgan Stanley expects Gold Futures to average $1,816 next year and Standard Chartered predicts a second-quarter average of $1,900. Both would be the highest ever. Investors bought 115.9 metric tons through Gold ETPs since the beginning of July, the most since the second quarter of 2010. Holdings reached a record 2,523.7 tons yesterday, data compiled by Bloomberg show. Physical Gold purchases will bolster prices before the Indian wedding season and religious festivals later this year.
Experts Speak: EconMatters (By Tyler Durden of ZeroHedge)
With their recently announced additional bond purchase programs, both the Federal Reserve and the ECB have added a new chapter to their respective handbooks. While at first glance they are both simply the end-game of money-printing-monkeys, Morgan Stanley sees some similarities but more differences that are critical to understand when judging the awesomeness (or not) of these actions. The ECB’s Outright Monetary Transactions (OMT), in contrast to the previous SMP program, will be ex ante unlimited in size but conditional upon government action. Likewise, the Fed’s additional purchases of agency MBS – Mortgage Backed Securities are ex ante unlimited in size (the monthly pace will be US$40 billion but the program is open-ended) and conditional (though not upon government action but labor market performance). Another parallel is that there was only one dissenting member each in the two policy committees (Jeffrey M. Lacker and Jens Weidmann). However, this is where the similarities end. Looking at the details, the two programs actually differ in five important respects.
First, the Fed’s MBS program is up and running and started last Friday. By contrast, the start of the ECB’s OMT is conditional upon a country going into an EFSF/ESM program or a precautionary program (ECCF), or a country in an existing program regaining market access. Hence, while this is not our base case, there is a possibility that the OMT will never be activated.
Second, while both programs are aimed at unblocking the monetary transmission mechanism, the Fed’s MBS purchases are targeting the mortgage market, while the ECB will buy short-dated government bonds. Both make sense to us, because the origin of the US financial crisis was in the mortgage market, which in the Fed’s analysis requires ongoing support, while the epicenter of the current European crisis is in the government bond markets.
Third, while the Fed’s buying program will lead to a further increase in the central bank’s balance sheet, the ECB plans to fully sterilize its purchases. Note, however, that sterilization is merely a fig leaf to placate German concerns because the size of the ECB’s balance sheet is entirely demand-driven due to its current policy of full allotment at its refinancing operations. Provided they have enough collateral, banks can take out any amount of liquidity they like. Note also that the term deposits which the ECB offered to banks when it sterilized the SMP purchases were eligible as collateral in the refi operations.
Fourth, the conditionality attached to the Fed’s and the ECB’s purchase programs is very different in nature. The Fed has tied its MBS purchases to an economic variable – it will continue until there is a substantial improvement in the labor market, while the ECB has tied the OMT to a political variable – whether or not a country goes into and adheres to an adjustment program. As government action (or non-action) is unusually more difficult to predict than labor market performance, this makes the scope of the OMT much more difficult to predict than the Fed’s MBS program.
Fifth, while the Fed’s action is fully aligned with its dual mandate, which includes ‘sustainable employment’ alongside price stability, there are some – the Bundesbank and the German Constitutional Court – who view the ECB’s OMT as potentially violating the ECB’s mandate, which prohibits direct monetary financing of governments. While the ECB’s position is very clear – it views the secondary market bond purchases, which are aimed at unblocking the monetary transmission mechanism, as in line with its mandate – the challenge coming from Germany provides additional uncertainty about the scope and effect of the program.
Crude Oil declined sharply yesterday after data announced a massive rise in US Crude Oil inventories, the highest since March & also on news of Saudi efforts to tame Crude Oil Prices. The Crude Oil Price dip continued today as a gauge of Chinese manufacturing shrank and Japanese exports declined, signaling fuel demand may be easing in the world’s biggest Crude Oil consumers. Crude Oil slipped over 3.5% yesterday, in the longest losing streak since June this year. US Crude Oil inventory surged 8.5 million barrels last week as Gulf of Mexico production resumed after Hurricane Isaac. Technical selling pushed Crude Oil to the lowest in six weeks. Big hedge funds were seen liquidating bullish positions built ahead of the Federal Reserves’ third dose of stimulus, announced last week. In the past 10 weeks, big speculators and hedge funds added nearly 100,000 net long positions, equivalent to 100 million barrels, in US Crude Oil options futures contracts. It was one of the biggest and fastest such build-ups since 2010. The week’s slide in Crude Oil to over 7% was enhanced after a Gulf source said Saudi Arabia would act to lower prices that hit four-month peaks on Friday.
West Texas Intermediate – WTI Crude Oil for October delivery contract which expires today is seen creeping below the psychological level of $90 & the more-active November Crude Oil futures were below $91. Brent oil for November settlement fell 94 cents to $107.25 a barrel on the London-based ICE Futures Europe exchange. Total Brent Crude Oil trading volume was 47% above the 30-day average, with US Crude Oil turnover 40% above its 30-day average. Stockpiles of gasoline and of distillate fuel, a category that includes heating oil and diesel, declined. Gasoline stocks fell 1.41 million barrels last week, while total distillate inventories dipped 322,000 barrels, the EIA’s weekly report said. US distillate demand over the four-weeks to Sept. 14 was down 11.2 percent versus the year-ago period. Refinery operating rates rose to 88.9% from the previous week’s 84.7% as plants resumed units idled when Hurricane Isaac made landfall on Aug. 28. US imports of crude oil jumped by 1.28 million barrels per day to 9.81 million barrels per day. Net crude oil imports hit their highest weekly level since January. The US, China and Japan accounted for about 37% of the world’s Crude Oil consumption last year.
Crude Oil has a substantial support at $90 & could consolidate around this level for a fresh bounce up towards its first resistance of $97.30 & then a stronger one at $100. A decline with large volumes & sustained momentum below this psychological level of $90 could lead to further falls towards $79.75. Crude Oil will get highly bullish on a break above $100 for the longer term with immediate resistances seen then at $108.10 & then at $114.50. With so many simultaneous & large Monetary Easing programs announced by several important Central Banks, liquidity is abundant & will sooner than later trigger Inflation. Crude Oil Price rise is generally the biggest contributor towards global inflation rises. I am of the view that the huge longs (including Hedge Funds) build up in Crude Oil Futures around the timings of these Quantitative Easing announcements, made them sitting ducks for a sharp & sudden manipulated blow in the opposite direction. Crude Oil may soon resume its ideal course.
The global Crude Oil market is well supplied, OPEC Secretary- General Abdalla Salem El-Badri said in a speech yesterday. The OPEC – Organization of Petroleum Exporting Countries’ spare production capacity is at “comfortable levels,” and commercial inventories “remain healthy,” Badri said at the European Mineral Resources Conference inLeoben, Austria, according to a transcript on OPEC’s website. Saudi Arabia’s crude oil exports fell 7% to 7.29 million barrels a day in July, a month when the nation’s crude oil production averaged 9.8 million a day, according to statistics the government submitted to OPEC and posted on the Joint Organizations Data Initiative’s website yesterday. Brent Oil eased below $108 a barrel after data showed China’s manufacturing activity continued to contract, weakening sentiment further in a market already reeling from Saudi Arabia’s pledge to keep global oil prices low. Saudi oil minister Ali-al Naimi last week said the world’s top oil exporter was ready to take action to calm rising prices of Crude Oil, which he said were not supported by market fundamentals.
The HSBC Flash China manufacturing purchasing index (PMI) for September was 47.8, well below the 50-mark that separates contraction from expansion, although a shade higher than the nine-month low of 47.6 reached in August. The Chinese data comes a day after the Ministry of Commerce said export outlook in the world’s No. 2 oil consumer was poor and demand would remain weak in the next few months. Analysts said the Chinese Economic Data might be a sign that the slowdown in the economy is coming to an end, which in turn may limit expectations of stimulus action from the authorities and weigh on the country’s demand for commodities, reported Reuters. “If China hits a wall, and Europe falls out from under us, then we’re going to be falling back into a recession, and that could be worse than the Great Depression,” said Tony Nunan, an oil risk manager at Mitsubishi Corp in Tokyo.
Silver & Gold Bulls are bidding up markets based on the monetary easing policies introduced over the last few weeks. While the Federal Reserve and the European Central Bank have done their part of monetary easing, countries like Japan and China are starting to copy the same, which explains why Commodity & Equity markets are mostly higher yet and may continue to push upwards in the days ahead. Central banks around the world are gaining exposure to Gold in recent years as compared to the past where they shed Gold assets rather regularly. A Chinese finance ministry researcher said the risks for inflation in China exceed the need for more economic stimulus. There is a slew of fresh economic data coming out of China on today. The Chinese economic data looks to be the most important data of the week for fresh momentum triggers in Silver, Gold & Base Metals.
Chinese Premier Wen Jiabao may need to roll out more stimulus measures to support growth that’s poised to slow for a seventh quarter after the Bank of Japan’s surprise decision yesterday to expand monetary easing. A dispute between China and Japan over islands claimed by both threatens to interfere with trade between the nations, adding to challenges for Asia as Europe’s debt crisis weighs on export demand. The preliminary reading was 47.8 for a China PMI – Purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics, compared with a final level of 47.6 last month. China’s gross domestic product expanded 7.6% in the second quarter from a year earlier, the smallest gain in three years and the sixth quarterly deceleration. Growth may cool to 7.4% this quarter.
Investors are continuing to be bullish on Silver in 2012, increasing their holdings of the precious metal that are at near record levels, said the Silver Institute today. Investors have so far purchased more than 32 million ounces of the white metal through Silver-backed exchange-traded products this year. Exchange-traded fund – Silver ETF Holdings now total more than 608 million ounces with a value of $20.5 billion through September 15. Silver Prices have risen more than 20% since the beginning of this year. Significantly, from January 2009 through September 15, 2012, the silver price has increased an astounding 211%. Factors leading to the price increase include a desire by investors to diversify their portfolios with hard assets, the diminished value of key currencies and continued global economic uncertainty. Silver also enjoys a wide range of important uses in industry. Industrial applications accounted for over half of world fabrication demand in 2011. Unlike Gold fabrication, which is heavily reliant on jewelry, Silver can call on a more diverse range of applications. Furthermore, in the short-term, many of these uses are relatively price inelastic, helping to create strong price support. But what is driving the price of Silver today is investor demand, say many precious metals analysts. In fact, some analysts have increased their fourth quarter Silver price projections given Silver’s recent price performance.
India’s central bank, the Reserve Bank of India said it will encourage more financial products in Gold to trim physical holding. RBI can provide people with an option having the financial attraction of gold without them having physically own it. That would in a sense reduce the pressure on Gold imports. Financial products on the lines of Gold ETFs are ideal that give options to investors to take advantage of price movement in the precious metal and allow people to buy or sell gold without physically holding it. Rising gold import has pushed India’s current account deficit to a record high of 4.2% in last fiscal. The Chairman of Indian Prime Minister’s Economic Advisory Council C. Rangarajan has said that an attractive product linked to the price of gold could help put brakes on a growing number of people buying gold as a hedge against inflation. India had earlier launched gold bond schemes including offering amnesty to those with unaccounted funds to prompt them to channelise money for productive uses rather than hoarding the physical asset. But these schemes had had very little impact. Gold Prices in India could remain under pressure on the INR rise & that would make Gold more attractive in India. Gold at lower prices in India would immediately attract buying.
Silver & Gold got an early boost from the Bank of Japan announcing overnight a fresh economic stimulus package. However, the Crude Oil futures prices fell sharply again yesterday, the effect of which spilled over into some selling pressure in other commodity markets, including Silver & Gold. September 2012 has had a slew of major quantitative easing announcements. The Bank of Japan joined the party after the ECB & Fed announced unlimited easing measures earlier. The Bank of Japan eased monetary policy yesterday by boosting its asset-buying program, as prospects of a near-term recovery in the world’s third largest economy faded due to weakening exports and a prolonged slowdown in Chinese growth. There have also been the worries that a territorial dispute with China, Japan’s biggest trading partner, will damage exports even more. But, BOJ Governor Masaaki Shirakawa stressed that the move was prompted by recent disappointing data, not the Fed’s action, while the anti-Japanese protests in China played no part in the decision to ease, reported Reuters. The BOJ increased its asset buying and loan program, currently its key monetary easing tool, by 10 trillion yen ($127 billion) — double the usual amount — to 80 trillion yen, with the increase earmarked for purchases of government bonds and treasury discount bills. Standing over $1 trillion, the total stimulus is now equivalent to nearly a fifth of Japan’s economy. The BOJ expanded its target for purchases of government bonds and treasury discount bills by 5 trillion yen each, and extended the deadline for meeting the new overall target by six months to December 2013. It also scrapped a rule that limits purchases of government bonds to those yielding 0.1% or higher, a move aimed at smoothening fund supply as it faces growing problems force-feeding cash to markets already awash with excess liquidity. A recent slew of weak data, including a slump in exports and factory output, has made Japanese central bankers less convinced that global demand will soon pick up to help a recovery in the export-reliant economy. The Fed’s pledge last week to buy assets open-endedly to boost job growth, dubbed QE3 by Wall Street, had also piled pressure on the Japanese central bank to follow suit with its own steps to support an economy feeling the pinch from a strong Yen and the widening fallout from Europe’s debt crisis. Finance Minister Jun Azumi welcomed Wednesday’s move, saying it was bolder than expected and will have a positive impact on Japan’s economy by stabilizing currency moves.
Investor Confidence in investing in U.S. publicly-traded companies held steady at 71% this year. Confidence dropped from 75% in 2010 to 70% in 2011. Since 2008, investor confidence in audited financial information has held steady at around 70%. Source: CAQ. The Center is affiliated with the American Institute of Certified Public Accountants.
Other investor findings in this year’s survey include:
Gold Demand increases as physical buying of Gold in India begins today with the auspicious occasion of Ganesh Chaturthi, the first day of the 10 day festival, later soon to be followed by Navratri in October & Diwali in November. Lord Ganesha is the God of wisdom, the herald of all auspicious beginnings and also the destroyer of all evils. Gold Demand is very high in India during this period, especially for Gold coins in these festivities accompanied by the wedding season. The timely rise in INR seems to offer a great start to this festive season. Gold Bullion & jewelry has an emotional connect with people in India, and any important celebration is seen as incomplete without Gold buying or gifting.
Physical Gold Demand which has been very low in comparison to previous year due to the sharp decline in the INR – Indian Rupee against the US Dollar, may get a boost as outlook on the Indian Rupee shifts to positive. Gold Prices may melt in Indian Markets if the INR rises now against the globally weakening US Dollar. The Indian Rupee may strengthen on the back of new government reforms and that may spur physical Gold Demand. Physical Gold Demand is a major factor in strengthening the Gold Bull run which is sorely lacking till now. The other important factors other than heavier trading volumes in Gold Futures are the Official Gold Demand, that is the Gold buying by the Central Banks & the demand by Gold ETFs, all of which have seen a huge rise. The INR rise comes in at a crucial time when buyers in India normally start to build inventories for the seasonally strong period towards the end of the year. Additionally, the weather has improved in agricultural areas and it “bodes well for incomes in rural areas and increases the possibility that Gold Demand will be resilient during the upcoming festival season. Emerging-market nations, particularly those nations with positive current account balances, view the growing indebtedness in the Western world with some alarm are likely to keep buying Gold, triggering further push in Gold Demand.
Precious Metals are trying their best to consolidate last week’s gains, but long liquidation from a perhaps overly bullish outlook has seen some losses overnight. Resurgent Eurozone fears, in particular over Spain’s potential request for a bailout, are putting pressure on risk assets. Most of the important market participant nations are already getting quite saturated by liquidity & this is likely to be supportive for Gold, Silver and the rest of the Base Metals. Incredibly low interest rates are likely to keep making Gold attractive due to a “negligible” opportunity costs and longer-term fears of adequate stores of value and wealth preservation. Asian Gold Demand in particular has grown dramatically, where China is expected to become the world’s largest buyer of Gold as soon as this year. European stock markets declined yesterday amid an apparent reluctance of Spain to ask for more financial bailout assistance from the European Union. There was a successful auction of Spanish short-term debt overnight, with yields lower and demand decent. A Spanish auction of longer-term debt later this week will be a bigger test, however. There was a positive economic report coming out of Germany, as the ZEW economic expectations readings was the strongest in five months. Asian stock markets were weaker on position evening ahead of important economic data coming out of China on Thursday. There were also anti-Japanese demonstrations in China that unsettled the market place inAsia. The Bank of Japan started a two-day meeting, at which the BOJ may introduce some fresh monetary stimulus.
Striking platinum miners at Lonmin’s Marikana mine in South Africa accepted a hefty pay rise offer on Tuesday, ending six weeks of violent labor unrest that killed 45 people and rattled Africa’s largest economy. “It’s a huge achievement. No union has achieved a 22% increase before,” Zolisa Bodlani, a worker representative at Marikana, told Reuters. Lonmin confirmed that the deal had been signed in Rustenburg on Tuesday night. “The agreement includes a signing bonus of 2,000 rand and an average rise in wages of between 11 and 22% for all employees falling within the Category 3-8 bargaining units, effective from 1 October 2012,” it said in a statement. In another sign that weeks of trouble in South Africa’s platinum belt were ending, the world’s biggest platinum producer, Anglo American Platinum, said it had resumed operations in the strike-hit Rustenburg area.
The conflict, most notably the police killing of 34 Marikana strikers on August 16, had also ignited criticism that President Jacob Zuma and his ruling African National Congress were neglecting poor workers and siding with wealthy business owners. The rock drill operators who began the strike will receive an effective 22% rise on their total package including allowances which will bring it to just over 11,000 rand per month. An illegal strike by 15,000 workers at the KDC West mine operated by Gold Fields, the world’s fourth largest bullion producer, continued on Tuesday as its chief executive said the firm would not agree to demands for a minimum wage of 12,500 rand a month. In a separate development, parliament approved a 5.5% pay increase for Zuma on Tuesday, taking his annual remuneration to 2.6 million rand ($315,600) a year.
Gold and Silver Prices have been on a rampage for the past 6 – 7 weeks & seemed highly due for a slight pullback on the basis of RSI – the Relative Strength Index. Gold and Silver Charts are beginning to look a bit parabolic which indicate that Gold and Silver Prices are set to correct or consolidate in the short term. There can be repeat bouts of profit-taking & these ideally should be used for opportunistic bottom fishing or buying opportunities. Repeat bouts of small profit-taking will also ensure the continuation of the Gold and Silver Price Rally further ahead. Only a very sharp or a deep decline can demark a trend reversal. Gold is expected to rise to at least $1,855 in the coming weeks, with $2,200 on the horizon if supported with higher momentum & volumes above $1855 – The last Massive Rally Lap. The outlook for Silver & Base Metals is even better than as expected for Gold as explained below.
Gold and Silver Prices had a softer tone for much of the first half of the year due to a stronger US dollar, uncertainty about the US Fed’s policy and limited progress in the Eurozone. Some general soft profit taking hit commodity markets this week in the aftermath of last week’s US Federal Reserve’s announcement of the much awaited QE3. The last couple of weeks saw Gold and Silver rise aggressively as markets witnessed the ECB take an aggressive & unorthodox step of announcing an unlimited bond-buying program & the Fed later announced another round of Quantitative Easing (QE3) that will have an open-ended timeframe adding more & Un-limited liquidity in the US. The risk associated with “toxic” European debt means safe-haven demand for Gold and Silver as well as for the Base Metals. Meanwhile, the European Central Bank “will likely continue pumping money at the problem. With the QE3 for as long as it takes and close to zero interest rates for another three years, Gold and Silver Prices may not face sharp declines & may get downside support sooner than expected. The Federal Reserve’s Blank Check has led to a freefall in the exchange rate of the US Dollar versus a basket of major currencies globally & will continue to add fuel to the fire, which in turn is positive for Gold and Silver Prices in the longer term. Gold and Silver Prices may only see more of a Price consolidation than a healthy correction & prepare for a further rise, since the Fed will continue with its QE3 program until there is a marked improvement in the labor situation and the economy, which will obviously not happen very soon. The open ended timeframe QE3 for improvement in the labor market & economy effectively implies the Fed’s willingness to tolerate inflation, which in turn supports Gold and Silver Price rise. Chinese selling interest has been low, which could mean another sharp move higher for Gold and Silver Prices.
Meanwhile, the South African police stopped ANC rebel Julius Malema from addressing striking workers Monday as the government intensified efforts to contain the unrest and violence that has accompanied it. There are some expectations that workers will return to mine shafts soon.
The outlook for Silver & Base Metals is even better than as expected for Gold. Sentiment toward Copper and other Base Metals has turned bullish since the past few weeks and this could last for some time on the multiple & simultaneous Quantitative Easing Programs announced. Most base metals are modestly softer on the LME – London Metal Exchange after getting a boost last week from more US & European Quantitative Easing, and they could slip some more in the short term strictly. It is too early to do a complete about-face on the effectiveness of the Fed’s easing program. Expectations for a stronger US economy should help demand for industrial Base Metals, Gold and Silver. Silver, Copper & Base Metals will also continue to rise on the weakening US Dollar as Investors will utilize these as a hedge against the fall in US currency and also as Investment in Gold tends to be less lucrative in comparison to Silver & Base Metals as Gold Prices rise. Silver & Base Metals had declined more than Gold Prices during the earlier declines & have more potential to rise & deliver more gains in percentage terms. After a lackluster buying trend for the past few months, physical demand for gold rose “dramatically” on Friday, says Barclays Capital, citing a report by Reuters. Jewelers and investors scaled-up purchases despite local record prices. Indian buyers bought into the rally ahead of several major Gold-buying festivals amid concerns that prices could breach Rs. 35,000 /10g following the announcement of the US QE3, raising the support level for Gold Prices. The next major news event the markets are awaiting this week is Thursday’s manufacturing data coming out of China.
Silver could easily soar past $44, its first strong resistance before hitting $50.50, benefiting from rising investor and industrial demand. Buying interest in Silver is rising, with the metal “benefiting from its status as the higher-beta, cheaper version of Gold. Rising Silver Prices are attracting investors, particularly in China, which had vacated the market following violent action in 2011. SGE Silver Trading volumes are at the highest level since May 2011, with 4,062 metric tons traded on Friday alone. This was the highest daily volume since late April 2011, when Silver neared $50 an ounce. The bank says action is similar on the SHFE, where combined volumes picked up significantly since late August. It’s clear that Silver is rebuilding investor interest here. Chinese investors here have played a significant role in Silver’s powerful moves last year.
Comex Gold remains largely strong till trade maintains momentum above the crucial $1744.3 level & may see bounce ups to $1778.5, $1801, $1825.3 & then $1855. A strong decline below $1742.5 to $1734.4 support range could lead Gold to $1716.4 & then to a strong support level of $1660.6 also. Comex Silver retains strength till above $34.03 & may resume its upside journey to $35.56, $36.28 & then 37.72 for the short term. The first real resistance Silver may face would then be around $44.20. MCX Gold has declined for the past 2 days more on the back of the sharply rising INR / US Dollar, than due to corrections in Gold in the International Markets. I strongly feel that Gold would continue to remain weak in Indian markets till the INR continues its Northward journey. Trade in MCX Silver would provide more handsome returns in comparison to Gold in Indian markets also. The US Dollar fall is what is making Gold Futures prices rise, but at the same time the fall in US Dollar makes the INR stronger which in turn has an adverse effect on Gold prices in Indian Markets. Indian Investors in Gold Bullion may be largely disappointed & Silver would prove a better bet.
The Reserve Bank of India (RBI) on Monday left interest rates unchanged but cut the CRR – Cash Reserve Ratio for banks by 25 basis points. The RBI – Reserve Bank of India said the primary focus of its monetary policy remains fighting inflation, after the Government of India unveiled a slew of reforms to boost growth and improve its fiscal situation. Reserve Bank of India hailed the government’s latest policy measures. Those included a hike in diesel price by Rs 5, limiting subsidized LPG cylinders at 6 a year per family, allowing foreign direct investments in aviation and multi-brand retail upto 49% and 51% respectively. It also decided to dilute stakes in public sector units. The Reserve Bank of India kept the Repo Rate -the key policy rate unchanged at 8% in its mid quarter monetary policy review, as expected. The Reserve Bank of India cut the cash reserve ratio, the share of deposits banks must keep with the central bank, by 25 basis points to 4.5% in a move it said will inject about 170 billion rupees (Rs.17,000 crores) of liquidity into the banking system. The RBI policy action is almost in line with most market expectations.
The RBI Cut in CRR by 50 bps to 5.50% . It infused around Rs 32,000 cr liquidity in the system on January 24, 2012. Reserve Bank of India cut in CRR by 75bps to 4.75%. It infused around Rs 48,000 cr liquidity in the system on March 09, 2012. Induced cut in policy rate by 50 bps to 8% on April 17, 2012 & a cut SLR by 1% to 23% on July 31, 2012. Earlier in the year, RBI decreased the policy or repo rate by 50 basis points in April. It slashed cash reserve ratio by 150 bps so far in 2012. Repo and reverse repo remained unchaged at 8% and 7% respectively. RBI continued with its primary policy focus in “the containment of inflation and anchoring of inflation expectations.” The core inflation did not show any sign of relief with non-food manufactured product inflation rose to 5.6% in August as against 5.1% in April. “Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky,” RBI said, reported Moneycontrol.
Many market participants were expecting the Reserve Bank of India to cut interest rates after the government announced some key policy reforms last week. But by keeping the repo rate unchanged at 25 basis points, the RBI has made it clear that it is more worried about curbing inflation in the short term. However, in a bid to ease liquidity in the system, the central bank has trimmed the cash reserve ratio by 25 basis points. INR – The Indian rupee rallied today to 4-month high by gaining 64 paise at 53.66 against the US Dollar on persistent selling of the American currency by banks and exporters as well as capital inflows amid strong equity market. Weakness of dollar in the overseas market also boosted the rupee value against the US Dollar. Capital inflows from foreign funds in equity markets also boosted the Indian Rupee.
The recent upward revision in diesel prices and rationalization of subsidy for LPG is a significant achievement but in the short-term, there will be pressures on headline inflation. Globally, as risks have risen, both the European Central Bank (ECB) and the US Fed have responded with liquidity measures intended to calm financial markets and provide further stimulus to economic activity. While these measures have certainly mitigated short-term growth and financial risks, they will also exert pressure on global asset prices, and particularly, commodity prices. Growth in several major emerging and developing economies (EDEs) is also moderating. Additionally, drought conditions in major grain-producing areas of the world and the possibility of further hardening of international crude prices in view of the fresh dose of quantitative easing impart ubiquitous risks to overall global macroeconomic prospects. A moderation in the trade deficit combined with increased inflows in response to domestic policy developments could ease pressures on the balance of payments. However, risks from global factors, in terms of both capital movements and oil prices will persist. Given these external risks, holding down the current account deficit to sustainable levels will depend on durable fiscal consolidation.
Equity Markets trimmed gains on expectations of more than what the Reserve Bank of India delivered today. The markets seemed to have already priced in the RBI’s move of a CRR cut. The Indian Rupee and bond prices weakened immediately after the RBI decision, with the yield on the 10-year bond rising 5 basis points from before the Reserve Bank of India statement to 8.17%. The one-year swap rate rose 8 bps to 7.68% from before the release. The BSE Sensex & Nifty also trimmed gains. In an unexpected, 24-hour frenzy last week, New Delhi unveiled a slate of measures to rein in a ballooning fiscal deficit and avoid a credit rating downgrade to junk. The Reserve Bank of India has held borrowing costs steady since a deeper-than-expected 50 basis point cut in April, and has repeatedly called on the government to do its part by improving its fiscal position, which had fuelled some expectation that it might cut rates as a gesture in reply to the government’s moves. The BSE Sensex had surged to its highest in 14 months, with retailers such as Pantaloon Retail India and airlines including SpiceJet rallying after the government opened up the sectors to foreign direct investment. The BSE Sensex had gained 0.88% as of 9:53 a.m., after earlier hitting its highest since July 26, 2011. The Nifty had gained 0.93%.
India announced more measures in around 24 hours than done in last 8 years, a sign of the urgency felt after high spending and low growth battered India’s finances in recent times. India allows FDI in multi-brand retail, aviation & hikes Diesel prices in a bold new round of reforms aimed at reviving growth & also avoid a Ratings Downgrade. India finally opened its retail and aviation industries to foreign direct investment in a strong bid to shake off a sense of crisis over the slowing economy and a stalled agenda, risking a political backlash. The Indian Government seemed to have made up its mind strongly to push ahead with fresh measures to revive the economy after months of dithering, even as it came under heavy fire from allies and opponents alike for raising heavily subsidized fuel prices. In the biggest policy push of Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart and Carrefour to own 51% of supermarket chains, shelved last year after alliance partners threatened to revolt, have been enforced, Commerce Minister Anand Sharma said yesterday. Overseas airlines are allowed to own 49% of Indian carriers, he said. New Delhi is also likely to announce some spending cuts on Saturday for the 2012/13 fiscal year to March, two government sources told Reuters. They did not offer any details on the size of the cuts. The government’s decision late on Thursday to raise diesel prices by 14%, the first such move in 15 months, is aimed at shoring up a weak fiscal position, but it was swiftly rejected by the opposition and allies within the Congress party-led ruling coalition.
India raised Diesel Price by 5 rupees per litre on Thursday in a move guaranteed to alienate the common man, but please foreign investors, oil marketing companies and ratings agencies. The Diesel Price increase “comes as a rare victory for the Prime Minister and Finance Minister Palaniappan Chidambaram against the ingrained populism” of the ruling alliance. Allies such as Mamta Banerjee, the chief minister of West Bengal state, have said they will continue to oppose moves to allow overseas companies Wal-Mart and others into the country. Banerjee’s party yesterday gave the government 72 hours to reverse the policy changes, Press Trust of India reported. Diesel accounts for more than 40% of India’s refined fuel consumption, and there is no doubt that this move will hurt farmers, commuters, businesses, inflation and the common man in the near term. But sometimes, governments must make hard decisions that threaten the popularity of its ruling politicians. India economy is slowing, the fiscal deficit is ballooning and no country wants its debt downgraded. If raising the price of diesel tells the world that India is serious about fixing its economy, rolling back the price would tell everyone that it’s not. A relatively small amount of pain now will avoid a great deal more pain in the future.
Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home. Infighting in the fragile coalition government led by Mr. Manmohan Singh’s Congress party had earlier forced it to shelve the retail and aviation reforms, casting a shadow over India’s aspirations to join the world’s leading economies. S&P on April 25 lowered the outlook onIndia’s sovereign credit rating to negative from stable, saying the move reflects a one-in-three likelihood of a ratings downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade. India’s inability in the past months to push through major reforms and ease its subsidy burden has put it in danger of becoming the first of the big “BRICS” emerging economies to see its credit rating downgraded to junk.
The measures are partly aimed at convincing the RBI to lower interest rates to help revitalize the economy. These latest measures will add to inflation in the short term, but will ultimately make it easier for the RBI – Reserve Bank of India to loosen monetary policy and help revive investor confidence. “I believe that these steps will help strengthen our growth process and generate employment in these difficult times,” Prime Minister Manmohan Singh said via Twitter. Hopes of a immediate response from the RBI, which meets on Monday 17 Sep, were not helped by inflation data that showed underlying price pressures remain strong. The increase in diesel prices will add 60 basis points to inflation. Indian demand for refined fuels is expected to rise 4% in 2012 to 3.4 million barrels per day. The government estimates the changes will reduce losses by about 203 billion rupees for the remainder of the fiscal year. But a reduction in excise duty on petrol may mean the net impact on government finances will be lower.
The government has championed the policy as a way to unclog supply bottlenecks that cause a third of fresh produce to rot before it reaches an Indian table. It is hoped global chains will offer better prices to farmers by cutting out middle men, while also pumping investment into cold storage facilities. But it will also come with stiff riders. Foreign retailers will only be allowed to set up in cities with a population of more than 1 million, and must source at least 30% of goods from local, small industries. State governments will have the freedom to decide whether to allow the supermarkets on their patch and the minimum investment will be $100 million, Commerce Minister Anand Sharma said. Half of that investment must be in rural areas. The Aviation reform will allow foreign carriers to take a stake of up to 49% in local airlines, providing a potential lifeline to the country’s debt-laden airlines.
The NIfty rose 2.62% to 5,577.65 points, while ending up 4.1% for the week. BSE Sensex rose 2.46% to 18,464.27 points, its highest close since July 26, 2011 and gaining for an eighth consecutive session, also rose 4% for the week. Banking sector surged on hopes that more government reforms could open up the prospect of interest rate cuts, although the Reserve Bank of India is expected to stay on hold at its policy review on Monday after August inflation rose more than expected. ICICI Bank gained 5.1%, while State Bank of India rose 5.6%. Blue chips rallied, with Reliance Industries surging 5.3%, while Larsen & Toubro rose 5.1%. SpiceJet rose 4.4%, bringing its gains over the past four sessions to 17.34%, while Kingfisher Airlines rose 7.5%. Pantaloon Retail gained 7.12%.
The Indian rupee posted on Friday its biggest daily gain in two-and-a-half months after the government’s diesel price hike raised hopes for more fiscal reforms, while the Federal Reserve’s stimulus action sparked a rally in global risk assets. The partially convertible rupee closed at 54.30/31 per dollar, gaining 2.1% from its close of 55.43/44 on Thursday to mark its biggest single-day gain since June 29. The INR rose as high as 54.29 during the session, its strongest since July 4. In the currency futures market, the most-traded near-month dollar/rupee contracts on the NSE – National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.29 with a total traded volume of around $7.6 billion.
Gold and Silver surged sharply higher after the FOMC announcement that the Federal Reserve has launched more Quantitative Easing- the much awaited QE3. Comex Gold December shot up from the day’s (also the week’s) lows close to $1702 to a fresh six-month high of $1,775.00 as forecasted a day back, the highest for a most-active contract since Feb. 29. Given 12 Sep in: Gold Futures may soon enter last Massive Rally Lap:- Alerted therein was that Comex Gold Futures remain strong till above the crucial $1702 level & can surge to target upside levels of $1756, $1774 & $1810 also. The longer term Target of $1855 for Gold Futures remains within close reach on fresh US Monetary Easing. Till a few minutes before the FOMC announcement Gold had slumped off on some nervousness & traders preferred to maintain a cautious approach on mixed sentiments towards the crucial & much-anticipated FOMC meeting results, but Gold surged happily within minutes to the day’s highs after the aggressive announcements. When combining the MBS- Mortgage Backed Securities and the purchases via Operation Twist, the Fed is buying $85 billion each month through the end of the year.
Commodities surged to a five-month high after the Federal Reserve announced a third round of fiscal measures to bolster the U.S. economy, fueling expectations that raw-material use will increase, reported Bloomberg. The Fed’s QE3 compliments the ECB Bond Buying program & the ratification of the ESM timing as appropriate to add to the Global efforts to contain a crisis spreading wide. Gold and Silver gained the most in 10 weeks, leading the rally. Markets had anyways harbored a bullish outlook for Gold Prices. Market expectations favored the view that Bernanke will announce the QE3 or some sort of fresh stimulus package yesterday, after last week’s atrociously dismal U.S. jobs report. The FOMC statement was aggressively accommodative, which surprised even those who were already expecting QE3 to be announced Thursday. The Fed will now pump $40 billion a month into the U.S. financial system and will keep interest rates very low until at least 2015. That news sunk the U.S. Dollar index which extended its losses & hit a fresh four-month low and was bullish for the U.S. Equity Market which surged to a new 4 year high. The LME – London Metal Exchange index, which includes Aluminum, Copper, Lead, Nickel, Zinc and Tin, rose for the fifth straight session, the longest rally in eight months. The highlight & also the most unusualness about the QE3 is that it has an open-ended timeframe which makes it positive for Gold because it heightens the inflation fears and weakens the dollar. The start to a Gold Price Rally & the QE3 timing were almost sealed when Federal Reserve Chairman Bernanke’s comments in Jackson Hole that QE could help alleviate the stubbornly high unemployment rate, calling the employment situation in theU.S. “A grave concern.” The final boost for Gold came when the U.S. Department of Labor released a lower-than-expected August employment report. On top of expected stimulus from the Fed, Gold found initial support on fresh stimulus from the European Central Bank and China.
The $40 billion of mortgage debt each month will increase liquidity, thereby increasing potential for more Inflation, which in turn is good news for Gold. The Federal Reserve didn’t set any limit on the ultimate amount of large-scale asset purchases it would buy or the duration of the program. This stimulus will be expanded until the Fed sees “sustained improvement” in the labor market. Comex Gold till above $1742.5 may keep its momentum intact for further rises to $1797.4, $1825.3 & then to $1855 – a major resistance zone. MCX Gold remains vulnerable on the INR valuations against the now declining US Dollar. MCX Gold may keep strength till above Rs. 32,140 for further Targets of Rs. 32,608 & 32,896 also.
Silver should be the Metal to watch out for as repeatedly alerted since long. A push above $34.75 has the potential to send Silver prices to above $44.20 & then close to $50.50 also. Base Metals have already shown a steady rise for the last two weeks & seem to have more steam left for further rises.
The IMF said yesterday that Greece would need a third round of financial bailout assistance. In South Africa, newspapers report striking Gold miners marched to hostels and mine shafts at the Gold Fields KDC West mine to prevent non-strikers from working. Around 15000 workers at KDC West began striking on Sunday. There have been calls for a nationwide mining strike following a series of disturbances of several platinum and gold mining sites, including Lonmin’s Marikana platinum mine, where 45 people have died since protests began, including 34 shot dead by police last month. Crude Oil prices advanced to a four-month high on the QE3 news & also on concerns that protests in the Middle East andNorth Africamay lead to supply disruptions.
The unusual QE3 definitely is a significant shift in FOMC policy & a very aggressive commitment to success on its mandates. The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.
“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said. The Fed does not have a defined upside limit to securities purchases, except to say that these will continue until the outlook for the labor market improves. If unemployment stays high, this means asset purchases will continue automatically. The FOMC said it would likely hold the federal funds rate near zero “at least through mid-2015.” The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
The decision risks provoking a renewed backlash from Republicans, including presidential nominee Mitt Romney, who say Bernanke’s policies threaten to ignite inflation while doing little to spur the economy. Representative Paul Ryan of Wisconsin, Romney’s vice presidential running mate, yesterday said the Fed is “trying to make up for failed fiscal policy.”
The U.S. economy remains vulnerable to the so-called fiscal cliff, the $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts, Bernanke said. Europe’s sovereign debt crisis may also weigh on growth, he said.
The much awaited third round of quantitative easing by the Federal Reserve & a fuel price hike decision by the Indian Government helped the Indian Equity benchmarks rise to a massive 7 month high. The government may also clear FDI in aviation and broadcasting soon which may give the necessary boost to the Indian Equity Market. The Indian Rupee has rallied up as expected but is yet trading around 54.60 per US Dollar, from the 58.4 life time low, seen a few months ago & yet has huge potential for corrections. Capital inflows from foreign funds in equity markets also boosted the Indian Rupee. MCX Gold Prices shot up yesterday to a New Record of Rs. 32,421 for October contracts from it’s the day’s low of Rs. 31,667. MCX Gold Prices have seen a steady rise even when Gold Prices have been on a decline in the International Markets due to the heavy depreciation of the INR / US$. For detailed explanations read more at – Posted 5 Sep:- MCX Gold Prices in India seem Vulnerable to Potential INR Volatility. Gold Prices in India seem poised to face a very high volatility period, taking into consideration the expected Monetary Infusions by the ECB & the US Fed any time now. These infusions, be it from the ECB or the US Fed, will potentially weaken the US Dollar & simultaneously strengthen the Euro. Comex Gold Prices will rise sharply on the same but the weakening US Dollar may strengthen the INR at the same time & in return weaken MCX Gold Prices (inIndia).
The BSE SENSEX climbed 423.62 points or 2.35% to 18,444.78 and the 50-share NSE Nifty jumped 132.15 points or 2.43% to 5,567.50, in line with strong global markets and the government’s move to hike diesel prices by Rs. 5 per litre to cut subsidies and reduce fiscal deficit. Nifty can expect a resistance towards a 5626 – 5671 range. A sustained Breakthrough above this range could lift the Nifty to above 6040 levels also.
The Wholesale Price Index (WPI) for the month of August rose to 7.55% compared to 6.87% witnessed in July. August inflation was expected at 7.06%. Meanwhile, June inflation has been revised to 7.58% (7.25%). Food articles inflation fell from 10.06% in July to 9.14% in August.
Gold Prices ended the previous session slightly lower on some mild profit-booking as traders maintained a cautious approach on mixed sentiments towards the crucial & much-anticipated FOMC meeting results on the fresh Quantitative Easing. Gold Markets for the day could witness choppy two-sided trades. After having been let down several times this year, markets may finally get to see some Fed action which may act as the driver of Gold Prices to higher levels. Gold Prices received a boost earlier yesterday on the ruling ratifying the ESM – European Stability Mechanism treaty by the German Constitutional Court. The court also capped Germany’s contribution at EUR190 bln, with parliamentary approval needed for any increase to this cap. Italian and Spanish bond yields declined following the court ruling, which is another step on the path to stabilizing the European Union sovereign debt crisis. Federal Reserve Chairman Bernanke holds a press conference today afternoon after the 2 day meeting ends. Market expectations favor the view that Bernanke will announce the QE3 or some sort of fresh stimulus package today, after last week’s atrociously dismal U.S. jobs report. Bernanke had mentioned the Unemployment in the US as a “Grave Concern” in his speech at the Jackson Hole symposium. Stable US Inflation condition and High Unemployment rate means perfect potential for monetary action. The U.S. dollar index hit another fresh four-month low, boosting Gold Prices in return. Inducing Quantitative Easing will lead to US Dollar weakness which in turn makes Gold Futures bullish.
Gold Prices continue to hold ground ahead of a crucial decision from the Federal Open Market Committee & seem to sustain the accelerating rally of the last 4 to 5 weeks. The Federal Reserve may also view the timing of the ECB Bond Buying program & the ratification of the ESM as appropriate to add to the Global efforts to contain a crisis spreading wide. The Fed has been waiting long enough & has been keenly observing the kind of action European Union takes, & to then add to the action. Now could be the most appropriate time. Gold Prices are likely to shoot up higher if the FOMC – Federal Open Market Committee announces fresh Quantitative Easing or some sort of fresh stimulus package, but a market with already-heightened expectations for such an outcome would be extremely vulnerable to a sharp sell-off if the Fed does nothing of the sort, which is again less likely. A pullback in the Gold markets could remain limited if the Fed signals that policy-makers remain dovish and easing is still a large possibility.
“People have priced in quantitative easing and the disappointment factor is very high,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “If this Quantitative Easing does not materialize, you’d surely see gold prices fall,” reported Bloomberg.
Markets anyways harbor a bullish outlook for Gold Prices. A bullish situation in Gold Prices is evident on the longer-term charts & could easily digest any shallow or short-lived retractions. Any further major Rally in Gold Prices though could be the last lap for a long time to come. Read more in: Gold Futures may soon enter last Massive Rally Lap. This last but massive rally does not include the small one that has been seen in the last few weeks. It essentially would have to be a major one with Gold Prices soaring to new lifetime highs, probably to our long term forecast of $2200 as given way back in the year 2008. This Bull Run in Gold Prices could commence now or any time soon. The current rally in Gold Futures may remain limited to an upside target of $1855 but for Gold Prices to rise & maintain the rally momentum further, the QE3 would have to be endorsed very strongly. Fresh US Quantitative Easing – The QE3 will probably take the form of outright purchases of U.S. Treasuries and perhaps mortgage-backed securities also to the extent ranging from $550 billion to $700 billion. The Fed also has the option to (Only or Also) extend its low-rate guidance from late 2014 to the mid of 2015 at least.
The IIP – Index of Industrial Production data released by the Central Statistics Office showed output at factories, mines and utilities has grown marginally at 0.1% in July compared to -1.8% in the previous month. Poor show by manufacturing, mining and capital goods sectors, reflecting weak economic activity add to the woes of IIP pressure. Capital goods output, seen as a key indicator of future investment, slumped 5% in July against a contraction of 13.7% in the same month a year ago. The pace of industrial expansion was slower than a forecast of 0.3% growth in a Reuters poll. In June, output contracted 1.8%. Growth in factory output, as measured by the index of industrial production (IIP), was 3.7% in July last year, and 6.1% in the April-July period in 2011-12. The manufacturing sector, which constitutes over 75% of the index, witnessed a contraction in output by 0.2% in July, as against growth of 3.1% in the same month last year. The data was more evidence that the problems afflicting Asia’s third largest economy are far from over. GDP has grown 5.5% or less in the last two quarters, a far cry from the 7-8% growth seen in the preceding period.
The performance of the manufacturing sector in April-July was poor as output contracted by 0.6%, as against a growth of 6.5% in the four-month period of last year. The output of capital goods contracted in April-July period by 16.8%, as against a growth of 8.2% in 2011-12. Mining output dipped in July by 0.7%, against a growth of 0.7% on A Year-on-Year Basis. The sector’s production in April-July quarter declined by 0.9%, compared to a growth of 0.6% in 2011-12. Consumer goods production was up 0.7% in July as compared to 6.4% growth in the same month last year. During the April-July period of this fiscal, the growth in the segment was 3.3%, compared to 4.9% in the four month period a year ago. Capital investment in the economy grew a meagre 0.7% in the quarter ending in June from a year earlier. Capital goods output has grown only once in the past 11 months. Structural woes are also stoking inflation, which has barely dipped below 7% in nearly three years. Headline inflation probably picked up to 6.95% in August from 6.87% in July. A senior Congress party leader told Reuters that party chief Sonia Gandhi had yet to decide on cutting subsidies on fuel, seen as the most urgent move to tackle a swelling deficit. With the manufacturing Purchasing Managers’ Index (PMI) easing to a nine-month low in August, the outlook for the sector does not look promising.
A positive verdict from the German Constitutional Court gave a new lease of life to global as well as domestic markets. Indian Equity Market benchmarks made the most of the positive mood and the BSE Sensex soared past the 18,000 mark, recording a six month high closing. The Nifty too moved above the 5400 mark, ending the day at 5431. The domestic environment too looks pretty good with the monsoon picking up and FII flows to India increasing over the past couple of months.
The IIP data or the Index of Industrial Production data has a direct co-relation to the stock market. Every month the stock markets wait with bated breath to hear the IIP numbers. These IIP Numbers decide the market movement. IIP is the key tracker of industrial production. The IIP is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994.
IIP represents the state of health of the industry. If the IIP exhibits an increasing trend, it indicates that industrial production is steadily rising, thus indicating a healthy state of affairs for the economy. Under such conditions, one can expect a growth in the GDP. On the other hand, a decreasing trend of IIP indicates falling industrial production which becomes a cause for concern for economic growth. Today it is important because with the news of recession hovering over the horizon, better IIP figures would bring in hope and optimism among investors and the stock market with regards to the state of the economy.
The optimism amongst the stock markets and investors may translate into the markets going up. This is because the markets expect that company profits are set to rise and thereby leading to the growth in the country’s GDP. It could also lead to an improvement in the country’s economy, thus making it an attractive investment destination to foreign investors. The first time IIP was used with the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times. Currently, IIP uses 1993-94 as the reference year. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector. They are segregated into 3 parts:
1) Manufacturing. 2) Mining. 3) Electricity.
They are also classified on the basis of usage:
1. Capital goods
2. Basic goods
3. Non-basic goods
4. Consumer durable’s
5. Consumer non-durable’s
The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like The Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and Central Electricity Authority. But at times, the entire data may not be easily available. Hence, some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently. Though IIP does indicate the condition of the country’s economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance on the basis of underlying speculative practices. So one needs to ascertain the reasons behind an increase or decrease in IIP figures, before investing.
ESM verdict boosted global stocks and the Euro currency as investors breathed a sigh of relief that the Eurozone’s rescue fund for nations in crisis could soon take effect after months of delay. The euro hit a four-month high against the dollar following the ruling, and German bond futures fell to their lowest level since July. A week ago, the European Central Bank announced that it was prepared to buy “unlimited” bonds from stricken Eurozone members to reduce their borrowing costs. But its plan depended on the ESM going through. The long sought-after Eurozone Bazooka has been delivered within a span of a week; with the Eurozone finally receiving conditional but unlimited ECB bond purchases and the ESM. German Foreign Minister Guido Westerwelle called the ruling “a smart move” and Economy Minister Philipp Roesler said it was “a good day for Europe”. “With this clear decision from the Constitutional Court, we came an important step closer to the goal of keeping the euro stable,” Roesler said, reported Reuters.
Germany’s constitutional court ruled today (rejecting bids to halt) that the ESM – European Stability Mechanism treaty is in line with the German constitution, clearing the way for Berlin to ratify the Eurozone’s new 500 billion- euro ($644 billion) and permanent rescue fund under certain conditions on its use. Germany’s constitutional court insisted the German parliament have veto powers over any future increases in the size of the fund. The Federal Constitutional Court in Karlsruhe today dismissed motions filed by groups including a conservative lawmaker and an opposition political party that sought to block the fund, known as the European Stability Mechanism, and a deficit-control treaty championed by Chancellor Angela Merkel. The court stipulated that a cap of about 190 billion euros be set on German liabilities before ESM ratification, unless parliament decides to back extra funds.
Legal experts said the court’s decision underlined Germany’s commitment to deeper European integration despite the misgivings of the plaintiffs. They had sought to block the introduction of the ESM on the grounds that parliament’s sovereign power over budget matters was being eroded. The judges said that Germany must state when ratifying that it won’t be felt bound by the treaty unless these reservations are efficiently met. Much in the crisis hinges on the permanent ESM, which is designed to go into operation as the temporary European Financial Stability Facility is phased out through next year. The bailout fund would work in tandem with the ECB in buying bonds to lower yields for states such as Spain and Italy. The court also ruled that a clause in the ESM treaty which seeks to keep decisions of the fund confidential “must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat (upper house)”, meaning both chambers would have the right to be consulted on the ESM’s activities.
Germany is the only country in the 17-nation Eurozone that has yet to ratify the European Stability Mechanism (ESM), which is meant to erect a 700 billion – euro firewall against the spread of the three-year-old sovereign debt crisis. Jean-Claude Juncker, who heads the group of Eurozone finance ministers, said the board of governors of the ESM would meet for the first time on October 8, a sign of optimism that the fund will be operational next month.
ECB to police banks, closer fiscal integration designed to end years of financial and economic turmoil in the Eurozone. European Commission President Jose Manuel Barroso outlined the proposal in his annual “state of the union” address, laying out a path to further economic and fiscal integration to underpin the future of the euro currency. “The crisis has shown that while banks became transnational, rules and oversight remained national,” Barroso told members of the European Parliament. “We need to move to common supervisory decisions, namely within the Euro area.” The single supervisory mechanism proposed today will create a reinforced architecture; with a core role for the European Central Bank. It will be supervision for all Euro area banks. The proposed banking reforms, which need to be approved by European Union member states, aim to break the link between heavily indebted countries and their struggling banks, tackling a core element of the debt crisis that has afflicted Europe since early 2010. A banking union foresees three steps: the ECB gets the power to monitor all Eurozone banks and others in the wider EU that agrees to the oversight; the establishment of a fund to close troubled banks; and a fully fledged scheme to protect citizens’ deposits across the Eurozone.
Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the Eurozone’s 17 members that has frustrated investors and helped drive up borrowing costs for weaker states. Handing powers of supervision to the ECB also unlocks the possibility of direct aid to banks from the Eurozone’s permanent rescue scheme, the European Stability Mechanism (ESM), although it is not clear when Spain and others would benefit. Under the terms of the proposal, the ECB would be at the head of the current fragmented system of national regulators, with the power to police, penalise and even close banks across the Eurozone. The ECB would also gain powers to monitor banks’ liquidity closely and require them to keep more capital to protect themselves against future losses. Germany, the Eurozone’s economic heavyweight, is opposed to allowing the ECB supervise all Eurozone lenders. Berlin says the central bank will be overstretched if it has to monitor all 6,000 Eurozone banks. Although Britain, outside the Eurozone, will not join the scheme, many international banks in London have operations in the Eurozone that will be affected by the ECB’s new supervisory reach.
Gold Futures have rallied for the last 4 weeks largely on hopes for further stimulus not only from the US Federal Reserve but also the European Central Bank and China. Gold Futures Markets remain focused today on the German constitutional court ruling on the validity of the ESM – European Stability Mechanism & the all important 2 day meeting of the FOMC – Federal Open Market Committee of the U.S. Federal Reserve starting today, winding up tomorrow, 13 Sep 2012. There were last-minute efforts on yesterday by some EU politicians to delay the court ruling, but those efforts quickly failed and the ruling will be announced today & markets expect the German court to uphold the ESM measures – a huge positive for the entire Commodity & Financial Markets.
Stable US Inflation condition and High Unemployment rate means perfect potential for monetary action. Last Friday’s atrociously dismal U.S. jobs report likely opened the door wider for a fresh U.S. Quantitative Easing announcement by the FOMC which will be bullish for the Equity and Commodity Markets, at least initially. Fresh US Quantitative Easing – The QE3 will probably take the form of outright purchases of U.S. Treasuries and perhaps mortgage-backed securities also to the extent ranging from $550 billion to $700 billion. FOMC is widely expected to also extend its low-rate guidance from late 2014 to the mid of 2015 at least.
Comex Gold Futures yet in uptrend, now have a support at $1702, which if breached, may slump to $1669 or $1651 levels. Gold Futures remain strong till above the crucial $1702 level & can surge to target upside levels of $1756, $1774 & $1810 also. The longer term Target of $1855 for Gold Futures remains within close reach on fresh US Monetary Easing. Silver Futures Prices remain Bullish till above the crucial $30.70 levels. On a sustained uptrend momentum, Silver Futures could easily target $34.30 & $36.10. The longer term target for Silver Futures of $44.20 & then $50.50 does not seem difficult if Silver Futures maintain sustained momentum & higher trading volumes above $35.20.
Gold Futures net longs have jumped around 40% in last 2 weeks. Gold Futures have till now maintained an upside momentum but the rise has not been astonishingly swift which was the case in the last few years, but are most likely to shoot up sharply higher if the FOMC – Federal Open Market Committee announces fresh Quantitative Easing on Thursday. But a market with already-heightened expectations for such an outcome would be vulnerable to a sell-off if the Fed does nothing. That is also a huge possibility as the Fed Chairman Bernanke would want to avoid any appearance that he might be trying to influence political elections in November. The US Dollar would probably soar in that event & Gold Futures could face a bout of profit taking, but for a couple of days only. The next move in Gold Futures would hinge on just what kind of language policy-setters use. Gold Futures may not see steep declines on bottom fishing by market participants who will still likely retain expectations of future easing, and therefore harbor a bullish Gold Futures outlook. US trade deficit widened in July by 0.2% to $42 billion. The bigger the deficit gets the higher, market interest in Gold rises. Demand for Gold from physically backed exchange-traded funds yet remains strong. Gold ETF holdings tracked by Bloomberg continue to march higher to a new record 79.748 million ounces, having expanded by around 2 million ounces in the past month. Gold ETF inflows since the beginning of the month are now at over 20 tons in total, and at 90 tons since the end of July.
Inducing Quantitative Easing will lead to US Dollar weakness which in turn makes Gold Futures bullish. Silver & Base Metals will also rally as trader’s hedge against the falling US Dollar. With the Federal funds target rate already effectively at zero, markets are watching to see whether the Federal Reserve undertakes a third round (QE3) of Treasury security purchases, intended to drive down long-term yields. The rally in Gold Futures Prices will be proportional to the size of the Quantitative Easing announced. The further rally in Gold Futures may also be limited to $1855, much below its all time high of $1925 seen last year, as Gold Futures seem to have largely already factored in more Quantitative Easing, But Silver Futures & other Base Metals may have a larger & a sharper medium term rally. Silver Futures are currently priced way below last years lofty high’s & have a long way to go. Silver Price Rally in the last 5 weeks has already outperformed the Gold Prices rally. Fundamentally, Shortage of supply in addition to a period of downside consolidation gives Silver a double advantage of a swifter & a larger price rise. Gold Futures are down only by a paltry 10% to the present $1730 level from its all time high if $1925 but on the other hand, Silver is yet down 32% to the present $33 levels from its high of $50 seen last year, providing a better opportunity of a faster upside recovery.
Gold Futures price rally may well be on its last lap. The Impact of Quantitative Easing on Gold Prices may not remain long lived as Physical Gold buying; one of the most important factors for sustainability of a long price rally is sorely missing. India, the world’s largest consumer of Gold is expected to see a 50% drop in Gold Demand due to Record high Gold prices on the back of a sharp decline of the INR / the US Dollar in the past 12 months. MCX Gold Futures have seen Gold Prices touch a Lifetime high of Rs. 32,077 per 10 grams for October Gold Futures on the exchange. Physical Gold has surged above Rs. 32,275 in the Indian Markets which has slacked the demand. Higher Gold Prices have largely induced re-cycling of Gold. The severe Austerity measures instilled in the European nations can also push people into selling physical Gold at higher prices for survival purposes, thus increasing the market inflow of physical Gold & creating a case of more supply than demand – A perfect scene for a major price slump. Official Buying by Central Banks & Gold ETF inflows though have been steadily increasing till now & may provide some flooring to the price decline when ever it may occur.
Experts Speak: EconMatters (By Tyler Durden of ZeroHedge)
Moody’s Warns of Possible US Debt Downgrade Now – 13 months ago, in the aftermath of the debt ceiling fiasco, which we now know was a last minute compromise achieved almost entirely thanks to the market plunging to 2011 lows, S&P had the guts to downgrade the US. Moody’s did not. Now, it is Moody’s turn to fire up the threat cannon with a release in which it says that should the inevitable come to pass, i.e. should congressional negotiations not “lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term” then “Moody’s would expect to lower the rating, probably to Aa1″ or a one notch cut.
Moody’s also warns that should a repeat of last year’s debt ceiling fiasco occur, it will also most likely cut the US. Of course, that the US/GDP has risen by about 8% since the last August fiasco has now been apparently forgotten by both S&P and Moodys. Sadly, continued deterioration in the US credit profile is inevitable, as every single aspect of modern day lives that is “better than its was 4 years ago” has been borrowed from the future. More importantly, with the S&P at multi year highs courtesy of Bernanke using monetary policy to replace the need for fiscal policy, Congress will see no need to act, and Moody’s warning will be completely ignored. This will continue until it no longer can.
Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook, says Moody’s Investors Service in the report “Update of the Outlook for the US Government Debt Rating.”
If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody’s.
If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.
Moody’s views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called “fiscal cliff” actually materialized—which could lead to instability. Moody’s would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.
Moody’s notes that it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The Aaa rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.
The rating outlook also assumes a relatively orderly process for the increase in the statutory debt limit, says Moody’s. The debt limit will likely be reached around the end of this year, and the government’s ability to meet interest and other expenses out of available resources would likely be exhausted within a few months after the limit is reached.
Under these circumstances, the government’s rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury’s resources. Moody’s took a similar action during the summer of 2011.
And this is where we stand: Moody’s has basically said that unless the red line stop going from the lower left to the upper right it may, just may, do something:
Experts Speak: EconMatters (By Morningstar via QFinance)
Much has been said about the recent data coming out of China. Not only has the aggregate rate of growth fallen below 8% but recent anecdotal evidence in iron ore prices in particular has also been pointing to weakness. We remain bullish on the overall Chinese growth story and see the current economic softening most likely as an intentional government driven slowdown, rather than a bust. We don’t currently subscribe to the doomsday scenario that China is about to drift into insignificance and the points to back our investment thesis are summarized below. Our view is based on a long term ideology.
First of all, the structure and strategy around the Chinese economy cannot be viewed in the same way as other western developed economies. An investment view on China needs to consider one of the most important underlying elements – the ability of the central government to navigate its way through challenges. The Communist party needs the economy and associated flows of capital in order to sustain its existence. For many Chinese, this is the only system of government they have known. The US and European economies can withstand a severe financial shock without a shock to the underlying system of government, but in China the same does not hold. The Communist party will do all it can in order to sustain social and political order and the economy is to a large extent the most important part.
A collapse in China’s economy could see a collapse to the system of government, something the ruling party cannot tolerate. So the allocation of resources and fiscal approach is not purely driven by short term economics.
China’s planners are in the late stages of forming the next major economic shift – outwards from coastal cities towards the less developed rural communities. More on this point shortly. China knows that its coastal cities will soon start to lose their competitive cost advantage to other economies in Southeast Asia and even places like Mexico. This means more investment in social housing, public infrastructure and industry to ensure a more even allocation of employment opportunities and social order should the recent migration towards coastal centres reverse.
Balancing out an economy as vast and diverse as China’s isn’t an easy task and a lot of hard work to ensure sustainable growth has been put into place during 2012. The intensity in infrastructure investment, which was initiated in 2009 due to the threat from global forces, has largely phased out but not disappeared. This has seen the iron ore price for example fall from around US$180 per tonne to around US$90-100 recently. The commonly quoted spot price for iron ore, unlike copper or gold for example, isn’t the best measure – it’s one reference point. Many iron ore producers in Australia, for example, negotiate various prices based on grades and shipping rates to individual steel mills.
China’s steel mills would have to drastically stop consuming for the iron ore price to remain below US$100 per tonne. The marginal cost of production, when excluding huge capital costs, is currently at around US$50 per tonne. To put the current spot iron ore price into perspective, Australian potato growers are currently getting around $240 per tonne of produce sold into the wholesale market. A tonne of wheat is trading at a similar amount in European markets. A ramp down of China’s steel industry would see large job losses throughout the whole construction industry and large social unrest when applying the impact throughout the whole Chinese economy. This brings pressure from local and provincial governments towards the central government, a threat which should not be underestimated. China is the largest global manufacturer of steel, around 10 times the size of Russia and around 15 times the size of Germany.
Iron ore as a commodity class is not the only indicator of China’s production capacity. Copper is also an important point of reference. Used in a whole range of industries, China is also the largest marginal consumer of copper by a large factor. Chinese consumption of copper per capital is still almost half that of North America. Not all of China’s consumption finds its way into exported goods, in fact the proportion of copper used in domestic consumption has been growing over the past decade. The current copper price near US$3.45/lb at the time of writing is somewhat off its highs above US$4/lb but still well above the recent historical average. Copper stockpiles as measured by the London Metal Exchange are sitting towards the lower end of their five-year historical averages. Many copper producers – including the top ten global producers – are struggling to maintain grades above an industry average of 1.4% per unit of ore. New mines come with large capital costs and often sovereign risk factors, not to mention rising operating costs. The world class Escondida mine in Chile is a perfect example, so too is BHP Biliton’s (BLT) decision not to proceed with its Olympic Dam project in South Australia last month due to rising capital cost constraints.
We understand that Beijing is currently finalizing plans for a Central Plains Economic zone – a region which has traditionally served Northern China’s agricultural belt and been an important corridor for the transport of goods between rural and coastal economic centres. The new zone will cover almost 300 thousand square kilometres and encroach into Henan and neighbouring provinces. The aim is to create a buffer to any social fallout in the moderating economic activity in the coastal hubs. As workers migrate back inland, the aim is to have the Central Plains regions self sufficient so workers can bring back their capital and skills with job prospects. The Central Plains Economic zone is expected to commence in 2015 and will by then be the largest single zone in terms of land mass and population. The region also houses an enormous and relatively young population, which means it has a large potential labour force and decent consumer base. This is only a temporary period of moderation
We note this not because the Central Plains Economic zone is likely to solve all of China’s economic issues but that it is an example of a new strategy to shift growth policies inwards. The pipeline for future development opportunities like this is huge and thus will underpin a very long investment process in China, which in turn will require global commodities like iron ore. There will be a timing gap between new projects like the Central Plains Economic zone coming online and the 2009-led intensive construction boom phasing out. Perhaps we’re seeing the timing impact of this right now, which is leading to lower iron ore and coal prices, but our point is to again stress that this is only a temporary period of moderation. Henan in the central planes is still relatively small in its share of attracting foreign direct investment, around $10 billion last year but this was up by almost 50% on the prior year. Companies like Pepsi (PEP) and Foxconn (02038) have been part of this investment shift. China understands the importance of such development in order to address the social needs of its nearly 300 million migrant workers – roughly the size of the USA’s total population.
There are other signs of optimism outside of official government investment plans. The Chinese banking system has held up relatively well despite the liquidity issues in Europe and the engineered slowdown in the domestic economy. Industrial and Commercial Bank of China (601398) – the world’s largest bank by market capitalisation – booked an 11% increase in its second quarter earnings which was broadly in line with hosed down market expectations. Six months ago many market commentators were calling for a collapse in the price of banking stocks due to an impending property collapse in China, which has not occurred. The rise in profits came despite an elevation of higher bad debt charges. Despite this, bad loan ratios in China are still less than 1% which is the envy of many European counterparts. As interest rates fall in China, so too does the deposit rate which many Chinese rely on as their source of saving. It provides a cheap source of funding for the banks and insulates their earnings from potential bad charges.
My last point is on Macau – one of two special administrative regions of China which is quickly growing to become the gambling capital of the world. Macau’s gaming numbers are a good forward indicator to confidence in the mainland economy. Gamblers in Macau are not a perfect sample for the broader economic picture but they form part of the puzzle, much like Las Vegas visitor numbers correlate to confidence in the US economy. Gross table gaming revenue for the first two weeks of August showed an improvement on the prior month despite adverse weather impacts. July booked one of the slowest monthly gains since 2009 so the improvement is welcomed. Many gaming analysts have recently revised upwards their August numbers to anywhere from 4%-6% compared to 1.5% growth booked in July. This compares with 12.2% and 7.3% booked in June and May respectively.
Over the next few months we will continue to expand our investment thesis on China. The current negative sentiment around China could remain until the last two months of 2012 before government fiscal plans like the Central Plains Economic zone are announced and further monetary loosening takes place. City Index sees inflation as likely rising towards the People’s Bank of China’s official 4% target range in the first months of 2013. August PMI is likely to surprise on the downside given recent flash data but the trend should improve in September-November.
Copper has found solid support above US$3.30/lb and investors continue to see this as an opportunistic entry point. A further selloff in iron ore stocks could provide a great medium term trading opportunity for those with patience – BHP Biliton (BLT), Rio Tinto (RIO), Atlas Iron (AGO) and Fortescue Metals (FMG) could all represent compelling value at current prices.
We also note the issues Glencore (GLEN) is having with its proposed tie up with Xstrata (XTA) after Qatar’s sovereign wealth fund vowed to vote against the merger. Despite being a global commodities trader and mine operator, Glencore lacks decent iron ore exposure and might see the current circumstances as an opportunity to shelve Xstrata plans and focus elsewhere. This may lead the firm to perhaps take a strategic holding in one of the Australian iron ore companies.