Review of June, Second Quarter and First Half of 2013

Investor-hope-despairwall_street_roller_coaster

Dear PGM Capital Blog readers,

Friday June 28. 2013. was the last trading day for the month of June and marked the end of the second quarter and first half of 2013.
In this blog edition we we’ll review the most important events of last week, the month of June and second quarter 2013 and will provide an outlook for the 3rd quarter and second half of 2013.

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 June 24th 2013.:

  • Best first Half for the DOW-Jones Industrial since 1999.
  • Credit crunch confusion sends China’s stock market on wild ride.
  • Gold and Silver prices experienced worst quarter in 30 years.
  • Bond Fund Outflows Hit Record Level on Tapering Fears.

Best first Half for the DOW-Jones Industrial since 1999.

On Friday June 28th, the Dow and S&P-500 dropped respectively 114.89 and 6.92 points to end the week at respectively 14,909.60 and 1,606.28 as investors were reluctant to jump in following a three-day rally, but major averages still capped the volatile quarter with gains.

USA stocks finished lower for the month of June, logging their first monthly drop this year. But all three major averages logged their third winning quarter in four. And so far for the year, the Dow has surged more than 14 percent as can be seen from below chart.

 DOW-30 H1-2013 Chart

Althoug the DOW ended the month of June in the red it posted its strongest first half of the year since 1999.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, finished unchanged below 17.

Please see below table for more detailed performance of the major USA Indexes in the week of June 24, the month of June, 2nd Quarter and first Half of 2013.

U.S. Major Index Performance

  Last Today’s % Change 1 Week % Change MTD % Change QTD % Change YTD % Change
DOW 14,909.60 -0.76% 0.74% -1.36% 2.27% 15.28%
S&P 500 1606.28 -0.43% 0.87% -1.50% 2.36% 14.54%
NASDAQ 3403.25 0.04% 1.37% -1.52% 4.15% 14.96%
Russell 2000 977.48 -0.25% 1.43% -0.68% 2.73% 15.09%
CBOE VIX 16.81 -0.30% -11.06% 3.13% 32.36% -6.71%

On the economic front, business activity index in the Midwest fell in June to 51.6 from 58.7 in May, according to the Institute for Supply Management-Chicago. A Reuters survey of economists on average expected a median reading of 56.0 in June versus the May figure of 58.7.

In a report, the Bureau of Economic Analysis said, that the US economy grew by less than previously estimated in the first quarter of the year.

The US Q1-2013, Gross domestic product – which measures annual economic output –  was revised down to 1.8 percent from an earlier estimate of a 2.4 percent rise.

Weak business investment, a slowdown in consumer spending and falling exports led to the downward revision.

The economy also continued to be slowed by cuts in government spending, which fell in the first quarter at an annual rate of 4.8 percent, shaving about 0.9 percentage points off growth.

Earlier this month the International Monetary Fund urged the US government to repeal the huge federal budget cuts introduced this year, denouncing them as “excessively rapid and ill-designed”, and warning they would be a significant drag on growth this year.

Credit crunch confusion sends China’s stock market on wild ride

China’s stocks plunged on Tuesday June 25, 2013  with  more than 6% sending the CSI 300 Index down 20 percent from this year’s high as can be seen from below chart.

YTD CSI-300 Chart

The wild ride in the Chinese stock market on Tuesday tells the tale of confusion about the depth of China’s credit crunch and the authorities’ ability to control events.

The trigger for the afternoon rebound was comments from the central bank that it would guide interest rates to “reasonable levels” and that cash in the financial system would be managed flexibly.

China’s recent credit explosion started in 2009, when Beijing reacted to the West’s banking bust and recession by ordering a massive programme of investment, principally in public infrastructure, offices and flats. That succeeded in restoring strong growth to the economy – and, indeed, helped to prevent a bigger global downturn

Gold and Silver prices experienced worst quarter in 30-years

Gold futures dropped sharply on Wednesday, hitting multiyear lows on growing expectations the U.S. Federal Reserve will slow the pace of economic stimulus later this year.

On Thursday June 27th, after a good start, at around 1:30 pm EST, fund managers started dumping their gold position in order to do window dressing on their portfolio for them to show better Q2-2013 results to the outside world.

As a consequence of this the price of Gold went down the day with US$ 24.40 to close at a 3-year low of US$ 1,200.80 an oz as can be seen from below chart.

Gold Price History on June 27 2013

Gold and Silver have experienced their worst quarter in 30-years and are down in the first half of this year with respectively 26 and 36 percent as can be seen from below charts.

gold_6_month_o_usdsilver_6_month_o_usd

Currently the price of Gold is far below the breakeven production costs of most mineres. Due to this the world’s two largest gold mining companies have announced plans to start mottballing some mines and reduce their workforce.

In accordance with an article of “Seeking Alpha” of June 12th 2013, the average production costs of silver was at the end of Q1-2013 US$ 23.70 an oz, which is 37.27 percent higher than the closing price of Silver of Friday June 28, 2013, of US$ 19.45 an oz

Silver producing costs

Bond Fund Outflows Hit Record Level on Tapering Fears.

In the month of June, investors have unloaded bonds at a record pace. The combined outflow of US$ 47.2 billion is the highest in any month on record, sending the yield of the 10-year note to close the month of June at a 1-5 year high of 2.47 percent, which is a 44.83 percent rise for H1-2013 as can be seen from below chart.

Screen Shot 2013-06-29 at 6.03.31 AM

Comments: 

The analysis, statement and comments provided in this section of this blog article, are based solely on professional and dispassionate analysis of the points discussed here above. By no means it is our intention to interfere in the internal policy of a country, organization or person.

Friday June 28th 2013,  was the last trading day of June, the 2nd quarter of 2013 and first half of 2013. Gold has had its worst month ever, and its worst quarterly performance since 1968, plunging a whopping 25 percent.

Both gold and silver are right now trading respectively 17.61 and 37.27 percent below their production costs, which is unsustainable and will force gold and silver producers to cut production or even close some mines, which will put the suply side of the curve under pressure.

Gold is now 35.2 percent down compared to its high of September 6 2011 of US$ 1,889.70 an ounce, which is interesting because it was virtually identical to the 34% high-to-low down-move that we saw in gold in 2008.

The down-move in silver is now at roughly 60%, and, again, that is what the silver market experienced during the 2008 meltdown.

This makes us reasonably comfortable that both gold and silver are nearing the end of this corrective phase since they have followed the same path as the 2008 corrections.  We are now looking for signs that this is a bottom, despite the weakness, and that there may be a turn for the better from this point onward.”

Both gold and Silver are now at their long-term support level, similar as in 2008, and before that 2005. Both times, gold went on to jump over 80% in the following twelve months. A repeat of that from this point in time, would take gold north of  US$ 2,500 in the coming 12 months as can be seen from below chart.

Fitzaptrick gold June 25 2013 chart

When silver went through its 2008 correction, it got down to levels below US$9 an oz, then we saw the silver price multiply by a factor of over 5 times.  So assuming that we are near the end of the correction in silver, and history repeats itself, the new leg of the bull-market in silver would take silver at least to new all-time highs, but we could look for a target as high as US$ 100 for silver as can be seen from below chart.

Fitzpatrick silver June 25 chart

Basically this means that when a cycle low is due and major support levels are tested and held during that cycle, you may end up with a trend-reversal setup and a major high that could last for years.

The low that’s now forming in gold may well be your last chance to position yourself before gold’s next bull leg unfolds.

Like we stated in our last weekend edition, markets behave in a manic depressive fashion and subsequently go from one extreme to another. That’s how they cause the most amount of pain and gain for investors.

One of Warren Buffett’s famous quote migh be applicable for gold and silver:

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful

As gold bottoms, it means there’s also going to be a shift in many other markets and trends. From stocks to bonds, to currencies and more.

Even entire political systems will be in flux. Gold is the world’s most sensitive barometer and a leading indicator for all those kinds of things.

So when gold changes trend, as it’s about to do in a major way, you can bet that the winds of change will also be blowing in many different markets, sectors and countries all over the globe.

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