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

German Vow to Cancel Permits Sends Carbon to 11-Year High

This article by Brian Parkin and Mathew Carr for Bloomberg may be of interest to subscribers. Here is a section:

“We’ve seen an encouraging rise in permit prices, so it’s no surprise that we see it as essential that the instrument continues to work as it should do,” Schulze said. “That’s logical. It makes no sense at all to implement an exit from coal here, only to export pollution licenses into the wider European system.”

And

“Scarcity is central to the aims of the European carbon trading market.”



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Iron Ore's "Disconnected From Fundamentals" After Huge Rally

This article by Krystal Chia for Bloomberg may be of interest to subscribers. Here is a section: 

Iron ore has skyrocketed this year, hitting the highest level in more than five years, after a dam disaster at Brazil’s Vale SA and bad weather in Australia curtailed shipments just as Chinese demand expanded. The steelmaking material made another dash higher in recent weeks after Australian miner Rio Tinto Group cut output guidance again following operational problems. The ascent has spurred concerns the advance may prove to be unsustainable.

“Supply is looking pretty decent, with the exception of Rio,” Hedborg said. Exports from Australia in June should be strong as some miners ramp up in the last month of their financial year, he said. In Brazil, Vale has also restarted its Brucutu mine, a major operation that was suspended after the dam
collapse.



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Email of the day on the gold/gold miners' ratio:

Thank you very much for your excellent analysis of the precious metals on Friday's video. If possible, can you please also comment on the gold/gdx ratio in one of your future videos and/or comment of the day. As always thanks very much for your excellent service.



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Gold Sinks Most in a Year as Trade Truce Deals Blow to the Bulls

This article by Ranjeetha Pakiam and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section: 

Gold tumbled back below $1,400 an ounce after the U.S. and China reached a truce in their trade war, dealing a blow to havens.

Prices fell the most in a year after Donald Trump and Xi Jinping agreed to resume negotiations in a bid to resolve differences between the world’s top-two economies. Still, the setback may be temporary as investors now train their focus on U.S. jobs data due Friday for clues on the Federal Reserve’s next move on policy.

“Gold was well overdue a period of consolidation and gold bulls should welcome it,” said Ross Norman, chief executive officer of gold brokerage Sharps Pixley Ltd. “This provides a welcome entry point.”



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Ship Owners Need to Step Up Demolition Activity For a Sustainable Market Rebound

This article from Hellenic Shipping News may be of interest to subscribers. Here is a section:

n a separate note this week, GMS, the world’s leading cash buyer said that “the stagnating inertia in the international ship recycling markets continued this week, with Pakistan, Bangladesh and Turkey entirely offline due to Eid holidays (winding down the Holy Month of Ramadan) and the traditionally quieter monsoon season gradually getting under way in the Indian sub-continent. There was a brief bounce in the Indian market following the election victory of the pro-business Mr. Modi, but local steel prices have begun to cool off ever since and Alang Buyers appear notably reluctant to commit on new vessels as most of the market focus is now shifting to Alang, due to the overall intransigence from Pakistan and Bangladesh and the higher offers emanating from India. The market in Bangladesh remains the quietest of all, with the upcoming budget on June 13th likely to determine the immediate direction on prices, which have already lost USD 20 – USD 30/LDT over the last few weeks. Most yards in Chattogram also remain stuffed with tonnage and demand is at the lowest it has been all year, with essentially no new enquiries emanating from local Buyers. The expectation (as seems to be the case year-after-year) is that new duties / taxes are set to be announced in this budget and prices are likely to decline further thereafter. As such, Bangladeshi Buyers are no longer keen to import fresh tonnage before the date of the budget, given the likelihood of increasing duties within the next week”, GMS concluded.



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Putin's Big Bet on Gold Is Paying Off Nicely

This article by Leonid Bershidsky for Bloomberg may be of interest to subscribers. Here is a section:

The U.S. dollar’s dominance as a global reserve currency is commonly thought to result from the dearth of safe assets. Russia, however, recently has provided an example of how a sizable economy with the world’s fifth biggest international reserves can minimize dollar assets ad still do well. So far, it doesn’t have many followers, but gold buying by central banks is going up.

Since being hit by sanctions for its aggression against Ukraine in 2014, Russia has had good reasons to rethink the composition of its international reserve. While the European Union hasn’t toughened its sanctions for almost five years, the U.S. has been doing it all the time. The Kremlin and the Bank of Russia consider the risk of further restrictions unpredictable and dependent more on U.S. domestic politics than on anything Russia does. In the 12 months since the end of September 2017, the central bank has more than halved the dollar’s share in its international assets and sharply increased the shares of the euro and the renminbi.



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Fed Lowers Long-Run U.S. Rate Outlook as Growth Outlook Dims

This article by Steve Matthews for Bloomberg may be of interest to subscribers. Here is a section:

“This is really important,” said Torsten Slok, chief economist at Deutsche Bank Securities, who expects a rate cut in July. “For many years, the Fed has been arguing that monetary policy was easy and accommodative and supporting growth and inflation. After a decade of easy monetary policy, the Fed has decided that policy is no longer stimulative.”

Reasons listed for the lower neutral rate include ongoing fallout from the financial crisis, weaker productivity, continued slackness in the labor market and an aging population, which when combined leave the economy structurally weaker and so more vulnerable to rate hikes.

The upshot is the Fed may have to lower rates if it wants to boost expansion to offset global headwinds, including slow global growth and trade disruptions from President Donald Trump’s tariff battles.

Powell will give his view of policy in a speech on Tuesday to the Council on Foreign Relations in New York.



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Bitcoin Surpasses $11,000 as Memories of Popped Bubble Fade

This article by Eric Lam, Vildana Hajric and Joanna Ossinger for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin traded above $11,000 for the first time in 15 months, recouping more than half of the parabolic

increase that captured the attention of mainstream investors before the cryptocurrency bubble burst last year.

“The bounce-back of Bitcoin has been fairly extraordinary,” said George McDonaugh, chief executive and co-founder of London-based blockchain and cryptocurrency investment firm KR1 Plc. “Money didn’t leave the asset behind, it just sat on the sidelines waiting to get back in.”



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Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  



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Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 



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