These are stories Report on Business is following Monday, April 15, 2013.
Gold prices plunged again today amid a general rout in commodities, sinking below $1,400 (U.S.) an ounce to mark a decline of about $200 over two days of trading.
Shares of big gold producers also slumped as bullion chalked up its biggest single-day decline, in percentage terms, since early 1983.
“When gold begins to fall, it sparks margin calls, and then it’s a vicious circle,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
Just about everything looked ugly today: Silver, copper and oil also sank, as did stocks and currencies such as the Canadian dollar, which was down on a number of factors, including the decline in bullion.
Gold opened Friday at $1,561 an ounce, then sank, marking a plunge into bear market territory. By the close, it had slid $140.30 to finish $1,361.10 an ounce, its lowest close in over two years.
The real trouble began last week amid suggestions in a draft bailout document that Cyprus could sell gold from its reserves, sparking concerns that other embattled European countries, such as Italy and Portugal, could follow suit. As well, global inflation as tame as it is makes gold less of a hedge.
Two major banks – Goldman Sachs Group Inc. and Société Générale – also put out bleak forecasts.
Then today, a reading on China’s economic growth disappointed the markets, despite the fact it came in at 7.7 per cent, sparking fears over what’s supposed to be the engine of the global recovery.
"We already knew Europe isn't growing," said Kit Juckes, the chief of foreign exchange at Société Générale.
"Then we got a U.S. slowdown. Then we got a Russian slowdown and then the Chinese data came out and sent further despondency into the markets. Down went gold, down went equities, credit indices. Yield curves steepened and up went yen, dollar and Korean won, against pretty much everything else."
Gold will likely see a “minor rebound” after today, said Michael Haigh, Société Générale’s head of commodities research, but here’s how he views it: “Buying opportunities but I won’t be buying.”
Société Générale had projected a 15-per-cent drop in gold by the end of this year, to $1,375 an ounce, followed by what it forecast would be years of a “gentle bear market.”
Goldman Sachs, in turn, sees gold averaging $1,545 this year and $1,350 next.
Julian Jessop at Capital Economics in London said more is at play here.
“The trigger for the slump in the price of gold since Friday appears to have been aggressive selling by speculative traders, rather than any change in the long-term or fundamental drivers,” he said.
“Gold has also been caught up in the broad-based weakness in commodity markets, including oil and industrial metals, due to softer U.S. and Chinese economic data.”
The “fundamental explanations” for the plunge that are being tossed around simply don’t hold up, he said, citing the fact that it’s not yet known whether Cyprus will in fact sell, and that the latest economic readings in the United States don’t signal a pullback by the Federal Reserve on its stimulus measures.
“Any emphasis placed on the risks to gold posed by a stronger U.S. recovery and rising interest rates certainly looks increasingly misplaced, or at least premature,” he added in a report.
- Gold price plunges, years of ‘gentle bear market’ seen
- Inside the Market: All shine and no substance
- Scott Barlow in ROB Insight (for subscribers): Goldman Sachs waves a red flag at gold investors
Royal Bank of Canada today did a stress test of sorts on North American gold producers, finding “significant pain" should bullion plunge further to $1,300 an ounce.
Here’s what Stephen Walker, the head of the bank’s global mining research, and analysts Dan Rollins and Sam Crittenden found:
Gold at $1,500 an ounce: “We estimate a low probability that our selected gold producers would trigger a single-notch credit ratings downgrade. We would expect producers to draw down existing credit facilities, consider cash-saving measures and, where necessary, seek debt financing in order to complete the existing capital spending programs.”
At $1,400: A “moderate probability” of a one-notch downgrade to Barrick Gold Corp., while all producers cut expenses and delay spending plans.
At $1,300: A “moderate probability” of a one-notch hit to Newmont and Allied Nevada Gold, and a “conceivable” hit to non-investment grade debt ratings of Barrick and Kinross Gold Corp., while all producers would cut spending sharply, put off new programs and, for some, cut dividends.
At $1,200: A “high probability” of non-investment grade hits to Barrick, Newmont Mining Corp. and Kinross. “We would expect all the gold producers to consider care and maintenance for high-cost mines, cut all discretionary expenses, cut capital spending programs, defer new development projects and consider cutting dividends.”
- Falling gold price squeezes embattled producers
- Tim Kiladze's Streetwise (for subscribers): Barrick's stock wipes out a decade of returns
Stock markets around the world are also taking it on the chin today, largely because of China.
“After last night’s disappointing Chinese growth figures, which missed their target by some way, it is hardly surprising that commodity stocks have led the charge lower,” said market analyst Alastair McCaig of IG in London.
The downbeat mood began in Asia, where Tokyo's Nikkei sank 1.6 per cent and Hong Kong's Hang Seng 1.4 per cent. It spread into Europe, where London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by between 0.4 per cent and 0.6 per cent, and then into North America, knocking Toronto's S&P/TSX composite, the S&P 500 and the Dow Jones industrial average.
China growth slows
Driving the woes in the markets today is a reading from China’s National Bureau of Statistics showing the economy expanded by 7.7 per cent in the last quarter.
Economists had expected to see something more in the 8-per-cent range, Carolynne Wheeler reports from Beijing.
For any other country, growth in gross domestic product of 7.7 per cent would be to die for, but in China’s case it puts a damper on the outlook for imports, notably commodities.
“Last week we saw data showing that Chinese imports jumped sharply in February which raised hopes that the Chinese economy was showing a significant recovery after its slowdown in recent quarters,” said senior analyst Michael Hewson of CMC Markets in London.
“These hopes look to be somewhat misplaced after both GDP and industrial production came in well below expectations though retail sales did improve slightly,” Mr. Hewson said in a research note.
“The latest annualized Q1 GDP numbers show growth of 7.7 per cent, missing expectations of a rise to 8 per cent and a fall from 7.9 per cent, while industrial production in March fell from 9.9 per cent to 8.9 per cent missing expectations of a rise to 10.1 per cent.”
Suncor sells assets
A British energy giant and a state-owned company in Qatar are spending $1-billion to buy most of Suncor Energy Inc.’s conventional natural gas business in Western Canada.
Centrica PLC and Qatar Petroleum International will snap up properties in Alberta, northeastern British Columbia and southern Saskatchewan, The Globe and Mail’s Bertrand Marotte reports today, but the deal doesn’t include the bulk of the Canadian energy giant’s unconventional gas assets in B.C.’s Montney region or oil assets at Wilson Creek, Alberta.
“Today’s announcement is further proof of our commitment to capital discipline and aligning assets with strategic objectives,” said chief executive officer Steve Williams.
“We will continuously review and refine our portfolio of assets to ensure we are investing in projects that deliver profitable growth and strong returns for our shareholders.”
Centrica will own 60 per cent of the partnership, and its state-owned partner 40 per cent.
- Suncor sells assets to Centrica, Qatar Petroleum for $1-billion
- Carl Mortished in ROB Insight (for subscribers): Why Centrica and Qatar need Suncor's gas
Dish bids for Sprint
Dish Network Inc. is trying to bust up a marriage of Japan’s Softbank Corp. and Sprint Nextel Corp. with a rival bid for the latter of $25.5-billion (U.S.) unveiled today.
Dish is bidding $4.76 in cash and $2.24 in stock.
"The Dish proposal clearly presents Sprint shareholders with a superior alternative to the pending Softbank proposal," said Dish chairman Charlie Ergen.
"Sprint shareholders will benefit from a higher price with more cash while also creating the opportunity to participate more meaningfully in a combined Dish/Sprint with a significantly-enhanced strategic position and substantial synergies that are not attainable through the pending Softbank proposal."
In a letter to Sprint chairman James Hance, Mr. Ergen said that, if his bid succeeds, the combined company would be the only one in a position to offer “a fully-integrated, nationwide bundle of in- and out-of-home video, broadband and voice services to meet rapidly evolving customer preferences.”
Citigroup profit surges
Citigroup Inc. today posted a 30-per-cent jump in first-quarter, pumped up by investment banking and beating analysts' estimates even with a special charge.
The giant U.S. bank earned $3.8-billion (U.S.) or $1.23 share, well up from $2.9-billion or 95 cents a year earlier.
Excluding the charge, per-share earnings would have been $1.29.
Revenue climbed to $20.5-billion from $19.4-billion. Loan provisions eased to $23.7-billion, or 3.7 per cent of the total, from $29-billion or 4.5 per cent.
"During the quarter, we benefitted from seasonally strong results in our markets businesses, sustained momentum in investment banking, continued year-over-year growth in loans and deposits in Citicorp, and a more favourable credit environment,” said chief executive officer Michael Corbat.
“However, the environment remains challenging and we are sure to be tested as we go through the year."
Home sales sink
Canada's housing market sank again in March from a year earlier, though picked up somewhat from February, The Globe and Mail's Tara Perkins reports today.
Sales were down 15.3 per cent from March, 2012, according to the Canadian Real Estate Association, while up 2.4 per cent from February.
Canada's housing market has been cooling since last summer, when Finance Minister Jim Flaherty tightened mortgage restrictions for the fourth time in a row to tame Canadian borrowing.
Streetwise (for subscribers)
ROB Insight (for subscribers)
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- Where is China's credit growth going?
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