Gold prices after an historic crash have rebounded very sharply. Since hitting $1320 per ounce on Monday April, 15th, Gold (NYSEMKT:GLD) has risen as much as $145 and looks ready to climb even higher to end this week.
Gold has risen every year since 2001 but is off more than 10% this year so far. Investors buy the yellow metal as protection against currency and savings buying power erosion. But, the combination of poor economic data and slowing inflation despite the Federal Reserve’s quantitative easing had investors skittish about the Fed ending its monetary stimulus program. That’s the official story. There are reports of failures to deliver allocated gold circulating as well as the announcement that allocated bullion accounts at Dutch banking giant ABN Amro would be settled in cash rather than physical metal which has radically increased the demand for the physical metal around the world
Gold was not able to hold onto the $1600 level this week, closing out COMEX trading at $1595 per ounce. Not even weak U.S. GDP and unemployment data released this morning was enough to lift Gold coming into the end of the quarter. However, after a brutal 5 month sell off that brought it back to test the $1550 level, Gold put in the first positive monthly close since August of last year.
While not a reversal signal by any stretch of the definition, tracing an inside bar for the month of March does send a strong signal that selling volume is lightening. With mining and exploration stocks trading at historically low valuations relative to the underlying commodity investors should begin looking to rotate out of over-priced broad equities and into the unloved ones.
The miscalculation by the Troika in Cyprus has finally put the last nail in the medium term short gold (NYSEARCA:GLD) investment thesis. For just over a year and a half the central banks have coordinated, very effectively, to build an edifice of confidence in the global financial system that would allow the idea that quantitative easing would no longer be needed to finish the job of cleaning up the mess post-Lehman Bros. The Troika, and most explicitly, the IMF, overplayed their hand last weekend with their demands for explicit looting of savers in order to go forward with a rescue plan for Cyprus’ over-leveraged banking system.
This act and the subsequent chaos it has spawned has now firmly put in place a bottom in the price of gold. Regardless of the final outcome in Cyprus – exit from the eurozone, acceptance of the bail-in, civil unrest, etc. – the net effect will be a steady loss of confidence in the banking system, capital flight from both the US and the EU and grater movement into gold as a vehicle for savings and wealth preservation. While I would have preferred a close above $1620 per ounce this week, closing above $1600 as we approach the end of the month is strength enough given the current sentiment.
The asset bubble that is ChesapeakeEnergy Corp. (NYSE:$CHK) is continuing with its asset sales for the acreage it has amassed using massive leverage. In its most recent quarter, the company increased its output and made significant improvements in crude output but this was overshadowed by management tumult and a massive sale of its shale acreage to a Chinese firm at a price which is three times less than Chesapeake’s own estimates.
The China Petroleum and Chemical Corp (NYSE:$SNP), more commonly known as Sinopec, is purchasing half of Chesapeake’s850,000 acres of oil and gas assets at the Mississippi Lime shale field for $1.02 billion. Through this deal, Asia’s biggest refiner will considerably increase its shale footprint in the U.S. And, as I said at the outset, Sinopec won’t be paying any premium for the privilege. While some analysts have identified that the sale is $200 million below estimated value, Chesapeake itself had the land valued at an estimated $7,000 to $8,000 per acre for the property in July 2012. Calculating from the mid-point of $7,500, the asset is being sold at less than one-third of what Chesapeake valued it at less than 8 month ago.
It is going to be cheaper to get a sip of Starbucks (SBUX) coffee in India than in any other neighboring countries in South-East Asia, including ones with stronger currencies like Singapore or Malaysia. The reason behind this is its local sourcing arrangement with Tata Coffee. India is the only country where Starbucks will not have to import a majority of its beans for its local stores. And the company assures customers that the taste will be the same as it is worldwide.
McDonald’s (MCD) and other U.S. chains promise the same things but it is rarely the case. The menu and coffee blends will be tailored to local tastes in order to be successful. Moreover, India is a place where price sensitivity is far higher than it is in other places. Add to that the extreme worry over opening up foreign retailers’ ability to compete locally and this local sourcing scheme kills a number of birds both political and organizational. I’m sure Starbucks looked at the regional backlash against Wal-Mart’s (WMT) potential entry into India after the relaxation of foreign ownership rules for retailers and made the prudent decision to integrate itself into the local supply chain rather than forge a completely new one.
Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital. (read more)
The Big Trade: Simple Strategies for Maximum Market Returns
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