ANZ Banking Group analysts in Hong Kong confirmed that they expect tighter monetary policy on the part of the PBOC “ahead.” Not a question of “if” but of “when,” really. To what extent the higher interest rate environment visible in the PBOC’s policy pipeline will affect…everything (including the much-watched commodities’ sector) remains to be seen, but there is little argument about the fact that it will have an impact on current trends and values.
Separately, Japan raised its economic assessment for the first time in nine months today, while over in Europe, finance ministers agreed on an expanded bailout fund by the EU, should it become something to have to resort to. In all, the summit’s outcome was not deemed as having tackled the core issue of the region’s debt situation.
Over in the US, as mentioned, shoppers did their duty while manufacturers…manufactured more. The Empire State’s index of such activity gained steam this month, rising to 15.4 from January’s 11.9 level. Economists anticipate gains in US consumer spending and gains in US manufacturing to both remain relatively strong in 2011, following the pothole
that America’s economy had hit back in 2008. US consumer spending is anticipated to show a 3.2% gain in the current year; that would be the largest such increase in six years. Manufacturing, on the other hand, is seen as also rising, and it is certainly being watched with interest, as it comprises fully 11% of the USA’s economy. That said, there are remaining issues in the US economy, when it comes to housing and to jobs, even if such ‘issues’ show improvement tendencies.
Bloomberg indicates that “a government report tomorrow will show U.S. housing starts rose to an annual rate of 540,000 in January from 529,000 in December. The five-year average is 1.198 million. The U.S. unemployment rate has been 9 percent or higher for 21 months. Thirty-year bonds gained yesterday as yields near the highest level in 10 months bolstered demand and the Obama administration submitted a budget plan that included $1.1 trillion in deficit cuts during 10 years.”
In the “macro” background, the sentiment among fund managers around the world should present some reasons for concern among the emerging markets/commodities/risk assets speculative crowd. While evidence of such concern is at present thin, at best, the most recent Marketwatch survey offers some “crunchy” food for (investment) thought as we go forward:
“Fund managers are more bullish towards global equities than at any time in the past decade, according to a survey released Tuesday. Of the 188 fund managers polled around the world, a net 67% say they are overweight global equities, which is the highest reading since the survey began asking the question in April of 2001, according to the Bank of America Merrill Lynch Fund Manager Survey for February.
“The survey also noted an increase in risk appetite with only a net 5% of fund managers overweight global emerging markets equities, down from January's net 43%. A net 70% of investors now see the Federal Reserve raising rates in the next year, up from 62% a month ago.” Historically speaking, gold is thought to offer protection against weakness in the equity sector of one’s portfolio.
Gold is, also historically speaking, not supposed to fare particularly well in rising and/or positive real interest rate environments. The aforementioned ABN AMRO metals analysis observes that there has been a slight shift in sentiment on the heels of January’s gold correction: “The [gold] market is starting to position itself to cope with the (outside chance) that interest rates will start to go up in 2011, which would be bearish for gold.”
From where this scribe sits, a 70% segment of investors expecting higher rates courtesy of the hitherto extremely generous Fed is hardly an “outside” chance at all, even if the coming weeks could well witness higher interim values. The ABN team projects gold ETF demand in 2011 to total 270 tonnes, as against 2010’s 313 tonnes, and as against 2009’s 576 tonnes. It also only expects 31 tonnes of the yellow metal to be de-hedged in the current year by mines, as against the 205 tonnes de-hedged in 2010, and the 321 tonnes de-hedged in 2009. Meanwhile, the ABN projections call for both a mine supply (2,253 tonnes) and scrap supply (1,501 tonnes) record to flow into the market in 2011. Add it all up. By ABN’s tally, the 2011 surplus in the gold market will total 1,190 tonnes.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America