A ‘wonderful’ legacy

  • Russia’s oil move to help US oil stocks
  • Just a trinket?
  • Gold up, gold stocks up more
  • Masterclass begins

More ‘wonderful’ news for the Australian economy.

As the Australian Office of Financial Management (AOFM) reveals:

Subject to market conditions, a new 21 March 2047 Treasury Bond is planned to be issued via syndication in the week beginning 10 October 2016.

ANZ, Citi, Commonwealth Bank of Australia, Deutsche Bank AG, UBS AG Australia Branch and Westpac Institutional Bank will act as Joint-Lead Managers for the issue.

What this means is that, this week, Australia will launch its first ever 30-year bond.

The old refrain about governments going into debt is that it puts a burden on this generation’s children. Well, that saying now needs an update.

Now the government’s debt will officially put a burden on this generation’s grandchildren.

But aside from that, check out the banks involved in helping the AOFM — and by extension, the government — issue these new long bonds. Is it any wonder that the banks are quick to urge governments to go into debt?

The more governments go into debt, the more they need to issue bonds, and the more the big banks can charge in commissions for dealing in the bonds.

Not only that, of course, but the banks then typically encourage governments to ‘invest’ the bond proceeds into infrastructure. No prizes for guessing who gets the money. That’s right, the biggest Aussie construction companies.

Why should that help the banks? In two ways. First, the big construction companies are the banks’ customers. Secondly, the big banks control more than 80% of the Aussie funds management industry, which derives fee income from the money that flows into the superannuation industry.

The more revenue notched up by the building firms, the bigger their profits, and the higher their share prices…and the bigger the fee income earned by the banks and their funds management firms.

Yesterday, we introduced the idea of a government-central bank-retail bank cartel helping to prop up the Aussie housing market.

Well, here they are again — this time propping up the banking, funds management and construction sectors. Are there no limits to the length and breadth of this cartel’s influence?

We think not.


Overnight, the Dow Jones Industrial Average gained 88.55 points, or 0.49%.

The S&P 500 index climbed 9.92 points, or 0.46%.

In Europe, the Euro Stoxx 50 index closed up by 35.19 points, or 1.17%. Meanwhile, the FTSE 100 added 0.75%, and Germany’s DAX index gained 1.27%.

In Asian markets, Japan’s Nikkei 225 index is up 195.66 points, or 1.16%. China’s CSI 300 index is up 0.24%.

In Australia, the S&P/ASX 200 index is up 977 points, or 0.18%.

On the commodities markets, West Texas Intermediate crude oil is US$51.26 per barrel. Brent crude is US$53.05 per barrel.

Gold is US$1,258.08 (AU$1,662.30) per troy ounce. Silver is US$17.65 (AU$23.33) per troy ounce.

The Aussie dollar is 75.64 US cents.

Russia’s oil move to help US oil stocks

Nothing is ever straightforward in the financial markets. Prices move one way, creating winners and losers. Prices move the other way, and they create another set of winners and losers.

You’ve seen that with the oil price over the past two years. From mid-2014 to January this year, the oil price fell 75%.

There are many theories about why the oil price fell so far — and so quickly. Some say that it was just a matter of supply and demand. Others believe there was a coordinated takedown of the oil price by Middle Eastern interests.

Your editor subscribes to the latter theory. Of course, don’t expect us to produce any evidence to support the theory.

Our rationale was that Saudi Arabia wanted to regain control and influence over both the oil supply and the oil price.

Over the past two years, it appears to have done so. For several years, OPEC had become irrelevant. Nobody cared about its oil production policies.

But now, the market is paying attention to Saudi Arabia and OPEC again. The markets have today paid special attention to the latest news involving OPEC.

As the Financial Times reports:

Oil rose to its highest level in a year after Russian president Vladimir Putin said that he backed efforts for a production cap in the clearest sign yet that the country would join any global supply pact.

Speaking at an energy conference in Istanbul, Mr Putin said he hoped that the Opec producers’ group would agree on output curbs for member nations at its next ministerial meeting in November.

The news boosted the oil price. How things have changed.

When it forced down the oil price, it caused panic within the US shale oil industry. This was, an arguably still is, the biggest potential threat to Saudi oil dominance.

US shale oil producers typically have much higher costs. That’s because they’re extracting oil from harder to reach areas, and therefore using more expensive extraction techniques.

This explains why, when the oil price began to plummet in 2014, the number of US active onshore oil rigs began to plummet, too. You can see this from the Bakers Hughes Rig Count index below:

chart image

Source: Bloomberg
Click to enlarge

The number of rigs fell from nearly 2,000 in November 2014, to just 404 in May this year.

But, since then, you can see the rig count has steadily climbed as the oil price has rebounded. Today, the rig count stands at 524, the highest count since February.

This reflects the rising oil price. The oil price has almost doubled from US$27.10 in January, to US$53.06 today.

And just as Saudi Arabia and OPEC’s decision to increase oil production caused the oil price to slump, the apparent decision to cap production has helped boost the oil price. It’s up over 12% in the past month.

Naturally, this is good news for the US shale oil industry. The higher the price, the closer many marginal shale oil producers will get to moving into profit.

For those shale oil producers with lower production costs, the current price may already provide them with good profits.

Of course, you no doubt know that, as the price goes up, the more likely it is to bring supply back into the market. Which makes us think we’ve seen this all before.

OPEC and Russia may be happy to cap production and enjoy a US$50-plus oil price. But as influential as both these oil producing nations are, they can’t control the entire world supply.

If US producers ramp up production, we could soon end up back where we were in 2014, with Saudi Arabia frustrated at losing its influence.

What then? Another crash for oil prices? Let’s not think about that just yet. After all, we don’t want to be a complete party pooper. Let the oil bulls have their fun while they can.

Just a trinket?

But enough of oil; give us gold. On the subject of gold, our intrepid resources analyst, Jason Stevenson, remains ensconced at the Precious Metals Investment Symposium in Sydney.

We look forward to his summary of the event on his return.

Meanwhile, it didn’t take long. Gold falls 5% and the anti-gold mainstream commentators crawl out from the woodwork.

For an example of the latest lame effort to denounce gold, an article in the Financial Times, titled ‘Gold can only ever be a fashion victim’, should offer gold investors a few laughs.

A few choice tid-bits include:

Indeed, gold is the perfect medium for pseudo-analysis and the posture of investment authority because there is only ever one piece of relevant information — the price at which gold is bought and sold today.

In long-stable parts of the developed world, maybe a bag of gold coins buried in the garden offers a sort of nihilist insurance policy, allowing those who worry about scenarios somewhere between zombie apocalypse and the internet being switched off to sleep a little easier.

None of which is to say fashion is not legitimate business. The point is to recognise fashion is all that the gold price is and ever can be. To fight its fans with facts and figures is to offer attention, which is all the poseur ever really wants.

So nod if you want, maybe offer a smile, then change the subject.

The full article is available on the FT website, if you have a subscription.

So, gold is nothing but fashion. We’ll argue that. But let’s suppose it is fashion. Given a choice, we wonder what the author of the FT article would prefer.

Supposing your editor approached the author and said, ‘Dear sir’ (for we shall effect the tone of a 19th-century gentleman in order to match the author’s prose), ‘We should like to offer you a gift. That gift shall be of jewellery.’

No doubt the gentleman would sceptically respond, ‘Go on.’

So we would continue, ‘I mentioned a gift. But due to the goodness of our nature, and because we’re not au fait with the gentleman’s tastes, we should like to give you a choice.’

The gentleman responds, ‘Go on.’

So we do: ‘You have a choice of two items. The first item of jewellery is a finely crafted 24kt gold chain and gold pendant, designed and made by the finest jeweller in the land. The second item is a leather necklace with brass pendant. Which would you care for?’

We don’t need to conclude the story for you to get the point. Based on the article, the author would naturally choose whichever is most pleasing to his eye — regardless of the intrinsic value of each item.

Furthermore, we’re sure the author prefers his pounds and pence over his troy ounces and grains. Although, we’re not sure why, given the performance of the pound compared to the pound value of gold:

chart image

Source: Bloomberg
Click to enlarge

Since the beginning of the year, the pound sterling price of gold has risen 34.7% (white line). Over the same period, the value of the pound against the US dollar has fallen 19.7%.

The next time the author dares to discuss gold again in public, he is free to smile, but we’d wager that those with the biggest smile will be those with the foresight to own gold.

Gold up, gold stocks up more

As the British pound sterling has fallen, gold has risen, and UK-listed gold stocks have soared. Tiny UK gold stock SolGold plc [LON:SOLG] is up 841% this year.

Investors in that stock are no doubt smiling at that result.

Our resident ‘mystery gold stock picker’ doesn’t have any UK gold stocks on his radar, but why would he when there are hundreds listed here on the ASX.

And while he can’t guarantee an 841% gain, those are the types of multi-digit gains he’s aiming to achieve. For details on how he plans to do it, go here.

Masterclass begins

One last thing: If you haven’t done so already, remember to check out our latest masterclass. There’s no charge to take part. Just go here to register now.