Highlights of the week of February 10, 2014


Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of February 10, 2014.

  • Rio Tinto, reported blockbuster Q4-2013 earnings and increased dividend by 15 percent.
  • USA Economic data keep on disappointing  Investors.
  • Congress reached an agreement on USA debt ceiling.
  • Gold surges above 200-Day Average.

After Australia’s stock market had closed on Thursday, February 2014, the world’s second biggest mining company Rio Tinto (RIO.AX) revealed it had swung from a US$3 billion loss in 2012 to a US$ 3.67 billion dollar net profit last year.

Highlight of Rio Tinto Q3-2013 Earnings Report:

  • Underlying earnings of US$10.2 billion were up ten per cent on 2012.
  • Operating cash cost improvements of $2.3 billion exceeded the 2013 target of US$2.0 billion.
  • Exploration and evaluation savings delivered $1 billion, against the 2013 target of US$750 million.
  • Production records set for iron ore, bauxite and thermal coal and a strong recovery in copper volumes. Iron ore volumes were bolstered by the completion in August of the Pilbara phase one infrastructure expansion to 290 Mt/a, with ramp-up on track to reach nameplate capacity before the end of the first half of 2014.
  • Net earnings of US$3.7 billion reflect non-cash exchange losses of US$2.9 billion and impairments of US$3.4 billion, notably the impairment of a previous non-cash accounting uplift on first consolidation of Oyu Tolgoi, a project overrun at Kitimat and the previously announced curtailment of the Gove alumina refinery.
  • Cash flows from operations of $20.1 billion were up 22 per cent and capital expenditure was down 26 per cent to US$12.9 billion.
  • Net debt reduced to $18.1 billion at 31 December 2013, US$4.0 billion down on the half year and US$1.1 billion down on the previous year end.
  • 15 per cent increase in full year dividend to 192 cents per share reflects the sustainable growth of the business.


Based on the block buster earnings report, the stock of Rio Tinto, appreciated with approx. 5.9 percent during the week to close at a 52 week high of US$ 58.90 per share as can be seen from below chart.

 Rio Tinto 5-day Chart

In the week of February 10th, we have seen an avalanche of bad Economic News from the USA as follows:

Increasing Jobless Claim:
Labor Department reported on Thursday, February 13th, that more Americans than forecast filed applications for unemployment benefits last week and that jobless claims increased by 8,000 to 339,000 in the week ended Feb. 8 from 331,000 in the prior period.

Retail Sales fell in January:
The commerce department reported on Thursday, February 13th, that Sales at U.S. retailers declined by 0.4 percent in January, which is the worst retail figure since June 2012. Accordance to the department of commerce, this was mainly due to bad weather and uneven progress in the labor market, signalling the economy was off to a slow start in 2014.

On top of this, the commerce department revised the retail figures for December to 0.1 percent drop instead which previously reported as an increase.

US manufacturing output in January dropped to the worst level since 2009:
US Manufacturing Production declined 0.8% in January, which was the worst in four years. The drop in factory output disappointed expectations for a 0.1% rise in manufacturing and declined from the revised 0.3% rise in production in December. US Industrial Production declined 0.3% in January, which was the biggest decline in more than a year and disappointed expectations for a 0.2% rise in industrial output. Also, capacity utilization fell from 78.9% in December to 78.5% in January.

After a dramatic Senate vote on Wednesday, February 12, The USA, the US Congress approved on Thursday, February 13th, an increase in the country’s debt limit through March 2015, bowing to President Barack Obama’s demands to extend federal borrowing authority without conditions.

 U.S. Capitol Building stands in Washington

Without an increase in the statutory debt limit, the U.S. government would soon default on some of its obligations and would have to shut down some programs, a historic event that would have likely caused severe market turmoil.

Gold rose sharply on short covering Friday, February 14, as the dollar remained soft, with spot metal and the most-active U.S. futures contract both moving above their 200-day moving averages.

This rise in the price of the yellow metal is mainly due to a weaker US-Dollar and  short covering, (This is buying by traders to cover, or exit, positions which they had previously sold.)

As can be seen from below chart the yellow precious metal rose US$ 17.90 an ounce to close the week at US$ 1,318.90 a Troy ounce,  its most muscular level since November 7, 2013, and above its 200-day average of US$1,311.80 an ounce.

60-day Gold Chart


Rio Tinto:
Based on its fundamentals, financial condition and a dividend yield of 3 percent, based on the closing price of last Friday, we have a BUY RATING on the stock of RIO TINTO.

Below chart shows the 5-year chart of the the stock of RIO Tinto

Rio Tinto 5-year chart


USA bad Economic News:
Last year USA officials did their utmost to convince the public that the USA Economy is strong and has recovered from the effect of the ‘Great Depression”

We have our doubts on this because we have never seen a recovery, except for this one, that hasn’t included a rally in the base metals like copper, zinc, and tin.

We have warned our readers about this phony USA recovery in several of our articles in December of last year and January of this year.

Please find below some facts about the current state of the USA Economy:

  • A study by professor, Carmen Reinhart of Harvard who studied the performance of rich economies following a financial crisis. showed that, six years after a crisis, per capita GDP was typically 1.5 percentage points lower than in the years before the crisis. But in the US, per capita GDP growth is running 2.1% lower than its pre-crisis level.
    -Significantly worse than average.-
  • What kind of economy is it that reduces a man’s wages over a 43-year period?
    We don’t know. But it’s not likely to win any prizes. But why, with so many strikes against it, does the US economy still have the bat in its hands? It’s partly because the Fed has pumped up stock, bond and house prices – not to mention net corporate profit margins (by reducing the interest expenses on corporate debt) and consumer spending (through entitlement programs funded through the Treasury with ultra-low interest rates). So, the averages look pretty good… and they mask the ugliness beneath them. The rich got richer on the Fed’s easy money. But the average “capita” is actually poorer.
  • The bottom 90% of the population – people in 9 houses out of 10 – have 10% less income than they had 10 years ago.

-This is not a success story. It’s a disaster.-

 USA Debt ceiling:
Reaction in most financial markets to the drama on the Senate floor, regarding the debate on the debt ceiling issue was muted, with U.S. stocks holding near the unchanged mark on the day and most US Treasury debt prices remaining modestly lower for the session.

As a reaction to this the 10-year USA treasury bond sold off during the week, to close the week at a yield of 2.746 percent as can be seen from below chart.

5-days chart yield of the 10-year

Gold above 200-day average:

It’s pretty significant from a technical perspective that gold is back over its 200 day moving average and it has closed the week above this technically very important mark.

As can be seen from below chart. gold hasn’t traded above this average for more than a year.

Gold crossed above 200-day ma

It now means that gold has rallied around 11.5% from the new-year lows just six weeks ago – making gold the best performing currency on the planet (and asset for that matter).

The next target for the bulls will be the high from the end of October 2013 which is around the US$1361 an ounce level. Once this level is breached it should be enough to take gold onto US$1433 an ounce – the final real level of resistance before this bear correction phase can be called over – a 20% move from the US$1180 lows is around the US$1416 level.

gold-14-feb-2014 next resistance

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek


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