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David Fuller and Eoin Treacy's Comment of the Day
Category - Precious Metals / Commodities

    Panic Selling Grips Chinese Stocks After U.S. Tensions Worsen

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The escalation in tensions comes at a particularly volatile time for China’s stocks, with the government taking steps to manage a debt-fueled frenzy that had pushed equities to their highest since 2015. Bullish traders have pushed leverage to an almost five-year high.

    “Worries over China-U.S. relations will dominate the market,” said Raymond Chen, a portfolio manager with Keywise Capital Management (HK) Ltd. “People will be closely watching how the U.S. reacts to the closure of Chengdu consulate. I expect more panic selling in the near term.”

    China’s yuan fell as much as 0.28% to 7.0238 versus the greenback, the weakest since July 8. China’s government bonds extended gains, with futures contracts on 10-year notes climbing as much as 0.36% to the highest since July 3. The yield on debt due in a decade dropped 5 basis points to 2.86%, the lowest since July 1.

    Overseas investors sold 16.4 billion yuan of China stocks Friday, the most since a record 17.4 billion yuan was dumped on July 14. Turnover rose to 1.3 trillion yuan, the 17th session over the 1 trillion yuan mark.

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    Email of the day - gold attracting momentum traders

    How far could the "Robinhooder's" distort the precious metal markets?

    So far today the GDX/GDXJ do not seem to be confirming the upward movement in gold prices.

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    Wall Street Is Throwing Billions at Once-Shunned Gold Miners

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    But junior miners are now starting to benefit. Take the case of American Pacific Mining Corp., an exploration and gold-mining firm with market capitalization of less than $20 million. The company raised $3 million in the second quarter, six times more than it had initially planned. Interest was so big that it had to turn away offers for more, said CEO Warwick Smith.

    “The big boys play first, and then that money trickles down to the smaller companies, exploration companies,” he said. Revival Gold Inc., a Toronto-based exploration company, said Tuesday it was increasing its previously-announced public offering by C$3 million ($2.2 million) amid “strong demand” from investors. Spot gold prices rose 1.3% Tuesday to $1,841.94 an ounce, trading near the highest level in almost nine years.

    The reasons that boosted the appeal of gold miners are the very same pushing investors away from companies digging for metals like copper or lithium, which are more dependent on economic growth. Base and industrial metals firms raised just $34 million in the second quarter, data compiled by Bloomberg showed. That’s a 40% decrease from the same period a year earlier.

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    Out to pasture!

    This is potentially Edward Ballsdon’s final post for his Grey Fire Horse blog and may be of interest to subscribers. Here is a section:

    Recently there has been discussion about yield curve control (YCC), and whether the FED will introduce a new policy on managing interest rates. Do not be fooled - this is a rather large red herring, as the debt is now too large in the US (as it is in most major economies) to raise rates without the increased interest cost having a debilitating effect on annual government budget figures.

    There is no longer $ 1trn of outstanding US federal Bills - in June the outstanding amount surpassed $ 5trn. If rates rise from 0.2% to 2%, the ANNUAL interest cost just on that segment of the outstanding $19trn debt would rise from ~$ 8.5bn to ~$ 102bn. Naturally you would also need to also factor in the impact of higher interest rate costs on leveraged households and corporates.

    This is the red herring - the size of the debt will force monetary policy. To think that the central bank can raise rates means ignoring the consequence from the debt stock. And this is the root of my lower for longer view, which is obviously influenced from years of studying Japan, and which is now almost completely priced in to rates markets. Remember that the YCC in Japan led to a severe reduction of the BOJ buying of JGBs - it just did not have to.

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    Silver Futures Step Out of Gold's Shadow in Surge to 3-Year High

    This article by Justina Vasquez, Krystal Chia and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

    “Silver is currently trading at close to a record discount to gold, which should attract demand,” Goldman Sachs Group Inc. said in a note this month. “Silver often tends to lag gold at the beginning of a precious rally, and catch up to it as the rally continues and investors look for ways to diversify.”

    During the week through Tuesday, hedge funds and other money managers added to their bullish bets on silver, boosting net-long positions to the highest since late February, according to government data Friday. That amounted to “a larger-than-usual” US$638 million bullish flow spurred by the trifecta of rising haven demand, recovering industrial activity, particularly in China, and South American supply disruptions, according to Societe Generale SA analysts including Michael Haigh.

    Green Stimulus
    Unlike gold, silver’s price is largely driven by a host of manufacturing applications. Morgan Stanley estimated that industrial demand makes up 85 per cent of silver demand. The metal may be poised to benefit from a push toward less-polluting energy technologies such as solar power, according to BMO Capital Markets.

    With eyes on recovering industrial demand in countries including China, the world’s largest consumer of industrial commodities, some investors may be buying silver as a bet on new technology. U.S. Democratic presidential nominee Joe Biden outlined a goal last week of “a carbon pollution-free power sector by 2035” -- a move that would require rapid acceleration in the deployment of renewable wind and solar power as well as electricity storage, while continuing to rely on emission-free nuclear power.

    “Silver-intensive areas such as 5G and solar technology could well benefit from any fiscal impulse,” BMO analysts including Colin Hamilton said in a research note. “More than US$50 billion of green stimulus has been approved by governments thus far this year, over which roughly three-quarters has been in Europe. But perhaps more impactful has been the recent Biden campaign Clean Energy plan, most notably a zero-carbon power grid by 2035 which would see new wind and solar capacity built to displace thermal generation.”

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    Silver Strategy - Price momentum building as macro fundamentals improve

    Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

    Physical deficits forecast in 2020 and 2021. We have updated our supply-demand forecasts for silver, which now see physical deficits in 2020 and 2021, from modest surpluses previously. This primarily reflects a stronger rebound in economic activity than we had expected and we now forecast demand in 2020 down -4% vs. -17% previously. We have also incorporated a material ETF inventory build, resulting in even larger net deficits. Our near-term supply forecasts were relatively unchanged.

    Underlying industrial & commercial demand more robust. In the initial stages of the COVID-19 pandemic, Industrial Production (IP) on a period-over-period basis went to a highly negative level, driving a sharp move lower in silver prices. While we continue to assume YoY declines in global GDP and IP, we now think there could be a better outcome than previously expected, reflecting recent strength across industrial sectors in China, supportive global central bank stimulus and apparent rebounds in global PMIs. As such, our forecasts for industrial and commercial demand have improved.

    Investment demand accelerating. Silver offers many of the same investment qualities as gold even with 50-55% of demand coming from industrial use. This means it is similarly attractive in the current supportive gold macro environment. Notably, physically backed silver ETF holdings have risen +140 Moz over the past 3 months and this appears to have continued to support prices in recent weeks. We now add significant ETF build into our demand forecast to reflect likely further investment interest.

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    Gold adjusted for Purchasing Power Parity in USD, GBP, AUD, CAD, EUR and CHF

    Aphria-Aurora Combo Would Post Over C$1 Billion in Sales

    This note by Michael Bellusci for Bloomberg may be of interest to subscribers.

    A combined Aphria and Aurora Cannabis entity would suggest a company with over C$1 billion in sales in 2021, with over C$600 million in net cannabis sales, Stifel analyst W. Andrew Carter wrote in note.
     

    * Stifel says “headset market share data suggests” a combination would produce a leader in Canada’s adult-use market, with 30% share
    * Stifel questions whether a potential deal would garner regulatory scrutiny
    * Separately, Scotiabank analyst Adam Buckham wrote in note a potential deal makes sense
    ** Positives for Aurora holders would be annual cost savings and improved credit position
    ** Could spark pot sector M&A
    * Aurora shares in Toronto rose as much as 6.3% intraday; Aphria rose 7.7%
    * NOTE: Earlier, Aurora-Aphria Merger Talks Are Not Just Smoke: React (BI)
    * NOTE: July 14, Aphria and Aurora Explored Merger, Talks Failed: BNN Bloomberg

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    Equities & The Rise of Inflation: How Much Inflation Before Repression?

    Thanks to a subscriber for this report from Russell Napier which may be of interest. Here is a section: 

    The Thucydides Trap and the Rise and Fall of Great Powers

    Thanks to a subscriber for this report from Geopolitical Futures by Jacak Partosiak which may be of interest. Here is a section:

    Political scientist Joseph Nye believes that the key trigger in the Thucydides trap is an excessive reaction to the fear of losing one’s power status and prospects for future development. In the case of Washington and Beijing, the relative decline of America’s power and the rapid rise of China’s power destabilizes their relationship and makes it difficult to manage. Gen. Martin Dempsey, then-chairman of the Joint Chiefs of Staff of the U.S. Armed Forces, even admitted in May 2012 that his primary task was to ensure that the United States did not fall into the Thucydides trap.

    As a result of the slow but noticeable erosion of the U.S. position in the Western Pacific, it is highly conceivable that a scenario could emerge in which the current hegemon is tempted to conduct a strategic counteroffensive in response to an incident, even a trivial one, in the South China Sea or East China Sea, believing falsely that it has the edge over its inferior rival. This would trigger a modern Thucydides trap.

    An in-depth reading of Thucydides’ work reveals a second trap, even more complex and dangerous than the first. Thucydides clearly warned that neither Sparta nor Athens wanted war. But their allies and vassal states managed to convince them that war was inevitable anyway, which meant that both city-states would need to gain a decisive advantage at an early stage of the escalating confrontation. Thus, they decided to enter the war after being urged to do so by their vassal states.

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