Gold below $1,200 needed for ‘new equilibrium’

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A drop in gold prices below $1,200 an ounce may precipitate a fresh round of production cuts in the mining sector aimed at re-balancing the market, strategists told CNBC. Although the short-term view on gold remains overwhelmingly negative – with nearly three quarters of respondents in this week's CNBC gold sentiment survey forecasting further weakness for bullion – many say prices may start stabilizing below $1,200 – levels where a supply response from the mining sector may kick in.

"Gold production may fall at prices below $1,200 as it becomes uneconomical for many mines to operate profitably," said Mark O'Byrne, Founder and Executive Director of Dublin-based bullion dealer GoldCore.

An estimated 36 percent of the South African gold industry is loss-making even at today's spot prices, O'Byrne said, adding that 28 percent of the country's gold miners failed to turn a profit in the third-quarter, based on a gold price of $1,330.

Curbs on mine supply, according to UBS strategists Giovanni Staunovo and Dominic Schnider, "should come with the gold price decline toward the marginal cost of production."

  UBS estimates that 10 percent of supply "on a cash cost basis would be loss-making at a price between $1,050 and $1,150/oz. At this level, the gold market should be adequately balanced and find a new equilibrium," they said.

Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint, said major gold miners such as Toronto-based Barrick Gold are already starting to scale back production.
The world's largest producer by sales, Barrick sold three Australian mines this year and Chief Executive Officer Jamie Sokalsky said the company is in talks to sell more assets.

"Many miners have been reducing their capacity like Barrick," Moy said but warned that "if demand for physical gold picks up in the U.S., it will take miners quite a while to re-open their shuttered mines and produce gold."

CNBC's latest survey of market sentiment showed 74 percent of respondents (20 out of 27) expect prices to fall this week, 15 percent (4 out of 27) say prices will trade around current levels while 11 percent (3 out of 27) say prices will rise. Spot gold staged a modest recovery on Monday, climbing 0.5 percent to just under $1,250 after falling earlier to $1,227.34, its lowest level since July 8 after Iran and major western powers struck an initial agreement on Sunday aimed at limiting Tehran's nuclear program in return for sanctions relief. Gold slipped on the perception that the deal lessens the risk of tensions in the Middle East, reducing gold's appeal as a safe-haven.

ETF outflows
Bullion has fallen about 25 percent so far this year, reflecting concerns that the U.S. Federal Reserve will start winding down its stimulus program as the economy improves. Accommodative monetary policy tends to cheapen the U.S. dollar, making gold more affordable for buyers paying in other currencies.

  "With Fed tapering imminent – and likely to be pulled forward to December if anything – the path of least resistance remains lower and honestly I'm surprised we're not sitting at $1,200 already," said Tom Essaye, a former NYSE floor trader, now President of Florida-based Kinsale Trading LLC, publisher of The 7:00's Report. "The next major catalyst in gold is inflation, but we're still months or quarters from that appearing in the stats."

Investors continue to liquidate holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund (ETF) and a key measure of investor sentiment, as gold grinds lower.
Holdings fell 4.50 tons to 852.21 tons last Friday, the sharpest drop since Nov. 1 and stood at their lowest since February 2009.

UBS expects more selling. "Once the schedule of the upcoming Fed taper becomes clear – we expect this to start in March 2014 – ETF outflows should intensify." The Swiss bank expects fund outflows of more than 300 tons over the next 12 months.


While futures and options flows combined with Asian demand have been strong enough to offset "modest" ETF outflows in recent months, "we advise investors not to count on these factors once ETF outflows intensifies," UBS said.

A stronger U.S. stock market performance – reflecting a propensity amongst investors to take on more risk – has also undermined the case for gold and the correlation will likely remain a drag on prices, survey respondents said.

Dow industrials eked out a slim gain on Monday to end at another record high, after the Nasdaq topped 4,000 for the first time in 13 years and then slipped to close below that level, Reuters reported. The S&P 500 is up 26.4 percent for the year and the Dow has risen seven weeks in a row.
"Gold continues to be an innocent victim of the frenzy on Wall Street," said Jeff Nichols, managing director at American Precious Metals Advisors. Gold's appeal may return, however, once investors realize that "super-stimulative" monetary policies pursued by major central banks are creating over-priced stock valuations out of kilter with fundamentals.

"Sooner or later, when the bubble bursts, equity investors will really lose their heads and gold stands to benefit, if not at first, certainly as the dust settles on Wall Street," he said.
Scott Carter, the chief executive officer of Los Angeles-based Lear Capital and a long-term gold bull, questioned whether the "wild gains" in the stock market – exemplified by the Dow over 16,000 – are sustainable.

"Let's pause for a moment and think about how outrageous that really is," Carter said. "We are living in a simulated reality. Investors are acquiring and holding gold because they know that the market bubble will burst."

Carter added: "Gold remains a hedge, a protection strategy, a diversification tool, and a long-term savings shelter. It has historically always done its job."

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Why the Meltdown in Copper Prices this Week is Very Important for Precious Metals, and Equities Markets...

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The technical breakdown in Comex copper futures this week is not only an ominous clue for the red metal, but it's also a bearish signal for the entire raw commodity sector. December Comex copper futures prices this week dropped sharply and hit a three-month low. A bearish downside technical "breakout" occurred on the daily chart for the copper futures market, to suggest still more downside price pressure in the near term.

See on the monthly continuation chart for nearby Comex copper futures that prices have been trending lower for nearly three years and are on the verge of a downside breakout below key longer-term chart support at the $3.00 level.

Copper is a critical industrial metal used in construction worldwide. The fact copper prices dropped sharply this week is an early warning signal that construction activity worldwide could be flagging.
Indeed, history also shows copper market price moves can lead similar moves in the U.S. stock indexes. Along with the recent solid price downtrend in Nymex crude oil futures, the copper market meltdown this week suggests the raw commodity sector, in general, remains firmly controlled by the bears.

Importantly, the price action in copper and crude oil recently also corroborates the growing worries of worldwide deflationary price pressures.

Veteran commodity market watchers know that deflation is the archenemy of commodity markets.

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News Source: www.marketwatch.com

Physical Demand Could Determine Gold Price Direction...

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How the physical market reacts to gold’s drop under $1,300 an ounce Friday could determine next week’s price direction for the precious metal, market watchers said.
December gold futures fell Friday, settling at $1,284.60 an ounce on the Comex division of the New York Mercantile Exchange, down 2.2% on the week. December silver fell Friday, settling at $21.317 an ounce, down 2.4% on the week. 

In the Wsj News Gold Survey, out of 34 participants, 18 responded this week. Of these, four see prices up, while 12 see prices down and two see prices sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.
Gold prices fell under $1,300 after a much stronger-than-expected U.S. October nonfarm payrolls report. The Labor Department said 204,000 jobs were created in October, nearly double the expectations going into the report. September and August employment numbers were revised up by a combined 60,000, while the unemployment rate rose to 7.3% from 7.2%. That was likely an effect of the shutdown.

Analysts said they expected the federal shutdown to have impacted the jobs figures, but the Labor Department said survey responses appeared normal. One downside to the higher-than-expected figures was that labor participation, which showed the lowest reading since 1978.

Gold market watchers said prices fell on thoughts that the stronger jobs report, along with Thursday’s higher-than-expected gross domestic product data, mean the Federal Reserve may consider tapering its bond-buying program known as quantitative easing, earlier than expected.
Andrew Busch, founder and editor of The Busch Update, said the Fed may still be cautious even with the economic improvement.

“The U.S. economy is creating jobs and wage gains sufficient for the Fed to begin tapering in December if they want. They will most likely be cautious again and wait until January.  For the markets, this data along with the Q3 GDP supports the view that the U.S. economy has returned to being the major engine of global growth,” he said. 

Whether gold continues to fall next week depends on physical demand, which has been largely absent lately, said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva, Switzerland. How Chinese and Indian buyers act on Monday will be critical in determining price direction.

“Monday is going to be really important. If there’s no improvement on demand in the physical front, prices could fall to $1,250,” he said. Physical buyers have been disinterested in gold because the market’s recent range-bound trade between roughly $1,350 and $1,275, he said. If prices slip out of the current range, that could spur physical interest, Nabavi said. Part of the problem, though, is the overhang of supply on the market which has outweighed demand.

Kevin Grady, owner of Phoenix Futures and Options, agreed. “If the market breaks support at $1,270-$1,275, prices could fall to $1,250. The key is the $1,250 area and if any physical buying comes up. We’ve seen that happen before,” he said.

George Gero, vice president with RBC Capital Markets Global Futures and a precious metals strategist, said now that it is almost mid-November, it will be time to watch the jewelry industry and see what trends emerge of the December holiday season.
He said he’s “not too optimistic on prices” for next week because of the jobs data, but expects some bargain hunting to come in which may limit the downside. 

Grady mentioned that open interest in gold futures rose when prices fell on Thursday, which is generally a sign of new short positions established and is considered bearish. Given how speculative traders increased their net-long positions in the most recent Commodity Futures Trading Commission’s commitments of traders report, there could be more long liquidation ahead, he said.
Looking toward next week, the U.S. economic calendar is light. Greater attention will be turned to China. Weekend economic data to be released include industrial production, fixed asset investment, retail sales and consumer price index data.

Additionally, between Saturday and Tuesday the historic meeting in Beijing, the Communist Party Third Plenum takes place which could have long-term ramifications for commodities markets. Details of what the plan might be are unknown, but China-watchers said focus is likely to be on financial, tax and social security reforms.

However, Barclays and Nomura analysts aren’t expecting a lot of details or decisive action immediately. That could mute the immediate impact on markets. However, the longer-term impact will be more important.


“The stakes are high for commodity markets. If Chinese policymakers decide on a set of moderate reforms while protecting robust economic growth, we expect the impact on commodities would be neutral to positive, as the recent strength in Chinese demand was supported by strong infrastructure spending. However, if the government sets out plans to rebalance the economy more forcefully, sentiment toward commodities demand, especially base metals, could turn negative,” Barclays said.

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News Source: www.reuters.com

Twitter set for volatile debut after IPO raises $1.8 billion

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Twitter Inc could face volatile trade in its debut Thursday on the New York Stock Exchange, analysts said, but they remained enthusiastic after the money-losing social media company priced its IPO above the expected range.

The microblogging network priced 70 million shares at $26 on Wednesday evening, above the targeted range of $23 to $25, which had been raised once before. The IPO values Twitter at $14.1 billion, with the potential to reach $14.4 billion if underwriters exercise an over-allotment option.

If the full overallotment is exercised, as expected, Twitter could raise $2.1 billion, making it the second largest Internet offering in the U.S. behind Facebook's $16 billion IPO last year and ahead of Google Inc's 2004 IPO, according to Thomson Reuters data.

The focus now turns to the first day of trading, with some analysts expecting a small price pop. Even with the share price increase, Twitter has approached its offering more cautiously than Facebook, which raised both the price and the number of shares offered before its IPO only to see the price fall substantially at the outset.

Twelve-month price targets on Twitter's stock range from $29 to $54.
Brian Wieser, an analyst at Pivotal Research Group who valued Twitter this week at $29 a share, said the stock appears to have strong institutional investor support and could easily close over $30 a share on its first day.

But he warned that trading could be volatile, given that Wall Street has struggled to value an unorthodox social media company with a newfangled business model.

"There's still so much uncertainty and it's so difficult to even identify how big the opportunity is," Wieser said. "Twitter will make Netflix look like General Electric as a bellwether of stability."
Twitter boasts 230 million global users, including heads of state and celebrities, but it lost $65 million in its most recent quarter and questions remain about long-term prospects.

It also lacks the ubiquity of Facebook or the "stickiness" factor that keeps people checking the No. 1 social network on a daily basis. A Reuters-Ipsos poll last month showed that 36 percent of people who signed up for a Twitter account say they do not use it.

Moshe Cohen, a professor at Columbia Business School in New York, said pressure on the company could quickly mount if shares lose steam out of the gate. "Twitter, as a company with no expectations of making profits for several years, needs its investors to have faith," Cohen said. "If that stock starts to show some negative momentum from the beginning, it could last for a while."

Twitter, however, is listing amid the strongest market for U.S. IPOs since 2007, with equity markets soaring and uncertainty around the U.S. debt ceiling subsiding at least temporarily.
A number of recent IPOs have doubled on their first day of trading, including Container Store Group, restaurant chain Potbelly Corp and software company Benefitfocus Inc.

Twitter hiked its target IPO price on Monday from an initial range of $17 to $20. All of the proceeds from the IPO will go directly to the company, with no insider selling taking place.

Two sources said Twitter's underwriters will allocate roughly 20 percent of the offered shares to retail investors, while the vast majority of the remaining shares will go to large, "long-only" funds.
Goldman Sachs Group Inc, which beat arch-rival Morgan Stanley in gaining the lead position on the Twitter IPO, tops the list of U.S. technology bookrunners this year with an 18.3 percent market share, up from 11 percent a year ago when it ranked fifth, according to Thomson Reuters data.

Morgan Stanley and JPMorgan Chase & Co also led the IPO.
AVOIDING FACEBOOK'S MISTAKES
Twitter has focused on avoiding many of the pitfalls that plagued Facebook during its $16 billion IPO last May. The company priced shares more conservatively than Facebook did and listed on the New York Stock Exchange rather than the Nasdaq.

Trading glitches and the increase in both the price and number of shares in the Facebook offering contributed to a sustained decline from the $38 IPO price, with the shares taking more than a year to recover.

The high level of interest stoked by Twitter's road show spurred speculation in recent days that its bankers could raise the price again significantly higher than $25, but they ultimately did not.
"I'm glad they didn't take it up higher, as speculated," said Suntrust Robinson Humphries analyst Robert Peck. "It still provides enough upside for investors and provides a nice contrast to Facebook."

CHALLENGES REMAIN

Despite Twitter's massive valuation, some analysts have expressed concerns about whether it can sustain user growth and continue to ramp up advertising sales at a rapid clip.
Twitter, which has extensively courted large brands, still generates relatively little revenue per user compared with Facebook, while the majority of its users are located outside the United States in countries such as Indonesia or Brazil, which are less lucrative digital advertising markets.

During its road show over the past week, Twitter executives assured investors that the company could wring more money out of international users and smaller businesses by opening offices abroad and expanding its self-serve advertising products.

"Twitter has clear similarities to Google, Facebook and LinkedIn, but we would argue that Twitter exceeds these alternatives on the basis of its branded ad potential," Evercore Partners analysts said in a note, as they initiated coverage with an "overweight" rating and a price target of $43.
"The distinction in how Twitter charges advertisers stands to deliver higher than expected ad revenues and ARPU in the years to come." Analysts, however, say the company could encounter a slew of regulatory and policy hurdles in foreign countries as it expands.

Twitter said last month that its third-quarter revenue more than doubled to $168.6 million, but its net loss widened to $64.6 million from $21.6 million a year earlier as costs ballooned.
Twitter's expenditures will likely continue to rise as it expands its international presence and continues to invest in infrastructure and acquisitions.

Twitter's well-known intellectual property vulnerabilities could also force the company to invest heavily to expand its patent portfolio, as Facebook has done since going public. Twitter disclosed Monday that it had received a letter from International Business Machines Corp accusing the social media company of infringing on at least three U.S. patents.
Twitter is set to trade on the New York Stock Exchange on under the ticker TWTR.

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News Source: www.reuters.com

Damac Tests Appetite for Dubai Property With U.K. IPO Plan...

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Damac Properties Development Co., a Dubai-based housing developer, plans to raise as much as $500 million in a U.K. initial public offering that will test appetite for the emirate’s recovering property market.

Al Firdous Holding and Sahira Co., controlled by Damac founder and chairman Hussain Sajwani, will offer global depositary receipts in a new company called Damac Real Estate Development Ltd. in the IPO. Each GDR will be worth three ordinary shares of the company.

Damac has started projects including Hollywood-themed apartment towers and a Trump International golf course this year as Dubai’s property market recovers from a 2008 real estate crash that brought the sheikhdom to the brink of bankruptcy. The pace of the revival has prompted regulators to take steps to guard against a repeat of the bubble.

“There will definitely be appetite because Damac is a proxy to Dubai’s real estate, which is recovering at the moment,” Taher Safieddine, an analyst at Shuaa Capital PSC. “They have witnessed the boom and bust and managed to come out of the crisis relatively in a good shape.”

Damac has assets valued at $2.3 billion and it made a first-half profit of $332 million, up from $212.1 million in all of 2012, according to the filing. Gross profit margins averaged 44 percent in the three years through 2012 and 64 percent in the first half of this year, the filing said.

Dubai Focus

“Our biggest operations will continue to be in Dubai,” Sajwani said in an interview today. “The Middle East as a territory, especially Saudi Arabia where we have already developments and operations, will continue to grow for us.”

While Damac tends to be focused on building and selling homes, investors will compare the company’s valuation to Emaar Properties PJSC, Shuaa’s Safieddine said. Emaar, Dubai’s biggest publicly traded developer, generates much of its income from leasing malls and operating hotels, providing a cushion in downturns, he said. Emaar’s shares surged 63 percent this year.

Citigroup Inc. and Deutsche Bank AG along with Samba Capital and Investment Management Co. and VTB Capital Plc are managing the IPO, according to the statement.

Sajwani will remain Damac’s chairman and chief operating officer, according to the filing. Dubai’s decision to increase property-sale fees to 4 percent will have little effect on sales because the rate is still below countries in Europe and Asia, Sajwani said.


Damac, which partnered with Italian fashion house Fendi SpA and Paramount Pictures Corp. is expanding outside its home market with towers in cities across the region including Abu Dhabi, Riyadh, Jeddah, Beirut, Amman and Baghdad.

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News Source: www.bloomberg.com