The markets continue to linger in consolidation mode with gold and silver now back in the middle of a wide trading range (1500-1800 for gold, 28-37 for silver). The situation continues to develop as expertly laid out by Eidetic Research at the end of September and indeed a weak monthly close by gold for November would meet at least some of the conditions for the top reversal that took place late in the summer. Basically we need to work off the technical conditions that are weighing on the market as a result of that massive but ultimately failed move.
Our own outlook has not changed and we expect up and down trading into January without much net progress being made. That said, we may start to see the juniors firm up by the middle of December in advance of a broad commodity rally next Spring. The further we move into this period of weakness, the more bullish we are getting although there are still very good reasons to keep some powder dry. On the other hand, the current buying opportunity is the best since the summer of 2010 and arguably even better in some cases (such as prospective junior explorers and small profitable producers).
To be more specific, we are going to be exiting our remaining commodity hedges during the next few days and weeks. For example, we purchased the PowerShares DB Base Metals Dble Shrt ETN (BOM) and PowerShares DB Agriculture Dble Shrt ETN (AGA) early in the summer and have been taking profits during the past couple of months. Although commodities may not have bottomed and we are likely to be a bit early, hedging positions such as this have more-or-less met their intended purpose of at least keeping some cash safe in case of market weakness. We could be very wrong and an “all-markets” crash may still lie ahead as a result of European instability or any of a dozen other good reasons. For now at least, we view the markets as desperate yet not critical and that generally means an opportunity to get in according to our book.
We are also going to be carefully adding speculative exposure on the long side in the weeks ahead after several months of neutral or short strategies including put option speculations that have kept many of our accounts from melting down. For example, we have been playing natural gas with a bearish tilt (recently cashing in on December 3.40 puts in NYMEX NG) but will now be looking at bullish opportunities. To that end we have been buying the cheap (under $100) February 2012 5.00 NG calls and may lower the strike (looking to pay under $100 for the February call) if we get an expected final washout in that market before a late winter rally. Similarly, we are starting to play around with call options on some gold and silver miners and will get very serious about it if we get to January and the market looks like it wants to put in a final low.
On the straight long stock side of things, we are now ramping up to complete our comprehensive reviews of the gold and silver producing companies in order to identify the best opportunities for riding the Spring rally. Our recent Royalty Company Report has already provided some insights and we are also devising strategies based on our completed royalty model. We spent a lot of time on the model and we expect that the effort will continue to pay dividends (or should we say royalties?) in the weeks and months ahead. We expect similar results from our silver and gold models especially now that we are using the Tableau charting system for data visualization. There is nothing like this available anywhere else and we are just getting started (we will be building a full rare earths model next).
In the meantime, we have identified several companies in the gold/silver exploration and development space (for example see here) that we think have positive price drivers in the months ahead and we will continue to accumulate these on price weakness. Beyond these, there are literally dozens of juicy opportunities out there and we hope to help highlight some of them in an informal manner using our Mining News Reviews. We are behind by about 50 reviews at the moment that feature news or developments that we expect will turn out very positively in the short to medium term.
To summarize, we are now in midst of a very difficult period where many investors might just give up and throw in the towel but our view is that we should get at least a decent rally in the Spring after a possible bottom in January. By “bottom”, we don’t mean a low that necessarily takes out recent lows (such as the $1,535 print in gold on September 26) but rather a final low before a sustaining uptrend develops. For practical purposes, that might look for gold something like a spike down to $1,600 or slightly below. We will be prepared at such a possibility to deploy the last of our speculative capital. We would change this outlook if market, economic or geopolitical conditions deteriorate and may then again look for protection or hedging but otherwise we are going to be increasingly looking for long exposure into the expected January low.
Disclaimer: We may initiate strategies described above at any time. No compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company or strategy with a licensed investment advisor or broker.
re NATGAS, here are weekly/daily/30min charts for context http://www.alphatrends.net/2011/11/23/natural-gas-spikes/
So this winter the bulls are hibernating?
Climate change can be a bitch huh.
I’m testing the NG waters a bit with the new BOIL ETF. It’ll probably end in another averaging down exercise if today was any hint.
I’ve been feeling a knot in my gut lately about the general market malaise. It’s usually a good time to buy long when I feel the knotty gut, but I keep having these nightmarish thoughts that nothing is safe except puts and shorts.
Many REE plays followed Molycorp’s rocket rebound today. Pretium and Esperanza had big moves on good news but just wait till tomorow or the next day….if they follow this years script, BAM, they’ll not only fail to follow through, they’ll give it all back and then some.
I’ve kept a bunch of cash on the sidelines this year, but looking at the naked long exposure I’m commited to at this point doesn’t make me feel confident in any way,shape or form to making a bigger commitment. I’m wondering if the odds are closing in on even for the whole Western World to get a black swan sliding down the chimney instead of good old Saint Nick.
It doesn’t help when I watch interviews like this either. Kyle Bass on the BBC.
http://www.zerohedge.com/news/kyle-bass-un-edited-buying-gold-just-buying-put-against-idiocy-political-cycle-its-simple
@forwill
This is a good interview. It is unfortunate the journalist rarely allowed him to complete his responses.
Several times he discusses “asynchronous hedge” versus a run of the mill hedge . . . and most investors don’t hedge at all.
@Drew
Here is his 9/30 13F which only shows SEC registered securities . . .
http://sec.gov/Archives/edgar/data/1420192/000095012311098297/d85676e13fvhr.txt
If I am understanding this correctly, he had puts on the SPDR S&P 500 ETF worth $577 mm.
@Drew
sure it wasn’t “asymmetric”? The other key term I think was low theta (and low cost!).
@Drew
I guess that 5,100,000 SH means he’s holding 51,000 put contracts? It’d be nice to know what month and strike they are. There sure are more than a few that believe 2012 is going to be a very bad year for stocks.
The EU situation seems unresolvable without some kind of Euro breakup and some debt defaults. The Chinese growth story is weakening and the numbers they have been reporting for many years may turn out to be largely achieved from inflating the mother of all bubbles. The US powers seem intent on abusing the Dollar’s reserve currency status and their ability to create more debt backed notes at will to shift their debt obligations to commoners all over the world. If sustenance becomes unaffordable for millions of westerners who are accustomed to a great bounty, the civil unrest today will look like childs play. Then we’ll get bank runs, marshall law, asset siezures, curfews, price controls, rationing, etc.
Does anybody here think that the coordinated central bank move yesterday smacks of desperation? Liquidity? Yup, sure. Is the US Fed printing press tool now being used to “bail out” the Euro too? I guess when German bond yields started rising enexpectedly at the last auction the cat escaped the bag; more like a bobcat. So much for Europe’s saviour.
It must be nice to be a banker. Having all your risks mitigated by, um, yourself, in the name of saving the “people”. Actually getting real nice returns with no risk while the common schmucks assets are decimated by real negative returns. Will ANY of them use GOLD to back the promises they are making with the endless bond issues? Not only NO, but HELL NO brother, that’s real money. If they win they win and if they lose they win. What a sweet deal.
Personally, I’m going to use any end-of-year rally to bail on any individual stock that I can get a profitable sale on. The leverage to commodity that’s supposed to be derived from holding resource equities has been a negative one way street for many months now. As long as the Dollar and Treasuries are panic bought at every hint of Euro trouble, individual commodity equities just aren’t the place I want to be with any serious amount of money.
@forwill
Until we hit inflation? Which is one expectation that suggested this (miners) was a good trade from a long way back. But liquidity (and thus correlation) certainly seems to rule the day (just can’t make the adjustment here).
Certainly miners vs metals has not been good, as witnessed per….
– The gold mining benchmark NYSE Arca Gold BUGS Index ended last week at 17 times earnings, the lowest multiple in
more than nine years and below a five-year average of 37 times. (Bloomberg)
Buy more!
@Dave
But the bottom isn’t in is it?
@Dave The miners have correlated more with the S&P 500 than with the metals haven’t they? Any fear moves in the “markets” have consistently thrown strength to the Dollar, which drives the “markets” down. Players seem reluctant to dump their gold holdings, but the miners have been a different story.
@forwill
If you look at a chart of Gold (GLD), Silver (SLV) and the S&P (^GSPC, purple) vs. various mining ETFs and Indexes one notices several inflection points:
http://finance.yahoo.com/echarts?s=GDX+Interactive#chart16:symbol=gdx;range=20110103,20111130;compare=gld+gdxj+gldx+gdm+^xau+tsxv+^gspc+slv;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off
For the year gold and silver are up about 30% vs. about 0% and -30% for the large producers and smaller producers/developers/explorers respectively. The smaller companies were unsurprisingly sold off much more heavily throughout the summer and especially into October.
If you look at a two year chart not much changes actually except now gold and silver have shifted higher to a roughly 60% return. Depressing to be sure.I would argue that the producers might have kept pace if they had capitalized on record prices. Instead there was no shortage of mediocre to poor earnings as cash costs crept higher and production estimates were revised lower. The market is right to be cynical, but this does not worry us. In fact, we’re somewhat positive since we would expect our skills to be valued more highly in an environment of greater investor discrimination where value trumps hype.
It’s also a reminder that trading is very important. The buy and hold strategy just isn’t working well anymore as markets get more and more volatile. We are always evaluating trading opportunities, especially in the options and futures markets, and these trades are a major if not THE reason our corporate account (and others) are showing nice gains this year.
@forwill
I can’t argue with the strategy but I will make the point that in reality the EU debt issue has been handled VERY poorly so far from a central banking perspective. There are significant “opportunities” to not only improve the optics but to restore some semblance of certainty and confidence to markets. So in that sense I don’t view the move as desperation at all but rather the realization that, if you are going to be a Keynesian operation, you have to act as a Keynesian. So far Europe has pretended like they have a hard money system when they really don’t. Until they do, there is no point hoping for an ugly hybrid of gold/hard money and fiat, it is better they stay consistent and let the chips fall where they may.
@Dave
In retrospect the miners have settled into a seasonal, or better stated, cyclical play with a mini-cycle contained inside a larger secular trend. The last REAL mining/junior rally was actually in 2006-2007 and that is going to be 5-6 years ago by early 2012, which just happens to be right around the normal arrival time for the next cyclical reversal. Few are expecting much and the mood is generally as negative as it was in 2008 or early 2009. Either the commodity bull is over and the stocks just keep sinking without a meaningful turn up, or else we might just get the “lift all boats” rally like 1996-1997, 2002-2003, 2006-2007 … In any case, our positions as they now stand have various levers and drivers that may still eek out some upside even if the cycle is a bit late in the offing.
@forwill
The bottom is “in” only in the rear view mirror. That said, there are good technical and fundamental factors that point to January as being the “in”. The juniors in particular need a tanker load of new money to come slushing in and while I can’t discern a source for such a mountain of cash (although some semblance of a QE3 could be coming) that doesn’t mean it will not appear.
This is not a permanent situation and I’m willing to bet that exactly this type of thing is what has many investors folding their hand at precisely the wrong time. Heck, it had ME doing it when I was much less hip to the game.
@for will
It is desperation for sure. That is about the only thing that gets them to act.
All they can do now is try and save the banking system with liquidity when it is in danger of collapse.
I still think the good miners will have their day
@silverax –
Is long platinum and short gold a smart trade right now?
@David
What would the rationale be: economic recovery, supply disruptions…? There certainly has been quite a bit of divergence in the two during 2011, http://finance.yahoo.com/echarts?s=PPLT+Interactive#chart6:symbol=pplt;range=6m;compare=gld;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined, but I don’t see any reason why this gap has to shrink so I’m a bit hesitant.
@Zurbo
Rationale would be historic chart of gold:platinum ratio. Above 1 is often near a peak.
@David
why not long long rhodium and short platinum then? during 2008 the ratio has been as high as 5:1 vs current 1:1.
(disclosure: long rhodium, not short platinum)
@Giuseppe
I don’t know where or how to trade rhodium and I actually forgot that it existed until you mentioned it.
I am probably not going to put on the gold/platinum spread because gold is in a bull market, but just curious about the idea.
@David
To answer, I think long Platinum and short Gold could be problematic for now although it is the type of trade that would probably do well in a cyclical junior/commodities rally. Indeed, just about any combination of long X and short Gold could do well. But then again, why short Gold? If we don’t get the rally, the trade moves against you and if we do get the rally than it will probably see only meager net profit. I think it is probably better just to bet on the possibility of the rally in the first place, and just go long something with leverage.
As for rhodium, there is actually an ETF for that! http://www.google.com/finance?q=LON%3AXRH0
@Dave
Yes, it looks terrible — and I love it, NG never looks good right before it explodes higher…
@Rob
The warm weather is actually what is helping to keep NG contained — and actually climate change as modeled has the NE of North America getting colder and more brutal winters.
It is foolish to bet on black swans because by definition they cannot be predicted. We didn’t really have a black swan in 2008 as far as housing or the economy, it was mainly just a liquidity black swan. In any case, I am not going to buy a market argument predicated on predicting WHEN the next crisis will hit — for now I’ll just let the markets tell us how things are looking in the short term and we’ll react accordingly. As such, I am still seeing a December rally although nothing huge, followed by a decline into January (perhaps will look more like consolidation than an attempt to make a final bottom) and then a Spring rally (for commodities and juniors) possibly followed by a Summer rally (with the obligatory “sell in May” weakness along the way).
And look, I am not spouting the usual BS here — I preserved my portfolio during 2008 by simply going short one of the RIGHT instruments even after the flock of black swans had landed — copper (put options). No promises that we can do it again but the fact is that anybody who followed our trades closely could have bought copper put options AGAIN this past summer and ended up with very good looking accounts as of right now.
As far as EU and China, there are of course the very well known risks there, and for the most part I think they will continue to overhang the market next year but unless we see tangible movement in the wrong direction then we still don’t know when these overhangs will become avalanches. It could be years.
@silverax
Could you comment on this as I was wondering about these negative lease rates per the Kitco lease rate chart:
By Jack Farchy
Financial Times, London
Wednesday, December 7, 2011
http://www.ft.com/intl/cms/s/0/93885646-20fd-11e1-8a43-00144feabdc0.html
A dash for cash by European banks in a little-watched corner of the gold market has accelerated this week, highlighting the continued scarcity of dollar funding even after a co-ordinated intervention in the market by the world’s largest central banks.
Gold dealers said that banks — primarily based in France and Italy — had been actively lending gold in the market in exchange for dollars in the past week.
The rush has pushed gold leasing rates — the implied interest rate for lending gold in the market in exchange for dollars — to record lows, according to Thomson Reuters data. The one-month gold leasing rate fell to a low of -0.57 per cent on Tuesday, suggesting that a bank lending gold for one month would have to pay to do so, at an annualised rate of 0.57 per cent.
“People are lending gold out to raise dollars,” said one senior metals banker.
Edel Tully, precious metals analyst at UBS, said banks were “looking to offload metal either for balance-sheet reasons or funding, or both.”
Large bullion-dealing banks take gold on deposit from a range of customers such as investors, central banks, and other commercial banks.
Although they often lend out some of that gold around the end of quarterly reporting periods to reduce their liabilities, the moves have been unusually dramatic in recent months as the eurozone debt crisis has caused growing strains in the dollar funding market.
Banks do not, however, lend all their gold and some of it is held in accounts that preclude them from using it for trading.
The rush to exchange gold for cash began in September, when one-month leasing rates fell as low as -0.48 per cent. Traders cautioned that few if any banks were likely to receive the published rates since they have been skewed in recent months by a widespread reluctance among bullion banks to take gold for dollars. Bankers said they were surprised to see such heavy lending just after the Federal Reserve and other central banks announced measures to ease dollar liquidity to the financial system.
“It’s hard to understand,” said one New York-based bullion banker. “This wasn’t supposed to happen with the dollar swap lines in place.” The gold leasing rate eased slightly in the wake of Tuesday’s European Central Bank annoucement that 34 banks obtained $50.7 billion in three-month dollar funding. One-month rates were at -0.52 per cent, as borrowing interest returned, according to Ms. Tully.
@amarkscpa
Looks very bullish to me for gold:
1) banks are desparate for dollars indicating that the financial system is somewhat unstable
2) banks are not lending gold but they are borrowing dollars with gold as collateral
3) don’t they have other valid collateral to borrow? Note that it seems to be banks in Italy and France that are doing it
4) banks don’t want to sell their gold ( or is their customers gold? )
@amarkscpa
It’s not explained well in the article and in fact some of the quotes and statements are plain wrong.
First, the central bank is the one lending the gold (private banks don’t really have any) and the only reason would be so that private banks could sell that gold into the market for dollars. The private bank would then buy a futures or forward contract for price protection. A bunch of private banks doing this at the same time could very possibly increase the gold forward rate (more on that in a moment). That is what is happening, if something is indeed happening at all with gold leasing.
At the same time, you can bet that the central banks are not lending the gold at a loss as implied by the negative lease rate but in fact making net money on the trade. In other words, they are going to get the gold back plus a fee for their trouble. Therefore, the private banks who are borrowing the gold and selling it into the market are paying a POSITIVE lease rate for that privilege despite the gold lease rate supposedly being negative.
The reason why the actual lease rate and the published lease rate could have this discrepancy now but not so much in the past is that when banks leased gold from the CBs before, they weren’t doing it for liquidity but to engage in a carry trade to make arbitrage profits. In effect, they borrowed at one rate (the gold lease rate) and made loans at a higher rate. This required debt markets with decent yields where the consensus was that little risk of default existed, which is clearly not the case today despite Corzine’s ill-fated adventures in “A-rated” EU sovereign debt.
To be more specific, the lease rate is only an “indication”, derived mathematically as the difference between LIBOR (what banks pay to borrow cash) and the gold forward rate (the market rate for buying gold in the future). LIBOR has more or less been inching up the past few months, probably indicating tightening of dollar liquidity and thereby resulting in the central bank easing that we are now seeing. Meanwhile the gold forward rate has been climbing even faster at times, probably for several reasons with one possibility being the aforementioned forward buying of gold by the private banks who are leasing gold and selling it for cash in the spot market. So we have the appearance of a negative lease rate but in effect the rate that the private banks are paying to the central banks to lease gold is very much positive.
In summary, the lease “rate” is only an indication and not the real thing. More than likely the lease rate is positive in real transactions at this time especially if leasing is being used as a source of liquidity instead of generating bank profits. Anyone trying to do analysis on the supposed negative lease rates under these current conditions simply doesn’t know what they are doing or talking about.
@Tweetie
I’m not sure banks are desperate for dollars, but there is probably some tightening in liquidity that they want to head off early given the reactive stance in 2007-2008.
If the story is true, banks ARE lending gold (the central banks that is) in order to provide liquidity to private (member) banks in the short term. There are no dollars being borrowed, the gold is sold in the market for dollars and there you have the dollar liquidity. Of course this brings up the issue of what to do once the lease term expires. Do note however that the gold forward in a plain vanilla lease means there should be minor impact on gold prices when the lease is unwound, just like there is a minor impact on the gold price (considering where it is still trading) as the lease was put on and the gold sold into market.
No, the central banks don’t want to sell their gold and that is why they are presumably leasing it. Do note, however, that leasing does have limits under the central bank gold agreement.
If there is something bullish here, it is that gold is maintaining $1,700 despite a large amount of physical gold (perhaps 100-200 tonnes?) being sold into the market, and if that physical gold finds strong hands then the market will have to provide that much gold to replace the CB reserves when the leases are unwound. In other words, some future supply could be coming off the market as a result. No way to know if and how much that translates to a bullish price.
@silverax
Thanks.
Would appreciate if you would write a short commentary each month on gold and silver backwardation/contango, basis, and lease rates. Many of us became subscribers because of your comments and analysis on this subject.
If there is nothing of interest happening for the month, then post a very brief commentary saying so. If something of interest does occur, then you can make your commentary a bit longer.
In short, I vote for a monthly commentary on backwardation/contango, basis, and lease rate trends (rather than me getting blindsided by articles written by authors who are less knowledgeable than you, and then having to ask you to comment). Thanks!
@amarkscpa
That’s a fair request and maybe it would not be monthly but periodically. I do plan to do a quick “hit” piece on this negative leasing stuff very soon as it has popped up quite a few times recently with lots of misinformation. Until we have dollar interest rates off the floor, it is not really worthwhile to talk much about gold basis/contango/backwardation as I have explained a number of times in the past but perhaps I can still address certain issues or just explain different considerations both at a high level and in greater detail to address different levels of reader interest and knowledge of the area.
On a forum I frequent, there are lots of comments regarding this ZeroHedge article(http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe).
I post It here as it makes one consider exactly how much he wants to trade and how much he wants to be strictly in cash and physical metals outside of brokerage accounts.
Comments?
Rethinking Diversification — Katherine Austin Fitts