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.

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