A GREEK TRAGEDY IN THE EUROZONE

Investors have been disheartened by the events taking place in Greece over the past few weeks, which have been a setback to the global financial recovery. It’s interesting to take a look at Greece’s External debt-to-GDP ratio and compare that to other countries to see how dire the situation really is. You might be surprised to know Greece’s debt-to-GDP ratio isn’t actually the highest in the Eurozone.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank. This is similar to how an individual’s debt can include business loans, mortgages, credit card debt or student loans. Debt-to-GDP measures financial leverage of an economy.

World Top Twenty Debtors Nations

Source: External Debt (2009) information from The World Bank, GDP (2009) information from the CIA World Factbook.

When the European Union (EU) was formed, there was a fiscal deficit limit of 3 percent of GDP, but very few countries have honored that. Greece has a fiscal deficit of 12 percent of its GDP, four times the limit specified in the eurozone agreement. When the Eurozone was formed, its criteria also called for a government’s debt-to-GDP ratio to be below 60 percent—which also hasn’t been honored either.

So what does this mean? According to the World Bank and the IMF, external debt sustainability (the ability of a country to repay foreign debts) should not be more than 250 percent of a country's revenue or 150 percent of exports. Higher external debt is harmful to the economy and most likely will result in default.

So what are the causes of the high debt-to-income ratios in Europe?
Expensive labor.
Expensive exports.
Expensive currency.
Small population.
High levels of taxation and large social welfare systems.

Deficit spending, government debt and private sector borrowing are the norm in most western countries, but due in part to the financial crisis, some nations and economies are in considerably worse debt positions than others.

Most popular rhetoric on the topic would claim that wealthy countries have grown accustomed to being wealthy and they are enthralled by consumerism – it could be argued that this high level of debt could be a result of a culture that is used to and willing to buy now, and pay later…even if it means with interest.

Impact of Yuan Revaluation on Commodities

Beijing faces international pressure to scrap the yuan's peg, especially from Washington, which says the currency is seriously undervalued, sparking reports China may be about to revalue the yuan. While the size of revaluation is still being debated (2-5% cited initially) the impact is likely to be positive for commodity prices, particularly those where China is both a large, high-cost producer and a significant consumer. More importantly, it will serve to increase China's reliance on imports by reducing the cost (in RMB) of those commodities where it is a significant net importer. Raising the value of the yuan versus other currencies would cut the cost of China's imports of dollar-denominated commodities such as oil, copper and iron ore, while making Chinese exports more expensive. The greatest impact will probably be seen in bulk commodities such as iron ore, metals such as copper and in soy, where China is a big importer and consumes most of the products made from those imports at home.
China % of world consumption & seaborne production 2010E
Source: JP Morgan
Allowing the yuan to resume appreciation may help China control inflation amid record lending growth and surging property prices. The exchange rate has been kept at about 6.83 per dollar since July 2008 to help Chinese exporters wither the global recession.

Even a rise of 3 percent in the value of the yuan, the range of increase discussed, to around 6.60 to the dollar from last year's average, would have a profound effect on China's $244 billion commodity bill. Last year the country spent around 607 billion yuan ($88.97 billion) on importing oil, 343 billion yuan ($50.28 billion) on iron ore and 206 billion yuan ($30.20 billion) on copper. An increase of 3 percent in the yuan would have saved the nation some 56 billion yuan ($8.21 billion) on its commodity purchases, or enough to buy more than 1 million tonnes of copper.

The last time China raised exchange rates back in 2005, commodities saw a steady rally for more than a year after the revaluation. At that time copper prices doubled to a then record high of $8,800 a tonne in 2006, chipping around half a million tonnes off copper consumption annually.

Source: Bloomberg
The above chart shows the CRB Index, which tracks 19 commodities, the yuan exchange rate in the spot market and 12-month non-deliverable forwards for the currency. The CRB index surged about 10 percent in the first six weeks after China ended its decade-long peg of about 8.3 per dollar in July 2005, and that could be repeated.

Monthly View on Commodities - June 2009

Global Commodity

Commodities jumped, capping the biggest monthly rally in 34 years, as the slumping dollar bolstered demand for energy, metals and crops as a hedge against inflation. The US Dollar Index, headed for its sharpest monthly drop this year, lowest level in five months against a basket of six major currencies, fell 5% on speculation that gains in equities and signs of a global economic rebound will spur demand for higher- yielding assets. Precious metals typically move inversely to the US currency. The Reuters/Jefferies CRB Index climbed as much as 13%, the most rally since July 1974, extending to the highest level since Nov. 2008.

As we approach mid-2009, the global economic outlook has shifted from one of pessimism and fear of the unknown to optimism and a feeling that the worst of the financial crisis and global recession may be behind us. The premise for the recovery in base metals prices has been based on very little evidence; however, the fact that Chinese imports of refined metal have exceeded expectations is not based on any real pick-up in consumption, but more on the shifting of surplus metal from one location to another. The main forces behind this have been Chinese consumer and State Reserves Bureau restocking, and the strong arbitrage trade in Copper, Zinc and Aluminum.

Gold and Silver

Gold jumped 9%, most for a month since November and topped $980 an ounce yesterday. Silver had the biggest monthly increase in 22 years and rocketed 30% higher in May on rising economic optimism and firm gold prices. Prices for bullion moved higher as the dollar sank to its lowest level in five months against the euro and the British pound. The dollar has weakened considerably since March as investors move out of cash holdings and into riskier assets like stocks on hopes for an economic recovery. Investors are also worried that the massive amounts of money the government has been pumping into the system could lead to inflation. That has been a boon for commodities like Gold and Oil. Demand for gold tends to rise when the dollar is weak as investors seek protection against inflation, which can be triggered by a falling greenback.

There is an extreme fear that the U.S. economy may lose its AAA credit rating in due course, and this has been feeding the gold bulls pretty well. Things really aren't improving despite the [stock] market's desire to latch on to every little bit of positive news. The reality is the economy is still struggling quite significantly. Gold holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, increased 13.14 metric tons to 1,118.76 metric tons as of May 22

Global gold hedging was unchanged in Q1 2009 from Q4 2008, the first time it had not fallen since Q1 2002. An unusual amount of new project-related hedging and an absence of dehedging from the larger hedgers were behind the stasis. India's gold imports so far in May have been in the range of 10 to 15 tonnes, lower than 29 tonnes imported in all of May of 2008 as high prices have subdued buyers' appetites.

Gold is expected to trade on an upward bias for the next month with resistance of $1000 and may touch new high crossing $1033. This rally would be sustainable if we see some retracement in prices in initial days of the month.

Zinc

Zinc has plenty to gain from the on-going Chinese and US stimulus packages and its price has risen in anticipation. However, industrial activity is about to slacken off even more during the imminent northern hemisphere summer months and this ought to see subdued price volatility, although any further mine closures could offer support. LME zinc stocks have declined, falling to about 10 days worth of consumption, while the three-month price has gained 5% since April to reach $1570/t on 29th May.

Much of the LME stock has been sucked into China to feed state and consumer restocking programmes, which in turn have opened a strong arbitrage trade between the higher Shanghai prices than that of the LME, encouraging further imports. There is little fundamentally in the short-term to keep the price at such a high level, but zinc, more than any other base metal, entered into recessionary territory almost 18 months ago and the amount of mine and smelter production cuts and closures reflects this. It is estimated; about 1.6 Mt of mined zinc production has been cut or closed and 1.4 Mt of refined zinc output in 2009. Importantly, some of the mine closures are likely to be permanent, while others will take time and require financing to restart.

With zinc standing to benefit from the Chinese infrastructure-focused stimulus package more than the other base metals, besides perhaps copper, we expect to see some tightness in the market later in 2009, as some real demand returns. For the next month, we could see some profit booking in the initial days and that would be opportunity to build long position. Zinc is likely to trade higher next month with the resistance $1640 and $1700.

Lead

Lead prices have been in thrall to copper in May, with prices trading wildly in $200/t ranges. LME three-month lead started May at lowest level at $1325/t and ended at highest level of the month at $1570/t. Besides echoing copper, lead’s price strength can be traced to a number of reasons. The normally recession-resistant replacement battery sector, which accounts for about 40% of lead offtake, has benefited from the unusually cold winter in the northern hemisphere.

In addition, it is estimated about 360,000t of lead production has been cut in 2009 due to the severe cuts by zinc miners, as Lead is produced primarily as a by-product from zinc mines. This has tightened the market considerably, leaving LME stocks at no more than three days worth of consumption. Adding to this is the fact that China has become a net importer of lead. In 2007 it exported a net 211,000t, and in 2008 a net 2,700t. In Q1 2009 it imported 48,320t of refined lead, up 826% year-on-year. Also supporting the price was the suspension of US-based Doe Run’s La Oroya lead-zinc-copper smelter in Peru, which produced 114,000t of lead in 2008. It has now restarted, albeit at reduced capacity.

Lead looks the brightest fundamentally of all the base metals besides tin. The low level of LME stocks and tightness in near-term supply will support the price over the next month. For the next month, we could see some profit booking in the initial days and that would be opportunity to build long position. Zinc is likely to trade higher next month with the resistance $1640 and $1700.

Weekly Commentary on Bullion

FUNDAMENTAL COMMENTS AND VIEW

Gold is becoming expensive again after the International Monetary Fund (IMF) warned that the global recession could last longer than expected. Forecasts for the current year are already pessimistic and there are fears 2010 could also be problematic. This might be prompting global investments in gold, which is considered one of the safest avenues of investment in times of economic distress and uncertainty. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year. It estimates banks face further writedowns of $550 billion in the U.S. and $750 billion in the euro area

China Government has declared that it has bought 454 tonnes of Gold for its reserves since 2003 to 2008 and current Gold reserves stand at 1054 tonnes, making it fifth largest Gold reserve in the world. China's gold buying has been rumored for years, but the country stayed quiet so as not to limit its ability to find favorable prices.

The world leader in gold reserves is United States with 8133 tonnes as on September 2008 that accounts for 76.5% of its foreign exchange reserves. Germany has the second highest gold reserves at 3412.6 tonnes while IMF has 3217, France has 2508 tonnes constituting 58.7% of its forex assets. Italy has 2451.8 tonnes constituting 61.9% of forex reserves followed by Switzerland at 1040 constituting 23.8% of total forex reserves. India is way down at 14th position with gold reserves of 357.7 tonnes representing 3% of total forex reseres.

What's really pushing gold higher is India's buying festival and continued jitters about U.S. banks' stress test results. Around 10 tons of gold have already been imported this month. India will import 25 to 30 metric tons of gold in April after no imports in the last two months due to Akshaya Tritya which falls on 27 April 2009.

TECHNICAL VIEW

COMEX Gold has support at $890 and resistance at $920 and $935. Prices took support at 200 DMA at $860 lat week as suggested. And Prices have sustained above $900 to resume its uptrend.
Buy MCX Gold (Jun) above 14700 SL 14500 Tgt 15000

COMEX Silver has support at $12.4 and resistance at $13 and $13.4
Buy MCX Silver (May) above 21250 SL 20800 Tgt 22000

Weekly View on Bullion

FUNDAMENTAL COMMENTS AND VIEW

Gold fell sharply on last Black Monday to touch $865 on back of the news of the UK official at G20 Meeting proposing of the IMF to sell 403 tonnes gold reserves in order to raise cash in G20 Meeting last week. Silver prices also fell Rs 1000 in a single day. But it was overdone and prices started recovering rest of the week due to weak economic data released. US Consumer confidence slipped in March as people fretted about rising job losses and a deepening recession. Federal Reserve officials feared the U.S. economy might fall into a self-reinforcing cycle of rising unemployment and slumping business and consumer spending, making credit tighter in a weak financial system, minutes of the Federal Reserve’s March meeting show

Another round of negative news of US economy was released on Thursday. The number of continuing jobless claims - those drawn by workers collecting benefits for more than one week in the week ended March 28 - surged another 95,000 to 5,840,000, the highest level since the government started keeping track in 1967. Continuing claims have risen 12-straight weeks and are up well over one million since the start of the year. The unemployment rate for workers with unemployment insurance rose 0.1 percentage point to 4.4%, a 26-year high.

According to Gold Survey 2009 released by GFMS Ltd on Tuesday, it revealed, Gold will re-attain the $1000 mark in the coming months and even break the $1,100 barrier. It also stressed that Global gold mine supply contracted by almost 3% in 2008 resulting in production levels falling to a 12-year low and Indonesia output decreased by 35%, South Africa, 14% and Australia 13%.

Demand is likely to pick up in India in coming days to marriage season and festivals coming through and lower prices will attract buying in this counter. Kerala, Assam and some other north-eastern states will celebrate Vishu (Bihu) in a big way on April 14, and that is an auspicious occasion for people to start new things or buy gold. Again, Akshaya Tritiya, India’s two biggest gold-buying festivals along with Dhanteras, falls on April 27 when citizens, especially in the south, are expected to buy gold regardless of price, as they believe it will ensure lasting prosperity.


TECHNICAL VIEW
COMEX Gold has support at $865 and resistance at $890 and $905.
Buy MCX Gold (Jun) above 14450 SL 14200 Tgt 14750

COMEX Silver has support at $12 and resistance at $13
Buy MCX Silver (May) above 20750 SL 20350 Tgt 21150 and 21450

Weekly View on Bullion

FUNDAMENTAL COMMENTS AND VIEW

Gold has long been seen as a haven against inflation and the Fed’s announcement earlier this week that it is to inject more than $1 trillion into the US economy was well-received by markets worldwide but also fuelled fears of inflation down the road, hitting the value of the dollar and also prompting a surge in gold prices. The US Federal Reserve is to embark on quantitative easing by buying up longer-term Treasuries for the first time as part of a $1.15 trillion spending spree with the aim of reviving the American economy out of recession. FED will buy $300bn of US government securities, it plans to buy up to $750bn of additional agency mortgage-backed securities and double the agency debt it plans to buy this year from $100bn to $200bn. Gold prices spiked again on the back of the US's move to massive qualitative easing measures. Greenback weakness and inflation are two of gold’s friends, when it comes to pricing the commodity.

The FOMC’s decision to keep the benchmark rate in a spread between zero and 0.25 percent wasn’t market moving; but the announcement that they would actively pursue quantitative easing was. While policy officials have given considerable forewarning to such a move, it nonetheless raises concern about the health of the US economy and its assets

With gold so hot at the moment—SPDR Gold Trust, the world's largest gold-backed ETF, yesterday reported that having added 335 tonnes of gold so far this year its reserves have hit an all-time high of 1,114.6 tonnes. We continue our bullish stance on Gold and Silver.

TECHNICAL VIEW

COMEX Gold has support at $945 and $930 and resistance at $980 and $1000.
Buy MCX Gold (Apr) if prices sustain above 15550 SL 15350 Tgt 15800

COMEX Silver has support at $13.4 and resistance at $14.1 and $14.6
Buy MCX Silver (May) on dips around 22600 SL 22300 Tgt 23000 and 23300

Weekly View on Bullion

FUNDAMENTAL COMMENTS AND VIEW

The bullion market showed some wild fluctuations during the week. Clearly seeing the narrowest US Trade Balance in six years served to undermine some flight to quality bulls. Gold was battling profit taking by the longs, which might have been somewhat concerned about potential developments from the weekend G20 meeting. With price action choppy the metal may have been underpinned by comments from China's Central Bank warning that the financial crisis may lift gold to record highs. Strong investor flows into gold-backed securities along with currency devaluation concerns may have been other factor providing price support to the metal.

The Swiss franc is one of the traditional safe haven assets, a place where worried investors park money to escape turmoil in other markets. Interest rates are usually low, but Switzerland's conservative fiscal policies and stable economy make it a place where investors attempt to ride out a storm. But the SNB clearly signalled yesterday that it is unwilling to tolerate any further CHF appreciation and acted to sell the currency in the FX markets.

This improves the relative appeal of gold, also a safe haven asset, as it weakens the argument for owning the Swiss franc as an appreciating currency during difficult times. It may also persuade some Swiss-based investors to add to their positions in gold now that the risk of CHF appreciation has been eliminated. Gold did move higher immediately after the SNB intervention yesterday and could benefit further from these moves as investors re-assess their options after this change

China’s Premier Wen Jiabao said he is "worried" about the country’s holdings of US Treasuries and wants assurances that the investment is safe. China is the biggest holder of US debt. Should China or some other significant buyer of US debt announce that they will no longer buy US debt unless denominated in a non-US dollar currency, gold is going to the moon.

The holdings of the SPDR Gold Trust advanced to another record high of 1042 tonnes. The fund now has world's sixth-largest stockpile of gold; overtaking that held by the Swiss National Bank

Technical View

Gold continues to resist any sustained decline, bouncing back quickly from any minor sell off COMEX Gold has support at $900 and $885 and resistance at $965 and $1000.
Buy MCX Gold (Apr) ) if prices sustain above 15450 SL 15200 Tgt 15800

COMEX Silver has support at $12.5 and resistance at $13.5 and $14
Buy MCX Silver (May) ) if prices sustain above 22400 SL 22000 Tgt 22800 and 23000