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DealBook: Brazilian Billionaire Confirms Talks to Sell Stake in Energy Firm

March 19, 2013 by Leave a Comment

Eike Batista, chairman and chief executive of EBX Group, has vowed to become the richest man in the world.Mario Anzuoni/ReutersEike Batista, chairman and chief executive of EBX Group, has vowed to become the richest man in the world.

SÃO PAULO, Brazil — The Brazilian billionaire Eike Batista confirmed Tuesday that he was negotiating to sell part of his stake in MPX, his natural gas and electricity generation company that has over $3 billion in debt and several generation projects running behind schedule.

Mr. Batista is in negotiations “about the potential sale of a certain number of MPX shares that belong to him” but “at the moment, no document of any kind has been signed,” according to the filing with the Comissão de Valores Mobiliários, Brazil’s securities and exchange commission.

Brazilian newspapers reported last Friday that the German utility E.On would purchase 27 percent of MPX’s shares — half of Mr. Batista’s stake — for 1.8 billion reais ($910 million). E.On had previously bought a 10 percent stake in MPX for $456 million in 2012. According to the newspaper O Estado de São Paulo, an equity issuance would follow in order to reduce E.On’s participation to below 35 percent.

Mr. Batista is one of Brazil’s most public and colorful billionaires, who has vowed to become the richest man in the world. He has built a small empire of companies that all end in the letter X, which he says represents the multiplication of wealth that shareholders can expect.

But several of his ventures have failed to meet expectations and have seen debt levels rise faster than profits. Since March 2012, his five “X” firms have lost 54 billion reais ($27.3 billion) in market value on the São Paulo stock exchange.

In the 2013 Forbes list of the richest people in the world, Mr. Batista fell to 100th place, from the seventh place he had had the year before. Forbes estimated that his net worth fell by $19.4 billion to $10.6 billion.

EBX Group, Mr. Batista’s holding company for his five firms, signed a strategic cooperation agreement on March 6 with the Brazilian investment bank BTG Pactual, which reportedly is closely involved in the negotiations over MPX.

Rumors in the Brazilian financial press are that Mr. Batista’s troubled petroleum company OGX may be next on the block, with BTG Pactual once again involved in the deal-making.

Article source: http://dealbook.nytimes.com/2013/03/19/brazilian-billionaire-confirms-talks-to-sell-stake-in-energy-firm/?partner=rss&emc=rss

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European Central Bankers Criticize Role of Rating Agencies

January 18, 2012 by Leave a Comment

Mario Draghi, the president of the European Central Bank, and Mervyn A. King, the governor of the Bank of England, separately questioned the role of rating agencies after Standard Poor’s cut its ratings Friday on nine European countries, including France and Italy.

One should “put less focus directly on what the ratings agencies say and more on what the market as a whole is saying in terms of sovereign debt,” Mr. King told a parliamentary committee Tuesday in London. “What we need to do is to move to a point, and I think markets have gone some way towards that, where they pay less attention to the verdicts of the ratings agencies.”

Mr. Draghi told the European Parliament in Strasbourg on Monday that “we should learn to do without ratings, or at least we should learn to assess creditworthiness.”

He added, “Certainly one needs to ask how important are these ratings for the marketplace over all, for investors.”

Ratings agencies have attracted criticism from politicians for specific downgrades, but the comments from the two central bankers questioned the wider role of the agencies.

The three big rating agencies — S.P., Moody’s Investors Service and Fitch Ratings — have repeatedly lowered their ratings for the sovereign debt of European economies over the past year, saying some austerity measures were not far-reaching enough to deal with high debt levels. The downgrades have made it more difficult for governments to raise money cheaply and heightened concerns about the ability of some countries to finance their debts.

Martin Winn, a spokesperson for Standard Poor’s, said the agency was “focused on fulfilling our role to investors by providing an independent view of creditworthiness — one based on rigorous analysis and our transparent and consistently applied criteria. We would also point out that our sovereign ratings have an excellent track record as indicators of default risk.”

A Moody’s representative said, “The fundamental concern over the role of credit rating agencies stems from their use in regulation, and Moody’s has long supported removing the mechanical reliance on ratings in regulation.”

A spokesman for Fitch, Daniel Noonan, wrote by e-mail that credit ratings “should be considered among numerous inputs when making investment decisions.” He added that Fitch “broadly supports efforts to reduce overreliance on ratings.”

In a sign that investors are already starting to pay less attention to rating agencies, Spain’s borrowing costs fell during an auction Tuesday even after Standard Poor’s cut the country’s debt rating by two levels on Friday. Greece also sold Treasury bills on Tuesday with a yield that was lower than at an auction in December.

Stock markets on Monday had shown a muted reaction to the downgrades, which were widely anticipated, and to a separate warning by Moody’s that France’s debt outlook was putting pressure on its credit rating.

Standard Poor’s on Monday also cut the top credit rating of the European Financial Stability Facility, the euro zone’s bailout fund, which sold €1.5 billion, or $1.9 billion, of six-month bills Tuesday.

The German finance minister, Wolfgang Schäuble, told a German radio station on Monday that he did not think “that S.P. really has understood what we have already gotten under way in Europe.”

The European Commission said Monday that Standard Poor’s recent downgrades of European economies ignored the progress that the countries had already made by reducing debt and implementing cost-saving measures.

Mr. King also sent a warning Tuesday to British banking executives not to accept excessive bonuses. “The reputation of those institutions will be affected if their senior executives reward themselves,” he said. “Particularly in a period when the banks, in terms of their share prices, have hardly been stellar.”

Josef Ackermann, the chief executive of Deutsche Bank, lamented Tuesday what he said was the erosion of confidence in the solidity of the euro, the European Union and even the principles of Western democracy.

“Not only followers of the Occupy movement have been asking questions about the business models of banks and the purpose of certain financial product,” Mr. Ackermann told a business audience in Frankfurt. “It is also investors, customers and representatives of the entire political spectrum.”

“Doubts expressed publicly by politicians have deeply shaken belief in the permanence of the currency union,” he said.

“The government debt crisis has amplified the loss of credibility and legitimacy of the market economy,” he added, adopting an unusually pessimistic tone four months before he is to retire. “The belief in the superiority of the West and of democracy has been thrown into question.”

Jack Ewing contributed reporting from Frankfurt.

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E.C.B. Promises Continued Support for Europe Banks

January 13, 2012 by Leave a Comment

And while the central bank left its benchmark interest rate unchanged at 1 percent Thursday, the bank’s president, Mario Draghi, indicated he was prepared to take further steps to ease credit, if necessary.

The Italian Treasury found brisk demand Thursday in selling 8.5 billion euros ($10.9 billion) of 12-month bills at an interest rate of 2.735 percent. It was the lowest interest rate Italy has been able to sell one-year debt at since an auction in June — and less than half the 5.952 percent Italy had to offer at the last sale, in early December.

In Madrid, the Spanish Treasury said Thursday it sold a total of 10 billion euros ($12.8 billion) of bonds — twice the amount it had set as a target — with yields down from previous auctions. For example, $4.3 billion in three-year notes were sold at a yield of 3.384 percent, compared with 5.187 percent in December for three-year notes.

Both Spain and Italy have been under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

Both countries’ longer-term debt yields, which reflect higher risk and uncertainty, remain relatively high. Another bellwether of the crisis comes Friday, when Italy tries to auction more than $9 billion in longer-term debt. The question remains whether enough investors will bid on that debt and feel confident enough in Italy’s fiscal health to justify declining yields.

The interest rate on Italy’s 10-year debt has dipped to 6.6 percent from 7.1 percent earlier this week, though it is still unsustainably higher than the 4 percent to 5 percent it traded at for much of the last two years.

But Thursday’s solid auctions were the latest sign that shorter-term government debt has become more attractive to commercial banks and other investors since the central bank last month began a program of offering low-interest three-year loans to commercial banks in the euro currency region.

While a large portion of that money has been used simply to pay off other lenders, it has clearly eased pressures on the banks and helped free up cheap money the banks can use to purchase sovereign debt.

“We do think this decision has prevented a credit contraction that would have been much more serious,” Mr. Draghi said Thursday.

He said the central bank would continue to support commercial banks in the euro zone and predicted that the bank’s next refinancing operation, in February, would attract even more lenders.

The central bank, based in Frankfurt, left its benchmark interest rate unchanged Thursday, after having cut rates by a quarter point twice since Mr. Draghi became its president at the beginning of November. The rate cuts have been meant to help slow an economic downturn in the 17 countries in the European Union that use the euro. Mr. Draghi said the bank was pausing in its rate cutting amid what it called “tentative” signs of increased economic stability. But he indicated the central bank was prepared to take further steps, if necessary.

Analysts took Mr. Draghi’s comments as a clear sign that the central bank stands ready to reduce its benchmark interest rate below the already historic low of 1 percent to counter a recession.

“He kept the door open,” said Jacques Cailloux, the chief European economist for Royal Bank of Scotland. “He made a very clear statement that the E.C.B. stands ready to act.”

Earlier Thursday, in London, the Bank of England kept its benchmark interest rate at a record low of 0.5 percent as the British government’s tough fiscal measures and the crisis in the euro zone exacerbated economic problems.

The Bank of England also voted to continue with its existing bond purchasing program of £275 billion ($422 billion). Many economists expect the British central bank to expand the asset-buying program at its next meeting in February in a bid to pump more capital into the economy.

Some economists expect the central bank to move as early as next month for a rate cut. But others predict that the governing council will hold off until March, when a fresh growth forecast for the euro zone is to be issued.

Reporting was contributed by Julia Werdigier from London, David Jolly from Paris and Raphael Minder from Madrid.

Article source: http://feeds.nytimes.com/click.phdo?i=6208be51011350861b4708d150aa651c

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Forecast for Economic Growth in Europe Is Lowered

November 11, 2011 by Leave a Comment

BRUSSELS — Europe’s economic outlook received a fresh dose of gloom Thursday, when the European Commission warned that the Continent’s economies were stalled and faced the risk of a double-dip recession.

The commission’s latest growth forecasts intensified concerns that, as some members of the euro currency union take tough austerity measures to appease the debt markets, they are stifling any chance for economic growth that might help pull them out of financial distress. The commission predicted that, as a result of the contraction, the region’s government debt levels would edge up next year.

“The recovery in the European Union has now come to a standstill, and there is a risk of a new recession,” Olli Rehn, the European commissioner for economic and monetary affairs, told reporters in Brussels.

“This forecast is in fact the last wake-up call,” he added.

Mr. Rehn, an unflappable Finn who is rarely prone to hyperbole, was not exaggerating. Even Germany, the economic engine of Europe, is now expected to record just 0.8 percent growth in 2012 — more than a percentage point lower than the European Commission predicted in its spring forecast. And none of the euro zone’s other three biggest economies — France, Italy and Spain — are projected to achieve 1 percent growth in 2012.

At the other end of the spectrum lies Portugal, which was forced to ask for a bailout this year and is contracting so fast that it might not be able to meet its financial goals. The new forecast is for Portugal to have negative growth of 3 percent for 2012 — worse than the minus 1.8 percent predicted earlier.

That would rank Portugal at the bottom of the chart, below even Greece, whose economy is expected to shrink by 2.8 percent in 2012.

“The slowdown in economic activity is compounding investors’ concerns about debt sustainability,” said Simon Tilford, chief economist at the Center for European Reform in London. “In the south of Europe we have very high borrowing costs and no economic growth. That’s a lethal combination.”

Italy, for example, risks being forced into a vicious downward cycle if it has to make deep cuts in public spending to meet its creditors’ demands, and the austerity measures plunge the country into a recession that reduces tax revenue, Mr. Tilford said.

Over all, the European Commission’s revised forecast showed growth of only 1.5 percent this year for the 17 nations using the euro, before slumping to 0.5 percent next year.

The commission had previously expected the euro area’s economies to expand 1.6 percent in 2011 and 1.8 percent next year.

Debt levels in the euro area are predicted to increase from an average 88 percent of gross domestic product in 2011 to 90.4 percent in 2012 and 90.9 percent the following year.

The debt of Greece, the region’s outlier, next year is expected to reach a more staggering level than the 162.8 percent of G.D.P. this year. The forecast is for 198 percent of G.D.P. in 2012, and even marginally higher than that the following year.

The next highest debt ratio in the euro zone is Italy’s, at 120.5 percent of G.D.P. — and the sheer size of its debt, 1.9 trillion euros, makes it a much bigger worry for Europe. The commission forecasts growth of only 0.1 percent for Italy in 2012, with its debt ratio remaining stable.

The commission’s report underscores the risk that European leaders have begun to acknowledge in recent months — that austerity measures could send euro zone economies into a downward spiral. To stimulate growth, the European Commission wants to press structural reforms like liberalizing labor markets and relaxing restrictions that can create market inefficiencies.

A separate document prepared before a summit meeting of European Union leaders last month noted that through changes like freeing up services and integrating the energy sector, Europe could add 3 percent of G.D.P. by 2020. But those ideas still face resistance in many euro zone nations and would take years to put in place.

So Mr. Tilford argues that the euro zone’s healthier economies should be stimulating demand.

Article source: http://feeds.nytimes.com/click.phdo?i=6d4050d9a23d021098776079e8ff8831

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Economix Blog: How Much Do You Owe? Guess Again

October 20, 2011 by Leave a Comment

It would appear that Americans don’t even know how much they owe.

Households underreport the magnitude of their credit card debts by at least one-third, according to a new study from the Federal Reserve Bank of New York. The difference for the average household is more than $2,000.

Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money.

The paper has the discomfiting consequence of raising questions about the accuracy of the Fed’s Survey of Consumer Finances, widely treated as an authoritative source. The authors compared the debt levels reported by participants in that survey with data that lenders reported to the Equifax credit bureau. They found that consumers gave accurate testimony about most kinds of debt, including mortgages and student loans, but not when asked about credit card debt.

In fact, borrowers reported owing only about 50 cents for each dollar claimed by credit card lenders.

There are plausible explanations for part of the difference. In particular, people who pay the full balance on their cards each month – lenders call such customers “convenience users” or, more colorfully, “deadbeats,” because they do not pay interest and therefore are less profitable — may not regard that balance as “true” debt, and therefore choose not to report it. The industry, however, simply reports the total volume of outstanding loans. (Lenders, after all, have no way to know which loans will be repaid at the end of the month and which loans will stay on the books.)

The authors overcorrect for this possibility by subtracting all transactions made in the last year, as if everyone paid their bills each month. They also make some other adjustments, including subtracting an estimate of the debt that consumers put on their credit cards for business purposes, on the theory that some people may also place this debt in a separate category.

Even with those changes, however, the average household reports credit card debts of $4,700, while lenders report an average balance per household of $7,134.

Why do people underreport the magnitude of their debts?

Embarrassment is an obvious candidate, but there are a couple of problems with that explanation. First, people accurately report other categories of debt, like  mortgages and student loans. Of course, those are the kinds of debts people are encouraged to carry. But people also accurately report personal bankruptcies, which would seem more embarrassing. Still, it is possible that embarrassment plays a role; the authors note evidence that people tell small lies more readily than large ones, perhaps explaining why people are less willing to lie about filing for bankruptcy.

Another partial explanation: Individuals report their credit card debts more accurately than households, suggesting that people may be ignorant of debts run up by their partners. This difference, however, does not come close to explaining the magnitude of the discrepancy.

And that leaves ignorance: The possibility that Americans simply don’t know how much they owe.

“Uninformedness,” the paper notes (bringing a new word into existence), “could result from willful ignorance, as large credit card balances are not welcome information, from difficulty understanding the growth of credit card balances,” or from other barriers to knowledge.

Interestingly, there is some evidence that underreporting has declined in recent years, perhaps as a consequence of a crisis that has forced households to pay more attention to their debts.

Article source: http://feeds.nytimes.com/click.phdo?i=d3eac3a5565039b2c8df46202b6b42b8

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Stocks Decline a Day After Fed Announced Stimulus Measure

September 23, 2011 by Leave a Comment

Several factors contributed to the heightened gloom, including new signs of political paralysis in Washington, Europe’s continued failure to resolve its debt crisis and indications of economic stress in developing countries that had been strong.

While the Fed’s measures to lower interest rates could increase growth a bit, some economists worry that the scale of the problems call for more stimulus efforts globally, but other countries are not cooperating.

With investors so nervous, the markets may rebound over the next few days, as volatility and big swings of 3 and 4 percent have become more common. On Thursday a downcast mood appeared across the board.  Stocks plunged about 5 percent across Europe and in Hong Kong, and more than 3 percent in the United States.

“Today, we really seem to be stuck in a negative spiral,” said Matthias Jasper, head of equities at WGZ Bank in Düsseldorf. “Investors just want to keep their exposure low and watch from the sidelines.”

Financial markets beyond stocks also reflected growing anxiety. Commodities like oil fell, and even gold dropped sharply in price. As investors continued to seek havens, United States bond prices soared for a fifth consecutive trading session, pushing the 10-year benchmark yield to a new low of 1.72 percent.

The cost of insuring the government bonds of Western European nations against default rose to a record high. The extra yield investors demand to hold Italian government debt also rose, pointing to lingering worries about debt levels in the euro currency region. Despite steps taken last week by central banks to help banks in Europe borrow dollars, there were signs of rising borrowing costs for these institutions.

It is not only economies in the United States and Europe that are faltering. Financial markets in developing countries are showing levels of stress last seen during the financial crisis, a senior World Bank official said Thursday.

The official said that problems in the developed world increasingly were shaking the economies of developing nations, not because of a drop in trade flows or capital investment, but because a sense of gloom was spreading around the world, shaking the confidence of domestic investors.

“We are increasingly worried about the possibility of global contagion,” said the official, who shared the World Bank’s assessment of the global situation on condition of anonymity.

“At some point the global mood changes. Just like the realization that even big banks are vulnerable” shook world markets in 2008, the official said, “the idea that even the U.S. is vulnerable means that many investors have lost an anchor.”

The market downturn was set in motion on Wednesday after the Fed announced that a complete economic recovery was still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed also announced it would buy long-term Treasury bonds and sell short-term bonds to help stimulate lending and growth.

Some analysts were disappointed the Fed did not act more forcefully and they had little faith that policy tools like lower interest rates were encouraging consumers and businesses to spend more or to start creating jobs.

“The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to ‘ride it out’ over a long period of time,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company. The policy conundrum is illustrated by the fact that despite lower rates people are not taking up new mortgages or refinancing existing ones. Rates on 30-year fixed mortgages dropped after the Fed’s announcement, falling to 4.05 percent from 4.21 percent on Wednesday, according to HSH.com, which publishes mortgage and consumer loan information.

But the number of new mortgage applications is running at the lowest level since August 1995, according to the Mortgage Bankers Association. Guy Cecala of Inside Mortgage Finance, which monitors mortgage activity, said the volume of new mortgages this year would probably be about $1 trillion, down from $1.5 trillion in 2011, which was already anemic.

Companies, too, are holding back on spending even though they have built cash reserves to 6 percent of their total assets, the highest level since at least 1952, according to Credit Suisse.

The proportion of United States companies’ cash flow being spent on new equipment and other investments has not rebounded since the financial crisis and is stuck at the lowest level since the late 1950s, said Doug Cliggott, an analyst at Credit Suisse. A survey by the bank of 60 large American companies published Thursday found that two-fifths actually planned to cut spending in the next six months.

In what may be a bellwether trend, FedEx, the logistics company, on Thursday cut its expectations for earnings for the entire fiscal year, citing a slowdown in global growth and sending its stock down 8 percent.

The markets on Thursday homed in on a darkening economic outlook in the euro zone and concerns that China’s growth rate would start to slow. A closely watched gauge of private sector activity from the euro zone — the composite purchasing managers’ index — fell to 49.2 points in September from 50.7 in August, according to Markit, a financial data provider.

Analysts said the fall in the euro area index reflected a combination of slowing global growth, significant belt-tightening in the euro area and growing concern about the escalating sovereign debt crisis.

A review on Thursday by Standard Poor’s showed that the market capitalization of publicly traded equities around the world had fallen by more than 17 percent, or $9.2 trillion, since July 1.

In the United States, without greater stimulus, the dollar headed sharply higher on Thursday, catching investors off guard and causing rapid selling of investment positions, like gold, that had relied on a cheaper currency.

“I think that the market had performed so bullishly across all the precious metals that a correction was probably in the offing,” said James Steel, an analyst at HSBC. “And it may have been used as a convenient place for some profit-taking.”

When the price of gold moved so quickly below $1,800, he added, it encouraged further selling. With sustained losses in stocks, investors could be using gold as it was meant to be used — to raise cash.

“This might sound perverse but gold is actually fulfilling its traditional role allowing you to raise cash in uncertain times,” Mr. Steel said.

Reporting was contributed by Matthew Saltmarsh and Binyamin Appelbaum.

Article source: http://feeds.nytimes.com/click.phdo?i=0097ecf6f2e80310a6a7698d4b4b385a

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Prices Surge as Investors Rush to Safety of Gold

April 21, 2011 by Leave a Comment

The prices of other precious metals, like silver and platinum, have also surged recently on what analysts call a flight to quality, when uncertainty about the economic and political outlook sends investors into assets that are perceived to be safest.

“We’re seeing a perfect storm for gold and silver prices,” said Robin Bhar, a senior metals analyst in London for the French bank Crédit Agricole.

The list of factors that have supported the price of precious metals in recent weeks is long. It includes worries about the sustainability of European debt levels and whether countries like Greece will soon default; the weaker dollar; rising inflation in many parts of the world; continued unrest in North Africa and the Middle East, which has also pushed up oil prices; and concern over the United States budget, which also stirred fear in world stock markets earlier in the week.

Stocks recovered somewhat Wednesday after strong earnings reports restored investor confidence, analysts said.

Other factors that are helping precious metals include the buildup to the early autumn wedding season in India, during which families lavish gifts of gold on brides; the longstanding shortage of skilled labor and equipment at certain mines; and the increase in the number of mutual funds investing in gold.

The recent popularity of gold-based exchange-traded funds has also propelled prices of the underlying metal by making it easier for more investors to trade in gold.

Each share in a gold exchange-traded fund represents part of an ounce of bullion, but it comes without the inconvenience of holding the metal or the risk of buying futures and options. Before such funds became popular in the middle of the last decade, individuals who wanted to invest in gold had to buy gold jewelry, coins or bullion — and pay the high security and transaction costs. They could also invest in the shares of gold mining companies — more of an arm’s-length exercise — although the cost of investing in those companies has also risen recently.

In addition to benefiting from increased demand for the underlying metal, gold and silver futures contracts are seen as attractive substitutes for paper investments, given that they can be redeemed for a physical commodity.

“Gold is sometimes a currency, sometimes a commodity and sometimes a store of value,” analysts at Merrill Lynch wrote recently.

Gold for June delivery rose as high as $1,506.50 a troy ounce during trading in New York on Wednesday before settling at $1,498.90, a gain of $3.80 on the day. It was the first time that gold had breached the $1,500 level.

While that represented the highest level in nominal terms, the inflation-adjusted price was higher during the early 1980s, when it was well above $2,000 in current dollars.

Silver prices also climbed on Wednesday. Silver for May delivery climbed 1.2 percent, to $44.46 a troy ounce in New York, after rising as high as $45.40, the highest price since 1980. A troy ounce is 31.1 grams, or 1.1 ounces.

Although gold prices are likely to remain volatile and are vulnerable to retreat as investors take profits on their gains, few analysts are willing to bet on a sharp reversal in the near term. “As the purchasing power of workers in emerging markets increases, we see demand for gold as a commodity increasing over the next few years,” the Merrill Lynch report said.

In a research note published Friday, Goldman Sachs forecast a gold futures price of $1,690 an ounce in 12 months’ time, driven primarily by the assumption that the Federal Reserve’s continued stimulus policy, known as quantitative easing, would keep interest rates low in the United States, bolstering demand for the metal as an investment.

The market for silver, which Mr. Bhar of Crédit Agricole described as a “poor man’s gold,” is far more illiquid than gold. Mr. Bhar said several hedge funds appeared to have been “bullying” the price higher in recent sessions. Prices of palladium and platinum have also climbed.

Less valuable base metals like copper, tin, aluminum and zinc, which are used in large quantities in construction and heavy industries, have also climbed since last year, after plummeting during the financial crisis.

But among these commodities, there have been more divergences, according to Jim Lennon, head of commodity research in London for Macquarie Securities.

Markets for commodities like coking coal, used to make steel, iron ore and copper have been tight, he said, driven by inventory accumulation from producers and concerns about output bottlenecks at mines in Africa, Australia, Brazil, Chile and China.

For other base metals like aluminum, zinc and nickel, supply and demand appear better matched, he added.

Overhanging many of these markets remained the question of China, and whether its roaring economy might soon cool down. Many metals’ traders and analysts have had to become China watchers, poring over the economic data issued by that country and studying accumulations of stocks in Chinese warehouses. During the first quarter, China’s economy expanded 9.7 percent from a year earlier.

Investment and consumer spending in China have remained robust despite the government’s effort to temper growth through interest rate increases and curbs on bank lending.

Article source: http://www.nytimes.com/2011/04/21/business/global/21gold.html?partner=rss&emc=rss

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Gold Tops $1,500 an Ounce in ‘Flight to Quality’

April 20, 2011 by Leave a Comment

PARIS — The price of gold rose above $1,500 an ounce on Wednesday for the first time ever, pushed higher by investor concerns about global inflation, government debt and turmoil in the Middle East.

Other precious metals, like silver and platinum, have also experienced a recent surge in prices on what analysts call a flight to quality, when uncertainty about the economic and political outlook pulls investors into assets that are perceived to be safest.

“We’re seeing a perfect storm for gold and silver prices,” said Robin Bhar, a senior metals analyst in London for the French bank Crédit Agricole.

The contract for May delivery of gold in New York rose as high as $1,506 a troy ounce during trading Wednesday before settling at $1,498.50, a gain of $3.90 on the day. It was the first time that gold had breached the $1,500 level.

While that represented the highest level ever in nominal terms, the real price was higher during the early 1980s, when it was well over $2,000 when adjusted for inflation. In March 2008, the nominal price of gold first broke the $1,000 level.

Silver prices also climbed Wednesday. Silver for May delivery climbed 1.2 percent to settle at $44.461 a troy ounce in New York, after rising as high as $45.40, the highest price since 1980. A troy ounce is 31.1 grams, or 1.1 ounces.

The list of factors that have supported the price of precious metals in recent weeks is long. It includes worries about the sustainability of European debt levels and whether countries like Greece will soon default; the weaker dollar; rising inflation in many parts of the world; continued unrest in North Africa and the Middle East, which has also pushed up oil prices; and concern over the U.S. budget, which also sent fear into world stock markets earlier in the week. Stocks recovered somewhat Wednesday after strong earnings reports restored investor confidence, analysts said.

Other factors that are helping precious metals include the buildup to the early autumn wedding season in India, during which families lavish gifts of gold on brides; the longstanding shortage of skilled labor and equipment at certain mines; and the increase in the number of mutual funds investing in gold.

The recent popularity of gold-based exchange traded funds, or E.T.F.’s, has also propelled prices of the underlying metal by making it easier for more investors to trade in gold.

Each share in an E.T.F. represents part of an ounce of bullion, but it comes without the inconvenience of holding the metal or the risk of buying futures and options. Before such funds became popular in the middle of the last decade, individuals who wanted to invest in gold had to buy gold jewelry, coins or bullion — and pay the high security and transaction costs. They could also invest in the shares of gold mining companies, a more arms-length exercise — although they, too, have risen recently.

In addition to benefiting from increased demand for the underlying metal, gold and silver futures contracts are seen as attractive substitutes for paper investments, given that they can be redeemed for a physical commodity.

“Gold is sometimes a currency, sometimes a commodity and sometimes a store of value,” analysts at Merrill Lynch wrote recently.

Although gold prices are likely to remain volatile and are vulnerable to retreat as investors take profits on their gains, few analysts are willing to bet on a major reversal in the near term. “As the purchasing power of workers in emerging markets increases, we see demand for gold as a commodity increasing over the next few years,” the Merrill Lynch report said.

In a research note published Friday, Goldman Sachs forecast a gold futures price of $1,690 an ounce in 12 months’ time, driven primarily by the assumption that the U.S. Federal Reserve’s continued stimulus policy, known as quantitative easing, would keep U.S. real interest rates low, bolstering demand for the metal as an investment.

The market for silver, which Mr. Bhar described as a “poor man’s gold,” is far more illiquid than gold. Mr. Bhar said several hedge funds appeared to have been “bullying” the price higher in recent sessions. Prices of palladium and platinum have also climbed.

Investment and consumer spending in the country have remained robust despite Beijing’s efforts to temper growth through interest rates increases and curbs on bank lending.

Less valuable base metals like copper, tin, aluminum and zinc, which are used in large quantities in construction and heavy industries, have also climbed since last year, having previously plummeted during the financial crisis.

But among these commodities, there have been more divergences, according to Jim Lennon, head of commodity research in London for Macquarie Securities.

Markets for commodities like coking coal, used to make steel, iron ore and copper have been “tight,” he said, driven by inventory accumulation from producers and concerns about output bottlenecks at mines from Chile and Brazil through Africa to China and Australia.

For other base metals like aluminum, zinc and nickel, supply and demand appear better matched, he added.

Overhanging many of these markets remains the question of China, and whether its roaring economy might soon cool down. Many metals’ traders and analysts have had to become China watchers, poring over the economic data issued by that country and studying accumulations of stocks in Chinese warehouses. During the first quarter, China’s economy expanded 9.7 percent from a year earlier.

 

 

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