Cheap Gold and Silver prices – the deal of a lifetime?

20 Jul

Eerily, perhaps the worst precious metals market sentiment currently exists that has been observed since the early 1970’s.

mcx gold silverThe gold and silver markets have fallen dramatically in the wake of the FOMC signaling an end to its controversial Quantitative Easing or QE programs. The pricing in of such FedspeakQE taper-talk has also triggered a yield spike in southern Europe that could deepen that region’s existing debt crisis.

Furthermore, sharply rising interest rates have resulted as billions of investors exit perhaps the largest financial bubble ever seen. The end of cheap real estate refinance has finally arrived as mortgage rates are now approaching five percent.

Rising government bond rates mean more money that will increase the chances of stealth inflation. The Fed acting to crush the effects of inflation may even lead to more money printing.

Other background factors

In addition, rising oil prices have been cutting in to already lofty equity valuations, as fallout from the “Black Swan” in the Gulf of Mexico expands. Gasoline prices are already rising.

The public has also been caught largely off guard by embroiling social unrest in various parts of the world. This dissatisfaction is indirectly the result of exporting inflation that is collateral damage from currency depreciation wars.

A dead precious metals mining sector has been cutting off any “perceptual” idea of supply as paper metal prices are now well below the cost of production. New supply matters little for gold. For silver, by the time the sector catches up with demand, there will be no silver left.

Precious metal prices suffer despite bullish fundamentals

Offset by an unprecedented and record breaking surge in physical demand for silver, from silver coins to international demand. Yet, eerily, perhaps the worst precious metals market sentiment currently exists that has been observed since the early 1970’s.

Bullion banks are currently long buyers by every indication, yet they are still maintaining a concentrated short position in the futures market. This could be an intentional effort to suppress physical metal prices by selling paper so that they can accumulate real metal more cheaply.

In short, it is unfathomable how low the precious metals markets are by any measure. Technically, the market could still go lower, but does this change the likelihood that investors have now been presented with what seems to be the precious metal buying opportunity of perhaps multiple lifetimes?

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Commodity hedge funds bear longest losing streak on record

19 Jul

Funds betting on commodity price moves have lost money every month since January, their joint longest losing streak on record, raising more doubts about their ability to make money at a time when the commodity “supercycle” may be over.

The average fund slid 3.58 percent in the first six months of the year, according to a widely watched Newedge commodity index. Funds have only suffered five consecutive losing months once before, in 2002-2003, the index shows.

Hedge funds market themselves as capable of making money in all markets, yet funds trading commodities as varied as gold, grains and gas, have failed to turn an annual profit in the last three years.

The weak performance will put more pressure on the industry to lower fees and introduce clawbacks, which enable investors to reclaim some performance perks paid to hedge fund managers in boom times if the returns they hope to achieve fail to continue.

Worries about cooling demand in key markets like China, and a huge shift in the supply-side from shortage to glut, has sent prices tumbling in recent years, and left many warning that the end of the commodity “supercycle” – the long period of rising commodity prices – is here.

“Historically most of these funds have been a levered beta play on the commodity cycle, or in some cases arbitrageurs of commodity spreads,” Michele Gesualdi, portfolio manager at hedge fund investor Kairos, said.

“The end of the supercycle has hurt the first area, while the volatility and discrepancies that have arisen in forward markets have made life difficult for the second.”

Adding to the sector’s woes, hedge funds which trade other asset classes such as equities have rebounded this year, including those that trade mining and energy shares.

The USD 1 billion fund of Clive Capital, a firm which trades oil and ran about USD 5 billion at its peak, is down 3.5 percent to June 28, performance data shows. Krom River’s Commodity Fund has lost 4.4 percent to end-June, while Brevan Howard’s Commodities Strategies Fund is off 2.5 percent to June 28.

Krom River’s chief executive Itay Simkin said that despite falling prices, commodities were still a very good investment due to production problems, urbanisation, decent economic growth rates and a lack of forward investment in mining.

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Other funds mentioned in this story either declined to comment or could not immediately be reached for comment.

Funds trading bullion are nursing some of the heaviest losses. Gold has tumbled this year on expectations the U.S. Federal Reserve will cut back on its money-printing programme, which had driven gold to record highs.

John Paulson, the billionaire U.S. investor, has seen his gold fund, his smallest with USD 300 million in assets, plunge 23 percent in June and is down 65 percent this year.

Despite the losses, most managers are not down as much as commodity prices this year – the 19-commodity Thomson Reuters-Jefferies CRB index fell 5.7 percent through end-June.

Some have also shone. After losing 30 percent in 2011 and 7.6 percent and a big chunk of his assets in 2012, Mike Coleman’s Merchant Commodity Fund is up 24.2 percent this year.

But the bigger concern for commodity funds is proving they can consistently make money amid a sustained downward trend in prices.

The problem, investors and managers say, is that the long, gradual trend of rising prices has been replaced with shorter, more uncertain trends, in which prices can plunge suddenly, making it difficult to profit from their slide.

Commodity prices, down 22 percent from a 2011 peak, have entered bear market territory, while volatility – which some funds thrive on – has also fallen, challenging managers further.

Oil Down Slightly in Asia

18 Jul

Oil futures traded modestly lower in the early part of Thursday’s Asian session as traders in the region digested a swath of key central bank and data points out of the U.S. Wednesday.

On the New York Mercantile Exchange, light, sweet crude futures for September delivery fell 0.14% to USD106.21 per barrel in Asian trading Thursday.

Crude traded slightly higher Wednesday in the U.S. after the U.S. Energy Information Administration said in its weekly report that U.S. crude oil inventories fell by 6.9 million barrels in the week ended July 12, blowing past expectations for a decline of 2 million barrels.

mcx crude oil

Total U.S. crude oil inventories stood at 367.0 million barrels as of last week. The report also showed that total motor gasoline inventories increased by 3.1 million barrels, confounding expectations for an decline of 0.5 million barrels.

Oil also got a small lift after the Fed’s Beige Book business survey, which encompasses the central bank’s 12 regional banks, showed manufacturing expanded in most regions since the last report. The report showed modest growth across 11 districts with Dallas showing strong growth.

In other economic news out Wednesday, the Commerce Department said U.S. housing starts fell 9.9% to a seasonally adjusted annual rate of 836,000 unit in June, the lowest reading since August 2012. Analysts expected starts to rise to 959,000 units. Bad weather was cited as one of the reasons for the slack reading.

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Meanwhile, Angola, a member of the Organization of Petroleum Exporting Countries, forecast its daily output for September will be 1.67 million barrels, well below the 2 million barrels per day target. The country expects to pump 1.7 million barrels a day next month. Angola is Africa’s second-largest oil producer behind fellow OPEC member Nigeria.

This year, Angola has averaged about 1.72 million barrels per day in production, below the daily average of 1.9 million barrels for Nigeria. Angola is banking on new offshore discoveries to boost output in the future.

Elsewhere, Brent futures for September delivery inched down 0.04% to USD108.63 per barrel on the ICE Futures Exchange.

Copper drops 1% as dollar strengthens ahead of Bernanke

17 Jul

copper

Copper futures came under heavy selling pressure on Wednesday, as the U.S. dollar strengthened ahead testimony on monetary policy by Federal Reserve Chairman Ben Bernanke later in the day.

On the Comex division of the New York Mercantile Exchange, copper futures for September delivery traded at USD3.139 a pound during European morning trade, down 1.4% on the day.

New York-traded copper prices fell by as much as 1.5% earlier in the day to hit a session low of USD3.137 a pound.

Copper prices struggled for upside traction due to a broadly stronger U.S. dollar, as dollar-priced commodities become more expensive to investors holding other currencies when the greenback gains.

The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was up 0.2% to trade at 82.80.

Market participants looked ahead to Bernanke’s testimony on monetary policy amid speculation over the timing of a possible reduction to the bank’s USD85 billion-a-month bond buying program.

Copper prices advanced 2.7% last week after Bernanke said the Fed will continue to maintain accommodative monetary policy for the foreseeable future.

Investors also looked ahead to the release of key U.S. data on housing starts and building permits later in the day.

Any improvement in U.S. economic activity could scale back expectations for further easing, boosting the dollar and weighing on silver.

The Fed’s stimulus program is viewed by many investors as a key driver in boosting the price of commodities as it tends to depress the value of the dollar.

Elsewhere on the Comex, gold for August delivery shed 0.5% to trade at USD1,284.05 a troy ounce, while silver for September delivery fell 0.9% to trade at USD19.74 a troy ounce.

Moves in gold and silver this year have largely tracked shifting expectations as to whether the U.S. central bank would end its bond-buying program sooner-than-expected.

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Investors Flee Gold as Long Positions Hunker Their 2002 low

17 Jul

Although gold is perched near its highest levels in nearly three weeks, investors remain wary of buying it. BofA analysts note that market players have largely liquidated their bullish bets on gold: at USD 2.1 billion, bullion long positions are hunkered at their lowest levels since 2002, the bank said.

mcx gold tradingGold has fallen out of favor with large speculators, according to data from Bank of America/Merrill Lynch, with positioning sliding to its lowest spot in nearly a decade.

Although gold is perched near its highest levels in nearly three weeks, investors remain wary of buying it. BofA analysts note that market players have largely liquidated their bullish bets on gold: at USD 2.1 billion, bullion long positions are hunkered at their lowest levels since 2002, the bank said.

Meanwhile, “speculative shorts in gold are their largest ever,” BofA added.

Despite global central banks’ having no intention of removing their collective foot from the monetary throttle anytime soon, gold bulls have been chastened by a dizzying selloff that has shaved more than 25 percent from bullion’s value in 2013.

Hedge fund guru John Paulson’s flagship gold fund has plummeted by more than 65 percent this year, according to reports.

Over the last week, gold has staged a modest rebound. Still, it is far from the heady days of 2011, when the Federal Reserve’s loose monetary policy prompted gold bugs to bid bullion up to a record USD 1,900 an ounce.

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BofA called market signals on gold “extreme” and said that positioning “remains in the contrarian buy zone,” given that the metal has broken above a near-term resistance area at USD 1,270 an ounce. That creates a “near-term base and positioning-led squeeze higher,” the bank added.

—By CNBC’s Javier E. David

History Shows Gold Could Fall Another $500/oz

16 Jul

A slowdown in growth in China, as evidenced in data released on Monday which showed that growth had slowed to 7.5 percent, was one potential indicator of lower gold demand.

gold updatesThe price of gold could fall below USD 800 an ounce over a long-term horizon, a drop of some USD 500 from its current level of USD 1,294 an ounce, Duke University’s Campbell Harvey told CNBC on Monday.

Harvey, who works at Duke University’s Fuqua School of Business, said that over 2,500 years of history, the real price of gold (the nominal price adjusted for inflation) had remained roughly the same.

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“Right now we’re way above the mean,” Harvey said, suggesting that the price of gold would correct over the long-term to approximately USD 800 an ounce.

“If you look historically, it doesn’t just go down to the average and stay there. It actually goes through and falls below, then comes back up,” he said.

The price of gold could therefore potentially go even lower than USD 800, he said. “It has been lower in recent history.”

“It might not be tomorrow,” Campbell added, but “the cycles go in 10-15 years, and we’re well into one of these cycles.”

He said investors mulling the price of gold should focus on demand rather than supply, which he said was “amazingly constant”.

A slowdown in growth in China, as evidenced in data released on Monday which showed that growth had slowed to 7.5 percent, was one potential indicator of lower gold demand.

“China is a demander of gold, lower growth there means lower demand,” Campbell said.

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India now Nigeria’s biggest crude oil buyer

15 Jul

India now leads the United States in the purchase of crude oil from Nigeria, Indian High Commissioner to Nigeria Mahesh Sachdev has said.

Read more: India now Nigeria’s biggest crude oil buyer.