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 main reason for the duty hike is the rising current account deficit, driven largely by India’s traditionally large gold imports – demand which has grown with the price pulling back below $1600 per ounce and the rupee strengthening somewhat from its worst levels. The current account deficit reached an all time high of 5.4% of Gross Domestic Product in the third quarter of 2012. India’s current account deficit problems look similar to the balance of payments crisis in 1991, when the Reserve Bank of India had to sell 47 tons of gold to Europe as collateral for a loan to avert a sovereign default.
In early December, Marathon Oil (NYSE:$MRO) announced a $5.2 billion capital budget for 2013 and ConocoPhillips (NYSE:$COP) plans to invest $15.8 billion in the next year. But the biggest announcement came from Chevron (NYSE:$CVX) which will make investments of $36.7 billion in 2013, which is 12% more than its planned budget for 2012–$3.3 billion of which is allocated for its affiliates. About 90% of $36.7 billion will go towards upstream crude oil and natural gas exploration and production while 7% will go towards downstream operations.
Russia’s state owned energy giant OAO Gazprom ($OGZPY), which holds the world’s largest natural gas reserves, recently released its third quarter results in which its net income nearly doubled to $10.1 billion versus analysts’ estimate of $9.6 billion while revenues increased by 18% to $37 billion. Gazprom will need to make serious changes to maintain this level of performance as there are shifts coming to the European gas market that seek to drag down prices and profits.
Honda (NYSE:$HMC) delivered extremely strong quarterly performance in Q4 on the back of a U.S renaissance in car sales – due to aging fleets and hope – as well as improved operations after the 2011 Thailand floods.That said, however, its outlook remains weak due to headwinds in China and Europe. Honda achieved record sales in 2012 of 3.82 million units — an increase of 19%. Quarterly profits increased 62.6% to $851 million but the annual forecast for FY 2013 has been reduced for the second time by 1.33% to $4.01 billion (¥370 billion from ¥375 billion) as Honda expects to sell 4.06 million cars versus the 4.12 million cars announced earlier. Results like this are creating real problems for the number three Japanese auto brand in the U.S., Nissan (NASDAQOTH:$NSANY), as Toyota (NYSE:$TM) also surged back in 2012.
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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