US FINANCIAL SECTOR ie BANKS
by plotting the financial sector against gold. As the fear of a financial collapse waned, financials headed higher and gold headed lower. The more confidence there is in the financial sector recovery, the higher the financial sector has gone and the lower gold has gone. Gold looks almost like the mirror image of the financial sector since mid-2011 when gold peaked.

(click to enlarge)

 

AUDUSD and GOLD
Gold traders may also be surprised to hear that trading the Australian dollar is just like trading gold in many ways. As the world\’s third-largest producer of gold, the Australian dollar had an 84% positive correlation with the precious metal between 1999 and 2008. Generally speaking, this means that when gold prices rise, the Australian dollar appreciates as well. The proximity of New Zealand to Australia makes Australia a preferred destination for exporting New Zealand goods. Therefore, the health of New Zealand\’s economy is closely tied to the health of the Australian economy, which explains why the NZD/USD and the AUD/USD have had a 96% positive correlation over the same time period. The correlation of the NZD/USD with gold is slightly less than that of the Australia dollar but is still strong at 78%.

GOLD AND 10 YEAR BOND YIELDS and INTEREST RATES

That however is not how gold has been behaving. Gold has been demonstrating direct correlation with bonds and inverse correlation with interest rates – the exact opposite of what would happen if gold was acting as an inflation hedge.,

That observation has not gone unnoticed, as Claude Erb, a former commodities portfolio manager for Trust Company of the West and co-author Campbell Harvey, a Duke University finance professor, highlight in a recent National Bureau of Economic Research Report entitled “The Golden Dilemma.”

In the report they highlight that gold and the 10-year treasury yield have an R-Squared of 0.78.

In the case of the gold-interest rate correlation over the last decade, Erb told me in an interview, the r-squared is a very high 0.78. (Click here for a summary of his findings.)

Most correlations on Wall Street don’t come anywhere close to being that high. Indeed, many of the drugs that get FDA approval have lower r-squareds between their use and positive medical outcomes.

As pointed out, that is a very high R-Squared for these kinds of relationships. The author then used this simple single variable model to forecast the price of gold given various interest rates. He claims that a 3% yield on the 10-year Treasury would translate into a gold price of $1,196.70/oz, a 4% yield would result in a price of $841/oz for gold, a 5% yield would take gold down to $471/oz and that it would take a 1% yield to get gold back up to $1,900/oz.

If the 10-year Treasury yield rises to 5%, gold will fall to $471 an ounce… And if that yield rises to just 4%, from its current 2.8%, gold will still plunge – to $831… for gold to make it back to its all-time high above $1,900 an ounce is for the 10-Year Treasury yield to fall to 1%… At the beginning of 2013, of course, that yield stood at 1.76%, and gold bullion stood at nearly $1,700. He told me that the model at that time would have predicted bullion’s price would be $1,196.70 when the 10-year yield hit the 3% point.

That point was reached on Dec. 26 of last year, and the London Gold Fixing price on that day stood at $1,196.50.

That counts as hitting the bulls eye.

Why this is so important is because gold is acting in a counterintuitive manner. The classic relationship of gold to inflation has been flipped on its head. Unlike past times when gold performed well when inflation developed, it is likely that gold will do just the opposite this time, at least in the early to mid stages of this recovery. The reason gold has such a lofty value isn’t because of inflation from printing all this “money out of thin air,” it is because of fear of a financial collapse. Gold has a fear premium built into it, not an inflation premium.

Higher interest rates will signal economic recovery, a return to normalcy, a lowering of the risk of a financial collapse, higher inflation and lower gold prices. The key is that the fear premium has to be removed before an inflation premium gets built in. The cycle in gold therefore is likely lower gold prices in the near to intermediate future, then a period of consolidation as the economy picks up steam, but not so much as to threaten undesirable levels of inflation, and then a tightening labor market, the emergence of demand driven inflation and then higher gold prices as the inflation premium starts to build. That however may be a long way off given the tremendous excess capacity that exists in the labor market.

The term ETF (Exchange-Traded Fund) is generally used as an umbrella term to refer to a range of different exchange-traded products. But in fact, ETF refers to a specific product type within a wider range of investment products. The correct umbrella term for all of these products is ETP (Exchange-Traded Products).

ETPs encompass:
– ETFs
(Exchange-Traded Funds)
– ETCs (Exchange-Traded Commodities/Currencies)
– ETNs (Exchange-Traded Notes)

That’s enough acronyms to make your head spin! But this article will explain everything as simply as possible.

ETF Chart

ETPs (Exchange-Traded Products)
Exchange-Traded Products are best defined as open-ended investments listed on exchanges and traded like stocks. They are investments that aim to replicate the performance of a given market, whether that market be in currencies, commodities, debt or equity.

ETFs (Exchange-Traded Funds)
Exchange-Traded Funds track market indices, such as equity and fixed-income indices. They are UCITS III compliant, which means they abide by certain rules in order to be marketed to the general European public.

ETFs represent about 90% of the overall ETP market in terms of total assets under management.

(For a more comprehensive ETF definition, read “What is an ETF?To learn about different ETF categories, read “ETFs: Active vs. Passive & Physical vs. Synthetic”) 

ETCs (Exchange-Traded Commodities/Currencies)
Exchange-Traded Commodities are similar to ETFs; however they track the performance of commodities markets, either using a physical/spot approach or futures contracts. They are fully collateralised, meaning that counterparty risk is hedged out. The main difference between ETFs and ETCs is that the latter are debt securities instead of funds.

Exchange-Traded Currencies are also secured debt securities and they give investors exposure to foreign exchange rates.

ETCs are not UCITS III compliant, which means they cannot be marketed across different national borders within the EU.

ETNs (Exchange-Traded Notes)
Exchange-Traded Notes are generally senior, unsecured, unsubordinated debt issued by a single bank and listed on the exchange. They are not asset-backed. The underwriting bank agrees to pay an index return, minus fees upon maturity. Therefore by buying this product, investors get direct exposure to the credit risk of the underwriting party.

There are two types of ETNs: collateralised and uncollateralised notes. Collateralised ETNs are hedged partly or fully against counterparty risk whereas uncollateralised ETNs are fully exposed to counterparty risk. Investors should therefore make sure they fully understand the underlying risk of the ETN before investing.

– See more at: http://www.morningstar.co.uk/uk/news/69341/a-beginners-guide-to-different-etf-categories.aspx#sthash.ucxnnAGj.dpuf

How The Metal Market
Prices Are Set

Precious Metal Market Prices Are Set Daily

The London Gold Fix or Gold Fix is the procedure by which the price of gold is set on the London market by the five members of the London Gold Pool. It is designed to fix a price for settling contracts between members of the London bullion market, but informally the Gold Fix provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world’s markets. The Gold Fixing is conducted twice a day by telephone, at 10:30 GMT and 15:00 GMT.

The first fixing took place on 12 September 1919 amongst the five principal gold bullion traders and refiners of the day: N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was four pounds 18 shillings and ninepence (GBP 4.9375) per troy ounce.  Gold prices are fixed in United States dollars (USD), Pound sterling (GBP) and European Euros (EUR).

On 21 January 1980 the Gold Fixing reached the price of $850, a figure not overtaken until 3 January 2008 when a new record of $865.35 per troy ounce was set in the a.m. Fixing. [1] However, when indexed for inflation, the 1980 high would equate to a price of $2398.21 in 2007 dollars, thus the 1980 record still holds in real terms.

The Fixing historically took place twice daily at the City offices of N M Rothschild & Sons in St Swithin’s Lane, but since 5 May 2004 it takes place by telephone. In April 2004 N M Rothschild & Sons announced that it planned to withdraw from gold trading and from the London Gold Fixing. Barclays Bank took its place from 7 June 2004, and the chairmanship of the meeting, formerly held permanently by Rothschilds, now rotates annually.

A tradition of the London Gold Fixing was that participants could raise a small Union Flag on their desk to pause proceedings. Under the telephone fixing system, participants can register a pause by saying the word “flag”, and the chair ends the meeting with the phrase “There are no flags, and we’re fixed”. “As part of this change, it is intended that a web-based commentary of the Fixing will be introduced later this year”, the Fixing said in a statement.

The current 5 participants in the Fixing, who must be members of the London Bullion Market Association, are:

Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia

Barclays Capital — Replaced N M Rothschild & Sons when they abdicated

Deutsche Bank — Owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley & Abell

HSBC — Owner of Samuel Montagu & Co.

Société Générale — Replaced Johnson Matthey and CSFB as fifth seat

How the Prices of Platinum and Palladium are Set

The Johnson Matthey Base Prices are the company’s quoted selling prices for wholesale quantities of platinum group metals set by their trading desks in the USA, Hong Kong and London, based on market offer prices.  The price is for metal in sponge form, with minimum purities of 99.95% for platinum and palladium, and 99.9% for rhodium, iridium and ruthenium, and is normally available to customers for several hours after it is set – an advantage not offered by any other price setting or fixing.

How the Price of Silver is Set

Handy & Harman has operated as dealers in silver and gold bullion (bars) and coins since its founding in 1876.  On the basis of their experience in precious metals, Handy & Harman began, in 1892, to issue a daily silver price as a service for American silver producers. This price, based initially on conversion of the London price to American terms, rapidly became the basis for virtually all silver transactions throughout North America.

Handy & Harman’s daily silver price quotation has long since become independent of London. Today it represents simply the lowest price at which, on any given day, Handy & Harman can buy silver for its own needs and this price is accepted as a guide for silver transactions worldwide.

Information obtained from Wikipedia (en.wikipedia.org/wiki/Gold_Fix),
Johnson Matthey (www.platinum.matthey.com/info/1046776915.html
Kitco (66.38.218.33/glossary/london_fix.html), and
The Handy & Harman Story (www.handyharmancanada.com/hbpm/hhstory.htm)

COMPANIES LEAST AFFECTED BY FALL IN THE DOLLAR (LEAST AFFECTED ON TOP)

  • Paladin Energy
  • Ten Network
  • Whitehaven Coal
  • Alumina
  • Myer
  • Lynas
  • Drillsearch
  • Bluescope Steel
  • Recall Holdings
  • Orica
  • Greencross
  • Sims Metal
  • Mount Gibson Iron
  • Pact Group Holdings
  • Resolute Mining
  • GUD Holdings
  • McMillan Shakespeare
  • Metcash
  • Buru Energy
  • Nine Entertainment
  • Arrium
  • Primary Health Care
  • Northern Star Resources
  • Sigma Pharmaceutricals
  • Karoon Gas
  • Newcrest Mining
  • Horizon Oil
  • Ramsay Health Care
  • Village Roadshow
  • CSL
  • Cabcharge Australia
  • Ozforex Group
  • Sundance Energy
  • Ainsworth Game
  • Medusa Mining
  • Caltex
  • Bendigto and Adelaide Bank
  • APA Group

THE COMPANIES HARDEST HIT, IN ORDER

  • G8 Education
  • Kathmandu
  • GrainCorp
  • Leighton Holdings
  • ALS Limited
  • TPG Telecom
  • Seek
  • WorleyParsons
  • Boral
  • Qube
  • Cardno Limited
  • Independence Group
  • JB Hi-Fi
  • Veda Group
  • Wotif
  • Bank of Queensland
  • Lend Lease
  • SKY Network
  • Evolution Mining
  • Fletcher Building
  • Iluka Resources
  • Premier Investments
  • Seven Network
  • Transfield
  • UGL Limited
  • Nufarm
  • Aristocrat Leisure
  • Carsales.com.au
  • Senex Energy
  • Trade Me
  • The Reject Shop
  • Ardent Leisure
  • Drillsearch
  • Harvey Norman
  • Skilled Group
  • Sundance Energy
  • AMP
  • Monadelphous Group
  • ANZ

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Style Russell 1000 Value
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Barclays U.S. 7-10 Year Treasury Bond
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Markit iBoxx $ Liquid High Yield
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Commodity Bloomberg Commodity
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Bloomberg WTI Crude Oil Subindex
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Bloomberg Natural Gas Subindex
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London p.m. Gold Fixing
GLL
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London Silver Price
ZSL
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Currency EUR/USD 4:00 p.m. ET exchange rate
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CROC
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