Geo-political tensions in Syria have led to a spike in oil and gold prices compounding India’s weak rupee (down 8.6% this week). While we think this will be short-lived, in this report, we look at a stress case scenario for India.
Markets: worst case lower; but watch for policy action Our base case for the Sensex is that it will be range-bound between 18,500 to 20,500. However, as we mentioned in our earlier report (see report), the market would stay below this range if the currency does not stabilize.
So where can the market go now on a worst case? The market is trading slightly below the long term average forward PE of 14.1x. However, at its low, the market tends to go to 10x whenever there is a global crisis. Given that the developed world is recovering, we are assuming current valuations for the export companies and 1SD below mean for the rest of the universe. Based on this we get a stress case index level of 16,000 for the Sensex.
Equity investors have not yet panicked in India: One key risk for markets is that FII holding at 21% (45% of free float) is close to all time highs. India remains vulnerable to any GEM sell-off.
History tells us to be wary of sharp recovery: Looking at past instances of sharp rupee depreciation of over 15%, the market has fallen in all the 3 instances on an average 21.5% (ranging from 4.5% to 47%). Interestingly, markets
recovered practically the entire loss 3 months later on all the 3 occasions. Markets will stop panicking when policy makers start panicking: Any policy measures to shore up the rupee by say quasi sovereign bonds/NRI bonds is the key and could lead to a spike in the rupee and help markets. Read More
Gold shorts covered an enormous 23,518 futures contracts last week – the equivalent of 2,351,800 ounces of gold. With JPMorgan appearing to be calling everyone (here and here) to get their hands on gold to deliver, it seems our concerns over a short-squeeze are starting to solidify. The last time shorts collapsed at this fast a rate was in the 1999/2000 period which saw a considerable 33% squeeze ramp in gold prices over the space of 3 weeks in the fall of 1999. Notably, the gold short position still remains huge compared to historical values – having fallen back only to the previous all-time record high levels (i.e. plenty of room for moar squeeze). In addition to this surge in covering, Gold ETFs saw their first inflows in 2 months.
as Gold ETFs saw their first inflows in 2 months… Read More
Investors’ holdings of commodities fell by a record $63bn in the second quarter, surpassing even the drop seen at the height of the 2008 financial crisis, according to Barclays.
Commodities have fallen out of favour among investors this year as fears of the end of the supercycle of ever-rising prices have been hardened by China’s slowdown.
The slower growth from the country, which accounts for more than 40 per cent of global demand for commodities like copper and steel, has combined with the impact of the Federal Reserve’s pronouncements on tapering of its quantitative easing programme to damp enthusiasm among investors towards the asset class.
Barclays’ monthly survey of commodity investments showed that total assets under management fell to $349bn at the end of June, the lowest in nearly three years. Read More
The marginal cost of production of gold (90% percentile) in 2013 was estimated at $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1104…
Which means that of the following mines (as we showed here) which make up the gold cost curve, one by one, starting on the right and going left, production is going to go dark, even without the recent demand by South African gold miner labor unions to have their wages doubled. Until eventually virtually no gold will be produced.
Gold prices are near a two-year low and down 17pc for the year, after 12 straight years of annual gains. A sell-off in April released years of pent up demand, especially in Asia, stretching regional supply and pushing spot premiums to records.
Singapore last year also excluded gold traded for investment from sales tax liability, prompting even more interest in buying and storing bullion in the city-state, Reuters reported.
“This offering will encourage a significant development in a Singapore-based precious metals market,” Ronan Donohoe, Deutsche Bank’s global head of metals and dry bulk trading, said in a statement.
Deutsche Bank already has precious metals trading, financing and physical distribution operations in Singapore. The bank said the new vault would be one of the largest physical holdings of gold in the city state.
It will open the storage facility at the Singapore Freeport, a warehouse for items such as precious metals, art and wine located at the airport.
The latest batch of economic data from China suggest that growth continues to be sluggish.
Let’s walk through each of them.
First, industrial production climbed 9.2% on the year, slightly below expectations for a 9.4% rise. Industrial production in May was led by heavy industries, with steel products up 11.3% year-over-year (YoY), up from 8.1% in April. Auto production slowed to 15.7%, from 18.3%, according to Bank of America’s Ting Lu.
Second, fixed asset investment (FAI) was up 19.9% on the year, and year-to-date FAI was up 20.4% on the slightly below expectations for a 20.5% gain. Remember FAI is a good gauge of a country’s investment activity. Read More
There are over 3 billion ounces of gold in the world’s deposits. The Top 50 of these mines alone contain over one-third of the total gold. North America is the ‘cheapest’ place to produce gold and Africa the most expensive. Gold producer profits are getting squeezed from both directions: lower gold prices and rapidly inflating costs… Read More