IG - Morning Thoughts and Opening Calls

IG - Morning Thoughts and Opening Calls

Good Morning

The sheer weight of numbers is now decimating the gold bulls.

The biggest ever bet against gold is now in place, as the Soros Fund Management LLC sold its final quarter of its gold fund after shedding 12% from the same fund the week before. This occurred as Goldman Sachs enters the ring behind Deutsche Bank, predicting gold is heading for the basement.

Gold future papers saw 74,432 short positions being entered into the start of last week, which only accelerated as the precious metal found itself below US$1400 an ounce. This is the largest short position since records began in June 2006. What is even more concerning for the gold is the net-long positions reversed 20% to 39,216 - the softest reading since 2007.

Gold is now sitting at $1359 - its lowest level since the April 15 and 16 capitulations. The difference this time was that in April, stops were the triggered and the fall was disorderly; this time around the fall was ordered, with the volumes being behind the fall rather than being triggered by the fall. This has a little further to go in the interim.

The investment in the USD has every spotlight on the stage shining down on it and they don’t look like dimming anytime soon. The returns in the currency are too good to ignore and the wall of monies tied up in gold is leaking out like a sieve.

We have been harping on about commodities for a little while now (particularly gold). For a resource-rich country such as Australia, the bottoming out of commodities will see the end of mining boom accelerate. Mid-cap Australian only producers along with global copper and gold producers are right in the firing line for some serious pain if this continues. Directly affected by the slowdown will be mining service stocks.

So far we have seen the likes of UGL, WorleyParsons, Boart Longyear and Coffey International all downgrading guidance and being publicly humiliated to the tune of double-digit percentage falls. Next in the firing line are Leighton, Monadelphous, Cardno and Bradkin.

Bradkin was the stand-out performer in the space, its first- half earnings surprised to the upside, as the product line on offer is slightly different from the others. BKN has the advantage of being in both the exploration phase and the production phase in the engineering services space, with ground-engaging tools such as buckets, scoops, crushers and mills being the main components. However, even it won’t escape the loss of contracts from the miners, as it scales back capex over the next three years.

BHP and RIO are dropping mining capex by up 27% over this period -that’s upwards of $6.5 billion wiped off the bottom lines of mining service companies that are all varying for the same dollar. There is no escaping this; mining services are the next sector to be whacked by the slide in mining.
We have already seen the start of this over the last week and a half; it will only get worse as more mining service companies join the queue for their public lynching as they downgrade their earnings guidance.  

Ahead of the open, we are calling the ASX 200 up 24 points to 5208 (+0.47%). Once more the defensive stocks look like the place to be. Over the weekend it emerged that the basis-point differential between Aussie bonds and US bonds hit 127 basis points. That is the lowest gap since June 4 as the RBA’s rate cut pushes investors out of safe-haven assets and into higher-yielding assets. The banks and yield plays such as TLS should support the market over the coming days

BHP’s ADR is suggesting the security will add 20 cents today to $34.65 (+0.58%), as iron ore pops off year-to-date lows to US$130.20 a tonne, and investors start to become slightly optimistic about BHP returning cash to investors over the coming years.

As already explained, the sectors that may struggle to hold above water are capital goods and gold stocks. Gold names are the worst performers in the market. Some of them are now producing gold at US$1500 to US$1700 an ounce - that is more than you can buy physical gold from the Bank of England. Investors know this and are shedding the stocks and sending the resulting losses to their accountants as June 30 approaches.

ENDS

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