Highlights in the week of September 7, 2015.

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 September 7, 2015:

  • Brazil downgraded to Junk rating by Standard & Poor’s.
  • Huge outflow of gold held for delivery by Comex.
  • PetroBras downgraded to Junk by Standard & Poor’s

On Wednesday, September 9,  after market close, Standard & Poor’s downgraded Brazil’s credit rating to BB-plus, the highest junk rating, from BBB-minus. The outlook on the new rating remains negative, which means additional downgrades are possible in the near term.

S&P warned less than two months ago that a downgrade was possible but the unusually fast move underscores how quickly Brazil’s economy and public finances have deteriorated since then.

The junk status will make it harder and more expensive for Brazil to borrow money.

Brazil’s financial markets fell on Thursday after Standard & Poor’s cut the country’s rating to junk late Wednesday, though losses were mitigated by bets that competing ratings agencies will not immediately strip Brazil of its investment grade.

Brazil’s interest-rate futures jumped as investors demanded higher returns to hold Brazilian assets following S&P’s downgrade. Yields paid on interest-rate contracts expiring in January 2023, 2DIJF23 rose 39 basis points to an all-time high of 15.15 percent.

The latest update from CME Group, on Wednesday,  September 9, shows a huge outflow of gold held for delivery by Comex as can be seen from below chart.

This means that there is now an unprecedented 228 ounces of paper claims for every ounce of deliverable “registered” gold. This is the lowest “coverage” ratio in the history of the Comex.

Which means that there are now less than 6 tons of registered physical gold available for delivery and that the price of paper gold versus the price of physical gold is experiencing one of its biggest disconnects ever, because those paper gold contracts are so diluted.

Below video provides more details on this issue.

On Thursday, September 10, Standard & Poor’s Ratings Services downgraded Brazil’s state-run oil firm Petroleo Brasilero SA, – the world’s most-indebted oil producer – to BB to junk status, following the downgrade to junk status of Brazil’s sovereign debt.

Petrobras’ ratings was lowered two notches, from BBB- to BB, with a negative outlook. The ratings firm said the downgrade of Petrobras was triggered by its downgrade of Brazil’s currency.

Moody’s Investors Service downgraded Petrobras’ debt to junk in February.

The ratings agency also downgraded some 30 other Brazilian state companies, including electric utility Eletrobras.

When Brazil first got the coveted investment-grade stamp from S&P, in 2008, after decades of financial volatility, it was considered a star among developing nations.

Once Rousseff took office in 2011, however, the economy began to slow down sharply and last quarter it officially entered a recession.

Brazil’s rating downgrade, reflects President Dilma Rousseff’s struggle to regain investor confidence as political turmoil drives a growing government deficit in Latin America’s largest economy.

As can be seen from below chart, the Brazilian BOVESPA has fallen with more than 35 percent, since president Dilma Rousseff, assumed office on January 1, 2011.

The once so prestigious Brazilian Real, got even a bigger hit, and declined with approx. 58 percent, since the presidency of Ms. Rousseff as can be seen from below chart.

In a statement, S&P said on Wednesday, that its decision, to downgrade Brazil credit rating to junk, was based on the mounting political problems that have muddled economic policy.

These problems, S&P said, have been weighing on the government’s “ability and willingness” to submit a 2016 budget consistent with the significant policy fixes Rousseff promised after she won re-election last year.

The economy has also been weighed down by a massive corruption scandal at state-run oil firm Petroleo Brasileiro SA, for which, its market capitalization dropped from over 31o billion US-Dollars at its peak in 2008 to 30 billion today.

Below chart shows the 10 year-chart of Petrobras.

In our previous blog article we have warned our readers about Brazil. The current Brazilian story underline once more the correlation, between Good Governance, Economic growth, Credit rating and Financial stability in a country. Based on this we unfortunately believe that Brazil Economy hasn’t reached its bottom yet.

Paper gold contracts traded on the COMEX and other speculative markets can significantly influence the nominal price of gold from day to day, as we saw with the sharp downturn in the dollar price of the metal this summer.

Conversely, physical buyers are simultaneously paying some of the highest premiums ever for gold, because the supply of the metal is so limited.

In fact, gold production has gone down in 2015, while demand in both the US and Asia has been growing.

When we talk about gold, our readers have to understand that there are really two different prices for gold. There’s the price you pay when you go into a gold bullion dealer and you buy a bar of gold. And there’s the price that you see on the COMEX, which is a paper exchange for gold.

Currently, if you were to walk into a gold bullion dealer and try to buy a solid bar of gold, you will pay one of the highest premiums ever in respect to that bar of gold. The reason being is there just isn’t that much gold out there.

On the other hand, on the COMEX, if in the middle of the night somebody – a speculator, an investor, or an institution – drops $100 million or $200 million worth of paper gold, it’s going to bring the price of gold down.

Based on this the price of paper gold versus the price of physical gold is experiencing one of its biggest disconnects ever, with dilution ratio between physical gold and paper gold at a new all-time low of just 0.48%!

Based on the above we believe the prices that we see in the market for gold might have a huge upside potential in the months ahead.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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