Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss, the following economic data and the subsequent market reactions for you to judge if the world and capital markets currently are being turned upside down.
- The USA GDP shrank in Q1-2014, but the USA markets are at all time high.
- China Economy grew with 7.4% in Q1-2014, but Chinese CSI-300 Index is at 5-year low.
- Demand for physical Gold at record high, but prices are falling on the commodity exchanges.
- Too Cold winter weather is being blamed for negative growth in Q1-2014, in the USA, while too Hot winter weather is being blamed for negative economic growth in the Netherlands in the same period.
USA ECONOMY SHRANK 1% IN Q1-2014:
The commerce department in the USA reported on Thursday, May 29, 2014, that the country’s economy for the first time in three years, contracted over the course of a quarter. In the interim report on GDP, the BEA estimates that the US economy shrunk by a full point in 2014 Q1, a downward revision of the advance estimate of 0.1% growth.
As can be seen from below chart this is the worst performance of the USA GDP, since the -1.3 percent drop, in the first quarter of 2011.
Some Highlights:
- Businesses accumulated US$ 49.0 billion worth of inventories in the first three months of the year, far less than the US$87.4 billion estimated last month.
- Business spending on nonresidential structures, such as gas drilling, contracted at a 7.5 percent rate. It previously had been estimated to have increased at a 0.2 percentage pace.
- Net trade, or the combination of exports and imports, declined from -0.83 percent to -0.95 percent, far below the positive boost of 0.99 percent in Q4.
- Government subtracted another -0.15 percent from Q1 growth, more than the -0.09 percent initially expected.
See below chart for the details:
Economist in the country blamed the severe winter weather for negative growth of the USA Q1-2014 GDP.
CHINA ECONOMY GREW WITH 7.4% IN Q1-2014:
The Chinese economy grew with 7.4 percent in the January-March quarter from a year earlier, the National Bureau of Statistics said on Wednesday. That was slightly stronger than the median forecast of 7.3 percent.
According to the world’s leading statistical agencies, China is poised to pass the USA as world leading economic power this year.
The figures shown in above video are compiled by the International Comparison Program hosted by the World Bank.
China became the world’s largest trading nation in 2013, overtaking the US in what Beijing described as “a landmark milestone” for the country.
China’s annual trade in goods passed the 4 trillion US-Dollar mark for the first time last year according to official data, after exports from the world’s second largest economy rose 7.9% to 2.21 trillion and imports rose 7.3% to $1.95 trillion.
China is also already the world’s largest consumer of energy, and has more foreign currencies in its official reserves than any other nation.
INCREASING GOLD DEMAND:
Lifted by a continued surge in Asian gold sales, consumer demand for gold reached an all-time high in 2013 at 3,893 tonnes.
Amazingly, 54% of this demand came from two places: India and China. However, it is only recently that the East has dominated global demand for the yellow metal.
Below table shows that the total Chinese gold import during the first 4 months of this year increased with 53 tonnes or 18 percent, compared with the same period last year.
|
Month |
Net imports 2013 (tonnes) |
Net imports 2014 (tonnes) |
| January |
20 |
84 |
| February |
61 |
111 |
| March |
136 |
85 |
| April |
77 |
67 |
| May |
106 |
|
| June |
102 |
|
| July |
113 |
|
| August |
110 |
|
| September |
111 |
|
| October |
131 |
|
| November |
77 |
|
| December |
95 |
|
| Comparison 2013 – 2014 ytd |
294 |
347 |
| Full year |
1139
|
Reports from World Gold Council also shows, that Gold Purchases by Central Banks, specially in Asia were also very strong during the first 4 months of this year.
According to the International Monetary Fund (IMF), in the month of March, Iraq’s central bank added 36 tonnes of gold bullion to its reserves—worth about US$ 1.5 billion. This is the first purchase by the central bank since August of 2012, when it bought 23.9 tonnes of gold. (Source: Reuters, March 25, 2014.)
ECONOMY OF THE NETHERLANDS SHRANK WITH 1.4 PERCENT IN Q1-2014:
The Netherlands’ economy unexpectedly shrunk in the first quarter of the year, marking the first contraction since early 2013, preliminary figures from the Central Bureau of Statistics showed Thursday.
Gross domestic product declined 1.4 percent from the fourth quarter 2013, when the economy grew 1 percent, which was revised from 0.9 percent. Economists were looking for a flat reading.
Some Highlights:
- Household consumption fell 2 percent annually, while government consumption grew 0.1 percent.
- Fixed asset investment rose 6.3 percent, following 6.7 percent growth in the previous quarter.
- Exports grew 1.4 percent and imports rose 1.8 percent.
- Employment declined by 32,000 from the previous quarter.
Economist in the Country, blamed the first quarter contraction partly on weaker demand for gas due to the very mild winter.
PGM CAPITAL COMMENTS:
USA / The Netherlands / China:
Although the Economic figures of both the USA as well as the ones of the Netherlands are showed contracting economic activities in both countries, both U.S. as well as Dutch stocks were trading higher as investors focused on the brighter second-quarter growth prospects, for which the DOW reached an all time high last Friday, May 30th, as can be seen from below chart.
On top of this, the United States has been running consistent trade deficits since 1980 due to high imports of oil and consumer products. In recent years, the biggest trade deficits were recorded with China, Japan, Germany, Mexico and Saudi Arabia. Below chart shows the trade deficit of the USA during the last 12 months.
On the other side although strong performance by the Chinese Economy, the Chinese CSI-300 Index, currently is at 5 year low as can be seen from below chart. 
It really amazed us, how the media and some economist in the West, can misuse weather conditions, to explain who severe winter weather in one country (the USA) while mild weather in the other country (the Netherlands) is to be blamed for negative GDP growth in both countries.
It also amazed us how these same media and economist, are talking down China, for which the CSI-300 index, has an P/E ratio of 9.6, compared with an P/E of 17 of the USA Indexes and 21. for the Dutch AEX-25. At present, the amount of negativity towards gold bullion is immense.
Gold:
The gold markets fell during the bulk of the session last Friday, but as we can see from below technical analysis video, it found enough support just below the US$1250 level to cause the market to turn back around and form a hammer.
But the fundamentals on the other side paint a different picture. Central banks around the world (especially China) continue to be major buyers of gold bullion, as do private individuals.
This year, world gold production will decline as gold companies have slashed their exploration budgets and shut down low-grade, cost-ineffective mines. After reading this blog article, you should agree with us, that currently the markets are behaving completely irrational.
The following quotes of John Maynard Keynes are currently applicable:
“The market can stay irrational longer than you can stay solvent.”
Yours sincerely,
Eric Panneflek