PGM Capital – Blog

Russian Central Bank bought 1 million Ounces of Gold in March

By Eric Panneflek

Dear PGM Capital Blog readers,
On Monday, April 20, the Central Bank of the Russian Federation (CBR) published its official reserve assets report that indicated, that  the country has added 30.5 tonnes of gold (981,500 troy ounces) to its reserves in March 2015. The massive purchase is the largest since September last year and is valued at approximately US$1.15 billion.

According to data from the World Gold Council (WGC), Russia sold less than half a tonne of gold in January. This, however, is peanuts compared to the 30 tonnes it purchased two months later or to the metal it had snapped up in the preceding months. Moreover, this sale seems to follow the pattern we observed in January 2014 when the country sold roughly the same amount of gold as can be seen from below chart.

As a consequence of this on April 1st, the country’s gold reserve stands at about 1,238 tonnes or 39.8 million ounces as can be seen from below chart.

Above chart shows a clear pattern of purchase of Gold by the Russian Central Bank which has boosted the country's gold holdings from just above 400 tonnes to well over 1,200 tonnes since 2001.  Above chart shows also that roughly 173 tonnes of Gold were purchased last year alone, which is more than double the 77.4 tonnes of gold bought in 2013 and above the amounts acquired in any of the previous years.

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".

In our opinion, Russia strategically  is accumulating Gold, to both hedge against financial calamity and to push the world away from the U.S. dollar.

Below chart shows, the decline of the US-Treasuries holding by Russia, since January 2014, and demonstrates unambiguously that country began its de-dollarization efforts before it was hit with Western sanctions.

The message the Russian government is sending is clear, by offloading treasuries and loading up on gold, Russia is making an all-in bet against the US dollar, in favor of the yellow metal.

The continuation of Russian gold accumulation is a sign that the country is still not satisfied with the current shape of financial markets, and that their desire to replace the reserve currency role of the U.S. dollar is not over.

Concurrently, it’s playing an active role, along with the likes of China, Iran, and Kazakhstan, in the expanding international movement to bypass the dollar’s use in trade settlement via the employment of currency swaps and other measures.

The news of the latest Russian gold reserve addition confirms the World Gold Council prediction that overall central bank gold reserve rises will continue at a strong rate this year, beside this, there is also speculation that China may also confirm a big rise in its reserve by as much as 2,500 tonnes or more in the months ahead as it jockeys to try and have the Yuan accepted by the IMF as a part of the make-up of a revised Special Drawing Rights basket.

The IMF-SDR, with currency code "XDR" currently consists of a basket of the US$, Euro, GBP and JPY, with the following weight factors, since January 1st 2006.

The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.

Below video, provides more details on the IMF SDR.

The IMF review this basket every five years, for which December 30, 2005, was the last time it was updated.

Earlier this year, Ms. Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) said:

"It was a question of when, not if, China's Yuan will be included in the SDR basket"

The first step in the IMF's review of the basket for the SDR, an international reserve asset, is an informal board meeting in May, followed by a formal review in the autumn. Any changes would likely come into effect in January 2016, and can be passed by a simple majority.

In order for the China's Yuan to be included in the SDR basket, it must be a free floating currency.

Currently the Chinese Yuan is pegged to the US$, analysts believe that a depegged, Chinese Yuan, will appreciate immediately in value against the US$ and other currencies in the SDR Basket.

The IMF will decide on China’s internationalization in December. It is a date to watch. It will be a hint as to how China-U.S. relations will be for the next five years.

The IMF makes such decisions only twice a decade.

The time for China is now!

If the IMF decides to add the yuan into the basket, the path to its internationalization will be well paved, with the consequence that the US-Dollar will have a true rival.

Until next week

Yours sincerely,

Suriname Times foto

Eric Panneflek


Highlights of the Week of April 13, 2015.

By Eric Panneflek

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 April 13, 2015:

  • On Wednesday, the US-Treasury Department said that Japan overtook China in February as the top foreign holder of U.S. Treasury Securities.
  • The Dow-Jones Industrial triple digit lost on Friday, April 17 and is flat Year-to-Date.

According to data from the USA Treasury Department, released on Wednesday, April 15, Japan surpassed China in February as the largest foreign holder of U.S. Treasuries for the first time since August 2008 as can be seen from below chart.

As can be seen from below chart, Japanese holdings of Treasuries actually declined in February by US$14.2 billion or 1.1 percent to US$1,224.4 billion from US$1,238.6 billion in January, while China’s holdings declined in February by US$15.4 billion or 1,2 percent to US$1,223.7 billion. On a year-over-year basis, Japan’s holdings increased US$13.6 billion, while China’s declined US$49.2 billion.

It is also worth-mentioning that foreign central banks sold US$11.1 billion in Treasuries in February,
shedding U.S. government debt for a fifth straight month.

All over holdings by foreign holders of US Treasuries declined with US$56.6 billion in February, to US$6,162.8 billion, from US$6,219.4 billion, in the previous month as can be seen from below table.

The Dow Jones industrial average declined on Friday, April 17, with 279.47 points or 1.54% and is now flat for 2015 as can be seen from below chart.

American Express (NYSE: AXP) fell 4.4 percent to its lowest level since 2013 after quarterly revenue missed estimates. Travelers Cos. (NYSE: TRV), 3M Co. (NYSE: MMM) and United Health Group Inc (NYSE: UNH). dropped more than 2.3 percent to pace declines in the Dow Jones Industrial Average as all 30 of its components slid.

  • The Standard & Poor’s 500 Index fell 1.1 percent to 2,081.11, on Friday and is now below its average price for the past 50 days.
  • The Nasdaq composite finished down 1.5% and the S&P 500 closed 1.1% lower.


Japan overtakes China as Biggest Holder of USA Debt.
The US Federal Reserve remains the single biggest holder of Treasuries, after snapping up US$2.5 trillion through its quantitative easing program. The bond-buying has since ended, but repayments and coupons are being reinvested in the market, keeping the Fed’s holdings steady.

However, Japan and China are by some distance the biggest foreign holders of Treasuries and account for about two-fifths of all foreign ownership of US-Treasuries.

As can be seen from below chart, Chinese ownership of U.S. government debt has been generally declining since it peaked in November 2013 at US$1,316.70 billion, while Japanese ownership of U.S. government debt hit its most recent peak in November 2014, when it hit US$1,241.50 billion.

In a paper published last month, the Congressional Research Service (CSR) said:

“China’s purchases of U.S. government debt help keep U.S. interest rates low.”

However, over the past few years, Chinese officials have expressed concern over the 'safety' of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings, for which reason they are diversifying their reserves out of the US-Dollar.

The Chinese aren't the only one selling US-Treasuries, overall international investors like overseas central banks, hedge funds, insurers, asset managers and pension funds decreased their holding of US government debt to US$ 6.16 trillion at the end of February, compared to US$ 6.21 trillion in January.

Dow-Jones Industrial flat Year-To-Date.
Friday April 17, recorded the worst drop for the Dow-Jones Industrial this year since March 25. The Dow has struggled since reaching a record high on March 2 of this year and is now back where it started the year.

Investors have been bracing themselves for a disappointing earnings season. Analysts expect companies in the S&P 500 are expected to report earnings per share fell 2.6 percent from a year earlier.

While the US markets are flat for the year, the markets in Asia, mainly the Hong Kong - Hang Seng Index - and the Chinese - CSI-300 - have risen double digit year-to-date, as can be seen from below chart.

Blue Chart = CSI-300 Index, Green Chart = HSI Index, Red Chart = DOW-30 Index

Up to now, Q1-2014 earnings-season, has showed slowing to declining earnings growth in the USA. On top of this with a Shiller P/E ratio of the S&P-500 of above 27,  we can consider the USA markets to be overvalued.



On the other hand we can consider the Hong Kong, "Hang Seng Index", - which contains most of the Chinese Big Caps - , with an P/E ratio of 10.50, as extremely undervalued.

Below chart shows the historical P/E ratio of the Hong Kong, Hang Seng Index (HSI).


Due to the above we believe that based on their P/E ratio and fundamentals, we can expect the Hang Seng Index to soar this year and for the USA Index to perform sideways or to go into a correction this year.

Last but not least, take into considerations that markets can stay irrational longer than you can stay solvent and before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that markets of emerging markets can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


The Biggest Oil Deal in a Decade: SHELL to buy BG

By Eric Panneflek

ShellGeneric-oil-image-1071BG Group

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to elaborate on the biggest energy deal in a decade: Royal Dutch Shell, (LSE:RDSA) buying BG Group plc (LSE:BG), for 70 billion US-Dollars.

Royal Dutch Shell plc, is an Anglo-Dutch company that operates as an independent oil and gas company worldwide.

Business Summary:

  • The company explores for and extracts crude oil, natural gas and convert them into a range of refined products, including:
    • Gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, sulphur, and LPG
  • Markets and trades; natural gas, fuels, petrochemicals, lubricants, bitumen, and liquefied petroleum gas (LPG) for home, transport, and industrial use.
  • The company holds interests in approximately 24 refineries; 1,500 storage tanks; and 150 distribution facilities

The company was created in February 1907 through the amalgamation of two rival companies: Royal Dutch Petroleum Company and the "Shell" Transport and Trading Company Ltd of the United Kingdom.

  • Royal Dutch Petroleum Company was a Dutch company founded in 1890 to develop an oilfield in Sumatra.
  • The "Shell" Transport and Trading Company was a British company, founded in 1897  which expanded in 1833 to import and sell sea-shells, after which the company "Shell" took its name.
  • The terms of the merger gave 60 percent ownership of the new group to the Dutch arm and 40 percent to the British.

The company has its headquarter in The Hague, The Netherlands and its registered office, in London, United Kingdom and is the biggest company by market capitalization on the Amsterdam Exchange as well as on the London Stock Exchange.

The company before this merger, was ranked by market capitalization as the second biggest energy company - behind Exxon-Mobile (NYSE:XOM). Worldwide the company is ranked on position 12 by market capitalization.

Below figure shows the 10-year chart of the stock of the company.

BG Group plc is a British multinational oil and gas company headquartered in Reading, United Kingdom.

It has operations in 25 countries across Africa, Asia, Australasia, Europe, North America and South America and produces around 680,000 barrels of oil equivalent per day. It has a major Liquefied Natural Gas (LNG) business and is the largest supplier of LNG to the United States. As of December 31, 2009 it had total proven commercial reserves of 2.6 billion barrels (410,000,000 m3) of oil equivalent.

BG Group is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index, under the symbol (BG.L)

At the close of the market on Friday, April 10, 2015, it had a market capitalization of £39 billion, the seventh-largest company listed on the London Stock Exchange.

Below figure shows the 10-year chart of the stock of the company.

On Wednesday, April 8th, Royal Dutch Shell announced it will buy BG for US$70 billion, a move that will add considerably to the oil giant's capacity and profits in two areas: deep-water drilling and liquefied natural gas (LNG).

Part of the deal's attraction is the precipitous drop in oil prices we've seen since mid-2014. Since both Shell and BG are also into oil in a big way, that's allowed Shell to snap up BG's assets at relatively cheap prices, despite paying 50 percent more than BG's closing share price on Tuesday.

The third-biggest oil and gas deal ever by enterprise value will bring Shell assets in Brazil, East Africa, Australia, Kazakhstan and Egypt.

Gaining greater access to Brazil’s deep water oil reserves was one of the key motivations behind Shell’s $70 billion acquisition of BG on Wednesday. Shell’s CEO Ben van Buuren, also cited Australian natural gas drilling blocks owned by BG as another reason for the acquisition. But when it comes to drama-free oil, Brazil is as good as it gets.

Shell’s access to Brazilian deep sea oil deposits is less than BG at the moment. Shell only has drilling rights in the so-called Libra Basin, while BG has drilling rights to blocks in Iara, Sapinhoá, Lapa and the Lulabraz (formerly Tupi) oil fields.

The consolidation will ostensibly allow Shell to combat those falling prices by eliminating overlapping costs, and to immediately expand its oil and gas reserves by 20 percent while upping annual production by 20 percent. The LNG market is also expected to keep expanding, as China, in particular, moves off coal to reduce air pollution.

The merger will make the combined company - Royal Dutch Shell-BG Group- the biggest oil company by market capitalization, putting Exxon-Mobile behind them on the second place.

Breaking News


On Friday April 10th, PetroChina Co. (HKE: 0857) passed Exxon Mobil Corp. as the biggest energy company by market value for the first time since 2010 as can be seen from below chart.

As can be seen from above chart, Exxon’s capitalization was US$352.6 billion through Thursday April 9, compared with PetroChina’s US$352.8 billion as of 1:36 p.m. in Shanghai.

The Chinese company’s A shares surged about 61 percent the past year, versus Exxon’s 14 percent drop. PetroChina was larger by value most recently at the close of trading on June 25, 2010.

Below figure shows the 10-year chart of the stock for Exxon Mobile versus the one of Petrochina, in which clearly can be seen how the stock of Petrochina has outperformed the one of Exxon-Mobile.

With this new development, Exxon-Mobile will be pushed to the third place, behind Royal Dutch Shell -No2- and Petrochina -No1-, after completion of the merger between Royal Dutch Shell and BG-Group.

Based on its fundamentals, strong balance sheet, P/E ratio of 11.1 and a dividend yield of 4.4% we have a STRONG BUY rating on the shares of PetroChina.

With an P/E ratio of 12.7, strong balance sheet and an dividend yield of 4.7% we have a BUY rating on the stocks of Royal Dutch Shell and consider it as a good hedge against the week Euro and current low Oil prices.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek