- extended period of time, disregarding rising inflation as noise. Surveys show investors expected the Fed to hint it would raise interest rates faster than previously anticipated. As a result, the U.S. dollar weakened to its lowest level this month, and speculators, who had pushed the number of short contracts to a five-fold rise since March, were left scrambling to unwind their trades.
- Earlier in the week, gold naysayers were calling for the gold price to consolidate around the $1,280 range despite the escalating conflict in the Middle East that sent oil prices above $105 per barrel. Even in light of intensifying unrest in numerous places around the world, Fidelity’s head of asset allocation called for investors to sell gold and buy stocks at today’s “attractive valuations.” That strategy may work in a riskless world, but according to Mineweb contributor Lawrence Williams, the numerous conflict flashpoints around the world make this the best time to hold gold.
- The Shanghai free-trade zone international gold trading will be a reality by year-end, according to city government officials. More details leaked out this week to give investors a better idea of the impressive capabilities of the proposed exchange. Testing for interest rate liberalization and currency usage is currently ongoing, as the exchange seeks to allow foreign investors to trade in the market using offshore Chinese yuan accounts. Jiang Shu, senior analyst at Industrial Bank in Shanghai, stated the recent advances show the Chinese authorities are serious about yuan and gold trading reform.
Weaknesses
- A new report by SNL Metals & Mining, coming in at a modest 538 pages, concludes that the cost of building a mine has increased significantly over the last decade, from $560 per ounce of production capacity in 2004 to more than $2,300 last year. To make matters worse, SNL analysts argue that curtailment in capital spending since 2013 will take at least until 2015 to reverse the rising trend, as current forecasts show costs will rise to $2,400 per ounce this year.
- China National Gold, the only central enterprise in the Chinese gold industry, announced it is no longer in talks with Ivanhoe Mines on its African assets after talks began last year. Similarly, in Mali, gold production is set to fall 12 percent in the next three years as mine closures outpace new production, thus curbing revenue from the country’s main export. Randgold Resources recently announced its Morila mine is in the process of being closed, while IAMGOLD suspended operations at its Yatela mine last year.
- There was major disappointment among miners looking to mine the ocean floors as New Zealand rejected Trans Tasman Resources application for an undersea project. The country’s decision was being closely watched by other countries. The New Zealand EPA argued there were “uncertainties in the scope and significance of the potential adverse environmental effects” as reasons for rejecting the project.
Opportunities
- Headline inflation rose robustly in May for the third consecutive month, bringing the annual change above 2 percent for only the second time since the end of the recession. U.S. Personal Consumption Expenditures, the most widely monitored inflation measure by Fed officials, leaped to 1.4 percent. National Bank research argued dismissal wouldn’t be easy this time around, but that’s exactly what Janet Yellen did in her press conference. On the same note, Canaccord raised gold to overweight following the CPI readings and the belief that the Fed is “cornered.” It concludes by saying investors should buy inflation-protection hedges.
- Bank of America recommends investors buy gold into the third quarter as the seasonality trade kicks in with Ramadan and Indian buying. Historically, the July-August period sees a demand boost from religious festivities, which Bank of America believes could push gold past $1,400 this year. In a related note, Mining Recruitment Group’s outlook suggests mining executives have turned bullish this year as a poll shows the percentage of bearish executives dropped from 64 percent to 14 percent from a year ago.
- First Quantum announced it entered into a definitive agreement to acquire Lumina Copper for approximately $470 million. Lumina is the owner of the Taca Taca copper deposit located in Salta Province in northwest Argentina. Lumina founder Ross Beaty highlighted the sale as a win for Argentina, whose economic team is set to stabilize the nation’s currency, negotiate debt settlements with holdouts and instill confidence in foreign investors. The transaction is inevitably bullish for other copper developers in the region and the mining sector in Argentina as a whole.
Threats
- South Africa’s platinum mining industry’s main labor union has tabled fresh new demands beyond the preliminary agreement struck with producers last week. The demands add more delay-pressure to an already long-running strike. Facts show that South Africa’s mining output has been declining in a linear pattern for the last 20 years. At this pace, argues Mineweb contributor Michael Schroeder, the last skip of gold bearing ore from the once giant Witwatersrand deposit will be hoisted in 2019, costing the country some 130,000 jobs.
- The five-year-long positive correlation between gold and oil came apart recently as the prospects of a global economic recovery boosted energy consumption and lowered gold’s appeal. The relationship tightened over the past two weeks as the Iraqi conflict took over headlines. Analysts continue to expect oil to trade higher on fears of a Middle Eastern supply disruption, which would mean lower gold prices if the negative correlation holds.
- A group of more than 40 Congressmen asked the U.S. Fish and Wildlife Service to delay the implementation of new rules and procedures that would be overly prohibitive for economic activity. The proposed changes to procedures could increase in millions of acres the areas designated as critical habitats, regardless of whether the protected species occupy these areas or not. These proposals have resulted from hundreds of closed-door settlements with litigious environmental groups.
Energy and Natural Resources Market
Strengths
- North American crude oil producers maintained leadership within the resource sub-sector as the price of West Texas Intermediate (WTI) breached $107 a barrel. Accordingly, Anadarko Petroleum, Cimarex Energy and Whiting Petroleum all made fresh 52-week highs along with numerous other oil producers.
- Gold- and silver-related equities outperformed this week. Bullion prices gained following the Federal Reserve’s decision to hold off a rate hike as well as in response to geopolitical instability in the Middle East. Both Franco-Nevada and Royal Gold outpaced the natural resources benchmark.
- The utilities sector reacted positively following Fed commentary this week that an interest rate increase is not expected in the immediate future. Nextera Energy and NRG Energy returned 3.2 and 2.8 percent on the week, respectively.
Weaknesses
- The price of iron ore continues to trade below $100 per tonne on the seaborne market on weak demand from China. Moreover, the dry bulk shipping freight rate is down over 40 percent from its high set in March. Knightsbridge Tankers underperformed by 270 basis points.
- Base metals equities lagged the natural resources subsector this week, due in part to rising nickel inventories on the London Metals Exchange. Sherritt International fell by 8.5 percent in the period.
- Food stocks were mixed on the week, but generally underperformed the broader market. ConAgra Foods fell 12 percent this week after the company cut its second-quarter estimates on disappointing sales within the private-label division.
Opportunities
- Global exploration and production spending in the oil and gas industry is expected to reach $712 billion in 2014, up 6.2 percent from 2013. This would represent the fifth consecutive year of annual worldwide spending gains since the 2009 downturn.
- A Senate panel is looking to bypass President Obama in order to provide a permit for the Keystone XL pipeline. If approved, Keystone XL’s Northern leg could transport 600,000 barrels per day of crude oil from Hardisty, Alberta to Steele City, Nebraska. Shipping costs versus rail would be approximately $6 to $7 lower.
- Peru proposed a new tax stability contract for mining companies. The contract locks in tax rates for 15 years on a minimum investment of $500 million in order to boost private investment in the country. Mining companies with big projects in Peru such as Southern Copper, MMG Ltd. and Newmont Mining, would likely benefit under the new tax system.
Threats
- Lightweight high-strength steel parts won’t be used in vehicles until 2017, due to a five-year lag from concept to production in the automobile sector, according to the president of Steel Market Development Institute. Top steel makers maintain steel will be preferred for vehicle manufacturing as required weight reductions can be achieved in a cost-effective and environmentally friendly manner.
- Iron ore producers are feeling the pinch. With iron ore prices hovering around $90 per metric tonne to China, the Australian producers are certainly feeling the pinch. For every $1 per tonne decline in iron ore prices, BHP and Rio Tinto together lose $220 million in profit. The Australian industry will be dealt a hit in revenue of $30 billion if prices remain at current levels.
Emerging Markets
Strengths
- Greece was the best performing emerging market for the week aided by a favorable risk-on environment. The most important news out of the country is a report by Moody’s highlighting positive developments in Greece’s fiscal health and the local credit sector. In addition, the ratings agency revised its growth estimate for this year in Greece from 0.0 to 0.4 percent. The report was viewed by market analysts and government officials as a prelude to a credit rating upgrade.
- Taiwan was the best performing country in Asia and recorded the largest equity inflow adjusted for market size this week, driven by outperformance from semiconductor and electronic component producers, which continued to benefit from new smartphone rollouts globally in the second half of this year and China’s 4G network deployment.
- Shire, an Irish pharmaceutical company, rose to an all-time high after announcing it had rejected a takeover approach from the American drug maker AbbVie that valued the company at about $46.3 billion. Shire said AbbVie’s proposal “fundamentally undervalued the company and its prospects.” According to the New York Times, the offer is the latest in a rush of recent tie-ups by pharmaceutical companies, particularly as American companies look to reincorporate in countries with lower tax rates, such as Ireland and Britain.
Weaknesses
- Egypt was the worst performing emerging market for the week, followed by other Gulf markets, which were affected by the escalating violence in Iraq. The conflict is especially damaging for Egypt as higher oil prices could worsen its balance of payments and hit state finances through the fuel subsidy system.
- Financials was the worst performing sector in emerging markets this week, driven by weaknesses in Chinese property developers. Official government statistics confirmed private party observations showing that new home prices softened month over month in 35 of 70 major cities in May, a rapid deterioration compared with April’s eight out of 70.
- Ukrainian president Petro Poroshenko declared a unilateral ceasefire to give anti-government insurgents time either to leave Ukraine or give up their weapons. However, as The Economist argues, the fighting now has its own self-perpetuating logic, showing that decisions taken in Kiev, or in Moscow, may have little effect on the ground. As such, the conflict and instability may continue, even if Poroshenko and Putin reach de-escalation agreements.
Opportunities
- Refrigerator contents speak volumes about their owners, and their proliferation signals a country’s economic progression. This is one of the conclusions reached by Alliance Bernstein’s emerging markets analysts. By analyzing the contents of 70 refrigerators in rural and urban homes across 12 developing countries,
