Gold climbs back above $1,240

Friday, May 14, 2010

Jan Harvey

LONDON — Gold rose back above $1,240 (U.S.) an ounce in Europe on Friday, close to this week’s record highs, as investors bought the metal to protect against sovereign risk in the euro zone and instability in the foreign exchange markets.

Gold priced in euros, sterling and Swiss francs extended the record highs they have already set this month as investors concerned about the outlook for the European currencies chose gold as an alternative asset.

Spot gold was bid at $1,240.15 an ounce at 0924 GMT, against $1,231.83 late in New York on Thursday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange rose $11.20 to $1,240.40 an ounce.

“The gold price has benefited from strong safe-haven demand linked to fiscal issues in the euro zone, and a pull-back from the euro as a reserve currency,” said BNP Paribas analyst Anne-Laure Tremblay.

“We expect incremental safe-haven demand to ebb as the Greek crisis subsides,” she added. “However, gold will remain a much sought-after hedge should fiscal concerns over Greece or other EMU countries mount again.”

Gold hit a record $1,248.15 an ounce on Wednesday as haven buying rose. Concern over the outlook for Greece and other debt-laden euro zone economies has prompted demand for assets seen as a safe store of value this year.

A $1-trillion rescue deal aimed at stabilizing financial markets announced last weekend helped the euro and European equities recover some losses, but the boost it gave the markets has proved short-lived.

The cost of insuring peripheral euro zone government debt against default rose on Friday, having fallen sharply this week after the deal was unveiled, while the euro fell below $1.25 to a 14-month low and European shares slid.

A weaker euro and consequently stronger dollar would usually weigh on gold, but this link has been weakened as sovereign risk concerns fuelled buying both of bullion and the U.S. currency.

While investors have traditionally bought gold as an alternative to the dollar at times when the U.S. currency is weak, analysts say they are increasingly seeing it as an alternative to paper currencies in general.

“Bullion is performing rather well against any fiat (paper) currency at the moment,” said VTB Capital analyst Andrey Kryuchonkov.

INVESTMENT STRONG

Investment interest in physical bullion was strong as buyers sought safety, with holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust , at a record high 1,209.5 tonnes on Thursday.

The fund’s reserves have risen 68.5 tonnes or 6 per cent in the last four weeks. The SPDR ETF is the world’s sixth largest holder of gold, ahead of Switzerland, China and Japan.

However, high prices are set to curb gold demand from the jewellery sector after a soft year in 2009 in key gold buying centers such as India, Turkey and the Middle East.

Gold imports by India, the world’s biggest market for the precious metal, could drop for a third straight year in 2010 as record high prices scare off traditional buyers.

Among other commodities, oil prices slid more than 1 per cent towards $73 a barrel on Friday on concerns the European debt crisis may curb global growth, and therefore energy demand. Industrial metal prices also fell.

Silver tracked gold higher to at $19.57 an ounce against $19.41. Platinum was at $1,721.50 an ounce against $1,731.50 and palladium at $534.50 against $537.

“Selling pressure has again been seen overnight but again we expect tightening fundamentals to offer background support,” said James Moore, an analyst at TheBullionDesk.com.

“Volatility may increase in the coming days ahead of next week’s Platinum Week activities in London.”

Toronto stock market was higher Tuesday as a $1-trillion (U.S.) plan to contain Europe’s debt crisis persuaded investors to send shares higher

The Toronto stock market was higher Tuesday as a $1-trillion (U.S.) plan to contain Europe’s debt crisis persuaded investors to send shares higher for a second day.

But there was an underlying mood of caution about how much long-term relief the package will provide and nervous investors looking for safety pushed gold to a record high close. Meanwhile, a report that China’s inflation is rising helped chip away at base metal stocks over fears of a possible slowdown in the Chinese economy.

The S&P/TSX composite index closed up 52.71 points at 12,000.61 while the TSX Venture Exchange added 21.82 points to 1,612.58.

The TSX global gold index was the leading advancer in Toronto, as the June bullion contract in New York rose $19.50 to a record high close of $1,220.30 (U.S.) an ounce. At one point it hit $1,225.30, close to its all-time intraday record of $1,226.40 an ounce.

“Bullion is rising because there is still the broader economic concerns out there related to all the issues that the European bailout package was addressing,” said Steve Uzielli, portfolio manager and director at ScotiaMcLeod Equity Advisory.

“It’s provided a temporary Band-Aid for now but...if you follow through the logic of this bailout package, the only way it works is if these austerity measures are put into place and that means significant cutbacks in government spending and it effectively forces those European countries back into recession.”

Barrick Gold Corp. jumped $1.92 to $46.87 while Goldcorp Inc. ran ahead $2.61 to $47.21.

Stock markets rose sharply Monday after the European Union unveiled its massive financial support package to defend the euro and prevent the debt crisis that started in Greece from spreading to other big debtor countries like Portugal and Spain.

But investors also realize that these heavily indebted countries face huge challenges and still have to significantly scale back spending, possibly stalling any European economic recovery and dragging down a global rebound.

The Canadian dollar moved up 0.24 of a cent to 97.87 cents (U.S.), while the euro weakened, trading at $1.2685 (U.S.), down from $1.2775 (U.S.) late Monday.

The utilities sector was also supportive as investors found defensive stocks attractive, rising almost one per cent as Emera Inc. gained 34 cents to $24.55 while Fortis Inc. was up 28 cents at $27.36.

The Toronto energy sector was 0.6 per cent lower amid volatile crude prices. The June crude contract on the New York Mercantile Exchange lost 43 cents to $76.37 (U.S.) a barrel after earlier going as high as $77.68. Suncor Inc. shed 70 cents to $31.94, while Canadian Natural Resources lost 87 cents to $73.11.

Also having a depressing effect on commodity stocks Tuesday was a report that showed inflation in China accelerated last month. Continued high inflation might force the Chinese government to further clamp down on credit to prevent speculative bubbles. China might eventually be forced to raise interest rates to fight inflation, which could slow the economy and imports.

Such a scenario was particularly bad news for the TSX, which is heavily weighted in resource stocks which have benefited from the strong Chinese economy.

“That’s another factor on our list of things to be concerned about in terms of the global economic recovery,” said Uzielli.

“A lot of it does hinge on expectations for China, so if those expectations get curbed, then it has implications down the line in terms of demand for commodities and therefore commodity prices. So it filters all the way down.”

The July copper contract on the Nymex lost four cents to $3.19 (U.S.) a pound and the base metals sector backed off 4.6 per cent. Teck Resources lost $3.07 to $36.46 while Ivanhoe Mines dropped $1.05 to $15.49.

The consumer staples sector got a boost after George Weston Ltd., which owns a majority stake in grocer Loblaw Cos., reported Tuesday that it had $42 million in net earnings, or 25 cents per share, in the first quarter. Revenue came in at $7.1 billion. A year earlier, Weston’s continuing operations posted a $27- million loss. Its shares gained 33 cents to $74.

New York markets were weak as the Dow Jones industrials began the day in the red, jumped almost 100 points, then finished 36.88 points lower at 10,748.26.

The Nasdaq composite index added 0.64 of a point to 2,375.31, while the S&P 500 index slipped 3.94 points to 1,155.79.

In other corporate news, Toyota cruised back into the black in the latest quarter, handing in a profit of $1.2 billion (U.S.), compared with a $8.27-billion (U.S.) loss the year before. Toyota is forecasting even better results for the fiscal year through March 2011, projecting annual profit to rise 48 per cent to $3.3 billion (U.S.).

Whether the world’s biggest automaker can continue its recovery rests, in part, on salvaging its reputation after recalling more than eight million cars worldwide for faulty gas pedals, a braking software glitch, faulty floor mats and other defects.

In Canada, Ivanhoe Energy Inc. shares were down 17 cents at $2.73 after the company reported a first-quarter loss of $2.6 million (U.S.), reduced from a year-ago loss of $12.3 million, as oil revenue fell due to a reduction of the oil and gas producer’s working interest in China-based production.

First Quantum Minerals Ltd. said Monday it earned $146.2 million (U.S.) or $1.81 per share for the quarter ended March 31 compared with a profit of $10.9 million (U.S.) or 16 cents per share a year ago. Revenue totalled $562.8 million (U.S.), up from $261 million but its shares still declined $3.45 to C$70.01.

Pan American Silver Corp. shares gained 91 cents to as the company more than doubled its quarterly profit compared with a year ago as revenue grew nearly 90 per cent. The silver miner said Monday that it earned $19.1 million (U.S.) or 18 cents per share for the quarter ended March 31 compared with a profit of $6.6 million or eight cents per share in the comparable year-earlier quarter.

Northgate Minerals Corp. shares gained 24 cents to $3.45 after reporting earnings of $4.9 million (U.S.) or two cents per share in the first quarter, compared with $21.4 million or eight cents per share a year ago. Revenue was $125.3 million, up slightly from $123.8 million in the same period of 2009.

Canfor Corp. said Monday it will restart operations at its sawmill in Quesnel, B.C., in June because of demand from China. The lumber producer said it will recall approximately 155 employees and its shares were ahead 11 cents at $10.41.

Stocks overvalued? Depends on which yardstick you use

One thing has become obvious during the endless debate in recent months about whether stock markets were overvalued: There’s more than one way to look at stock valuation.

The answer to the valuation question differs depending on whether you’re looking at forward 12-month price-to-earnings or trailing 12-month P/E. Or maybe you’re talking about Robert Shiller’s cyclically adjusted P/E (CAPE) measure. Perhaps you prefer price-to-book-value? Or price-to-cash-flow?

But there’s more to the valuation debate than just which measure to choose, argues Oppenheimer & Co. Inc. chief investment strategist Brian Belski. He says investors may need to rethink what is “normal” for stock valuations – as well as what it means to be outside of the norm.

Exploring the CAPE

The CAPE valuation for the S&P 500 – a current darling of analysts, which uses inflation-adjusted, 10-year average earnings per share in order to smooth out anomalies in the earnings cycle – sat at 21 at the start of last week, well above its historical average of 18. That fact has led many market strategists to argue that U.S. stocks were considerably overvalued – leaving the market ripe for a 10- to 15-per-cent correction. One might even argue that this overvaluation lends some fundamental credence to the panic selling the U.S. market saw last week.

But Mr. Belski says this interpretation ignores the historical relationship the S&P 500 has had with CAPE. Typically, the two move along similar paths; when one is above its historical trend, the other is, too. But while the CAPE is above its historical norms, the S&P 500 hasn’t yet recovered to its long-term historical trend line after the 2008-09 plunge. This suggests stock prices have some catching up to do.

“There have only been two times since World War II when CAPE was this far above average with the S&P 500 price levels below average,” he wrote in a report last week. When it happened in 1995, the S&P 500 rose 27 per cent in the following 12 months; when it occurred in 2003, the index gained 16 per cent in the next 12 months.

A new normal

But even looking at good old-fashioned P/E, stocks aren’t overvalued at all if you consider two key influences on stock-market valuations: Inflation and interest rates.

In times when rates and inflation have been higher, P/Es have typically fallen in response. But when rates and inflation are near historical lows – as they are now – higher P/Es are typical. Mr. Belski’s analysis shows that current P/Es look quite reasonable, given inflation and interest-rate levels.

Still not satisfied? Well then, Mr. Belski has devised a “valuation composite,” which combines six equally weighted valuation measures (trailing P/E, forward P/E, price-to-book, price-to-free cash flow, price-to-sales and P/E-to-growth, or PEG). What does it show? That U.S. stock valuations are in line with long-term norms.

World stocks and the euro fall as investors doubt massive plan to contain Europe’s debt crisis

World stocks and the euro fell Tuesday as the massive relief rally triggered by a $1-trillion plan to contain Europe's debt crisis fizzled out.

In Europe, the FTSE 100 index of leading British shares was down 84.80 points, or 1.6 per cent, at 5,302.62 while Germany's DAX fell 79.98 points, or 1.3 per cent, to 5,937.93. The CAC-40 in France was 56.41 points, or 1.5 per cent, lower at 3,663.88.

All three indexes enjoyed one of their best days in months Monday after the European Union unveiled a massive €750-billion financial support package to defend the euro and prevent the debt crisis that started in Greece from spreading to other big debtor countries like Portugal and Spain.

A pullback is expected when Wall Street opens later, too – Dow futures were down 97 points, or 0.9 per cent, to 10,644 while the broader Standard & Poor's 500 futures fell 12.60 points, or 1.1 per cent, to 1,144.

“Yesterday's burst higher is already looking short lived amidst concern over a wide range of issues,” said Ben Potter, research director at IG Markets. “Without doubt when gains of 5 per cent or more are seen in a single day a degree of reversion is perhaps to be expected.”

Though the package has helped ease near-term concerns about a wave of defaults across Europe, concerns about the solvency of the indebted countries remain – whether governments, which are still running sky-high deficits, will be able to push through massive austerity measures for years to come remain.

“Progress has been made, but the whole sovereign debt looks very like a can of worms,” said David Buik, markets analyst at BGC Partners.

Moreover, the European Central Bank's new role in sweeping up government bonds has stoked concerns about its independence from politicians – Axel Weber, president of Germany's central bank and a leading member of the ECB's governing council, appeared cautious about the bank's new responsibility.

Whatever divisions exist within the ECB and whatever pressure may have been put on its President Jean-Claude Trichet to intervene directly in the debt markets, the central bank is on a different course from that being pursued elsewhere – while the ECB is expanding monetary policy, other banks like the U.S. Federal Reserve and the Bank of England are starting to normalize it.

That may explain why the euro has given up most of the gains it garnered from late Friday when the markets were first alerted to the possibility of a bigger than expected EU plan – by late morning, the euro was down 0.8 per cent on the day at $1.2691.

“As the dust settles from yesterday's shock and awe bailout package, the realization that this is a sticking plaster to a much deeper rooted problem has slowly permeated through and the euro has given up most of yesterday's gains,” said Michael Hewson, analyst at CMC Markets.

The other major currency in focus Tuesday is the British pound, amid growing uncertainty about what the next government will look like. The currency has been under pressure ever since the Liberal Democrats said late Monday they were opening discussions with the Labour Party as well as the Conservatives, who won most seats and votes.

By late-morning London time, the pound was 0.3 per cent lower at $1.4814.

So far, bond investors don't appear to be worried – a £2.25-billion 17-year auction went smoothly for the government as the issue was covered nearly two and a half times by bids.

Earlier in Asia, stocks gave up much of their previous day's advance.

Japan's Nikkei 225 stock average fell 1.1 per cent to 10,411.10 while South Korea's Kospi dropped 0.4 per cent and Australia's S&P/ASX 200 shed 1.1 per cent. Benchmarks in mainland China, Taiwan, India, and Singapore also slid, while Hong Kong's Hang Seng index retreated 1.4 per cent to 20,146.51.

Stocks in the Philippines bucked the regional trend, surging 3.9 per cent as Sen. Benigno Aquino III, son of Philippine democracy icon Corazon Aquino, opened up a commanding lead in presidential elections after campaigning on an anti-graft platform.

Oil prices also lost their shine, with benchmark crude for June delivery down $1.03 to $75.77 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.69 to $76.80 per barrel on Monday.