Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
All bets are on the table
On Friday, gold bulls were off to the races, spurred by a turnaround in sentiment towards commodity markets and fresh indications that a rise in US interest rates may be further off than previously thought.
On the Comex market in New York, gold futures with December delivery dates traded up as much 1.3% at $1,159.30, the highest since August 21. Gold is up 5% from where it was trading before the US Federal Reserve at its September meeting decided to hold rates steady. The last time rates were hiked was June 2006.
Gold’s leg up on Friday came after Fed minutes released yesterday suggested that the US economy will grow well below historical averages for the rest of the decade. The central bank estimates growth of around 1.7% through 2020 versus average growth of 3.1% over the past 50 years.
The dollar and gold, and bond yields and gold, have strong negative correlations and on Friday the greenback fell against the currencies of its major trading partners while treasury yields fell across the board.
Hedge funds were wrong-footed by the decision to keep interest rates near zero reducing bullish bets to more than five year lows ahead of the Fed decision.
But sentiment has now turned and according to the CFTC’s weekly Commitment of Traders data for the week to October 6 large speculators on Comex – referred to as “managed money” – added nearly a fifth to their bullish positions from the week before.
The week before hedge funds more than doubled net longs which now stand at just under 5 million ounces, the highest since April. Speculators also cut back on short positions – bets that gold could be bought cheaper in the future – reducing overall positions to 7 million ounces, down from record highs above 11 million ounces set in July.
In late July and early August, hedge funds entered bearish positions not seen since at least 2006, when the Commodity Futures Trading Commission first began tracking the data.
Saxo Bank in its quarterly outlook released last week, said the “the eventual recovery in gold hinges on a change in sentiment among paper investors”.
The Danish bank pointed out that most of the third-quarter rallies were driven by hedge funds covering short positions, first after the Chinese devaluation and second after the dovish Federal Open Market Committee statement on September 17. Friday’s rally, in solid volumes, followed a similar pattern:
“The combination of a dovish Fed, uncertainty about China’s currency policy and the health of the global economy, as well as low investor involvement, may eventually be what triggers or forces a sentiment change. We have argued that the first US rate hike could become a buying opportunity as it would remove the uncertainty that has prevailed for many months. As we still wait for what potentially could be an elusive rate hike, some uncertainty will linger.
“But having seen three robust recoveries within a short period, we sense a change of sentiment is unfolding. Key to this would be a move above gold’s August high at $1,170/oz, which would confirm a floor has been established. We maintain our year-end target of $1,250/oz and only a break below $1,080/oz would bring a change to this outlook.”
Source: Saxo Bank
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Image by Jack Zalium
4 Comments
chris baus
For so long Fed has the interest at zero that the perception of risk changed what is clearly visible by the volatility. With interest higher many would have be wiped out. Once interests start rising so will perception of risk change and more money will go to gold as a safe commodity.
The talk of interests has been for so long that it doesn’t matter as much anymore. Imagine that the interests are rising. Capital from abroad increase its flow to US doing double damage: increase value of US dollar (no one in the US is longing for) and tighten liquidity in developing countries. This would further erode the weak world recovery. Fed would like that not to occur.
Basically, after Fed policies causing drop in earnings of 90% Americans over the period from 2006 to now, the prospect of inflation is unlikely. It looks like the Fed simply kicked the can down the road and did not solve the crisis. Now is time to let the 90% Americans to earn more money. Nobody know how to do it. Perhaps return to some small form of Glass-Steagel act abolished in 1999 by Clinton’s administration?
The opportunity was when the GFC stroke as the IRS should have taken over support for viable businesses so there was cash for business and let the bad banks collapse. Those which would survive would then take over busineses from IRS simply by IRS increasing interest above the banks. It would be much stronger solution and would not require 4.2 trillions with very little to show for: 10% best earning Americans increased they earnings. I guess there is inflation in luxury goods but that seems not enough to start normal recovery. 4.2 trillion and still at square 1.
Gold looks like a good bet.
BigDIndiana
The Fed is now “the Fed that cried wolf” with its 2 years of “we’re just about to raise rates, really”. They should just lock the doors and come back when they are ready to QE up again.
rayban
If GDP can actually be essentially unsold inventory and new loans requiring interest payments then if inventory rises to fire sale levels , sales happen . GDP turns lower on sold inventory and no new loans up = R as in recession . If QE comes out and hits fairly hard a US dollar that is high (and currently killing exports) may tumble . Thus Gold could get a double whack upward , followed by more buying or some similar . Gold MAY already be starting to bake in the next QE due to start in the next LOL 18 months LOL maybe ….Maybe . Gold looks good anyway , the world looks lousy everywhere . THX .
carefix
Well 1174 has been reached so today (Weds) may confirm a rally is underway.