12 August, 2015

Newsletter - The DELAIRE Report

Although investor sentiment remains largely negative towards gold, the price of the yellow metal spiked on Tuesday, after news that China devalued its currency after a run of poor economic data. After hitting an intra-day high of $1120 an ounce during the Hong Kong session, the price of spot gold retreated slightly.

An announcement from the Peoples Bank of China (PBoC) rattled the financial markets on Tuesday. The Chinese government devalued its currency, the yuan, by 1.9% to 6.2298 yuan per dollar – its lowest point in almost three years.

China’s devaluation of the yuan sent the dollar higher and raised the prospect of a new round of currency wars, just as Greece reached a new deal to contain its debt crisis.

It was the biggest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates.

The move was followed by a further devaluation announced today.

According to some market sources, Friday’s minor rebound in prices started when a buy order for 100,000 ounces of gold hit the marketplace just as U.S. equity markets were opening. Analysts noted that the big order in a relatively thin market helped prices pop higher by more than $10 an ounce.

The highly anticipated non-farm payroll report showed that in July 215,000 individuals were added to the employment market versus expectations of 225,000. At the same time the previous month’s figure was revised up from 223,000 to 231,000. The unemployment rate was unchanged at a seven-year low of 5.3% with participation rate held at 62.6%.

While the Greek financial crisis made the daily headlines, not much has been said about Puerto Rico’s debt crisis which escalated last week.

Last Monday, Puerto Rico missed a $58 million bond payment. It was Puerto Rico’s first default in 117 years. The New York Times explained:

For years, the commonwealth borrowed too much money, trying to paper over declining government revenue and prevent deep cuts in services and layoffs of public workers. Puerto Rico easily found lenders willing to extend the government more debt. The bonds made for hot investments across the mainland United States because the interest is often “triple tax exempt,” meaning the holder does not pay state, federal or city income taxes.

A default by Puerto Rico was bound to happen. For years, the government spent more money than it snatched up in taxes. And it borrowed to make up the difference.

Puerto Rico bonds offered high returns and tax-free income. And according to many financial advisors, there was little chance that the government would default on its debt.

More indebted than any American state by some measures, Puerto Rico sold its bonds far and wide, to everyone from wealthy Midwesterners to New York hedge funds. But more than 20 percent of the government debt is owned locally. And as values have plunged, some of the most intense pain is being felt by the tens of thousands of Puerto Ricans who bet much of their savings on the bonds.

“These are doctors, stay-at-home moms, teachers, older people, young people,” said Jeffrey B. Kaplan, a Miami lawyer whose firm represents more than 150 Puerto Rico bond investors. “And now they have all their eggs in one basket.”

Puerto Rico is set to propose a plan by Sept. 1 for putting off payments on some of its debt. The government’s officials have yet to say which bondholders may be affected or by how much.

Meanwhile, according to a Bloomberg article, the International Monetary Fund (IMF) said the yuan trails its global counterparts in major benchmarks and that “significant work” in analysing data is needed before deciding whether to grant the Chinese currency reserve status.

The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while countries such as France have welcomed China’s push, the U.S. has urged the nation to keep moving toward a flexible exchange rate and undertaking financial reforms.

“The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said.

The fund said international use of the yuan, officially called the renminbi and abbreviated RMB, has increased over the last five years, albeit from a low base. “Across a range of indicators, the RMB is now exhibiting a significant degree of international use, especially in Asia and increasingly in Europe,” the report said.

To qualify for the basket, currencies must be “widely used” to make payments in global transactions, and “widely traded” in major exchange markets. Key indicators include the share a currency makes up of official reserves, international banking liabilities and global debt securities, as well as the volume of use in foreign-exchange markets.

Last year, the yuan ranked seventh among currencies as a share of official reserves, behind the four SDR members as well as the Australian and Canadian dollars, according to the IMF. The yuan constituted 1.1% of official reserves, compared with 63.7% for the U.S. dollar.

The yuan also ranks outside the top five in terms of debt securities and currency trading, according to the report.

Winning the IMF’s blessing, following a rejection in the last review in 2010, would give the yuan prestige as a reserve currency that makes it more attractive for central banks to hold and potentially reduces the dollar’s dominance worldwide. From a technical standpoint, owning SDRs counts toward a country’s official reserves; the U.S. holds $50 billion worth, out of about $280 billion allocated to IMF members worldwide.

While, the paper market for gold and silver has been subjected to relentless selling there are many factors suggesting that gold prices should be going higher. Apart from the current global financial uncertainty, lower prices are pressuring the gold mining industry. There are a number of reasons for the industry’s woes, but most mines simply can’t make money selling their mined products at today’s low spot prices.

In addition, the surge in demand for bullion coins and bars will soon have a positive impact on prices.

Even though it has been extraordinarily difficult for some investors to keep their conviction and hold on to real value while paper markets relentlessly discount it, I am entirely convinced that we are getting to the end of this current bear market.

Newsletter - The DELAIRE Report

While the recent decline in gold prices has been mentioned on main-stream media, the decline seen in silver prices has garnered much less attention. Silver, like gold, has fallen in value as the Federal Reserve prepares to hike interest rates for the first time in years.

However, unlike gold, silver has many industrial uses-thousands of them-that put the white metal into a somewhat unique position. Silver has the potential to not only rally based on investment or safe-haven demand, but also has the potential to rally based on an improved economic outlook.

Silver prices have fallen; yet, demand is skyrocketing. As a result, premiums are increasing and delivery times are being extended. The physical market for precious metals, unlike the paper futures markets for gold and silver, DOES respond to real-world supply and demand fundamentals.

One misconception is that higher premiums go straight into the dealers’ pockets. In reality, the wholesale premiums and fabrication costs associated with securing inventory are also rising.

Evidence of the strong demand is was seen in recent weeks, as the U.S. Mint was completely SOLD OUT of American silver eagle coins. The Royal Canadian Mint has also been unable to keep up with demand.

Several bullion dealers in the U.S have reported huge increases in retail demand for silver coins, rounds and bars since mid-June.

Money Metals Exchange a U.S based bullion dealer with over 50,000 customers and $120 million in annual sales recently reported that from June 16 to July 31, the company experienced a 135% surge in gold and silver sales compared to the previous 45 days. And, since June 16, the number of first-time customers rose by around 365%.

“We’re seeing more buying interest than at any time since the 2008 financial crisis. If we see a further spike in demand, the whole supply chain could be cleaned out,” said Stefan Gleason, president of the company. “In that event, customers will face long lead times and limited product choices. Gold is showing some signs of strain, but silver could become completely unavailable.”

While I have often alluded to this, it seems that investors in South Africa are not taking note of what is going on in the USA as well as Europe and Asia. In my veiw, silver is a bargain at current levels and these levels will likely not be sustained for much longer.

Silver is already beginning to enter a supply crunch.

With the decline in silver prices in recent months, the silver market is likely on the verge of a significant reversal in price.

Simona Gambarini, a commodities economist for Capital Economics, said the following. “We have argued before that silver mine production had reached its peak and was going to decline over the next few years. However, the recent slump in precious and industrial metal prices might accelerate this process.”

That’s because silver is often mined as a by-product of copper, gold, zinc and lead. According to Gambarini, 70% of silver production in 2014 came as a by-product of other mining activities. The plunge in commodity prices in other metals is translating into a cut of Capital spending by miners, which in turn means lower output.

Over supply has played a role in silver’s downturn. Expect that over supply to change to under-supplies in the coming years, which in turn should drive prices higher.

Gambarini’s firm expects to see a 1 percent decline in silver output this year, which could drive prices up to $18.70 per ounce.

Spot silver prices were trading around the $14.74 per ounce level in late action Friday. A jump to $18.70 before the end of the year would mean an increase of over 26 percent in just the next few months.

Could silver prices go lower? Absolutely. Could silver trade sideways for a period of time? Sure.

One thing is abundantly clear, however. There is a lot more upside potential than downside potential at current prices.

Prudent investors are turning to precious metals. They finally understand their buying power is in jeopardy. They are taking advantage of low prices in silver.

Economic events worldwide practically ensure that the dollar will weaken in the future and individuals need to be protected against future dollar weakness.

Take advantage of the low prices now.

I recommend adding to silver holdings right now at current levels. If you don’t own silver already, now is the time to begin building a stash.

Precious metals are buy-and-hold, a crisis play, wealth insurance.


About the author

David Levenstein is a leading expert on investing in precious metals.  Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.