Are Commodity-Focused Investment Vehicles Producing Distortions?
Several observers have begun to wonder why gold stocks have so far been unable to consistently outperform the gold price, in light of the fact that input costs have begun to decline noticeably. In line with this, a number of gold producers have reported improvements in mining costs in recent quarters, which have in many cases accelerated of late (in some cases write-offs continue to weigh on net earnings, but these are non-cash events; also, the value of written down reserves will immediately increase again if/when the gold price rises).
Main shaft of the Kusasalethu deep level mine near Carletonville, west of Johannesburg
Photo via mining-magazine.com
We have previously remarked on the strong correlation between the HUI-gold ratio and the metals and mining stock ETF XME. This correlation at times seemed to make little sense. Our conclusion was that it is likely caused by the financialization of commodities during the expired commodity boom. In particular, investment funds focused on resource companies, ETFs, assorted tracker vehicles and indexes serving as benchmarks, occasionally appear to trigger indiscriminate selling and buying across the “metals mining” sector, regardless of what metals the companies concerned actually mine.
Prior to the era during which all sorts of commodities and commodity producing sectors became ETFs (a symptom of the general move to transform commodities into “investable assets” for investors who are not trading futures or are looking to obtain broad sector exposure), the behavior of gold stocks relative to other metal mining stocks as well as trend in all these sub-sectors relative to the prices of the underlying metals seemed to make more sense most of the time. Continue reading
If the PBOC was desperate last week, the catalog of words describing their likely stance this week is unbelievably short (pun intended). In the handbook of central bank operations, when conditions truly spiral out of control the first entry in that chapter says to blame speculators. Primary among them, subchapter one in the handbook, are the short sellers. If you think back to 2008, even the supposedly steady and omniscient Federal Reserve encouraged the SEC to ban short selling on bank stocks (first naked that July; then outright on September 19). As if it needs to be pointed out, it doesn’t work.
What short selling bans amount to are acts of proclaimed exhaustion; the central bank or central financial authority has no other options left and short sellers make a good and public target. Increasingly, it seems the PBOC in calling for increased “flexibility” (read: despair) the past few weeks (subscription required) has more and more focused on those speculators supposedly short selling yuan. Because of China’s dual market for currency, CNY and CNH (offshore), any distance between them supposedly opens arbitrage opportunities which can only further destabilize an already precarious position. Thus, by targeting speculation of that kind the PBOC claims to be working back toward good order.
So the behavior of the “dollar” is much like a short squeeze, and now the PBOC has used its state run banks to enact a short squeeze in yuan – fighting a short squeeze with a short squeeze. How could it possibly fail?
The arb between onshore and offshore RMB has the effect of moving “dollar” transactions to Hong Kong and away from onshore China; a “speculator” might “buy” CNH in Hong Kong and then “sell” in CNY in Shanghai, all using “dollars” as the funding mechanism. It displaces dollar activity and volume that is obviously needed and necessary onshore where the PBOC clearly believes it has legitimate interests. In other words, this is not the center of China’s “dollar” problem so much as it makes it that much more difficult and unsteady.
To be more specific, these damned “speculators” are believed not so much “buying” CNH and “selling” CNY but rather “borrowing” CNH and “lending” CNY. The jargon and technicalities get confusing because intent matters in these affairs more so than the actual arrangement of transactions. By tasking state banks to “buy up” CNH, that left little liquidity with which speculators might “borrow” and short it. The results:
Overnight HIBOR (CNH) hit a ridiculous 66.815%, while one-week HIBOR spiked to 33.791%! Even the 3-month maturity blasted to a record, jumping to 10.42%.
Submitted by Mark O’Byrne – GoldCore
John Hathaway, respected authority on the gold market and senior portfolio manager with Tocqueville Asset Management has written an excellent research paper on the fundamentals driving the gold market today.
“An acute shortage of readily marketable physical gold is developing that we believe will deepen in years to come. This possibility seems to be unrecognized by those who are short the gold market through paper contracts. The relentless dumping of synthetic or paper gold contracts since 2011 by speculators in Western financial markets has caused the shortage. The steady selling has driven down the price of physical gold, hobbled the gold-mining industry, and drained the stores of gold held in the vaults of Western financial centers …”
Veteran gold market analyst and CFA, Hathaway concludes that:
“Much of what passes for financial wealth is in our opinion imprisoned in a matrix from which there is no easy exit. The return migration of capital to real assets promises to be disruptive. The misdirection of capital could well cause losses for many but opportunity for a few. The list of opportunities is short, limited in capacity, possibly complex, and difficult to access. Among the possible opportunities, gold is accessible and straightforward. Gold has a history of responding inversely to the direction of confidence.
The pool of liquid gold to meet that need has been severely depleted.
We believe that the stage has been set for a significant repricing of gold in all currencies, including the US dollar. Ownership of physical gold outside of the financial system seems to make more sense than ever. Gold-mining equities, which have been severely depressed by the four-year decline in the gold price, should also participate. We believe that a trend reversal could prove explosive for the entire precious metals complex.”
Hathaway’s comprehensive piece is well worth taking the time to read and can be accessed here