Highlights of the week of October 14, 2013

Gold Silver Platinum PalladiumDagong Global Rating

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 October 14, 2013.

  • Chinese Dagong Global Rating Agency downgraded the USA on Thursday October 17, 2013.
  • China Economy grew with 7.8 percent in Q3-2013.
  • Precious metals rose sharply on Thursday October 17, 2013.
  • Google shares closed above US$ 1,000.00 on Friday, October 18, 2013.

Chinese Dagong Global Rating Agency downgraded the USA on Thursday October 17, 2013:
Dagong, one of China’s top four ratings agencies, cut its rating on U.S. sovereign debt to “A-” from “A” on Thursday, maintaining a negative outlook.

Dagong has a similar ratings scale as S&P and Fitch, with their “AAA” marking the highest rating.

It argued that the deal reached by Congress to end the partial government shutdown and raise the debt ceiling will only avert a crisis temporarily.

Dagong Office

Dagong said that the temporary fix of the debt issue would not defuse the fundamental conundrum of the U.S. fiscal deficit or improve repayment ability in the long-term, but could trigger defaults at any time in the future.

“The deal means only an escape from a debt default for the time being, but hasn’t changed the fact that the growth of government borrowing has largely outpaced overall economic growth and fiscal revenues,” China’s biggest home-grown ratings agency said in a statement.

Dagong said the increase in the debt ceiling, for the fifth time since President Obama took office in 2009, provided further proof of the U.S. government’s inability to make improvements to fiscal fundamentals that are needed to enhance its debt servicing capability.

It said it held a negative outlook for the United States, noting that the Federal Reserve continued to inject dollars into the market through quantitative easing policies, eroding the value of the outstanding debt and hurting ‘creditors’ interests.

The downgrade put the United States several notches below Dagong’s top rating and on par with Brazil, Israel and Panama, among others 

Source:

China Economy grew with 7.8 percent in Q3-2013:
Data from the National Bureau of Statistics showed on Friday, October 18, that China, the world’s second-largest economy, grew 7.8 percent in the third quarter from a year earlier.

Highlights:

  • GDP rose 7.8 percent in the July-September period from a year earlier
  • Industrial production advanced in September by 10.2 percent
  • GDP was up 2.2 percent from the previous quarter
  • GDP expanded 7.7 percent in the first nine months of the year
  • Fixed-asset investment excluding rural households grew 0.2 percent in the first nine months of the year

So far this year, investment has accounted for more than half of the expansion, showing the challenges faced by Beijing in trying to restructure the economy towards consumption, which policymakers expect to provide more sustainable growth in the years ahead

After three decades of double-digit growth heavily reliant on exports and investment, China is trying to shift or “restructure” the economic mix so that activity is geared much more to consumption, as it is in more developed countries.

Precious metals rose sharply on Thursday October 17, 2013:
On Friday October 18, Gold was trading near one-week highs  and headed for its best weekly gain in two months.

Spot gold rose 0.2 percent to US$1,321.66 an ounce by 0648 GMT, recording a near 4 percent gain for the week.

Gold’s gains supported other precious metals, with Silver and Platinum headed for their best weekly performance in months

Precious metals prices on Friday October 18, 2013, AT 0648 GMT
  Metal             Last    Change  Pct chg  YTD pct chg
  Spot Gold        1321.66    2.57   +0.19    -21.07
  Spot Silver        21.87    0.03   +0.14    -27.77
  Spot Platinum    1437.74    7.84   +0.55     -6.34
  Spot Palladium    738.47   -0.03   -0.00      6.72

 

Below charts give an overview price development of Gold, Silver, Platinum and Palladium, for Wednesday October 16 to Friday October 18, 2013.

gold_3d_b_o_USD dd October 18 2013

silver 3days dd October 18

platinum October 18

Palladium 3 days dd 18 October

Google shares closed above US$ 1,000.00 on Friday, October 18, 2013:
Google’s shares soared to new heights on Friday after the company reported sales and profits that easily beat Wall Street expectations.

Highlights:

  • Gross Revenues: US$14.98 billion, up 12% — that’s a beat.
  • Net income: US$2.97 billion, compared to $2.18 billion in the third quarter of 2012.
  • Earnings per Share: US$10.74 — that’s also a beat. It’s up compared to US$8.87 in the third quarter of 2012.

Source:

The big revenue boost seems to have come from an increase in paid clicks:

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 26 percent over the third quarter of 2012 and increased approximately 8 percent over the second quarter of 2013.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 8 percent over the third quarter of 2012 and decreased approximately 4 percent over the second quarter of 2013.

The Motorola unit looks like the only downside. Its revenue slipped despite launching the flagship Moto X phone:

Motorola Mobile Segment Revenues – Motorola Mobile segment revenues were US$ 1.18 billion, or 8% of consolidated revenues in the third quarter of 2013, compared to $1.78 billion, or 13 percent of consolidated revenues in the third quarter of 2012.

Below chart shows a breakdown of Google’s gross revenue per business segment in the period of Q1-2011 – Q3-2013.

screen shot 2013-10-17 at 4.24.32 pmBased on these results, Google’s stock soared with US$ 113..61 or 13.8 percent a share to close at an all time high of US$ 1,011.41 as can be seen from below chart.

Google all time chart

PGM Capital comments:
China is the biggest foreign holder of U.S. government debt. At the end of July, China held US$ 1.28 trillion in Treasuries, accounting for roughly 22.8 percent of all foreign holdings of U.S. government debt.

We believe that with the downgrade of the USA sovereign debt by Dagong Rating agency, China sent a clear message to U.S. lawmakers that China does not want to see a replay of the debt ceiling drama.

It is also worth mentioning that on Tuesday October 15th, Fitch Ratings, put the U.S. government’s “AAA” credit rating on ‘rating watch negative’ ahead of the resolution, noting that the standstill on the debt ceiling negotiations risks undermining the effectiveness of the country’s government and political institutions.

In the week of October 14, Gold prices advanced 3.5 per cent and Silver a little under three percent, in the best performance for precious metal prices in two months.

Based on this most investors are asking themselves, whether precious metals have now completed their two-year correction from the highs of 2011?

Last week could well prove to have been the decisive breakout amid one of the most tense weeks for financial markets of the year. The raising of the federal debt ceiling means that the money printing to cover the deficit can continue at least until the end of March.

Absent that market manipulation through sudden large sales of gold by the two major bullion banks acting on behalf of the Fed, the yellow metal’s price will be determined by supply and demand in the marketplace.

Buying Gold, Silver and other precious metals and the stocks of their miners at present values will look like plain commonsense in a couple of years with the benefit of hindsight. Why then is Gold so out of favor? Well that is how things look when prices have been falling for two years.

The gold price correction of the last two years, most resembles the crash of 1975-76, another era of monetary turmoil that ought to have been a one-way road for gold. Remember that gold picked itself up from halving in value in 1976 to rise eight-fold by 1980.

Hence the bounce in the price of precious metals. The Chinese will undoubtedly continue not buying bonds, leaving the Fed to buy them and support their value, while Asians invest their dollars into real assets like Gold and Silver bullions. The Fed has been doing them a favor by keeping gold prices down.

Palladium which has already been outperforming other precious metals this year surged to a 1½-month high Friday.

Palladium is the only precious metal which is up in 2013, largely based on expectations for a supply/demand deficit. The metal found support this year from supply constraints at a time of improving auto-sector demand, particularly in the U.S. and China.

China has become the world’s largest auto market, and September passenger-vehicle sales rose 21 percent to an eight-month high of 1.59 million units. More significantly, autos in the improving markets of China and the U.S. are both fueled mainly by gasoline-powered engines, which can use Palladium rather than more-expensive Platinum. China is also the world’s largest consumer of jewelry made from Palladium.

Buying low and exercising a little patience is how to make money, not waiting for the prices to go back up and then joining the party.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other 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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