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Weekly Overview
Week ending 3 August 2012
The European debt saga continues apace with the European Central Bank head, Mario Draghi stating that the ECB will do whatever it takes to support the Euro. A few days later he underwhelmed the market, which was expecting interest rate relief. Next day the ECB clarified his statements and market rallied. It seems to me that Central Bank intervention and a capitalist free market economy are not necessarily compatible. The Europeans continue to try and negotiate between themselves on how to resolve a crises of too much deficit spending. Politicians want to keep spending while banks cant handle any more sovereign debt. Either the ECB has to buy the debt which ensures a currency crises, politicians have to stop spending, or there needs to be defaults which will leave banks insolvent. Hard decisions certainly, but there is an unwillingness to take them. It appears Greece has reached an agreement with the Troika (IMF, EU, ECB) for the third and final tranche of their bailout funds. Now they need to implement more austerity on unions and sell off assets. This is the point at which things have fallen over repeatedly in the past. No problems making an agreement with the Troika and getting bailout monies. Actually implementing what they have agreed to has been a problem for the Greek Government. The benefits of Foreign investment has been hotly debated in Australia over the past few weeks. Its clear nobody really has a full understanding of the extent of foreign investment in Australia. It therefore seems a good idea to have a register of investments so that we can determine the actual numbers. I find the debate somewhat hysterical as foreigners cannot bring capital into Australia anyway. The money supply in Australia is determined by the Reserve Bank, not foreigners. Foreign capital flows affect the value of the Australian dollar, not the supply of investable funds. The Federal Reserve met on August 1st and basically had very little change to their outlook. The US economy appears to be moving sideways at a very low speed, with high unemployment and low inflation. The Re-monetisation of Gold is being discussed at various levels of monetary regulators. The Federal Reserve recently put out a discussion paper to move Gold to a Tier 1 asset status (vs Tier 3 currently). Tier 3 assets take a capital charge while Tier 1 assets dont. What this means is that banks holding gold will instantly have more capital, and in times of stress, banks would be sellers of assets that have a capital charge. If this change comes through, gold will get substantially rerated in the global asset pool. (Business Insider) Iron ore prices continue to slide putting pressure on the WA based miners BHP, RIO, Atlas Iron, and Fortesque. All these miners have big growth ambitions and projects. A scaling back of these ambitions along with problems for the smaller miners can be anticipated. The Australian dollar has reversed its recent downdraft and is breaking higher. Numerous central banks around the world have recently announced they will be holding A$ reserves increasing the demand for our dollars. Chg (week)
0.2% 0.4% 0.2% 0.0% 0.6% -1.2% -1.6% 1.4% 2.7% -0.3% 0.9% 0.7% -0.1%
2011
All Ords Index S&P 500 Shanghai RBA Cash Rate US Treasury Bond (10yr) Spot Gold Price Copper, spot Oil WTI Oil/Gold Ratio USD Index AUDUSD EURUSD USDCNY 4,111 1,258 2,199 4.25% 1.88% 1,563 344 99 6.3% 80.23 1.022 1.294 6.299
3 Aug
4,243 1,391 2,133 3.50% 1.56% 1,603 337 91 5.7% 82.38 1.057 1.238 6.377
Chg (ytd)
3.2% 10.6% -3.0% -17.6% -17.0% 2.6% -1.9% -7.5% -9.8% 2.7% 3.5% -4.4% 1.2%
Outperforming Underperforming Savers subsidising housing market Savers subsidising bank profits Looks strong, $1550 line in the sand support by central banks Down but not out Recovering
Running Hot, negative for corp earnings Euro wining the race to the bottom
Economy
June Retail Trade (+1.0% V's Bloomberg consensus of 0.7%) better than expected; June Trade Balance stats also beat consensus - up goes the A$ Total credit provided to the private sector by financial intermediaries rose by 0.3 per cent over June 2012, after rising by 0.5 per cent over May. Over the year to June, total credit rose by 4.4 per cent. (Macrobusiness) This is quite low credit growth and not indicative of a growing economy. Purchasing Managers index (PMIs) were released for the month of July for most countries. This is a much watched index by economists to judge the health of a countries manufacturing sector. They were a sorry list for Europe with most counties showing contraction (index under 50). Here is a sample from Asia, Europe, and others. Its clear who are the economic winners and losers at the moment. Australian manufacturing is a disaster due to the high A$. o BRICS, Russia, 51.0, China, 50.1, Indonesia 51.4, India 52.9 o Asia, Korea, 47.2, Vietnam 43.6, Japan 47.9 o Europe, Spain 42.3, Italy 44.3, France 43.6, Germany 45.0 o Australia 40.3, this is depression levels for Australian manufacturing o USA 51.8, UK 45.4, Canada 53.0
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Weekly Stockwatch
Gold has held up well over the last 12 months as other assets have been sold down. Performance from July 2011 to June 2012 as follows
Spot Gold Price Spot Gold Price, Australian Dollars Equity Market Performance, AllOrds Equity Market Performance, S&P500 Aust Equity Index, Gold Miners US$1,599, up 5.6% A$1,558, up 11.3% Down 11.2% Up 3.1% Down 33%
There seems to be a significant market arbitrage between performance of the Gold miners and the Gold price. Its worthwhile to look at this and see where we stand. See the chart of the Gold Miners index below. In 2008 during the GFC in the USA, the Gold miners had a correction of about 50% from peak to trough (about 6000 to 3000). The correction this past year, which looks largely driven by almost equivalent turmoil in Europe, has been about 37% (8000 down to 5000). In 2008, the Australian dollar Gold price kept increasing through the GFC, as it is doing now. A repeat performance and snapback of the gold miners looks a likely scenario as history repeats itself. The trickly bit is of course, at what point do you buy gold miners. Give me a ring if you want to take a closer look.