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Warren Buffett makes a big bet on gold

  
  Analysis
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Buffett bought a stake in miner Barrick Gold

Barrick Gold Warren Buffett
Warren Buffett has famously disparaged gold but evidently he’s had a change of heart.
According to a Q2 13F filed today, The Oracle of Omaha added 20.9 million shares of Barrick Gold, which is the world’s second largest gold miner. He paid $563.5 million for the stake, which equates to $26.95 per share and his Berkshire Hathaway owns 1.2% of the company. It was the only new company he bought in the second quarter.
The shares closed at $26.99 on Friday but jumped about $1.00 in after hours trading.
Warren Buffett
This could indicate a massive change of heart from the world’s most famous investor, or one of his deputies.
His most-famous musing on gold was from back in 1998:
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
As recently as 2018 he repeated his misgivings about gold.
“The magical metal was no match for the American mettle,” he wrote in his annual letter while comparing the returns of both since he first invested in stocks in 1944.
Now this doesn’t necessarily mean he has a new view on gold. Barrick’s cash flows with gold steady at these levels are compelling (and other miners are even more compelling).  Still, expect much more interest in the space now that Warren Buffett has given it his blessing.
Other highlights from his Q2 13F:
  • Exited Occidental Petroleum, but added to Suncor Energy
  • Cut JPMorgan stake by 62%
  • Cut Mastercard stake by 7%
  • Aside from SU, only added to STOR and KR
  • Reduced WFC, SIRI, PNC, MTB, BK
  • Exited DAL, LUV, UAL, AAL, QSR, GS, OXY
In terms of the ones he reduced. In general Buffett doesn’t sell shares unless he plans to sell out. However at times he has to sell to stay below ownership limits.
Overall, his investment mix doesn’t exactly show confidence in the economic or stock market recovery.

China reaffirms that US’ TikTok ban has nothing to do with national security

  
  Analysis
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Comments by the Chinese foreign ministry

US China
  • Beijing has been ‘consistent’ on trade deal
  • Declines to comment on further trade specifics
  • Says position on US sanctions is clear and consistent
  • Says US sanctions are irrational, groundless
  • Reiterates opposition towards ties between US and Taiwan
There’s nothing really new here as this has been China’s stance all along but it does reaffirm expectations that both sides have a lot more than just the Phase One trade deal to discuss if they were to meet later this week.

US July non-farm payrolls +1763K vs +1480K expected

  
  Analysis
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US July 2020 non-farm payrolls data

nonfarm payrolls chart
  • Prior was +4800K (revised to 4791K)
  • Two month net revision +17K
  • Change in private payrolls +1462K vs +1200K expected
  • Change in manufacturing payrolls +26K vs +255K expected
  • Unemployment rate 10.2% vs 10.6% expected
  • Adjusted for misclassification 11.1%
  • Prior unemployment rate 11.1%
  • Participation rate 61.4% vs 61.8% expected
  • Prior participation rate 61.5%
  • Underemployment rate 16.5% vs 18.0% prior
  • Average hourly earnings +0.2% m/m vs -0.5% expected
  • Average hourly earnings +4.8%% y/y vs +4.2% expected
  • Average weekly hours 34.5 vs 34.4 expected
  • Employment in the household survey +1.4m
  • Part time jobs +803K
  • Full time jobs little changed
  • Full report
I noted before the report that a seasonal adjustment quirk was likely to add nearly 1m jobs to payrolls. It only added 245K jobs. From the BLS:
Government employment rose by 301,000 in July but is 1.1 million below its February level. Typically, public-sector education employment declines in July (before seasonal adjustment). However, employment declines occurred earlier than usual this year due to the pandemic, resulting in unusually large July increases in local government education (+215,000) and state government education (+30,000) after seasonal adjustment.
However it was even stronger than that and the majority of it was in private payrolls. The unemployment rate was also better but you can discount most of that because of a dip in participation rather than the rise expected.
Looking at the US and Canadian jobs data together, one thing that caught my attention is the growing gap in labor force participation. The Canadian participation rate now 1.2 pp below Feb levels while US 1.9 pp lower. I would have expected it the other way around with more of Canada shut in July. That will be something to watch in the months ahead.
US vs Canada participation rate

Non-farm payrolls preview: Half the expected jobs gain in July are because of a quirk in seasonal adjustments

  
  Analysis
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Teaching jobs are a big quirk

The consensus for Friday’s non-farm payrolls report is for 1.5 million jobs gains in the month but that doesn’t tell the real story.
The ADP report this week got some attention because it showed private hiring at just 167,000 jobs. Normally, you would expect that to take a big bite out of expectations, but it hasn’t.
Why? A big reason is seasonal adjustments in the data.
Normally, one of the easiest and clearest seasonal adjustments is teachers. They’re laid off at the same time every year and hired at the same time every year. So you discount the lay offs in June/July and the hires in Aug/Sept. It all washes out.
This year though, teachers were laid off early — in April, May and June.
In the BLS model, most of those layoffs are supposed to happen in July. So what happens is they add nearly 1 million jobs to the total before they even start counting. The thing is, those layoffs haven’t happened this year.
teacher
Because of that effect, job losses were overestimated in April/May and now will be added back in July. They estimate the effect at +850K jobs.
Still, that number could be fluid and the assumptions and adjustments the BLS makes will be critical in how it turns out. The risk is that it shows a skewed picture.
Given that, the better spot to watch may be the unemployment rate, which is taken from the household survey. This has its own problems because many people laid off because of COVID-19 have been misclassified — a problem the BLS has been struggling to correct. The consensus there is an improvement to 11.2% from 12.3%. Private payrolls (consensus +1398K) could also offer a clearer look at the economy excluding teacher effects.
As for trading it, watch out for people pointing to the seasonal adjustment effect after the fact. But note that it should already be priced in.

China’s Global Times says “New cold war will not stop US decline”

  
  Analysis
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An opinion piece in state news organ Global Times

  • What is deeply worrying is the unpredictability, volatility and desperation of Trump. Driven by his fear of losing the presidential election in November, Trump sees nothing is off the table as far as he is concerned. Anything is possible. 
Of course, there is plenty more, link here
Over the weekend Pompeo spoke of further action against Chinese firms:
  • US to widen action against Chinese tech groups beyond TikTok

An opinion piece in state news organ Global TimesI think I am going to have find a cartoon of Xi and Trump engaged in a more violent sport rather than this tame effort.

Trump floats the idea of delaying the US election

  
  Analysis
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That’s a big change

For all the people who were worried about Trump calling off the election, this is some hard evidence.
With Universal Mail-In Voting (not Absentee Voting, which is good), 2020 will be the most INACCURATE & FRAUDULENT Election in history. It will be a great embarrassment to the USA. Delay the Election until people can properly, securely and safely vote???
I’m not a constitutional expert but I believe the November 3 election date is locked in with virtually no flexibility. But he sure is laying the groundwork for questioning the results or refusing to leave if he loses.
The market can ignore a lot of talk from Trump but there’s a limit and this is getting closer to it.

USD facing more questions about its status as the primary reserve currency

  
Analysis, Forex
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Here is an item on the US dollar from Bloomberg that may be of interest.

It cites analysts from Credit Agricole and Mizuho
  • USD accounts for more than 60% of global reserves
  • the most widely used currency for international transactions
  • But it risks ceding ground to the euro after European Union leaders agreed on a 750 billion euro stimulus package that enhances the appeal of the shared currency and euro-denominated assets
CA say that the recovery fund will facilitate diversification out of the US dollar
offering liquid, high-rating, euro-denominated debt
Here is an item on the US dollar from Bloomberg that may be of interest.
I’d not be getting too gung-ho on this, and note that the analysts say ‘risks ceding ground’, they are not writing off the dollar.

What to look out for in the week ahead?

  
Analysis, Forex
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As we turn to UK/EU trade moves in FX markets been a rather quiet affair despite the EU Summit having given us little to work with.

I have no firm intel on when we get full confirmation and the outcome but we’re now heading into the fourth day of the marathon talks, but at this point it appears we’re getting closer to a deal, with the level of grants the key sticking point and rumoured to be around E390b.

EUR implied volatility (vol) has been rising of late, as we can see this in the weekly implied volatility scan, with EURUSD 1-week vol pushing into the 32nd percentile of the 12-month range.

This puts EURUSD in an expected range this week of 1.1523 to 1.1303, with a 68% level of confidence. Once again last weeks implied move/range offered a solid guide for mean reversion traders, or those just looking to manage risk more effectively.

(Weekly vol matrix – snapshot from Friday’s close)

PS2
Traders were net buyers of the single currency on Friday into the EU Council meeting, with EURUSD testing 1.1447 – a level I’ve marked as core to markets – a weekly close through here could hold huge implications for global markets and take the USDX through 95.78.

EURGBP is also getting some good interest, with price having pushed into 0.9134 before finding good supply – I have this on this cross on the radar as the buyers are back in control here and we have Fridays high in our sights. A break of 0.134 would be clearly bullish.

Options traders extremely neutral on gold moves

Gold is on the radar too, with the USD firmly at the centre of the thought-process today.

Moves today should be sanguine, and if I look at the options markets I see 1-week implied volatility falling to a 7 vol discount to 1-year vol – the lowest since 2013 – showing a belief that near-term moves in gold will be incredibly subdued and a grind. I also see 1-week risk reversals at 0.56, and 1-month risk reversals at 1.015 – effectively, the options markets is about as neutral on the metal as I have seen in some time – a move through 1813, and into new cycle highs, possibly changes that dynamic and see traders looking for a more explosive move in price.

PS3

Still upbeat on equities but fiscal debates offer new challenges

On the index side, the weekly chart of US500 looks constructive, and despite earnings season ramping up this week, the feel the technical side is suggestive of further upside. The risk for the market this week is on the fiscal side and equities could be sensitive to the news flow and one suspects it will not be smooth sailing.

Staying in the vol space and we see equity vol headed lower, with the cash VIX -2.3 vols on Friday and into 25.68% – closing below its 200-day MA, which is something it failed to do throughout the various tests in June. Our VIX index tracks the VIX futures and is approaching the June lows – one to watch as lower equity vol is saying we’re moving into the US summer doldrums and is having an effect in FX markets. (more…)

Here is the list (so far) of the crypto hacked Twitter account

  
  Analysis
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Accounts hacked so far by the Bitcoin scam, asking you send coins to a bogus address

  •  Bill Gates
  •  Elon Musk
  •  Joe Biden
  •  Warren Buffett
  •  Kanye West
  •  Michael Bloomberg
  •  Apple
  •  Uber
  •  Jeff Bezos
  •  Barack Obama
Tweet looks like this – DO NOT SEND COINS TO ANYONE AT ALL RIGHT NOW until this thing is fixed:
Accounts hacked so far by the Bitcoin scam, asking you send coins to a bogus address

Eurozone May industrial production +12.4% vs +15.0% m/m expected

  
  Analysis
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Latest data released by Eurostat – 14 July 2020

  • Prior -17.1%; revised to -18.2%
  • Industrial production WDA -20.9% vs -18.9% y/y expected
  • Prior -28.0%; revised to -28.7%

Factory output rebounded in May but not as robust as anticipated, with the annual reading highlighting the plight faced by the euro area economy despite the gradual easing of lockdown measures. June should also reflect a rebound but new normal conditions and the pace of the recovery will likely only be seen in July to August or later in Q3.

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