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February 21, 2013
I’ve had some thoughts on gold that are quite interesting, I thought I might share them.
 
Chain of events initiated in Dec 2012:
- Abe calls for QE in Dec
- This precipitated a huge flood out of the yen and into other currencies (including USD)
- Magnitude of move causes carry traders to unwind yen carry (exaggerates move)
- Dollar demand increases the borrowing rates for dollars. I’m not 100% clear on this but you can see the 10 year tips yield turned up at the same time. His analysis is not the whole story, just check the first chart:
- Dollar strength affects commodity markets cost of carry because commodities are priced in dollars
- Gold sells off, maybe due to the tips rate (see below).
- This causes more dollar strength which incidentally causes oil to get dumped as well as other commodities.
 
This guy has an interesting take on the situation, for the following reason. He says that from about 09-now the price of gold has correlated with the tips rate, so traders sensitive to that would have sold off heavily, and because the bond yields are zero, if you are looking by that factor alone, you could call the end of the bull market in gold.
 
 
HOWEVER, he goes on to say that what this really means is we now have to focus on the USD cross currency rate and inflation instead of the bond prices to figure out the direction of gold, so rather interestingly for this to be a pullback and not the top of the bull there needs to be a paradigm shift in that the traders who are currently following a tips related correlation strategy may think the bull market is over, but in actual fact this may be a SUPERB buying opportunity to those who thing inflation is going to increase/accelerate.
 
So right now – just on this analysis which may be incomplete – gold is a long. Worst case scenario you get a bounce, best case you are in at the bottom of the inflation fueled next leg up.

Low volatility WW3/Credit “event” spread

November 22, 2011

I wanted a bit of middle east WW3 exposure so I was looking at defence longs.

My view is WW3 is in the post. Is that a bad thing? Makes no difference. Its an inevitable thing. Like the end of a relationship. Don’t kid yourself, if its happening its happening.

After mooching over a few possibilities I settled for long Boeing/short UAL.

Now, there are worse airlines than UAL (American Airlines you suck) but thats not the point. Theres too much volatility and I got squeezed last month so when this low volatility spread came up I found it attractive.

The second factor is its also “crash is upon us” trade if you look to what happened in 2008.

Looks like its gonna take off.

It looks good until it stops looking good. 10% stop loss, 35% target. Know when to quit.

Intra Sector Spread (Retail Grocery) for the UK

May 22, 2011

Inflation is in the UK already, hyperinflation might be in the post, commodities are still high, UK consumer sentiment is flagging.

This obviously will have an effect on consumers so I came up with the idea that shoppers will move from expensive stuff to cheap stuff.

Quite simple really, Marks & Spencers make expensive foods and sell expensive clothes (yes, expense is relative but you know what I mean); Morrisons are a cheap grocers. As the UK consumers are knee deep in it they will be looking for downmarket substitutes. Just go long Morrisons and short Marks.

This is a lovely long/short position that excludes market and sector risk as the long and the short cancel each other out !!! So profit per unit risk in this trade is beautiful !!!

I also looked at Tesco/Marks amongst others but Tesco has many other interests I would have to hedge out. Aldi and Lidl are also quality cheap stores but they are privately owned.

During the last recession people went heavily from Marks to Tescos but Morrisons has increased market share recently and people are even poorer, so I am giving Morrisons a punt.

How a bullion rally develops

April 15, 2011

The stages of a bullion rally

Robin Griffiths of Casenove explains the rally unfolds in 3 stages:

  1. Bullion rises so far it alters the economics of mining (we are possible there already).
  2. Great mining companies (e.g. Newmont, Barrick, Goldcore, Agnico-Eagle etc.) say yes we’ve been mining copper and nickel but at these prices we can’t lose money so we have to open some gold mines. So the mining companies have a run.
  3. Some place in the middle of nowhere with terrorists in the background has a boom but this turns out to be a hole in the ground with a liar on front of it.

How to trade it

Right now in silver is my favourite metal. We are still in the bullion rally phase so AGQ is way outperforming SIL (AGQ is the proshares ultra double long physical silver ETF; SIL is an equity basket of silver miners). AGQ is backed by futures based on the London silver fixing, so presumably on the LBMA. Its a little bit risky because the metals markets are all paper but we haven’t defaulted yet and its easy money … for now.

Keep your eye on the miners for new bullion mine announcements then take option positions on those. Pick a target and ramp up your gains with bull spreads. This is also a good inflation hedge if things go that direction as ultimately you will end up with equities which have a certain intrinsic value and also safer than paper contracts if they are backed with nothing.

Watch the frontier markets for new mining concerns. Mongolia actually has a huge amount of mineral wealth so when we reach stage 3 some of the unheard of companies will actually be ok.

1 Month AGQ versus SIL

This is the difference in performance over 1 month. Its the same story if you look further back.

References

Rare Earths

April 10, 2011

What they are

You are probably aware of the rush to invest in gold and silver recently. If not go to http://silvergoldsilver.blogspot.com first and get up to speed.

However, there are other metals in the world that also present interesting investment opportunities and perhaps don’t have as much coverage as they should have, i.e. rare earth metals.

The chemical properties of atoms is determined by their valence electrons, i.e. those in the outermost shell, and because of this the rare earths all possess similar chemical properties.

The magnetic properties of an atom are however determined by the electronic structure of the the sub shells and this is what gives rare earths their interesting and industrially useful properties. There are so many applications if I wrote them all out this post would get kinda boring so I’ll just point out a few and you can get googling if this doesn’t satiate your curiosity. There are 17 rare earth elements in total but I will only describe a few here.

Neodymium

Neodymium is a critical component of strong permanent magnets. In 1984, General Motors and Sumitomo developed the neodymium iron boron alloy for permanent magnets, which is the basis of all modern electric motors because it allows you to make a very small electric motor with the highest possible power density. Hence the miniaturisation electronics. Lets face it, nobody wants to carry around those mobile phone bricks we used to in the 80′s and 90′s again.

Furthermore they are essential for efficient wind turbines. Turbines generate electricity by rotating a copper coil inside a magnetic field. The more powerful the magnets the more energy can be generated. Also, if conventional magnets were used this would mean the turbines would have to be bigger with associated fabrication and maintenance cost increases.

Neodymium total world production is less than 20,000 tons.  According to estimates a single wind turbine electric generator producing 1 megawatt of electricity requires one ton of neodymium.

They are also used in the avionics of precision guided munitions.

Lanthanium

Strategically important for catalysts used in petroleum refining.

Each Toyota Prius contains 4.5 kg. Its the metal in nickel-metal hybride batteries.

Erbium

Erbium doped glass is pink so so can be used in novelty sunglasses. More boringly a little added to optical fibres allows them to carry light further. Is also used in lasers for dental and skin treatments because erbium lasers don’t allow heat to build up in skin.

China exports cut

China in order to conserve resources and to protect the environment has clamped down on mining whilst cutting export quotas. China was previously the largest exporter of rare earths but it is expected that they will become net importers in the next few years. China is the future. I was there last year on business and it was pretty obvious it wont be long before they are our masters. When they become net importers the price will skyrocket and they will have enough juice behind the yuan to pay the market price.

US strategic stockpiling

U.S. Rep. Mike Coffman, R-Colorado, Wednesday [6th  April 2011] reintroduced the Rare Earths Supply-Chain Technology and Resources Transformation Act of 2011 (RESTART Act), which seeks to re-establish a domestic rare earth industry in the United States.

How to trade this idea

Lynas Corporation Ltd. (LYC) – I prefer this as it is an Australian company and I see the AUD strengthening against the USD, so its a toofer (2 for 1). The Australian economy has a large mining component and because mines generate real assets the AUD strengthens in an inflationary environment. The rush to real assets and out of US bonds due to structural problems with the US deficit and the Bernank’s money printing death spiral frenzy makes me want to avoid US companies for the time being (although they will become good buys later – thats another post). They should be in production in the fall of 2011. Check out their website, you can see the facilities they are building already. They also have a tax free deal with the Malaysian government to do the processing of the ore over there.

Rare Element Resources (REE) - Not just rare earths but also gold. This popped 15% on Thursday 7th April 2011 on news that the US was considering stockpiling strategic resources.

Molycorp (MCP) - Lots of hype around this one recently. American company though and as I think the USD is toast I’m not touching it. Could be a good buy after the dollar collapses though.

Others – there are quite a few smaller mining concerns. Worth watching because as the premium on rare earths increase a valley full of moose turd or a sacred Aboriginal ground could turn into a significant mining concern so expect to see more mining startups and consolidation before this trade gets crowded.

Dumb idea – you could try bribing the port authorities at Shenzhen.

Make sure you pick good entries and set your stops. There is a fair amount of volatility in these stocks so be mindful.

References

http://www.mining-journal.com/production-and-markets/china-extends-ban-on-antimony,-tungsten,-rare-earths-mines

http://www.popularmechanics.com/technology/engineering/news/important-rare-earth-elements

http://www.glgroup.com/News/Braking-Wind–Wheres-the-Neodymium-Going-To-Come-from–35041.html

http://www.reuters.com/article/2011/03/22/us-china-rareearth-idUSTRE72L10I20110322

http://www.tickerspy.com/newswire/?p=4290

http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=124584&sn=Detail&pid=102055

http://www.defensemedianetwork.com/stories/rare-earths-provide-critical-weapons-support/

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