Tag Archives: price

GLD Continues To Lose Its Shine

The price of GLD continues to fall. The recovery of the U.S. economy keeps raising the odds of a rate hike in December, which pressures down GLD. This week’s GDP and PCE reports will provide additional insight into the direction of the U.S. economy and could indirectly move the price of the fund. The weakness in the gold market has also kept down the shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ). As the U.S. economy keeps showing signs of slow progress, the market raises the odds of a December rate hike. And this trend keeps pushing down the price of GLD. This week’s GDP and PCE will provide additional information about the direction of the U.S. economy. Additional strong results could drive GLD further down. This week, the second estimate of the U.S. GDP for Q3 will be released. In the first estimate, the GDP growth rate was only 1.5%, which was much lower than that in Q2. In terms of market reaction, even though the financial markets do tend to react to the progress of the U.S. GDP, the price of GLD doesn’t seem, as presented in the following chart, to have a consistent impact from the changes in GDP. (click to enlarge) (Source: BEA, Google Finance) The chart presents the relation, or lack of it, between the percent change in the price of GLD on the day the GDP report comes out and the “surprise” in the headline figure of the GDP annual growth rate – a positive percentage point indicates a better-than-expected growth rate. The dots don’t show a clear upward or downward trend to suggest a correction. The GDP growth rate tends to coincide with the movement of the U.S. dollar. And the latter also has a mid-strong correlation with the price of GLD – as the U.S. dollar rises, GLD tends to fall. But directly, GLD doesn’t seem to react in a more consistent way to the surprises of GDP’s headline figure. How about the relation over the long run? Although the slow recovery of the U.S. economy may have contributed, at least indirectly, to the decline in the price of gold, when you look at the two data series over the past decade, it’s hard to see any correlation as well. (click to enlarge) (Source: FRED ) These charts suggest that the progress of U.S. dollar, changes in long-term yields, the concerns over rising inflation and even, to a lesser extent, changes in the supply of gold are likely to be the main direct factors moving GLD. Does this mean the GDP report doesn’t matter? I don’t think so, especially at this stage when the FOMC contemplates whether or not to raise rates. After all, the market estimates that the chances for a rate hike next month by the FOMC are 74%. At the beginning of the month, these odds were lower than 50%. As the chances continue to climb, GLD tends to fall. It’s true that the Fed’s dual mandate refers to employment and price stability, not growth. These two targets are related to the GDP growth rate. And if GDP doesn’t rise, the Fed will be less incline to raise rates. Currently, the market expects GDP growth to come in higher than the first estimate of 2%. Any higher figure could indicate the U.S. economy is doing better than was previously estimated – another positive sign that could keep GLD prices down. It’s also worth noticing the components of the GDP report, such as changes in inventories, investments and personal spending. This week, we also have the PCE report – another indicator for the progress of U.S. inflation. In the past report, the core PCE stood at 1.3% year on year (as of September). The Fed’s annual outlook was 1.4% . If the core PCE doesn’t start to pick up, the Fed expects next year’s core PCE will rise to 1.7%. This may not delay the Fed from raising rates in December, but rather, it may maintain a very gradual rate hike pace next year, which will actually keep interest rates low and GLD from crashing. The price of GLD is still likely to further slowly decline. This week’s reports will provide additional information about the progress of the U.S. economy. As the U.S. dollar and long-term interest rates continue to climb, the downward pressure on GLD will intensify. It doesn’t mean the fund couldn’t experience short-term rallies – especially if the risk in the financial markets rises or the U.S. economy doesn’t progress or U.S. dollar changes course again and depreciates, just to name a few factors. But these short-term rallies aren’t likely, for now, to change the fact of the descent of GLD. For more please see ” GLD Continues to lose its appeal ”

What’s Behind The Recent Rally Of SLV?

Summary The silver market heated up in recent weeks. What’s behind the recent rally in the price of SLV? A weaker U.S. dollar and falling long-term yields are part of the story behind the latest recovery in the silver market. The silver market has heated in recent weeks, which has also pushed up the price of the iShares Silver Trust ETF (NYSEARCA: SLV ). What’s behind the recent rally of SLV? Let’s examine what is keeping up the price of SLV, and what does it mean up ahead for the silver market? Is it just because of the weaker U.S. dollar? It’s hard to consider the rally in the price of SLV without taking into account the recent depreciation of the U.S. dollar. The chart below presents the traded weighted U.S. dollar index (normalized to 100 for the end of March) and the price of SLV over the past several months: (click to enlarge) Source: FRED and Google Finance As you can see, the U.S. dollar lost some ground since the beginning of the month after several U.S. economic reports came below expectations including the NFP report, retail sales, and JOLTS. And since the core CPI came a bit higher than expected – the annual rate reached 1.9% – the market has become even more suspicious as to whether the FOMC will actually move forward and raise rates anytime soon, let alone this year. But the chart above also shows that while the depreciation of the U.S. dollar may have slightly contributed to the rally of the SLV, it still did fall by much to explain such a spike in SLV’s price. It’s worth noticing, however, that this week’s ECB monetary policy could have an impact on the foreign exchange markets including the euro/USD. And if the ECB were to convey a dovish sentiment that may include plans to expand or extend the current QE program, this news could actually pull back up the U.S. dollar – something that could curb down the recent rise in SLV and perhaps even bring it back down. If we also look at the recent changes in the long-term treasury yields relative to SLV, we could see that haven’t plummeted and only slowly came down in the past few weeks, which could have also helped boost up precious metals prices. (click to enlarge) Source of data: Bloomberg and U.S. Department of the Treasury Based on the CME Group 30-Day Fed Fund futures prices, the market has lowered the implied probabilities for the Fed to raise rates in December to only 30% and for March 2016 to 52% – only a month ago, the odds were close to 50% for a December hike. The drop in probabilities, mainly due to weaker-than-expected economic data – mostly in the labor market – has provided backwind to the silver market. And although from the fundamentals point of view, the market continues to slowly tighten, there haven’t been enough new developments to warrant such a rise in the price of SLV. Bottom Line The last time the price of SLV rose so fast in a single month was back in January of this year. Back then, long-term yields also dropped and the U.S. dollar fell against major currencies. And the Swiss National Bank decided to end the pegging of the Swiss franc to the euro. These events boosted volatility and helped pull up SLV. This time around, we also see falling U.S. dollar and lower LT yields, and volatility may have subsided in recent weeks, it could still erupt as there are growing concerns over the progress of China and even the U.S. This current climate could change and drag back down SLV especially if other central banks (ECB and BOJ) continue to move forward and devalue their respective currencies and the Fed pull its rate hike. But as long as these central banks don’t move forward – the Fed by raising rates, and ECB and BOJ in expanding their QE programs – the price of SLV is likely to continue to remain its current level. For more please see: Is SLV about to change course?

Investing With Russian ETFs

Summary With the majority of ETF options holding energy companies, the market has become a tradable opportunity for those looking to profit from volatility. The mid-term outlook remains bleak, as economic and political deficiencies have suppressed business growth in the country. For longer-term investors, the current market may provide an opportunity to build holdings in an emerging market portfolio. With the recent decline in Russian markets due to the drop in the price of oil, many interested investors have considered gaining exposure to the country. From a fundamental perspective, the nation’s abundance of resources provides a positive picture in the long term. However, the pertinent question is how investors can gain this exposure while also protecting themselves from unwanted paperwork related to direct investment in the Moscow Stock Exchange (MICEX). In the current environment, the best solution are the Russian ETFs available on the market. ETFs have become a popular tool in the past few years for diversifying portfolios and protecting investors from market volatility. For those considering exposure to the emerging markets, ETFs have become almost a necessity in the current decade, as global rates continue to decline and result in increased market volatility. Russian ETFs protect an investor’s portfolio from the large fluctuations in the MICEX while also offering a passive investment style which ensures even investment in all major Russian industry players. Many Russian ETFs have underperformed in the last year, due to continued pressure from a commodity price perspective. This period of pricing pressure provides an opportunity for investors to take on risk and bet on a recovery in the market as the price of oil recovers. Russian ETFs are not for everyone and while they offer reduced volatility compared to the MICEX, the outflow of funds from Russian ETFs in the past few months has reduced liquidity. In addition, a majority of the Russian ETFs are heavily invested in oil majors, a market that has taken hits due to sanctions related to the Ukraine crisis. For this reason, finding an ETF that offers exposure to oil while also targeting other industries is much more beneficial from a medium-term perspective. In the following article, I will cover three popular Russian ETFs to determine whether the current investment products available offer any opportunities for interested investors. Current market As many investors may already know, Russia is among the top oil producers in the world, ranking eighth in global proved reserves with 80 billion barrels of oil (BBL). That said, the Russian economy has been highly leveraged to the price of oil for several decades, as 60% of the country’s export balance comes from oil and gas, which also contribute 30% of its GDP. It is frightening to see how unsustainable the business model has been for the country, as it has leveraged itself highly to the primary industry and to commodity prices. From a productivity perspective , the average Russian worker contributes $25.90 to Russia’s GDP, while a US worker adds around $67.40. The gap in productivity relates back to the systemic deficiencies in the country as the political environment has weakened the country’s incentive to engage in international trade. The nationalistic behavior seen across the many Russian political groups has not only been limiting to the current generation, but will also create future deficiencies, as the current economy has set a precedent that the future generation is set to follow. Vladimir Putin looks to continue his reign in the country as propaganda from the Kremlin continues to support his 86% approval rating. The future looks bleak for the economy, and I suggest investors look at the country as a tradable opportunity rather than an investment , due to the constant volatility in the MICEX. For investors who would consider exposure to Russia, using the price of oil as a lead indicator is the ideal way to trade the nation’s currency and any other leveraged investment products. Possible Investment Opportunities For interested investors, the top three ETFs available are the Market Vector Russia ETF Trust (NYSEARCA: RSX ), SPDR S&P Russia ETF (NYSEARCA: RBL ), and the iShares MSCI Russia Capped ETF New (NYSEARCA: ERUS ). This begs the question: Which option should investors choose, and at what time should these ETFs be implemented into their portfolio? In the following analysis, I will take a quick look at the holdings and relative stability of each equity to help investors determine how these investment product should be used. (click to enlarge) Table source: Author’s own work. Market Vectors Russia ETF Trust (click to enlarge) Source: Google Finance. Market Vectors Russia ETF Trust seeks to replicate as closely as possible the performance of the DAXglobal Russia Index (DXRPUS), a modified, market capitalization-weighted index consisting of publicly traded companies based in Russia. The product offers ideal exposure to the Russian market and should profit from an increase in the oil price as the economy sees a direct benefit from increased production. As previously stated, the oil and gas industries in Russia contribute 60% of the country’s export balance and make up 30% of the nation’s gross domestic product. With such an integral relationship between the commodity and economy, when comparing the ETF that follows the Russian economy, we can see that the decline in the price of oil has a significant effect on the performance of the equity. Therefore, for investors who would like to play oil volatility – or expect the price to recover to $100/barrel levels – the ETF should benefit greatly from the recovery and offer an easy way to profit from the recovery in the Russian economy, as output and trade increase relative to the price of oil. Looking at the respective ETF, the top three holdings are Magnit PJSC (8.14%), Surgutneftegas OJSC (7.89%), and LUKOIL PJSC (7.67%). Magnit is the leading food chain retailer in Russia with 10,728 stores as of June 30, 2015. The retailer’s infrastructure offers the company an expansive reach across the country. Twenty-nine specialized distribution centers allow the company to deliver to customers on a daily basis. Looking at the past year, the 30.3% increase in revenue signals how strong the company is in a recessionary environment. The company has shown incredible strength in the face of the recession, due to over 90% of products coming from domestic players — a strategy that protects the company from dangerous currency fluctuations seen in the past year. Currency translations have been a barrier that has limited the growth of many Russian-based multinationals. The fall of the Ruble, the nation’s currency, is primarily due to the drop in confidence related to the price of oil in addition to the fall in exports as sanctions continue to hit major trading partners. Surgutneftegas is an oil and gas producer with one of the largest refineries in Russia, Kirishinefteorgsintez. The company has not performed well in the last year, with net income declining by 3.93% as the price of oil continues to hit Russian producers hard. With costs declining, the company should be safe in the short to medium term, as the refinery business supports revenue. However, the price of oil needs to recover, as the company produces oil at around $60/barrel, an unprofitable level in the short term. Oil company LUKOIL is one of the largest oil and gas vertically integrated companies with the firm accounting for over 2% of global crude production and approximately 1% of proved global reserves. In the oil sector, the company is a behemoth, and should do incredibly well in the long term as it continues to monetize its large proved reserves throughout Russia. Looking at the domestic market, the company accounts for 16.4% of Russian crude production, while also contributing over 15.7% to total refined crude oil in the country. Unfortunately, with the decline in the price of oil and additional sanctions from several international economies, LUKOIL has been among the most affected, with revenues declining by 31% which translated to a 59% decrease in net income. In the current market, the company has attempted to hunker down and survive the downturn through reducing costs by 19% and increasing production by 5.2% to utilize well efficiency in the short term. While reserve efficiency and hedging strategies will protect the company temporarily, it is essential for the price of oil to recover in order to support enterprise profitability. Overall the company has not done well in the short term, and funds like RSX will need to wait a long time to recover capital losses. Looking at the Market Vector Russia ETF Trust, the equity offers an ideal way to play the Russian market with exposure to numerous large industry players. In my opinion, the company’s high exposure to Magnit will help the equity in the down-turn as the company is quite recession-proof from an earnings perspective. On the other hand, Surgutneftegas and LUKOIL offer exposure to the nation’s oil and gas industry which has underperformed. Anyone who is considering purchasing this ETF should be aware that the performance of oil is very important to show any strength, due to RSX’s 42.73% exposure to the energy industry. SPDR S&P Russia ETF (click to enlarge) Sourced: Google Finance. SPDR S&P Russia ETF seeks to provide investment results that correspond generally to the price and yield performance of the S&P Russia Capped BMI Index. The Index is a float-adjusted market cap index designed to define and measure the investable universe of publicly traded companies based in Russia. The Index component securities are a subset, based on region, of component securities included in the S&P Global BMI Equity Index. The ETF has declined by 34.39% YOY, primarily due to its high exposure to the energy market (49.39%), as the price of oil and gas have consistently underperformed in the past year. Looking at the ETF’s top three holdings, Public Joint-Stock Company Gazprom (15.44%), Oil company LUKOIL PJSC (13.41%), and Sberbank Russia OJSC (7.41%) make up the top exposure to the Russian economy. Looking at the ETF’s exposure from a sector-specific perspective, Energy (49.39%), Basic Materials (14.37%), and Financials (12.09%) make up majority of the fund. With such high exposure to the price of oil and the related positions of the fund’s portfolio, large amounts of capital has left the fund as its current market cap of $24.44 million USD signals the illiquid environment the product is facing. Compared to the Market Vector ETF, which has over $1.72 billion USD in the fund, the SPDR S&P Russia has been badly bruised in the current Russian downturn. While the fund will recover, the timeline is unknown at the moment, and I would use the current environment as a case to judge the strength of the fund. Significant money flows out of the SPDR ETF has shown that investors do not favor the equity as their first choice to gain exposure to the nation. Therefore, while I am sure that as oil prices recover in the following 3 years, liquidity will be injected into the fund and help fuel returns, the current downturn has illustrated how weak the fund is compared to other available options on the market. When investing in an ETF, the liquidity and size of the fund is extremely important to protect holdings. In addition, the fees that investors pay on a smaller fund versus a larger fund results in compensation for the portfolio manager to be higher, which attracts more experienced and successful investors. Looking at the price movement of the fund, the product has seen more volatility due to the fact that liquidity is much lower and any institutional buyers will move the price much more. Thus, I recommend that investors look for another option to gain exposure to the Russian market as this ETF has been severely weakened by the current downturn in the market and does not provide an option to avoid market volatility. iShares MSCI Russia Capped ETF (click to enlarge) Source: Google Finance. iShares MSCI Russia Capped ETF is a much newer product available for investors as it was released in early January of 2015. The equity was introduced in order for investors to play the Russian decline as the Ruble, the nation’s currency, continued to fall on the FX markets. As economic output declined and prices continued to drop in regards to the decline in oil, the ETF has taken a position in major industry players at fundamentally undervalued price points. For this reason when looking at the equity’s exposure from a sector perspective, the top three sectors are: Energy (53.75%), Basic Materials (14.28%), and Financials (14.01%). Looking at the overall objective and investment strategy, with a relatively stable fund size of $208.43 million USD, the equity has taken large positions in undervalued sector leaders in order to take advantage of the current downturn in Russia. Looking at the overall performance of the equity, the iShares MSCI Russia Capped ETF is the only one in its product class that has shown positive returns; YOY, the equity has increased by 8.88%. Looking at the ETF’s portfolio, the top three holdings are public joint-stock company Gazprom (17.50%), oil company LUKOIL PJSC (12.74%), and Magnit PJSC (7.42%). Magnit and LUKOIL were previously covered, so I will skip over these two companies and focus on the ETF’s top holding, Gazprom. The public joint-stock company is a globally recognized energy player with major business lines in exploration, production, transportation, storage processing, and sales of gas, oil, heat and electric power. The company holds the world’s largest natural gas reserves in addition to being the largest producer and exporter of liquefied natural gas in Russia. With such a strong position, the company’s domestic market share has reached 72% in the last year while global market share in the natural gas sector was around 12%. The size of the company illustrates the sheer strength and presence it has on the global natural gas sector, with reserves estimated at 36 trillion cubic meters, while oil and condensate reserves reached 3.3 billion tons. In addition to strong reserves, the company has the world’s largest gas transmission system capable of sending production over 170,000 kilometers. The strength of this network was seen in early 2015 when Ukraine were unable to pay Gazprom for its natural gas due to its limited cash reserves . The country and majority of Eastern Europe have become dependent on the company’s production which provides an ideal market position for Gazprom as operations continue to expand in the oil and natural gas sector. Looking at the YOY performance of the company, while sales have declined by 2%, the increased profitability of the company’s pipeline network in addition to positive currency translation as volumes in Europe increased resulted in a 29% jump in net income. In addition, the company has been focused on reducing its leverage in the past year as net debt has declined by 12% due to natural gas and oil operations continuing to expand. I believe that both Gazprom and LUKOIL will do well in the long run, as the fundamental stability of their proved reserves and established network across Eastern Europe should help the companies. For this reason ,when looking at the iShares MSCI Russia Capped ETF, I am confident that the current downturn will be beneficial for the new product, as positions have been opened at the bottom of the down cycle and should help the fund increase as the recovery begins. Looking at the overall ETF, while the 53.75% exposure to the energy sector remains quite worrisome in the current market, due to the product coming onto the market at the bottom of the investment cycle, I am confident that these new positions in major oil and gas leaders should increase profitability in the medium term. In Conclusion (click to enlarge) Source: Author’s own work. After analyzing these investment holdings and determining how each ETF could be used in an investment strategy, I would like to provide a final comparison in order to help first time investors choose the safest investment product. In the current market, the recent decline in the price of oil has rocked the Russian economy and increased recessionary pressures in a nation that produces over 30% of GDP from the oil industry. When approaching a nation like Russia, having a defensive strategy is extremely important in order to ensure that holdings can survive a volatile downturn like the one seen in the past year. The investment approach should not be shaped in avoiding a loss but rather surviving one. Compared to many other emerging markets, Russia has leveraged itself to the commodity trade greatly and this leads to a cyclical investment experience where long-term investors will add to positions in the downturn and profit off any increases in the price of oil or gas. Looking at the longer-term projection for oil, the following decade should see a recovery to the $100/barrel as demand should continue to increase in the long-term. The question investors should ask themselves is not if there will be a recovery, but when . Therefore, with that mentality, when selecting a Russian ETF, keeping in mind the longevity and downside protection of major positions in the fund is essential to choosing the right product. Taking a look at the overall performance in the past 6 months, all products performed relatively the same, with returns in the 4% to 6% decline range. Thus, investors should not base their assumptions on the short-term performance of each product. The products have been designed to diversify holdings while reducing risk against volatility through the timing of established positions, an investment goal that is achieved in the long term. (click to enlarge) Source: Author’s own work. After taking into account the short-term performance of all three products, and understanding the overall investment strategy adopted by these ETFs, I believe that the iShares MSCI Russia Capped ETF New offers the best opportunity for investors to gain exposure to the Russian market in the long-term. While the other products have been available to the market for a longer period of time, and have allowed investors to better judge their historical performance, the timing of the iShares product means that majority of the positions initiated in the fund have been at the bottom of the downturn. With the price of oil continuing to decline into the New Year, the start of 2015 marked one of the lowest points in the past four years in regards to the price of oil. This decline had triggered the collapse of the Ruble and eventual recession in the Russian economy as the equity and FX markets saw large outflows of money. That said, the iShares product came onto the market at this exact time, and looking at the type of holdings in the product’s portfolio, the ETF has over 53.75% exposure to the energy sector through beaten-down industry leaders. I expect that in the following decade, as the price recovers, while all three products have holdings in these major industry players, due to iShares’s timing on the market, I expect the recovery to be much more profitable for the product and its investors. Overall, while my suggestion may provide the safest and most profitable option among the three products listed, the current market is a time to build holdings in an emerging market portfolio. Whether a Russian ETF product is the way to go depends on the investor and his/her risk tolerance. In my opinion, with the political and economic uncertainty, implementing a Russian ETF into your investment strategy is a very tactical decision that ensures protection against further volatility in the market while also profiting from increased money flow.