Metal Storm

–Well it looks like the big storm on America’s east coast has passed without causing social and economic chaos. In fact, the stock exchanges have made it clear they will be open for high-frequency trading and rampant speculation when the bell rings on Monday. Mother Nature was no match for markets, this time.

–You’ll notice we’ve omitted the word “free” from its usual place in front of “markets”. Financial markets are anything but free markets these days. They’ve become a high-stakes casino full of short-term players who hang on every word uttered by the Floor Manager of the casino, Ben Bernanke. It makes sense. Bernanke determines the price of credit for all the players in his game.

–Friday’s action in America all but guarantees a good day today in Australia. But it was confusing anyway. Speaking in Wyoming, the Fed chairman said, “Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”

–The absurdity of this comment must have confused investors. Shortly after they were made, markets and the gold price fell. It sounded like the chairman was saying no QE3 would be forthcoming because the economy was just fine. Then, because he said the economy was just fine, stocks rallied.

–Utter insanity. And by the way, was Bernanke really serious about the “growth fundamentals” of the US economy? Was he referring to the 9% unemployment rate, the continued implosion of residential housing, the soaring government debt, the declining real wages, the shrinking manufacturing sector or all of the above?

–With central bankers as clueless as Mr. Bernanke, it’s no wonder the gold exchange traded fund (NYSE:GLD) finally surpassed the S&P exchanged traded fund (NYSE:SPY) as the largest ETF by market cap, at least for a bit. GLD has a market cap of $76.7 billion on gold’s run to US$1898/oz. That beat SPY’s market cap of $74.4 billion on the same day.

–You can see from the chart below why GLD has become popular with momentum players. It’s clobbered SPY ever since Bernanke began using Quantitative Easing to manipulate markets. The desire to own gold is a desire for sound money. GLD isn’t really gold, mind you. It’s just a claim on gold. But the idea of claiming gold and owning  it is catching on the more people understand how foolish monetary orthodoxy is.

–That said, gold fell nearly $200 in a few sessions last week. Part of that was related to the increase in initial margin requirements on the Chicago Mercantile Exchange (CME). CME raised initial margins by 27% from $7,425 per 100-ounce contract to $9,450. It also increased the margin for hedging by 22% to $7,000 per contract, from $5,000.

–Increased margins require speculators to front up more cash to speculate on gold through the futures markets.  As with silver, increasing the margin requirements shakes out the leveraged players in the market. Raising the ante to play in the futures markets  shakes out the trend-hopping traders and weak hands as well. Rather than seeing it as the popping of a non-existent gold bubble, we see it as the necessary process of a bull market grinding its way up.

–Putting our money where our mouth is, we took the chance to check in at the bullion dealer in Sydney while we were there for business last week. Trouble was, there was a queue to get in the front door. There was a queue for financial disaster insurance!

–Interestingly, our informal survey of those willing to answer said that about half of those in line were buyers and half were sellers. This confirmed to us that the gold bull market still has some room to go. The move to $1900 was nearly parabolic. But on the street, people still see price hikes as a chance to sell. When the big move in gold comes, no one will want to part with it.

–If the line at the bullion dealer was a mild surprise, the party at the Hilton was not. BHP Billiton was putting on a show at the hotel your editor stayed at. And oh what a show it was!

–The corporate successor to Broken Hill Petroleum reported the largest annual profit in Australian corporate history. On revenues of US$71.7 billion, the company reported a net profit of US$23.6 billion. That was a handy increase of 86% over last year.

–Revenues in the iron ore group alone were up 83% to $14.4 billion. Base metals group revenue was up 36%. And petroleum group revenues were up 22.3%. As you can see from the company’s chart below, the underlying profit margins for all three groups exceed 50%. That’s what made for such a blow out result.

–But hold the parade and put away the crown of laurels for Marius Kloppers. The details of the company’s presentation reveal a sign that this result is…the top. The top of the commodity cycle. The last and final evidence of the credit super cycle. The pinnacle…the zenith…the apex…the apogee. Why?

–Margins were definitely up. But volumes were “negative” to use the company’s own word. It said fully $17.2 billion of underlying profit was due solely to rising commodity prices for coal and iron ore. This offset the lower coal export volumes as a result of flooding in Queensland.

–This last result reflects, we’re willing to bet, a cyclical peak in the iron ore and coal prices. More supply is set to come on line this year. And there’s no telling what global demand is going to be when the major developed economies face contraction and recession. Higher volumes on lower prices next year will make this year’s profit record hard to match or exceed.

–If BHP can do better next year, it will be because of its growing petroleum division. It will because of energy. The acquisition of shale-gas assets in America featured prominently in the company’s presentation. And it appears to us that structural shift is on within the company that makes energy the real growth area (and the real profit area).

–BHP’s strategy might not matter if China’s property bubble rapidly deflates. But we’ll make that case in more detail tomorrow. Until then!

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Metal Storm"

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Rick W

“The corporate successor to Broken Hill Petroleum ” ????

This is rewriting history. BHP was incorporated in 1885 – well before Petroleum had common use. Primary output was lead and silver.


@RickW, back in the days when the government set the price of gold…..


Broken Hill Pty Ltd. Shortened to BHP Ltd


Note new news but here is something for those that follow the illustrious and are inclined toward physical metals ….

“Glencore is following Goldman Sachs Group Inc. and JPMorgan Chase & Co., who have acquired warehousing companies this year. Glencore, which also controls copper and zinc mines, will get control of warehouses that store industrial commodities traded on the London Metal Exchange, the world’s biggest metals bourse.”

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