Gold $1,512/oz - prices fall back

• Portugal has agreed to bail out with the IMF.
• News of conflict in the Middle East seems to have subsided although it may have been overshadowed by events in Pakistan - this does not mean the world has become any less risky and security services are on alert for terrorist attacks.
• Consumer buying should pick up gold prices as the market finds its new level and the market discount applied to gold miners is likely to narrow as investors gain confidence in higher gold prices.

The number of global "events" this year, suggests the general pull back in equity markets over the last couple of days was somewhat overdue. There now appears to be a justified level of caution as focus returns to figures emerging from the US that suggest the economic recovery is not as solid as initially thought. The markets appear to be reclaiming a marginal sense of reality, perhaps realising that the flow of easy, stimulus cash in the US coupled with unsustainable government deficits does not make for a winning formula in the long run.

• Non farm payroll figures will be released tomorrow. The markets could well end the week in a very different position to where they started.
• News of the death of Bin Laden helped the S&P 500 to the highest level since June 2008 on Monday - When news like this drives the market, maybe it is time to reconsider where attention should be focused?

Japan's National Children's Day (Kodomo no hi) means Japanese markets are closed again today.

• The holiday was established to celebrate all children and honour their mothers.

ECONOMIC NEWS

Dow Jones Industrials -0.66% at 12,723.58

Nikkei 225 +1.57% at 10,004.20

HK Hang Seng -0.23% at 23,261.61

China - Deputy Minister of Finance has reiterated that curbing inflation is a big challenge for the country and priority number one.

• Former People's Bank of China advisor has stated that global demand for the yuan is now so strong the Central Bank should reduce its level of intervention in the markets to allow the currency to find its natural footing.
• Forex reserves climbed in the first quarter to US$3trillion as the central bank bought currencies in order to control the yuan's gain.
• New forecasts suggest that inflation eased in April to 5.2%

US - Bloomberg is reporting that two Fed regional Presidents have stated that stimulus will not be removed in the short term as the country is still missing its targets with regard to unemployment. Yesterday the ADP Employer Services announced a smaller than expected gain in private payrolls, increasing negative sentiment before the more important non farm payroll figures released on Friday.

• Forecasts ahead of report today suggest that productivity of US workers slowed in Q1 as a result of companies having to add more workers.

UK - Sluggish growth is being cited by the National Institute for Economic and Social Research as it forecasts that the Government will miss its goal to balance the budget by 2015. The think tank blamed an "unbalanced policy mix" as the defining reason.

Australia - Figures released this morning showed that retail sales unexpectedly fell in March for the first time in the last 6 months. Sales declined by 0.5% from a month earlier. The decline is being attributed to consumers facing higher mortgage and living costs.

• The RBA left its rates on hold on Monday.

Portugal - Reports this morning suggest that up to 15% of the country's bailout or 12bn euros will be used to support the country's banking industry, specifically those banks that fail to reach the new capital requirement ratios. The Government has stated that banks that fail to reach the 9% tier one capital requirements by the end of the year and 10% by the end of next year will be forcibly recapitalised.

Currency - Speculation that the ECB will raise rates again has helped the euro rise towards a 17 month high against the dollar. The dollar is off again this morning and the South African rand is also weaker against the dollar.

US$1.487/eur vs $1.486eur yesterday. Yen80.30/$ vs 81.05/$, SAr6.654$ vs 6.628/$ $1.647/GBP vs 1.652/GBP

COMMODITY NEWS

Precious metals:

Gold US$1,514/oz vs US$1,537/oz on yesterday - Prices are off slightly this morning as investors continue to trade out of the metal, locking in recent gains.

• Data released by the IMF shows that Central Banks bought US$6bn worth of gold in February and March. The IMF cited Russia, Thailand and Mexico as the main participants.

SPDR gold trust holdings fall further to 1,219.94t (39.222moz) from 1,224.49t (39.368moz) current value US$60,417bn

Platinum US$1,823/oz vs US$1,883/oz yesterday -

Palladium US$739/oz vs US$774/oz yesterday -

Silver US$38.88/oz vs US$42.16/oz yesterday - Prices have come off further today as investors digest the impact of the move by Comex to raise margin requirements and decide not to trade.

Rhodium US$2,250/oz unchanged

Base metals:

Copper US$9,028/t vs US$9,219t yesterday - Policy tightening concerns in China have lead to a decline in prices this morning as investors speculate that consumption in the coming months will drop.

Aluminium US$2,721/t vs US$2,793/t yesterday -

Nickel US$25,250t vs US$26,925/t yesterday -

Zinc US$2,155/t vs US$2,252/t yesterday -

Lead US$2,404/t vs US$2,497/t yesterday - Similarly to copper, prices are off this morning as demand prospects take a hit in China.

Tin US$30,025/t vs US$31,890/t yesterday -

Energy:

Oil US$121.24/bbl vs US$124.52/bbl yesterday -

• Local media is reporting that China's planned resource tax on the sale of oil could be as much as 10%. The tax is aimed at raising funds for less prosperous regions in the country.

Natural Gas US$4.560/mmbut vs US$4.693/mmbtu -

Uranium US$55.25 vs US$55.50 last week -

Other:

Rare Earths - Goldman Sachs have estimated that rising domestic demand in China may lead to further reductions in export quotas leading to a surge in prices. H1 2011 quota currently sits at around 14,446t down 35% on the same period last year.

Steel - Plans to regulate and reduce electricity consumption in China put forward by the National Reform and Development Commission is forecast to reduce steel consumption in China by around 5% this year. Power consumption in the country is estimated to grow by 14% this year as "intensive industries" drive demand. Steel output in the first 3 months of the year reached a record of 169.91mt suggesting that producers are already looking ahead to the power curbs and building stocks.

COMPANY NEWS

Glencore - unapologetic opportunists reap rewards of strategic position

• Glencore has many strengths as a business which have been hidden by their relative secrecy
• The company claims to have always been open with the counterparties with which it does business but this does not generally help the investment world.
• Glencore's trading activities will naturally remain relatively confidential as they must but the scale and range of activities is now open to public inspection. The move to public markets may expose the group to some aggressive questioning but past issues should be overshadowed by growth in the mining business and renewed focus on corporate governance should insulate the company to some degree.
• As traders Glencore can generate earnings from most moves in commodity prices meaning that greater price volatility should lead to better earnings potential. Falling metals prices can also be an opportunity for traders.
• Glencore has snapped up and nurtured mining assets opportunistically and has watched as Xstrata which it nurtured from modest beginnings grew beyond all expectations.
• The assets which Glencore held onto have also grown in value and Glencore sees an opportunity to invest yet more cash into these and new assets. Eg the consolidation of Kazzinc.
• Glencore's own base metals mining assets are mainly located in 'Frontier' market locations eg the DRC, Zambia and Kazakhstan where they have shrewdly invested at a time when others would not venture capital into these areas. We have seen Glencore pump investment into the Mopani copper smelter in Zambia and the Katanga / Nikanor copper mines in the DRC for example.
• Glencore appears to manage its mining assets well in difficult locations and does not seem to have attracted undue criticism of its operations.
• Glencore is 'probably the world's largest ever trading house' and its commanding position, like DeBeers, could ensure its longer term stature as the world's largest commodity trader. Funds to reduce leverage give it better financial stability and an ability to take advantage of new mining opportunities.
• Glencore could continue to grow in similar fashion and in potential competition to Xstrata and the combination of the two companies one day could create a new super-major in the years to come.
• In the meantime we expect Glencore to 'hover up' a number of mid-scale mining assets to boost its portfolio and to give its traders more metal / commodities with which to trade.

Shanta Gold* (SHG LN) 32p, mkt cap £58m - Chunya gold resource rises to 1.2moz

BUY - Target price raised to 78p from 71p

• Shanta Gold today announces a significant increase in its gold resource to 1.2moz.
• The resource rises by +45.9% to 1.23moz on a 0g/t cut off grade.
• A 0.5g/t cut off reduces the gold resource marginally to 1.15moz indicating that the mine could economically extract more than 1moz of gold.
• Grades have also risen to 2.03g/t from 1.69g/t
• The new resource expands the New Luika (Chunya) mine to nine open pits from five previously giving the new mine greater flexibility and the potential to expand gold production significantly beyond the current plan.
• The new resource will now be used along with further data to remodel and optimise the mine plan
• Higher gold grades and greater near surface resources should enable the mine to ramp up much faster than previously considered and may enable management to better utilise the larger-scale mills ordered.
• Expansion of the rest of the processing plant should require relatively little modification from the current plan although the capital cost may adjust accordingly.
• Valuation: we are raising our target price due to the resource increase and the greater certainty which this give to our modeled mine plan for the New Luika gold mine. We have lowered our discount rate to 8% for the mine which raises our valuation to 78 pence per share.

Conclusion: Shanta are now heading for a significant increase in gold production potential from the expanded resource at Chunya. The mine and surrounding area has significant potential for expansion and this first resource upgrade indicates that the geological team understand the area and how to best identify where to drill for further resources. We expect the New Luika mine to continue to expand in scale as the team push forwards through 2011.

Fairfax IS plc acts a nomad and broker to Shanta Gold

Mining last week:

Ampella Mining (AMX AU) 206c/s, A$416m - pre-feasibility starts on 2.2moz Konkera gold project BUY

Centamin Egypt (CEY LN), 130p Mkt cap £1.42bn BUY

Medusa Mining* (MML LN) 522p mkt cap £975m - Fidelity take stake to over 11% BUY

Glencore - price range set at 480p - 580p as Glencore prepares to publish prospectus for listing

Hambledon Mining* (HMB LN) 5p mkt cap £36m - Rising gold sales push Hambledon to profit in 2010

Ormonde Mining* (ORM LN) 10p mkt cap £30m - placing raises £4m to advance Tungsten project

BUY - Target Price raised to 21p from 19p

* Fairfax acts as advisor to Medusa Mining

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