Weekly Overview

Weekly Market Update
Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert
17/09/2012 11:14:23 AM Page 1 of 3
Weekly Overview
Week ending 14 September 2012
End 2011
All Ords Index S&P 500 Shanghai RBA Cash Rate US Treasury Bond (10yr) Spot Gold Price Copper, spot Oil WTI Oil/Gold Ratio USD Index AUDUSD EURUSD USDCNY 4,111 1,258 2,199 4.25% 1.88% 1,563 344 99 6.3% 80.23 1.022 1.294 6.299
14 Sept 2012
4,410 1,465 2,123 3.50% 1.87% 1,770 383 99 5.6% 78.84 1.055 1.299 6.320
Chg (week)
1.4% 1.9% -0.2% 0.0% 12.2% 2.0% 5.2% 2.7% 0.6% -1.7% 1.6% 1.4% -0.4%
Chg (ytd)
7.3% 16.5% -3.5% -17.6% -0.4% 13.2% 11.5% 0.2% -11.5% -1.7% 3.3% 0.4% 0.3%
Pushing up to 4400 again on Feds QE Surging on low volume Stagnating, moving to slower growth More rate cuts coming Higher rates on QE announcement Higher Gold on QE announcement
Lower USD on QE announcement High A$ again causing pain for Aussies Euro stronger Small gains for Renmimbi
On Thursday the Federal Reserve announced a third tranche of its Quantitative Easing Policy (QE3) whereby they will purchase $40b of mortgage bonds every month until there is substantial improvement to the labor markets. This is open-ended without limits to duration bringing into further question what the value of the US Dollar is (if any). As expected, commodity prices increased, Gold shot up $40 per oz to $1770, and the A$ punched through $1.055. Pushing through all the chatter, this policy is designed to decrease the value of the US$ so that American companies can export more and import less. Its a very blunt instrument to fix a very unbalanced economy. Simply, other countries can do the same thing to protect their industry, so consumer demand is the biggest victim as currencies and savings lose value. At the end of the day, economies need to be productive, printing money doesnt create productive capacity, it destroys it. On Wednesday, the German Constitutional Court ruled that Germany could participate in the European Stability (Bailout) Fund under certain conditions. I remain of the view that because the ECB bailout strategy is sterilized (for every bond they buy they sell another one) that effectively they are transferring money from the productive sectors of the economy to the unproductive (government) sectors. This type of activity is unlikely to produce real economic growth. The S&P500 has tracked up to four year highs finishing at 1465 on the back of the QE announcement, not too far away from all-time highs at approximately 1575. The market has traded up on very low volumes which is not a good sign for its sustainability. However, with the US determined to cut the value of the US$, the outlook for US corporate earnings is better than in most other countries which are trying to protect the value of their currency (like Australia). The Iron Ore market recovered somewhat this week with prices for ore getting over $100 / ton. Fortescue is still in a heap of trouble with too much debt and a capital raising muted to be coming. The catalysts for the bounce were Fortescue slowing growth projects (50m tons removed from supply), mine closures in India, and a Chinese stimulus program. Weve now had our bounce, lets see if it is sustainable from here, I have some doubts. The Australian Coal Sector has been crunched between falling demand from Chinese steel makers, a high A$, rising labor costs, the mining tax, and now higher royalties from the Queensland government. Miners who are developing coal mines are now in dire straights. South Africa is seeing mayhem in its mining sector as unions, corporations, and government compete for control of some of the best mining assets in the world, particularly platinum and gold mines. Whichever unions and corporations get control of these assets could shift the balance of power in the worlds gold market, and hence geopolitics. South Africa is the third largest gold producer and swing gold exporter (along with Australia). Asia is desperate to get control over gold flows as they move away from paper currencies as reserve assets. Chinese trade data on Monday was weak in the face of dampening global demand. Imports fell 2.6% while exports grew 2.7%. Im actually pleasantly surprised that they are able to increase exports with Europe in recession, the US/Japan in low growth, and not much happening elsewhere

17/09/2012 11:14:23 AM Page 2 of 3
Economy
From Markit Economics US Business posted its largest gain in inventory in July, up 0.8% on the month US Industrial Production down -1.2% in August Eurozone consumer inflation confirmed at an annual rate of 2.6% in August Eurozone industrial output up +0.6% m/m in July, still down -2.1% for the year Italian industrial output falls -0.2% in July, down -7.3% for the year Italian Q2 GDP revised won to -0.8% q/q US Non Farm payrolls +96k in August, expectation was +130k UK industrial output has best monthly rise since Feb87, up +2.9% in July Spain manufacturing output -2.5% y/y in July.
All Ords Charting

Last week I wrote After drifting earlier in the week, we have rallied Friday following Thursdays announcement for the ECB on more bond buying and the Chinese infrastructure stimulus. This is likely to provide a temporary bounce with 4400 still holding as resistance. Still waiting on announcements this week from the Fed on QE3 and the German Constitutional Court on bailouts. The market believes both will be favourable This weeks commentary. Here we are again, pushing up against 4400 resistance. More QE from the Fed pushes the Dow Jones higher, more bailouts from Europe pushes their markets higher. All this will result in a higher A$ and Gold price, and further exacerbate imbalances in the Australian economy, particularly for exporters. I cant see substantial reasons for market optimism here, but I continue to like the investment case for Gold Bullion.
Weekly Stockwatch
Commencing with my newsletter from 27 July and throughout August I was recommending clients top up on their holding of Gold and Gold miners. If you did, well done! If you didnt, its starting to be too late. Here are the charts of the (Aussie Dollar) Gold Price and Australias largest Gold miner Newcrest Mining from the last few months.

17/09/2012 11:14:23 AM Page 3 of 3
A$ gold bullion
Newcrest, breaking out and going higher
Chart of the Week

Here is a graphic example of the effect on Central Banks loose monetary policy and the effects of Quantitative Easing. As more money comes into circulation, the currency loses value and everything costs more, but particularly commodities, where demand is global. Chart of US Car Petrol price is below. Higher transportation costs are not conducive to economic growth.

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Weekly Market Update

Robert Davies, Patersons Securities

17/09/2012 11:14:23 AM Page 1 of 3

Weekly Market Update

17/09/2012 11:14:23 AM Page 2 of 3

All Ords Charting

Weekly Market Update

17/09/2012 11:14:23 AM Page 3 of 3

Newcrest, breaking out and going higher

Chart of the Week

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