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Two Numbers That Janet Yellen Is Going To Like

Bloomberg, Aug 7, 2015

This morning’s jobs release was one of the more ‘in line’ reports we’ve seen in some time. The unemployment rate stayed at 5.3 percent in July, as expected. The month also saw 215,000 new jobs added, which was just a tad shy of estimates. Average hourly earnings rose 0.2 percent, which was again right in line with expectations. But there was some good news hidden beneath the hood. U-6, which is a broader measure of unemployment that captures discouraged workers and workers who are part-time for economic reasons, came down to its lowest level since the crisis. And the average length of the work week ticked higher to match its highest level since the crisis. So while this wasn’t a lights-out report, the trend is the same: The labor market keeps healing and labor market slack keeps going away. That’s exactly what Janet Yellen wants to see before she raises rates.


OPEC leader Saudi Arabia is having to borrow money

CNN Money, Aug 7, 2015

saudi arabia stock market

Saudi Arabia is not as rich as you thought.

The oil kingdom is facing a big hole in its budget, caused by the slump in oil prices and a sharp rise in military spending. That’s forcing the government to raid its reserves, and it may even borrow from foreign investors, analysts say.

Saudi Arabia has already burned through almost $62 billion of its foreign currency reserves this year, and borrowed $4 billion from local banks in July — its first bond issue since 2007.

Its budget deficit is expected to reach 20% of GDP in 2015. That’s extraordinarily high for a country used to running surpluses. Capital Economics estimates that government revenues will fall by $82 billion in 2015, equivalent to 8% of GDP. The IMF is forecasting budget deficits through 2020.

Oil’s slump from $107 a barrel last June to $44 right now is largely responsible for the squeeze. Half of the country’s economic output and 80% of government revenue is generated by the oil industry.

Yet Saudi Arabia has only itself to blame. Its aggressive fight to defend OPEC’s share of the global oil market has led to a massive supply glut.

Riyadh is refusing to cut output, hoping to drive other producers, such as U.S. shale companies, out of business.

At the same time, it is ratcheting up spending. It has intervened in a war in neighboring Yemen, and has been involved in airstrikes against ISIS in Syria. Its military budget grew by 17% last year to roughly 10% of GDP.

King Salman also lavished generous bonuses on public sector workers after his accession to the throne in January. The gesture was popular, but stretched the kingdom’s finances even further.

“We will see increased borrowing in the coming months,” Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, told local media last month.

The country’s central bank would not comment on how many bonds it might issue.

Analysts suggest the Saudis could issue around $5 billion worth of bonds a month through the end of this year, some of those to foreign investors.

Still, it could quickly revert to drawing on reserves, rather than borrowing, if global interest rates rise.

Its foreign currency reserves, while depleted, still amounted to $660 billion at the end of June.


The Next Silver Bull May Have Already Started

By Laurynas Vegys, Aug 7, 2015

Silver is down 7.1% this year. Will this weakness persist? To find out, let’s look at the key factors in the silver market this year.

  • Like gold, silver fell as the US dollar rose on the back of expectations that the Fed will hike rates.
  • World demand for physical silver fell 4% in 2014, largely due to a record 19.5% drop in investment demand.
  • Silver exchange-traded funds (ETFs) did not see big liquidations in 2014. ETF holdings grew by 1.4 million ounces and recorded their highest year-end level at 636 million ounces.

The first two factors helped push silver 19.9% lower last year. That’s more than gold or any other precious metal fell. Despite this, silver production rose 5% in 2014. That added to the pressure on prices.

Why did miners produce more silver when prices were falling? Because of:

  • By-product metal. Around 75% of the silver mined is a by-product at gold or base metal mines. These producers will keep mining silver, almost regardless of price.
  • Reduced cash costs. The primary silver producers have cut costs since they peaked in 2012. The main way miners do that is by boosting production to achieve economies of scale.
  • Bull market hangover. Precious metals were in a major bull market from 2001 to 2011. Producers built a lot of mines in response. Nobody wants to pull the plug on a new mine that’s losing money if they think prices will go higher.

That’s the backdrop. Now let’s look at this year’s fundamentals.


Silver mine output has risen for 12 consecutive years (silver mine supply is a little different, due to hedging, but also trending upward). This year could break this trend. Industry experts at GFMS forecast up to a 4% decline in silver output in 2015.

Why? It’s not rocket science. There are now fewer major new mines under construction due to lower metals prices.

That leaves scrap supply. But scrap comes from jewelry, and sellers are price sensitive. People like to sell granny’s silver tea set when prices are up. We expect subdued scrap supply until silver heads much higher.


Investment demand – that’s us – is a big chunk of total silver demand: 18.4% as of the latest figures.

There was a big drop in investment demand last year: 19.5%. This tells us that most short-term investors and sellers have left the market. We don’t know any “silver bugs” who were selling. That means that today’s bullion is in stronger hands. And that means that any new buying will have a strong impact on prices.

But will there be buyers?

The Silver Institute expects more silver demand from investors this year. They say that the first half of 2015 sales of silver bars were the fifth highest on record.

Photovoltaics (PV) is another source of silver demand that many analysts expect to rise in 2015 and beyond. Global PV demand is set to increase by 30% in 2015, according to IHS analysts. China alone has plans to install 17 gigawatts of solar capacity by the end of the year.

The solar industry consumes a small amount of silver compared to jewelry and other electronics. Yet, if PV demand delivers in 2015, it will become the third-largest source of fabrication demand for silver.

Wildcard: Tesla plans to put batteries big enough to power a house in every home. What happens if that takes root is anyone’s guess… but it will be big. Really big. And the impact on demand for silver would be just as huge.

The Deficit

Silver supply went into deficit during much of the big run-up from 2001 to 2011. That may happen again. Silver Institute expects the silver supply deficit to grow to 57.7 million ounces in 2015. (Note that even if physical mine supply is up, net supply can be down if a lot of the mine supply was forward sold as hedges.) If the institute is right, it’ll be bullish for silver prices.

The Dollar and the Fed

We believe the dollar is grossly overvalued, and we are not alone. HSBC thinks the greenback’s rise since 2014 could be in its final stage. For the three months between April and June, the US dollar fell against every developed-market currency (save for the yen and the New Zealand dollar).

Many investors seem convinced that the Fed will raise interest as soon as September. We view this as unlikely at this stage. Yes, tightening US monetary policy would propel the dollar to new highs. But an even stronger dollar would mean slicing billions off the US GDP; not exactly a desirable situation from the standpoint of the Fed given the sluggish growth of the economy.  We think the Fed could delay raising rates until 2016. It might even stop talking about rate hikes indefinitely. Each delay, the dollar will get whacked, and that’s good for precious metals.

On the other hand, if the Fed does nudge rates higher this year, it would likely dampen the stock market. That would increase demand for silver and gold. This could push silver prices much higher, given the small size of the market.

The Gold-Silver Ratio

The gold-silver ratio (GSR) tells you how many ounces of silver you need to buy one ounce of gold. The record shows that the GSR often surges during a recession. (See the shaded areas on the chart below.)

Silver is about 17 times more abundant than gold in the earth’s crust. Silver and gold prices were close to this ratio for most of history. These facts make many investors think that the GSR should be 17-to-1 and that eventually it will be.

They may be right, but we’ve never found the GSR to be a strong predictor of gold or silver prices. To us, the GSR “suggests a lot but proves nothing.”


The fundamentals are positive for silver in 2015: less mine supply, and the healthy demand we already see is bullish. The greater demand that’s possible could create a real supply crunch. As a result, we expect silver to hold on throughout 2015 and perhaps even increase faster than gold, if the whole precious metals sector turns positive this year.

As for guessing the future, we have no crystal ball. We can say that Louis’ case for 2015 as a win-win year for silver is backed by the numbers.

P.S. If silver moves off its current level of $15 and into the $20 or $30 areas, silver investors could make large gains. But owners of a unique silver-related security could make gains that are five… 10… even 100 times greater. And right now is a once-in-a-decade chance to buy them very, very cheap.

Our friends at Casey Research are the world’s leading experts in this sector. And they’re EXTREMELY bullish on this rare opportunity. Read on here for details.

Hedge Fund Losses From Commodity Slump Sparking Investor Exodus

Bloomberg, Aug 7, 2015


Investors are demanding their money back as losses mount.

When even Cargill Inc., the world’s largest grain trader, decides to liquidate its own hedge fund, that’s a sign that commodity speculators are in trouble.

Hedge funds focused on raw materials lost money on average in the first half, the Newedge Commodity Trading Index shows. Diminishing investor demand spurred Cargill’s Black River Asset Management unit to shut its commodities fund last month. Others enduring redemptions include Armajaro Asset Management LLP, which closed one of its funds, Carlyle Group LP’s Vermillion Asset Management and Krom River Trading AG.

While hedge funds are designed to make money in both bull and bear markets, managers have a bias toward wagering on rising prices and that’s left them vulnerable in this year’s slump, said Donald Steinbrugge, managing partner of Agecroft Partners LLC. The Bloomberg Commodity Index tumbled 29 percent in the past year and 18 of its 22 components are in a bear market.

“No one wants to catch a falling knife, and demand for commodity-oriented hedge funds is very low,” said Steinbrugge, whose company helps funds find investors.

The amount of money under management by hedge funds specializing in commodities stands at $24 billion, 15 percent below the peak three years ago, according to data from Hedge Fund Research Ltd.

The Newedge index, which tracks funds betting on natural resources, suggests managers have lost money for clients during much of the past four years. A dollar invested in the average commodity hedge fund in January 2011, when values reached a reached a record, had shrunk to 93 cents by the end of June. Investing in the S&P 500 index would have returned 80 percent, including dividends.

Commodity profits tumbled in 2012 and 2013, prompting the first wave of closures, including funds run by Clive Capital LLP and BlueGold Capital Management LLP.

The exodus marked a shift from the boom times before the financial crisis, when the Newedge index surged almost sixfold from 1999 to a peak in June 2008. Since 2010, the gauge fell in three of the next four years and is down 0.3 percent in 2015.

The Galena Fund fell 0.8 percent in the first six months of this year, according to data compiled by Bloomberg. The fund, which had $637 million at the end of June, is the asset management unit of Trafigura Beheer BV, the second-largest metals trader. Officials at the unit declined to comment.

The $230 million Singapore-based Merchant Commodity Fund lost 3.9 percent in the first half, after returning almost 60 percent last year, a record.

“Investor appetite in commodities isn’t high,” said the fund’s founder, Michael Coleman.

Krom River, based in Switzerland, lost 2.9 percent in the first half, according to a letter to investors seen by Bloomberg. Assets under management stood at $64 million in June, from about $800 million in 2012. Chief Executive Officer Mike Cartier declined to comment.

The Armajaro Commodities Fund, which managed $450 million, lost 11 percent in the first half and was scheduled to close at the end of July, a person familiar with the matter said. The company declined to comment.

The founders of Vermillion Asset Management, the commodities hedge-fund firm owned by Carlyle Group, left this year after losses. Assets in Vermillion’s main fund fell to less than $50 million from a peak of $2 billion, a person with knowledge of the matter said last month.

Hedge fund manager Pierre Andurand. Photographer: Daniel Acker/Bloomberg
Hedge fund manager Pierre Andurand.

Others have fared better. Andurand Capital Management, run by Pierre Andurand, gained 3.5 percent in July, bringing his 2015 gains to 4.8 percent, according to a person familiar with the matter.

The fund, which manages about $500 million, delivered a 38 percent return in 2014. The company declined to comment.
“There’s no money going into commodities,” said Christoph Eibl, chief executive officer of Tiberius Asset Management AG, which has $1 billion in commodity investments.


German Manufacturing Orders Surge in Sign of Robust Growt

Bloomberg, Aug 6, 2015

Employees assemble the body shell of a Volkswagen Phaeton automobile on the production line at the Volkswagen AG factory in Dresden, Germany.

German factory orders surged in June in a sign of robust growth in Europe’s economic powerhouse.

Orders, adjusted for seasonal swings and inflation, rose 2 percent after sliding a revised 0.3 percent in May, data from the Economy Ministry in Berlin showed on Thursday. The typically volatile number compares with a median estimate of a 0.3 percent increase in a Bloomberg survey. Orders jumped 7.2 percent from a year earlier.

Germany, Europe’s largest economy, is benefiting from the lowest unemployment rates since the country’s reunification and a euro area that is being reinvigorated by European Central Bank stimulus and low oil prices. While the stand-off between Greece and its creditors caused a drag on some segments of the economy, the Bundesbank predicts “quite robust” growth for this year.

“The fundamental upward economic trend in Germany is intact,” said Andreas Rees, chief German economist at UniCredit Bank AG. “But with such a high number one must say, to be fair, that this occurred mainly because of bulk orders in the aviation sector.”

Airbus SAS, one of the world’s largest commercial aircraft manufacturers that assembles most of its single-aisle planes in Hamburg, received 135 aircraft orders in June, up from the 18 orders placed the previous month. China ordered as many as 75 A330 jets worth about $18 billion at list prices, Premier Li Keqiang announced on June 30.

Export Orders

Export orders jumped 4.8 percent in June, driven by an 8.8 percent increase in investment-goods demand from outside the euro area, the ministry said. Domestic factory orders dropped 2 percent. Total orders rose 3 percent in the second quarter from the previous three months.

The euro rose after the report was published and was up 0.1 percent at $1.0916 at 8:35 a.m. Frankfurt time.

“The trend for factory orders is clearly pointing upward,” the ministry said. “German industry should maintain its path of moderate growth in the coming months.”

Measures of optimism among German businesses improved in July as concerns eased over Greece’s crisis, and economists predict growth accelerated to 0.5 percent in the second quarter from 0.3 percent in the previous three months. In a sign that risks remain, a gauge of manufacturing indicated weaker growth as exports fell for the first time in six months.

“If you look at the fundamentals behind the German economy, they are strong,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “We had a sharp drop in energy prices, that will support the economy, we have a weak euro, and of course we have incredibly low interest rates.”