Recap 2014-07-09: Gold Miners, EU Yields, UST Repo Fails, US Rail Traffic


The FT notes how only ~87 tons of gold is hedged at the moment; just 2% of total mine supply and a fraction of the ’99 peak of 3K tons. Let’s compare gold prices then and now:

Of course, a simple statistic like how much gold is known to be hedged is not especially indicative of future prices. But if it is even close to the truth, it suggests that gold miners as a whole are faced with a fixed (and rising) cost base along with very little protection if prices fall. This suggests exceptional operating margin volatility. While that does not mean that the equity value of miners are overvalued, it does suggest higher future volatility for that value, which usually also corresponds with a higher cost of equity. That has sometimes, but not always, preceded a correction in miner prices. The chart below highlights this idea – Gold and the NYSE miner index in the top panel, and the correlation between spot gold and miner prices in the bottom panel. Note that when correlation between the two series reach the mid 80’s range, the value of the miners index has tended to fall:

Periphery spreads have been widening for a month, the longest stretch in some time. This isn’t a big surprise, but the net impact on the absolute level is muted given that German yields continue to fall, and are now near all time lows.

But does the move in Germany yields make sense? GS notes that: “Last week, the German Bundestag approved an economy-wide minimum wage bill, which will come into effect in January 2015. The bill sets an hourly minimum wage of €8.50. Although there is necessarily a high degree of uncertainty, the rise in wage costs could translate into a rise in unemployment of about 0.3% per year over the next two years. Our analysis also points to an expected increase in the price level of about 0.2%-0.3% per annum as a consequence of the new measure.” This suggests at a minimum, some additional yield compensation for the inflation risks.

Furthermore, note that the move in EUR real yields is actually quite at odds with the growth data. Despite the fall in EU PMI, (white) it remains well above the 50 mark, which indicates continued growth. In contrast EUR real yields have fallen to levels not seen since a year ago. The recent ECB action surely has been a large driver of this, but we should remember that they acted as a result of perceived risks of deflation. With the stabilization of the EUR, continued positive growth, and the wage bills like the German minimum wage bill noted above, there is a strong likelihood that EU deflation risks are mostly behind us. As a result, risk free EUR yields at these levels look too low at these levels, although it isn’t clear whether they are rich enough for an outright short.

Speaking of interest rates, there were several articles today on the jump in the number of failures to deliver in the treasury repo market. Recall that a repo delivery fails when the party that sold (or shorted) the treasury is not able to deliver it to its counterparty. Given that someone who is already long usually owns the security and hence will make delivery, to some extent, a naïve interpretation of the spike in fails is that there may be a large number of shorts in the market. Anyway, the chart below shows the relationship between the number of fails and yields. Historically, fails at these levels have preceded either stable or lower yields, with the exception of Bernanke’s taper speech last year. The sample size is small, so make your own conclusions.

Via BI, rail traffic in the US is up 4.5% YTD vs 2013. Slow growth in car loads of coal, which represents almost 40% of the total, was offset by strong growth elsewhere, especially in grain, petroleum, and nonmetallic minerals. Note also that Canadian rail traffic YTD is up only 2.4%, dragged down by substantial weakness in metallic ores and metals. Mexican rail traffic was also weak, rising 2.2% YTD vs 2013.


  • FOMC Minutes Highlights:
  1. Many participants expressed concern about the still-soft indicators of residential construction, and they discussed a range of factors that might be contributing to either a temporary delay in the housing recovery or a persistently lower level of homebuilding than previously anticipated.
  2. participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions. In particular, low implied volatility in equity, currency, and fixed-income markets as well as signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.
  3. it was also pointed out that, where appropriate, supervisory measures should be applied to address excessive risk-taking and associated financial imbalances. At the same time, it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion.
  4. Many judged that slack remained elevated, and a number of them thought it was greater than measured by the official unemployment rate, citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labor force participation rate.
  5. Aggregate wage measures continued to rise at only a modest rate, and reports on wages from business contacts and surveys in a number of Districts were mixed.
  6. participants generally agreed that … it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects … this final reduction would occur following the October meeting.

China CPI declined to 2.3% vs 2.4% prev.

Canada Housing Starts were stable at 198.2k vs 190k exp

Spying Case Left Obama in Dark, U.S. Officials Say – NYT

Chinese customers purchased $22 billion in US housing for the 12-month period ending in March, or around 24% of all foreign sales by dollar volume, up from $12.8 billion, or 19%, during the year-earlier period. WSJ


  • Wed: NZ Mfg Survey, AU Employment
  • Thu: Japan Consumer Confidence, BoE, US Jobless Claims, Australia Home Loans
  • Fri: Canada Employment, USDA WASDE Reports,
  • Mon: RBA Minutes