Highlights of the week of January 13, 2014

BrazilDOWN

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 January 13, 2014:

  • Brazil increased rates to 10.5 percent to fight inflation
  • Rio Tinto announced record production of Iron Ore, Bauxite and Coal
  • Precious metals good performance in the first 2 weeks 2014.

BRAZIL INCREASED RATES TO FIGHT INFLATION:
On Wednesday, January 15, the Brazilian Central Bank, raised its key interest rate by 50 basis points to 10.5 percent, as Latin America’s largest economy pursues an aggressive drive to curb inflation.

In a statement the Central Bank of Brazil said that the decision was unanimous and “continues the process of adjustment” that it begun last April, when the rate stood at 7.25 percent.

The rate of 10.5 percent is the highest since March 2012 as can be seen from below chart.

Brazil Inflation versus Interest rate since 2009Inflation is a Brazilian bugbear. The economic costs are clear: high inflation hits both the poor, struggling to make ends meet, and the indebted middle classes as interest rates rise. But it is also a political issue. Most adults recall the hyperinflationary era of the early 1990s, when shopkeepers would adjust prices each morning, and then change them again in the afternoon.

RIO TINTO ANNOUNCED RECORD PRODUCTION OF IRON ORE, BAUXITE AND COAL:

On Thursday, January 16, 2014, Rio Tinto (ASX: RIO) reported its Q4-2013, financial results:

Highlights:

  • Record quarterly and annual iron ore production, shipments and rail volumes.
  • Mined copper benefited from the ramp up of production at Oyu Tolgoi to full capacity and continued improvement in grades and throughput at Kennecott Utah Copper.
  • Record annual production and shipments for bauxite, with production records at both Australian mines and in Guinea.
  • Production of semi-soft and thermal coal improved significantly for the full year due to productivity improvement initiatives and the completion of brownfield mine developments.
  • Over US$2 billion of operating cash cost improvements achieved in 2013 compared with 2012.

Source:

As can be seen from below chart the stock price of Rio Tinto, has appreciated since its IPO in February, 1988 with 1,534 percent.

RIO TINTO All Time Chart

During this period of time the company was able to increased its dividend Year Over Year, and based on its closing price of last Friday of AUD 66.32 a share, the stock has a very healthy dividend yield of 3.2%.

PRECIOUS METALS GOOD PERFORMANCE IN THE FIRST 2 WEEKS OF 2014:
Precious metals have enjoyed a strong start to 2014, rising more than 2 percent in the first few weeks of the year. And after closing out the worst year since 1981.

As can be seen from below 30-day charts:

  • Gold, has appreciated from USD 1,202 an ounce on the close of December 31st 2013, to USD 1,259.40 an ounce, or approx. 4.8 percent in the first 2 weeks of 2014.
    gold_30_day_o_usd
  • Silver, has appreciated from USD 18.39 an ounce on the close of December 31st 2o13, to USD 20.30 an ounce or approx. 10.4 percent in the first 2 weeks of 2o14.
    silver_30_day_o_usd
  • Platinum, has  appreciated from USD 1.370 an ounce on the close of December 31st 2013, to USD 1,452 an ounce or approx. 6 percent in the first 2 weeks of 2014.
    Platinum 30 days usd
  • Palladium, has appreciated from USD 712 an ounce on the close of December 31st 2013, to USD USD 757 an ounce or approx. 6.3 percent in the first 2 weeks of 2014.
    Palladium 30 days USD

PGM CAPITAL COMMENTS:
Brazil:

The year 2014, did not begin well for Brazilian president Ms. Dilma Rousseff.

  • The Brazilian REAL ended 2013, one-third weaker against the US-Dollar than when she took office as Brazil’s president three years ago, see below chart for details.
    BRL USD 3-year chart
  • Car sales were down for the first time in a decade.
  • More dollars flowed out of the country than at any time since 2002.
  • Inflation close to 10 percent.
  • The Bovespa Index down more than 30 percent in the last three years as can be seen from below chart.
    BOVESPA 3-year chart

History has proven that populist, short-term thinking leaders and government, will not be able to create and maintain a sustainable economic growth for their country. It is a pity to see how Brazil has returned to a slow and flat growth country with high inflation and a devaluating currency.

Due to this we maintain our Hold to Sell rating on almost all Brazilian stocks with the exception of Companhia de Bebidas Das Americas (AMBEV), (NYSE: ABEV) and BRF SA, (NYSE: BRFS) for which we have  a BUY rating.

Rio Tinto:
Based on its Q4-2013 financial report and fundamentals, we maintained a Buy Rating on the stock of RIO-TINTO and advise our readers to buy it or accumulate it on any dip.

Precious Metals:
On Thursday January 17th 2014, Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about US$6 billion.

In a speech in Frankfurt, Elke Koenig, the president of Bonn-based BaFin, said:

The allegations about the currency and precious metals markets are “particularly serious because such reference values are based — unlike Libor and Euribor — typically on transactions in liquid markets and not on estimates of the banks,”

Source:

With this declaration of Elke Koenig, all doubts regarding the manipulation of the price of Gold last year, which caused the precious metal to lose approx. 27 percent of its value in 2013 has been cleared.

This combined with massive money printing by central banks, and the fact that Gold is trading far below its average production costs can be seen as a tailwind for the yellow metal and other precious metals for 2014 and beyond.

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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