Can mining strikes offset currency headwinds?

Platinum and the Rand: Can mining strikes offset currency headwinds? ETF SecuritiesCan mining strikes offset currency headwinds?

Platinum and the Rand: Can mining strikes offset currency headwinds?

Platinum prices have rebounded by over 20% during 2016, as the South African Rand (ZAR) has strengthened 4%. A stronger ZAR should constrain supply by narrowing already stretched mining company margins. Opposing forces are likely to keep price volatility elevated in coming months as a potentially weaker ZAR balances the threat of output cuts from strike action.

Economic conditions are challenging to say the least. South African growth is expected to be just 0.6% in 2016 according to the IMF, from 1.3% in 2015, the lowest in over six years. Rising social tensions are a result of burgeoning unemployment. Unemployment is at the highest level since records began in 2008, at nearly 27% of the population, according to Stats SA.

Drought is impacting food prices, driving inflation higher, and at the same time the central bank is raising rates to try and keep prices in check. Raising rates to offset supply side inflation and reduce capital outflows is a sign of desperation and the local currency is unlikely to be a beneficiary of such action. Indeed, the South African Reserve Bank notes that the weaker currency could be fuelling inflationary pressures.

As a general rule of thumb, investors should be wary of those EM countries that are tightening monetary policy to stave off capital flight, especially when there is little inflationary pressure and weak growth – South Africa is a good example. With lacklustre outlook for the economy, the Rand is likely to remain weak.

Early June sees the potential for a credit rating downgrade for South Africa from S&P Global Ratings, with consensus economist expectations that the country’s rating will enter junk territory by end-2016. The IMF’s most recent mission to the country suggests that the government’s budget target ‘may be challenging’. A decrease to non-investment grade is likely to prompt further capital outflows and see the ZAR move lower against the USD.

The close correlation between the currency and platinum should see metal prices follow ZAR lower in the near term. However, later in June, and with another supply deficit forecast in 2016, the platinum price is likely to receive support from potential output reductions resulting from contract negotiation activity and possible strike action[i].

(click to enlarge)

[i] Recent strike action in South Africa in 2012 and 2014 lifted the platinum price by 17% and 0.5%, respectively.

Martin Arnold, Global FX & Commodity Strategist at ETF Securities

Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.

 

The latest IMFs report highlights how important emerging markets are

The latest IMFs report highlights how important emerging markets are

The latest IMFs report highlights how important emerging markets are. Developments in emerging markets (EMs) account for more than a third of the variations in stock market and foreign exchange market returns worldwide, according to the IMF’s Global Financial Stability Report released last Monday. The financial spillovers – the extent to which EM equity returns are reflected in developed markets equity returns – have risen 28% (IMF estimates). For the largest emerging economies (Brazil, China, India, Russia and South Africa), they have risen by 40%. The spillovers on bond markets are less clear because bond flows have been strongly affected by monetary policies in advanced economies.
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Why do EMs get so much attention today? It is because EMs are far more invested now than ever, with the financial crisis being a catalyst to investor diversification. EMs share of global equity market capitalization more than doubled in the last twenty years amid declining market segmentation. The growing trend in EM financial integration is likely to continue until reaching a level consistent with the extent of their contribution to the global economy. EMs contribute to 38% to the global GDP but represent only 13% of the global financial system, according to data compiled by the IMF.

EM’s role in the global financial system is likely to continue to grow at a steady pace along with EM’s share in investors’ portfolios. First, EMs have demonstrated financial and economic resilience despite financial turbulences. Second, the quantitative easing programmes from developed economies have accelerated their integration into the global financial system by pouring liquidity into EMs. We believe the unconventional central bank policies are not likely to terminate any time soon. When they eventually end, it most certainly will not be in an abrupt manner. For these reasons, we think EMs are becoming a permanent and an influential financial players. In our view, current credit spreads are overcompensating investors for the credit and liquidity risks.

Morgane Delledonne, Fixed Income Strategist at ETF Securities

Morgane Delledonne joined ETF Securities as Fixed Income Strategist in 2016. Morgane has an extensive experience in Monetary policy, Fixed Income Markets and Macroeconomics gained at the French Treasury’s Office in Washington DC and most recently in her role as Macroeconomist and Strategist at Pictet&Cie in Geneva. Morgane holds a Bachelor of Applied Mathematics from the University of Nice Sophia Antipolis (France), a Master of Economics and Finance Engineering and a Master of Economic Diagnosis from the University of Paris Dauphine (France).

Golds Breakout Continues in February

Golds Breakout Continues in February

Gold and Precious Metals – Golds Breakout Continues in February

March 14, 2016
by Joe Foster, Portfolio Manager and Strategist
With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

Golds Breakout Continues in February

For the month ended February 29, 2016

Gold’s Bear Market is Over

We are willing to declare the gold bear market over. Is this the beginning of a new bull? Time will tell.

Since the Federal Reserve (the ”Fed”) raised the targeted federal funds rate on December 16, a number of changes have occurred in the markets that lead us to believe that one of the longest and deepest bear markets in the history of gold and gold equities may be over.

These changes include:

•    Waning conviction in the market regarding further Fed rate increases.
•    The U.S. dollar’s rise appears to have stalled.
•    Volatility and weakness in U.S. stock markets.
•    Strong gold prices despite seasonal weakness in Chinese demand.
•    Strong gold prices as oil and commodities have sunk to new lows.
•    Tremendous inflows to gold bullion exchange traded products (ETPs) and gold futures.
•    Technical breakout from an established downtrend.

Gold advanced $120.57 (10.8%) to $1,238.74 per ounce in February and is up $177.32 (16.7%) for the year [as of 2/29/16].

Growing Concerns About Global Financial Risks

Economic headwinds have escalated, from local occurrences in Asia and Europe to global concerns that now include the United States. The Institute for Supply Management’s (”ISM”) Non-Manufacturing Index fell more than expected in January and was weak in February as well. The U.S. has been in a manufacturing recession and the ISM reports suggest that the services sector, which makes up the bulk of the economy, is beginning to weaken.

Negative Interest Rates May Increase Gold’s Appeal

Worries about systemic financial risk have also escalated due to many European countries and the Bank of Japan employing negative interest rates on certain reserves. There are now trillions of dollars’ worth of sovereign bonds that trade at negative yields. Fed Chair Janet Yellen said recently that the Fed is evaluating whether negative rates are an option for monetary policy in the U.S. Meanwhile the president of the European Central Bank (”ECB”) has said the ECB is looking at expanding its stimulus. The Governor of the Bank of Japan (”BOJ”) stated last summer, ”If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal.” If negative rates work their way into commercial deposits, it might undermine money market funds, pension funds, and the insurance and banking industries.

Negative rates may also increase gold’s appeal, as gold effectively has a better yield at 0% than negative rate accounts. The Wall Street Journal reports that in the month after the BOJ’s negative rate announcement, sales of personal safes rose as much as 250% in some stores. What we believe markets are telling central bankers in 2016 is that radical monetary policies have not produced positive results and that further financial engineering risks bringing down the financial system. So far this year, because of these concerns, gold has supplanted the U.S. dollar as the preferred safe haven investment.

South Africa Stands Out Among Gold Shares

Gold stocks are showing the leverage we expect in a positive gold market. The NYSE Gold Miners Index (GDMNTR) gained 36.1% in February while the Market Vectors Junior Gold Miners Index (MVGDXJTR) advanced 35.0%. While nearly all gold stocks have seen handsome returns this year, the South Africans have seen additional gains as a currency play, with some more than doubling this year in the wake of the collapse of the rand. We continue to see the geopolitical, operating, and other risks in South Africa as impediments to prudent investing. In addition, many of the highly levered (high cost and/or high debt) but lower quality companies have outperformed. It is not uncommon for short covering and momentum investing to propel low quality stocks in the early phase of a strong market.

What to Expect from Gold Miners in 2016

The junior gold stocks have lagged the larger producers, as evidenced by the 6.6% year-to-date underperformance of the MVGDXJTR relative to the GDMNTR. The performances of some of the mid-tier stocks have lagged as well. This lag is typical in the early phase of a newly rising market as investment flows start with the large companies. We expect the mid-tiers and smaller companies to outperform if gold continues higher.

By analyzing companies’ fourth quarter reporting, 2016 guidance, and our meetings at the Bank of Montreal (BMO) Global Metals and Mining Conference, we have a better idea of what to expect in 2016 from gold mining companies. We have commented frequently about efforts to help reduce costs across the industry. It looks like the cost cycle is nearing its low point, as some companies are expecting further declines in 2016 and others are guiding to slightly increase. It is now common for companies to carry all-in mining costs of less than $1,000 per ounce. Large companies that were the perennial leaders 20 years ago are reasserting their roles. Newmont, Barrick, AngloGold, and Newcrest are the super majors that fell out of favor as they became bloated bureaucratic behemoths in the bull market. After several years under new managements, they are in the process of downsizing to become leaner, more efficient and more profitable companies. Barrick is targeting all-in mining costs below $700 per ounce by 2020. At the same time, company reports indicate that Barrick expects production to decline from 6.1 million ounces (before asset sales) in 2015 to 4.5 million ounces in 2020. Barrick also intends to reduce its net debt to zero. We think these are lofty goals, but if successful, they would solidify Barrick’s leadership and potentially reset the bar for the industry.

Gold Strategy Review: A Focus on Value Creation

Historically our investment strategy has tended to underperform during downturns in the gold price and outperform in positive gold markets, generating strong performance over the long term. However, based on our years of experience following the gold industry, we find our performance, and that of most actively managed funds in general, to be surprising so far this year given the rising gold price environment.

The overriding theme of our investment criteria, which has not changed, is value creation. Companies create value by taking an essentially worthless piece of property and turning it into a gold mine. This is what motivated me as a geologist in the ’80s and ’90s and it drives me now as a fund manager. So why is this investment style performing differently in 2016?

To answer that question we have undertaken a portfolio review and here are our conclusions:

•    As we mentioned earlier, South African mining stocks are on fire despite the risk mentioned earlier, with some gaining more than 100% this year. In the past, we have avoided South African stocks due to geopolitical risk, union strife, difficult deep mining conditions, and an unreliable power grid.
•    Highly indebted supermajors have outperformed. The market no longer seems concerned with excessive debt. We have been avoiding these stocks.
•    Beaten down companies with high costs and/or no growth have outperformed. We have avoided these fundamentally flawed names.
•    Mid-tiers and juniors that are creating value through growth have underperformed due to market concerns over project financing or acquisitions. These concerns began early in 2015 and gained momentum at the beginning of 2016. Some of these companies may need additional capital if gold prices average around $1,100 or less. We have been overweight in these stocks.
•    We believe most of the companies that fall into the first three categories are unable to create value outside of their ongoing operations. However, until we see the market again rewarding companies that fit our investment style, we must adapt. We are not abandoning our quest for companies that create value, just toning it down. Here are the key portfolio developments that have been made as of the end of February.

Investment considerations:

•    We continue to avoid South Africa due to risks. The outperformance is largely a function of a collapse in the rand, which we now believe is priced into the stocks.
•    We have said that the supermajors have done a good job of paring down debt. We initiated a position in Newmont last year and we continue to view the large caps in a more positive light. With the operating improvements and financial discipline evident throughout the bear market, these large caps are again able to attract the big funds.
•    We will consider more operationally levered companies if the relative valuation is compelling. However, some of these companies are in need of an acquisition to maintain production. We will continue to underweight or avoid potential acquirers until they make a transformative acquisition.
•    We have adjusted our exposure to mid-tier growth names until we see the market take a more positive view. We are not avoiding these companies, as we believe they are now acquisition targets for the majors. We have increased exposure to Australian mid-tiers and juniors. There is a reemerging gold sector in Australia that doesn’t carry the same financing stigma of its global peers.

Our overall top-down allocations have not changed much. However, the strategy has more names, fewer overweights, and a few new names in the top 10. As we had indicated at yearend, we have reduced royalty companies to rotate into producing companies. The portfolio will remain more diversified until we gain the conviction to make larger bets. Also, our investment universe will expand if gold stays above the $1,200 per ounce threshold.

Finally, despite these challenges, we find all this market action very compelling. Seeing the movement in South African and other stocks reminds me of the early phase of the bull market that started in 2001.

Fed’s Rate Hike: The Straw Breaking the Camel’s Back?

To appreciate what is going on in the markets this year, we believe investors must use a perspective that takes into account the post-credit crisis economy. We believe that the post-crisis monetary tightening cycle did not begin with the first rate increase, as it did in past cycles. Tightening began when the Fed began ”tapering” its purchase of government bonds in late 2013. Once the Fed stopped buying bonds, it talked about raising rates. Then on December 16, 2015 it finally increased rates by 25 basis points. We see this as the modern tightening cycle and it has been going on for two years. The Atlanta Fed’s Wu-Xia Shadow Federal Funds Rate model measures an overall tightening in financial conditions that occurred while rates were artificially held around the zero-bound by central banks. The Wu-Xia calculation estimates there has been a tightening that is equivalent to a 3.19% rate rise over the last two years. An economy that, in our opinion, is overburdened with regulations, taxes, uncertainties, and misallocations of capital is unable to grow without monetary stimulus. The December 16 rate increase was the straw that is seemingly breaking the camel’s back.

Three areas that we believe have underpinned the stock market have diminished as this tightening cycle has progressed:

•    Companies that took on debt when corporate rates were lower to buy back stock.
•    Risk averse investors who moved out of treasuries and CDs into higher risk stocks and junk bonds to generate yield.
•    The sovereign wealth funds of energy producing countries who must sell stock to help support their economies.

Flows in to Gold Stock Reverse Course

As markets seem to have passed a potentially historic inflection point, it looks like the money that flowed out of gold and into stocks and corporate debt over the last five years is beginning to reverse course. When a little of this money flows into gold stocks, it can have a big impact. The market cap of the global gold industry is only $205 billion, which is roughly one third (36%) of the value of Apple. While gold stocks have performed well this year, when factoring in the higher gold price, Scotiabank figures stock valuations of the senior producers are lower now than they were a month ago. We find that the valuations of many mid-tier and junior stocks are even more compelling.

Gold Breaks Out of Technical Downtrend

Gold has broken a technical downtrend that was well established. Following gold’s crash in 2013, it traded in a declining $150 range that in December stood at $1,050 to $1,200 (see chart below). Gold has clearly broken out of this range and until we see a new technical pattern emerge, it will be difficult to discern a trend. The next major technical resistance is at $1,600, which was the support level before the crash in 2013. However, we believe reaching this level is unrealistic in 2016, barring some sort of black swan event. At some point during the first half of 2016, we expect gold to pull back and consolidate. At that point, the depth and duration of the correction will help determine whether this is a new positive trend. We believe gold will be driven by a heightened undercurrent of financial risk as a result of growing distrust of central bank policies, global economic malaise, and overall market turbulence. Layered onto this is additional uncertainty brought on by Middle Eastern turmoil and widespread discontent with political leadership as evidenced by the U.S. presidential race and the British referendum on EU membership.

Breaking the Technical Downtrend – Gold Price Per Ounce (USD)

(Click to enlarge) Source: Bloomberg.

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Supply Squeeze to Prompt PGM Recovery

Supply Squeeze to Prompt PGM Recovery

ETFS Trade Idea –Commodities – Supply Squeeze to Prompt PGM Recovery

Summary

Platinum and palladium markets capitulate
Over the last year the prices of platinum group metals (PGMs) have seen a momentous decline. Since the 23rd June 2014, when strike action in South Africa concluded, platinum and palladium prices have fallen 34% and 27% respectively (Source: Bloomberg). Being both industrial and precious in nature, they have succumbed to pressure from a softer economic outlook for China, a stronger US Dollar and broadly negative sentiment towards commodities. At current levels, we believe that platinum and palladium prices are at or near a bottom and offer a good opportunity to gain long exposure for those investors with a medium term time horizon. The current low price environment means that a considerable portion of PGM mines are currently operating in unprofitable territory, which should ensure that supply remains tight going forward. On the demand side, the roll out of further European environmental legislation later in the year should see increased usage within autocatalysts.

Positioning diverges

Exchange Traded Fund (ETF) and futures positioning have considerably diverged in the past month (see Figure 1). From June to July, ETF holdings of platinum and palladium have increased by 4.4% and 2.2% respectively while speculative futures positioning has turned increasingly bearish. ETF investors typically exhibit contrarian behaviour, with low prices often stimulating bargain hunting, and this appears to be at work within the PGM space. Indeed, at ETF Securities the last week saw the largest inflows into Exchange Traded Products (ETPs) providing long exposure to platinum and palladium in over seven months. ETP flows appear to corroborate our view that prices are near lows and provide an attractive entry point for those that are bullish on PGMs in the medium term.

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Supply shortages to come

South Africa is responsible for an estimated 73% and 40% of global platinum and palladium production respectively (Source: Johnson Matthey). Last year’s labour dispute was the longest in South African history and resulted in an increase in labour costs for PGM miners that were already suffering from low margins as a result of depressed market prices. Put into perspective, according to the Thomson Reuters GFMS Platinum and Palladium 2015 Survey, the average total cash cost1 for South African platinum producers was US$1,272/oz in 2014 (see Figure 2), which exceeds the current platinum price of around US$955/oz. Although producers are finding some respite in a depreciating South African Rand (ZAR), many are currently operating at a loss. Two of the dominant platinum miners in the region, Anglo American Platinum (Amplat) and Lonmin, have recently announced plans to close mine shafts and initiate large job cuts in response to falling prices, actions which in the future are likely to result in supply shortages and should, once sentiment abates, spark a recovery in PGM prices.

(Click to enlarge)

Legislation to generate European demand

Euro VI legislation is targeted at reducing the levels of exhaust emissions from vehicles on the road, specifically it is aimed at reducing the level of nitrogen oxide, carbon monoxide and an array of hydrocarbons in the atmosphere. It will primarily affect producers of new diesel cars as they will have to adhere to much more stringent emission limits. As such, from September 2015 (when legislation is due to be implemented), European autocatalyst demand for PGMs should grow and in turn support platinum and palladium price levels. This factor will be particularly important for platinum as approximately 42% of autocatalyst demand is sourced from Europe versus around only 24% for palladium (Source: Thomson Reuters GFMS).

Note: Total cash cost does not include: sustaining capex, indirect costs, corporate overheads, extraordinary costs or depreciation and amortization.

Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:

ETFS Platinum (PLTM)
ETFS Physical Platinum (PHPT)
ETFS Physical Palladium (PHPD)
ETFS Daily Leveraged Platinum (LPLA)
ETFS Daily Short Platinum (SPLA)
Swiss Franc Daily Hedged Platinum (CPLT)

The complete ETF Securities product list can be found here.

For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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Sydafrikansk aktiefond stiger trots svagare ekonomi i landet

Sydafrikansk aktiefond stiger trots svagare ekonomi i landet

Vi ser hur sydafrikansk aktiefond stiger trots svagare ekonomi i landet, Både de sydafrikanska aktierna och de börshandlade fonder som replikerar utvecklingen av landets aktiemarknad återhämtar sig från kursrasen tidigare i juni. En fortsatt hög inflation och en svag tillväxt kan emellertid komma att hämma utvecklingen framåt. iShares MSCI South Africa ETF (NYSEArca: EZA) har stigit med mer än sju procent sedan den 5 juni 2015, mätt i dollar.

Den sydafrikanska ekonomin verkar ha fastnat i en stagflation, eller i alla fall en ihållande hög arbetslöshet med hög inflation och låg tillväxt. Enligt den sydafrikanska centralbanken Reserve Bank, kommer tillväxten endast hamna något över två procent i år och nästa år spås den öka till 6,1 procent, jämfört med tidigare prognosticerade 4,9 procent. Tillväxten låter bra, men drivs i första hand av en prognos om en ökad inflation, något som tenderar att vara självuppfyllande.

De sydafrikanska konsumenterna är försiktiga, något som kanske inte är så pass konstigt eftersom landet lider av en hög skuldsättning, en rekordstor arbetslöshet på 26 procent och elbrist. Inflationen har-ökat efter en torka i söder drivit upp matpriserna. Dessutom har oljepriset studsat upp vilket drabbar ett land som Sydafrika som måste importera sin olja.

Stigande inflation drabbar konsumentsektorn

Den stigande inflationen kommer att ha en effekt på branscher som vänder sig mot konsumenter. EZA största sektorinnehav är sällanköpsvaror som har en vikt på 31,3 procent, följt av finans och telekomtjänster med 29,9 respektive 11,8 procents kapitalvikt vardera. Vi ser också hur landets elverk, det underinvesterade Eskom som förser 95 procent av Sydafrika med ström inte har tillräckligt med kapacitet att möta efterfrågan något som har lett till strömavbrott och störningar i den dagliga verksamheten hos landets småföretagare. Eskom har ansökt om att få höja sina priser mot slutkund med 13 procent, något som också kommer att leda till en ökad inflation men också minska landets tillväxt. På sikt kan en prishöjning vara till godo för Sydafrika om det innebär att tillväxten kan öka, men kortsiktigt innebär det antagligen en inflationsökning på o,5 procentenheter.

För att uppnå sitt inflationsmål har den sydafrikanska centralbanken gjort klart att den kommer att behöva höja räntorna. Medley Global Advisors räknar med en höjning på 25 räntepunkter i juli och en ytterligare räntehöjning före utgången av året. Observatörer beräknar att bankens ränteintervall kan komma att hamna så högt som 7 till 7,5 procent, jämfört med dagens ränta på 5,75 procent.

Den sydafrikanska ekonomin kräver en rad olika strukturreformer och investeringar i infrastruktur för att få landets ekonomi på fötter igen. Att mer fokus inte har lagts på detta kan bero på att det styrande partiet, African National Congress, varit alltför fokuserade på interna politiska stridigheter och skandaler kring användning av pengar.