Solar Energy Powers Silver Demand To Record High

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  • such as Verizon and AT&T, down 2.50 percent and 1.73 percent, respectively. Both of these names were up last week following President Barack Obama’s net neutrality announcement. AT&T responded to cease all high speed network expansion; however, both companies have given back last week’s gains following the last five days of trading.
  • Another area of weakness was information technology, which closed slightly positive, up 0.42 percent. It was dragged down by Salesforce.com, which was down 8.95 percent on a weak outlook after a positive third quarter earnings release.
  • The worst-performing company this week was Gamestop, which fell 14.75 percent as the company missed expectations on both top and bottom lines.

Opportunities

  • China made a surprise cut to its interest rates on Friday, cutting interest rates for the first time in two years, in order to spur growth. This could be beneficial for many sectors as a reinvigorated Chinese growth rate will help many aspects of the global economy.
  • Next week a few important economic data points will be released, such as new home sales, mortgage applications, durable goods orders, initial jobless claims and continuing claims, as well as personal income and spending.
  • OPEC has a meeting November 27, which may lead to a decrease in global production, which would in turn raise oil and gasoline prices. While this would negatively affect the average consumer, it would positively affect the domestic oil producing industry of the U.S., which is facing potential budget cuts over falling oil prices.

Threats

  • Following OPEC’s meeting, the cartel could maintain production, which could pressure oil further, helping the average consumer save, but lowering the feasibility and profitability of the shale oil and gas plays and the money that comes along with them.
  • With Black Friday next week, and holiday shopping season upon us, retailers are expecting one of the largest holiday sales ever, in terms of revenue. Any slight disappointment in these numbers could send the market downwards.
  • With the tensions in the Ukraine on the rise again, and President Vladimir Putin even leaving the G20 summit over how the other leaders treated him, one can only speculate the eventual outcome of the global conflicts that could tip the markets into a fearful negative decline.

The Economy and Bond Market

U.S. Treasury bond yields were basically flat this week even though central banks and policymakers were pretty active. The key stories this week were a surprise interest rate cut out of China and European Central Bank (ECB) President Mario Draghi pledging to ramp up stimulus to fight off deflation. Both of these events occurred on Friday and while the fixed income markets rallied modestly, the equity markets were much more responsive.  The reason behind all the dovish talk from global central bankers is related to the stalling growth that we have seen in many parts of the world and the low levels of inflation and real concern that Europe could slip into outright deflation. Inflation in the U.S. has consistently been running below 2 percent for more than two years and in Europe inflation has been declining since 2011 and currently stands at just 0.4 percent on a year-over-year basis.

Solar Energy Silver
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Strengths

  • Global central bankers responded to slow growth and the potential for deflation. While bonds didn’t rally materially on the news it significantly increases the odds the Federal Reserve will not move to tighten monetary policy in the foreseeable future.
  • Housing data was generally better this week with existing home sales rising to the best level in 13 months and homebuilder confidence hit a nine-year high.
  • The Index of Leading Economic Indicators rose a better than expected 0.9 percent in October, indicating solid growth prospects ahead.

Weaknesses

  • China’s HSBC/Markit manufacturing index fell to a six-month low in November, which is likely one of the key reasons the central bank surprised the market and cut interest rates.
  • Industrial production fell 0.1 percent in October and was below expectations.
  • Japan’s economy slid into a recession in the third quarter, on surprisingly weak numbers.

Opportunities

  • Global central banks are easing again, offsetting the incremental moves from the Fed that recently ended quantitative easing (QE), and remains a positive for fixed income globally.
  • Short-term treasury yields remain near the top end of the recent range, this is likely an opportunity as yields could reverse course. The Fed is likely on hold for an extended period based on weak international growth and a strong U.S. dollar which will act as a brake on U.S. growth in coming months.
  • Municipal bonds continue to look like an attractive alternative in the fixed-income universe.

Threats

  • With the Thanksgiving holiday next week most of the economic data is crammed into Wednesday, with durable goods orders, initial jobless claims and new home sales being the highlights.
  • Quantitative easing has ended and the next logical step would be an interest rate hike. While estimates of when that may occur remain fluid the Fed’s relatively hawkish tone increases the risk to the bond market.
  • The geopolitical situations in Ukraine heated up again this week and the potential for a misstep remains high. Potential fallout would be difficult to predict.

Gold Market

For the week, spot gold closed at $1,200.29 up $11.54 per ounce, or 0.97 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 4.24 percent. The U.S. Trade-Weighted Dollar Index gained 0.87 percent for the week.

Date Event Survey Actual Prior
Nov 18 US PPI Final Demand YoY 1.2% 1.5% 1.6%
Nov 19 US Housing Starts 1025K 1009K 1017K
Nov 19 HSBC China Manufacturing PMI 50.2 50.0 50.4
Nov 20 US CPI YoY 1.6% 1.7% 1.7%
Nov 20 US Initial Jobless Claims 284K 291K 290K
Nov 25 US GDP Annualized QoQ 3.3% 3.5%
Nov 26 US Durable Goods Orders -0.7% -1.3%
Nov 26 US New Home Sales 471K 467K
Nov 27 Germany CPI YoY 0.6% 0.8%
Nov 28 Eurozone CPI Core YoY 0.7% 0.7%

Strengths

  • Gold reversed losses after China cut benchmark interest rates for the first time since July 2012. Additionally, Standard Chartered raised its forecast for 2015 average gold prices to $1,245 per ounce, up from $1,160 saying that many of the factors pressuring gold will be neutralized. Standard expects dollar bullishness to fade and worries about deflation to subside.
  • The Dutch central bank shipped 122 tons of gold from safekeeping in New York back to Amsterdam, increasing its home reserves to 31 percent from 11 percent previously. The bank said it is joining other central banks that are keeping a larger share of their gold supply in their own country, contributing to a more balanced division of the gold reserves. This move may also have a positive effect on public confidence.
  • The U.S. Mint has sold 2,570,500 ounces of silver coins so far in November. If the pace continues, total sales for the month would be around 4,284,167, up 257 percent from a year earlier.

Weaknesses

  • The U.S. Geological Survey noted on Monday that gold production by U.S. mines in August had decreased by 11 percent from a year earlier.
  • Hedge funds extended their fastest exit from gold this year, cutting bullish gold wagers for a third week. Holdings tumbled 49 percent over three weeks, the most since December. Additionally, assets in exchange-traded products backed by the metal dropped to the lowest since 2009, as the World Gold Council said third-quarter global demand was the weakest in almost five years.
  • The Sierra Club filed a last minute request for review of proposed state mining permit against Romarco Minerals’ Haile gold project. The project has been under permitting for nearly four years and this filing calls for the state to seek more bonding, citing figures in the $100 million to $500 million range, way beyond the $60 million that was agreed upon through Romarco’s negotiations in permitting the project.

Opportunities

Solar Energy Silver
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  • Canaccord Genuity’s study looking at the four major Venture Composite corrections in the last three decades found that historically, the up-ticks after the corrections have varied from 144 percent to 347 percent. They also note that the previous three corrections ended around the year-end. The current correction is the second-longest at 43 months and Canaccord believes we could be closer to the end.
  • The rate at which gold is lent for dollars is the most negative since March 2001 as refineries spend longer recasting bars from vaults to meet demand from Asia, where consumers prefer smaller ingots and jewelry. This signals a bottleneck in supply that could support or even increase prices.
  • Virginia Mines and Osisko Gold Royalties announced on Monday they would merge in an all-share deal that is to make the company the fourth-largest royalty company in the world after Royal Gold, Franco-Nevada and Silver Wheaton. The all-stock offer represented a deal premium of 41 percent.
  • As can be seen in the chart, gold and the S&P 500 traded in a narrow range for much of 2012 but in the last two years the spread between S&P 500 and gold had widened significantly.  For portfolio rebalancing at year end this presents an opportunity to readjust your weightings.  Sell some of the assets that have been the strongest performers and reinvest the proceeds in the underperformers to reset your portfolio asset allocation mix back into balance for the new year.

Solar Energy Silver
click to enlarge

Threats

  • India is examining policy to curb the surge in gold imports that increased to $4.17 billion in October, up from $1.09 billion a year earlier. The policy measures are being considered to narrow the current account deficit and support the currency. As the second largest importer of gold, any measures would create a headwind for gold prices.
  • Goldman Sachs executives were probed on Thursday by members of Congress due to allegations that the bank had taken too large a role in the commodities market. The Senate subcommittee released a 400-page report saying that Goldman devised policies that made it hard to get aluminum out of its Detroit warehouses, pushing up the price of aluminum for American companies.
  • On Thursday the Peruvian government branded a 10-day long strike at the country’s biggest copper and zinc mine illegal while the operating company Antamina urged laborers to return to work. The union organizing the strike said the workers would meet to decide whether to apply for a legal review of the government’s declaration that their walkout is illegal, a move which would allow the strike to be extended for another week. Antamina produces nearly 33 percent of Peru’s copper and 23 percent of its zinc. Peru is the world’s third largest copper producer.

Energy and Natural Resources Market

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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