Tuesday, July 02, 2013

Buying From Panic Sellers: A Forgotten, Unloved Precious Metal


This article was originally published on my new site and newsletter, Contrarian Profits.
The panic selling in precious metals is giving us a special contrarian treat. I'm talking about a former inflation hedge sweetheart that's being unfairly dumped and is now trading very close to its cost of production.
But as savvy resource investors know, the cure for low prices is low prices. They know that when the price to make something drops below the price you can sell it for, less will be produced.
If you listen to commodities guru Jim Rogers respond to the talking heads on CNBC when asked for his favorite resource pick, he tells them he begins his research by looking at what's down the most.
That's where we take our clue and spotlight a "manic" metal that sometimes trades as a store of value, like gold and silver. At other times the metal – platinum – changes hands like an industrial metal, ruled by supply and demand.
Too bad these days it's being kicked to the curb like an unloved, unwanted inflation hedge. Yet it is still on the hook to meet industry demand. We need it for clean air, and consumers desire it for high-end jewelry.
This means the current price of platinum – just $1,319/oz. - is a real problem.
Demand for platinum should surpass supplies by a record amount this year – anywhere from 200,000 ounces (according to mining giant Lonmin), to 844,000 ounces (according to HSBC).
If the price drops more, South African miners – who produce more than 70% of the world's supply – will probably cut more production.
In fact, the two largest platinum miners – Anglo American Platinum and Impala – say their cost to get it out of the ground is $300 to $500 more than today'"street" prices.
Yet platinum demand is more stable than its cousins. Unlike gold and silver – whose long-term trends depend heavily on investor sentiment – platinum's demand comes from two steady sources:
  • Nice Jewelry - About half of the platinum mined each year goes to the jewelry industry. China is the big consumer, and its demand is steady.
  • Auto Emissions – Platinum is also used to clean up the air we breathe. It's a key component in cars for filtering vehicle emissions. Demand is growing, with more cars on the road and tightening emissions standards (even in China and India).
Platinum is not usually recycled – it is mostly "used up" for good. The only new supply is the amount dug up each year.
Platinum is already down more in dollar terms than you'd expect – maybe luring some investors into this trade early. This is because platinum's "native currency," the South African rand, has been weak. So mining costs are actually a bit lower than usual.
Beaten up with gold and silver, to four-year lows.
(Source: StockCharts.com)
The recent smack down of money-printing hedges, and selling from early traders giving up, presents us with a very interesting risk/reward setup. As contrarian investors, it's time to consider taking the other side of this panic selling.
There are some easy ways to own platinum thanks to ETFs. My favorite is the ETFS Physical Platinum Shares (NYSE:PPLT), because they actually have the stuff – they buy and store the platinum in vaults.
Most investors don't know the current carnage in the precious metals is tanking the price of platinum below viable levels. That means now is the time to buy, or as Warren Buffett would say, "Be greedy when others are fearful."

Wednesday, March 06, 2013

Trading Cotton Futures: King Cotton's Stealth Resurgence

Just nine months ago, we were licking our chops at cotton's blue light price special.  Cotton had been smashed from a post-Reconstruction high of over $2 to WAYYY down below the $0.70 mark.
Cotton futures have quietly dipped to their lowest levels in two years, prompting our "contrarian alert" to sound.  Likely, cotton will base out a bottom, and slowly restart an ascent likely to carry it well above $1. As we wait for a breakout to the upside, King Cotton is a nice potential trade to keep an eye on.  (Full analysis at Seeking Alpha)
Since then, The King has dusted himself off, and began his somewhat-long-awaited rally...

Cotton Futures Price Chart 6 Months
King Cotton picks himself up off the mat...

Cotton Futures Price Chart 5 Years
...and it's a LONG way back to the top of the hill. (via Barchart.com)

While the top-most chart (past 6 months) shows an impressive rally, the latter chart (past 5 years) shows recent stratospheric levels that cotton has traded at.  While a challenge of 2011 highs may be a bit much, a rally above $1 seems like a more reasonable thesis.

Going Long Cotton

I went long cotton in January upon its breakout past the $0.78 mark.  When soft commodities "base" for as long as cotton did, a breakout above the trading range should usually be bought...so far so good here.

We'll revisit the fundamentals of the trade next, but our stop-loss will be purely technically based.  If cotton hits a 15-day low, or decisively breaks current support at $0.82, we will close this trade out, book a modest profit, and wait for the next opportunity.

Cotton Fundamentals, and the Tape

Last May, we speculated that cotton supply may decrease because farmers would have fond eyes for the grains:
Corn and soybeans are not exactly cheap right now either - with corn above five bucks a bushel and 'beans in the lower teens, farmers are making some good coin on these crops. It's unlikely they'll replace this acreage with cotton at current prices.
Bloomberg today reports this is exactly what happened:
American farmers may sow 9.4 million acres of cotton in 2013, as they switch to more profitable crops, Macquarie Group Ltd. said today in a e-mailed report. That compares with 12.3 million a year earlier, government data show.
With corn and soybeans currently sitting higher than they were last spring, it's likely the bearish trend in cotton plantings will continue.

So demand is decreasing - how about supply?

This is the wild card that is more difficult to predict.  There have been reports that the real catalyst of the recent cotton rally has been China buying up as much cotton as it can.  While I find it impossible to get a macro-read on China from my comfortable office chair in Sacramento, I do have access to the cotton price chart, which does appear to be moving upwards.  Hence we'll continue to use the chart as our real-time indicator of Chinese demand for cotton.

We know the potential for a supply/demand imbalance is there.  It has been for years, and it tipped in a big way a couple of years ago.  Our working theory is that this could happen again - especially with central banks with their collective fingers on the money printing triggers.  So, we'll keep a speculative long position in cotton, thanks to the breakout as our cue.

Other Commodities to Watch

Rice and cocoa are both trading towards the lower end of recent ranges - these appear the most intriguing in the short term.  We'll also be keeping an eye on sugar and coffee...both of which continue to tumble, as cotton did in late-2011 and early-2012 before finally finding a nice base to prepare for this current rally.

Sunday, June 10, 2012

Cotton Surges "Limit Up" For Second Consecutive Day

Our soft commodity flavor-of-the-month, cotton, has seen its near term futures surge "limit up" for the second day in the row.  Was our case for cotton perfectly timed for once?  (See: Cotton's Blue Light Special)
Cotton futures price chart 2012
Cotton's sharp reversal sent shorts running for cover. (via Barchart.com)

While there have been additional acreage reductions announced in the past week, this sudden rally is being attributed to fast and furious short covering.  I'd hate to be short any commodity in a secular bull market, let alone when Bernanke has a microphone in front of him!

We'll keep an eye on a potential breakout - I prefer to see a 20-day high, at least, when entering a cotton position, and this didn't get us there.  Which is fine, as I also hate to trade V-shaped moved in the softs - they rarely happen.  I would expect the trend in cotton to remain sideways to down for a bit, with the potential for stimulus-driven swings.

Advantages - and Myths - of Returning to a Gold Standard

The gold standard these days has been reduced to a distant memory and fantasy of hard money proponents.  IF we returned to a gold standard, would all our problems be fixed?  No, contends monetary expert (and parter of the late great Harry Browne) Terry Coxon - but the reality of the current monetary situation would be exposed, and we'd get to see some deserved egg on the faces of our modern day monetary masters of the universe.  Coxon explains...

Myths and Realities of Returning to a Gold Standard

By Terry Coxon, Casey Research

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public's consciousness.

I'm happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I've noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let's take a closer look at what it really means. It's not that complicated.


What Isn't at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn't been the source of all mischief.

I've heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn't.

The legal-tender laws are usually part of the story, but the story doesn't hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don't like it, you can avoid it by declining to accept anyone's IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government's claim that it owns "dollar" as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark "Chevy" and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn't alter that situation or expand the range of your choices.

I've also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It's quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn't redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).

What It Wouldn't Fix

A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.

A new gold standard wouldn't be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve's ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.

And a return to a gold standard wouldn't ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we've seen, a gold standard adopted one day can be abandoned the next.

What It Would Fix

Now that we've dampened expectations, here's what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.

Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn't prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn't.

With a fiat money system, you don't need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money's purchasing power. The years-long lag between printing and the effect on prices makes deception easy.

If you print more money this year, well, it's only a temporary measure and only because of the recession you're trying to avoid. Next year, you'll slow down the printing or maybe not print at all – you'll have to wait and see what conditions are next year. And don't forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there's always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You'll think of something.

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.

With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.

The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.

Terry Coxon is one of several big-picture analysts at Casey Research who sift through today's cultural, political and economic trends looking for clues as to when and how they might shift... because those shifts hold strong profit potential for bold investors. To enjoy more articles like this, as well as to receive specific, actionable investment advice including when to buy or sell specific stocks and shorting stocks, among other things, sign up today for The Casey Report. A ninety-day trial is completely risk-free.

Attention Commodity Shoppers: Cotton's Blue Light Special

Cotton futures have quietly dipped to their lowest levels in two years, prompting our "contrarian alert" to sound. King Cotton, since rocketing to levels not seen since Reconstruction, has since plummeted:

cotton five year price chart
Cotton spikes, and crashes. (via Barchart.com)

Two months ago we mused that cotton and rice, both off significantly from their highs, may have piqued the interest of Jim Rogers, who recommended that investors interest in agriculture start by looking at what's down the most. Since then, cotton has drifted nearly seventeen cents lower, and is now sitting at levels not seen since early 2010.

On Cue: Supply Cuts Have Arrived Just as high prices tend to cure themselves with increasing supply and/or decreasing demand, low prices commonly exhibit the equal but opposite effect. And we're already seeing signs of supply going away, as China will decrease cotton plantings by nearly 10% this year...

Please read my full cotton analysis on Seeking Alpha.

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