Dear PGM Capital Blog readers,
In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 20, 2015:
- Russian Central Bank bought one million ounces of Gold in August.
- Caterpillar announced restructuring plans.
RUSSIAN CENTRAL BANK ADD ONE MILLION OUNCES OF GOLD IN AUGUST:
On Friday, September 18, the Russian Central Bank announced, that its gold reserves rose to 42.4 million troy ounces as of September 1, compared with 41.4 million troy ounces a month earlier.
The monthly accumulation of 1 million ounces in just one month was one of the more sizeable monthly purchases by Russia and equates to 31.1 metric tonnes in August alone.
According to an announcement by the bank of Friday, September 18, the value of the central bank’s holdings rose to US$47.68 billion from US$44.96 billion a month earlier.
As a consequence of this on April 1st, the country’s gold reserve stands at about 1,318 tonnes or 46.5 million ounces as can be seen from below chart.
As can be seen from above chart, Russia has been steadily buying bullion since 2007 and the advent of the global financial crisis and has more than tripled its reserves since 2005.
Based on its current reserves, Russia ranks as the seventh largest holder of gold reserves in the world behind the US, Germany, the IMF, Italy, France and China.
CATERPILLAR:
On Thursday, September 24, the industrial giant of heavy equipment and DOW-Component, Caterpillar (NYSE: CAT), announced plans for it to cut as many as 10,000 jobs as part of a restructuring plan in the face of what it called “a convergence of challenging marketplace conditions in key regions and industry sectors — namely in mining and energy.”
The moves are designed to save US$1.5 billion per year in costs.
The company’s yellow and black dump trucks, loaders, and bulldozers — not to mention turbines, locomotives, generators, and engines — can be found all over the world at mines, ports, construction sites, and elsewhere.
Based on the news shares of the company declined on Thursday with over 7%, to close the week at US$ 64.98 a share a drop of 9.8% compared with its opening price of Monday, September 20, as can be seen from below 5-day chart.
In its announcement on Thursday, Caterpillar noted that 2015 would be its third straight year of sales declines. With sales also expected to decline in 2016 to around US$48 billion, the company could be looking at its first four-year stretch of sales drops in its 90-year history.
Year-to-date, the stock is down about 25% as can be seen from below YTD-Chart.
PGM CAPITAL COMMENTS:
Russia Buys Gold:
We are not surprised of the Russian government’s decision to continue to accumulate gold, as their consistent accumulation since 2008 suggests something more than simple “reserve diversification”.
Gold has protected the Russian reserves and acted as a hedge as gold priced in rubles has surged over 60 percent in the last 12 months. The plunge in oil prices contributed to sharp falls in the ruble.
Russia added about 13 tons in July and 24 tons the month before that. As tensions escalate with the U.S., the UK and the EU, Russia appears to be intensifying efforts to diversify out of their large dollar holdings and into physical gold.
Caterpillar Warns:
Caterpillar is seen as a bellwether for the global economy because its equipment is big and expensive and often the kind of investment a company only makes when they feel confident about their prospects and the global economy.
In a statement, Caterpillar CEO Doug Oberhelman said:
“We recognize today’s news and actions taken in recent years are difficult for our employees, their families and the communities where we’re located. We have a talented and dedicated workforce, and we know this will be hard for them.”
As can be seen from below 5-year chart the shares of caterpillar are now at a 5-year low of US$ 64.98 per share.
This news out of Caterpillar follows a warning earlier this week from its UK-based rival JCB that it would cut jobs because of a slowdown in Russia, China, and Brazil.
From the late 1990s until the 2008 financial crisis, most commodities, mainly due to the rising demand from emerging markets such as the BRIC countries, experienced double-digit annual real (i.e., inflation-adjusted) price growth, a period known as the commodity “supercycle.”
This combined with the infrastructure and construction boom in China and Dubai, in the period 2001 – 2008, has created a high demand for heavy equipments, cranes etc.
The situation at Caterpillar can be seen as an other proof that the commodities supercycle and construction boom that started early in this century is over.
A consequence of this might be that countries, which haven’t invested the profits from the commodity boom period, in a Service- or Human Capital intensive economic sector, will experience very difficult socio-economic situation in the coming 5-10 years.
Until next week.
Yours sincerely,
Eric Panneflek