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Energy & Commodities

The Top Contrarian Bet in Natural Resources

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Posted by Amber Lee Mason & Brian Hunt

on Monday, 07 January 2013 09:06

It's an old saw in the resource industry that "you're either a contrarian or a victim." 

In other words, you want to buy commodities when no one else wants them… and sell them when others will pay just about any price to get them.

Our colleague and fellow Growth Stock Wire contributor Jeff Clark covered this idea in the November issue of his Advanced Income newsletter… 

During the peak of the cycle, investors are convinced prices will run higher forever. And at the bottom of the cycle, investors think the industry is dead. It is at that moment – when nearly everyone believes the candle has been snuffed out – that low-risk investment opportunities exist.

Jeff was telling his readers about the opportunity in one of the most hated commodities on the planet: coal. 

President Obama is publicly anti-coal. And coal competes with natural gas, which – as regular readers know – has become super-abundant and super-cheap here in the States.

In short, it's not hard to find obituaries for the entire coal industry. But the world still needs coal. We need it to make steel and to fire power plants in parts of the world (like China) that haven't tapped a new ocean of natural gas.  

And the time to buy is when everyone thinks there's no hope.

An easy way to make a bet on the coal sector is with the Market Vectors Coal Fund (KOL). This fund holds a basket of global coal producers, along with a few coal shippers and equipment makers.  

KOL is down about 30% from its peak this year… and about 50% from its peak last year. But as you can see from the chart below, it looks like the fund is trying to "carve out" a bottom in the $22-$24 range. And if you look at the right-hand side of the chart, you can see the fund just broke out to a new seven-month high.

GSW17kolredo

Breakouts can come on the downside or the upside. But whatever the direction, no trend can start without one. They act as a sort of "starter's pistol" for rallies and declines.

If a new uptrend is getting started in KOL, the gains could be big. If it can simply return to its 2012 highs, you'll have a 40% gain. A return to 2011 highs would be a double.

A bet on coal right now isn't a "sleep at night" trade. The coal industry may get even more hated before the cycle turns. And KOL will be volatile. After its recent run higher, it's likely to see a natural correction. In case that pullback turns into another bust, consider setting a stop loss near the fall lows. That's about 15% below today's levels. 

A recovery for the coal sector won't happen overnight… but the cycle will turn in coal. And right now, it's the contrarian bet.

Good trading, 

Amber Lee Mason and Brian Hunt

 

Further Reading:

Resource expert Matt Badiali expects an upside breakout in another beaten-down commodity sector this year… Right now, the companies he expects to lead the charge are cheap and offer outstanding upside… with only modest risk. Get the full story here: A Big Commodity Trade for 2013.



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Energy & Commodities

Why (Smart) Investors are Buying 50 Times More Silver than Gold?

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Posted by Eric Sprott: Sprott Asset Management LP

on Friday, 04 January 2013 10:11

As long-time students of precious metals investing, there are certain things we understand. One is that, historically, the availability ratio of silver to gold has had a direct influence on the price of the metals. The current availability ratio of physical silver to gold for investment purposes is approximately 3:1. So, why is it that investors are allocating their dollars to silver at a much higher ratio? What is it that these “smart” investors understand? Let’s have a look at the numbers and see if it’s time for investors to do as a wise man once said and “follow the money.”

Average annual gold mine production is approximately 80 million ounces, which together with an estimated average 50 million ounces of annual recycled gold, totals around 130 million ounces available per year. In comparison, annual mined silver production has averaged around 750 million ounces, while recycled silver is estimated at 250 million ounces per year, which adds up to approximately 1 billion ounces. Using this data, there is roughly 8 times more silver available to buy than there is gold. However, not all gold and silver is available for investment purposes, due to their use in industrial applications. It is estimated that for investment purposes (jewelry, bars and coins), the annual availability of gold is roughly 120 million ounces, and of silver it is 350 million ounces. Therefore, the ratio of physical silver availability to gold availability is 350/120, or ~3:1.1

Now, let’s examine how investors are allocating their investments between gold and silver. The data below is from the US Mint showing gold and silver sales in ounces:

Table1

As you can see, investors are choosing to buy silver at a ratio to gold that is well above what is available. This uptrend doesn’t show any signs of slowing either. The ratio of the physical silver to gold is both rising and extraordinarily above the availability ratio of 3:1.

We can also use other data such as the most recent issues of the Sprott Physical Gold and Silver Trusts. The last Gold Trust issue in September 2012 raised US$393 million and the last Silver Trust issue raised US$310 million. On the basis of prices for each metal at the time of issue, we could purchase ~213 thousand ounces of gold and ~9.1 million ounces of silver. This represents a purchase ratio of 43:1.

If we examine ETF holdings in both gold and silver, we note that in the period from 2007 to 2012, the increase in silver holdings amounted to 12,000 tonnes, compared to 1,200 tonnes of gold – meaning, investors purchased ten times more silver than gold.

These are only three factual data points to consider, but there are other indications that silver investment demand is way out of line with availability. Our favourite question to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus silver. The answer is that dollar sales are equal, which means that physical silver sales relative to gold are greater than 50:1.

A recent news headline on Mineweb read, “Silver Sales to Outshine Gold in India.2” It went on to quote a bullion dealer that “investors and jewelry lovers prefer silver jewelry these days.” As the largest importer of gold in the world, it would be impossible for India to purchase an equivalent amount of silver, as it would require more than one billion ounces, essentially more than the current annual mine production.

While these last two confirmations of silver demand are anecdotal, the statistics from the US Mint, the ETFs, and our Physical Trust issues, are factual.

For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.”3

Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows.

The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms.4

How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”

On behalf of all of us at Sprott, I wish you safe and happy Holidays and a prosperous New Year.

P.S. – US Mint Sold Out of Silver Eagle Bullion Coins Until January 7, 2013 
The Mint recently informed authorized purchasers that all remaining inventories of 2012-dated Silver Eagle bullion coins had sold out and no additional coins would be struck. Since the 2013-dated coins will not be available to order until January 7, 2013, this leaves a three week void for the Mint’s most popular bullion offering.

About Sprott Asset Managment

Sprott Asset Management LP (Sprott AM) is the successor to Sprott Asset Management Inc. which was founded in 2000, after the permanent separation from Sprott Securities that established in 1981. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.  Sprott AM is a fund company dedicated to achieving superior returns for its investors over the long term. In June 2009, Sprott AM reorganized to better define and streamline the key segments of our business. Sprott Asset Management LP currently manages a number of long/short equity strategies and mutual funds. Sprott Private Wealth LP (Sprott PW) provides advisory services to high net worth individuals. Sprott Inc. is the parent company of Sprott AM and Sprott PW.

 

1 Sources: Gold data is from World Gold Council www.gold.org, and silver data is from Silver Institute, http://www.silverinstitute.org/site/supply-demand/
2 Source: Mineweb.com
3 Source: Bloomberg: http://mobile.bloomberg.com/news/2010-10-26/silver-market-faced-fraudulent-efforts-to-control-price-chilton-says.html
4 Sources: Gold data is from World Gold Council, silver data is from United States Geological Survey (USGS) and Silver Institute.


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Energy & Commodities

A Tale of Two Forecasts

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Posted by Gregor MacDonald - Resource Investor

on Thursday, 20 December 2012 07:00

Where Has Objectivity Gone?

It was the best of times; it was the worst of times for the American public over the past month, as it was treated to two high-profile, but deeply conflicting, economic forecasts.

Despite declaring in 2008 that the age of cheap oil was over, the International Energy Agency (IEA) surprisingly announced last week that the United States would become the largest oil producer in the world by 2020. Hooray! This superlative declaration titillated US media organizations, who understand quite well that Americans love to secure a #1 ranking in just about any category (save for prison incarceration, divorce rates and obesity). As I explained to the Keiser Report, however, the IEA has done little more than produce an attention grabbing headline here. Simply ranking the “top oil producer” in 2020 may mean much less than the public currently understands.

This announcement has since led to the magical thinking that we can somehow take ownership of this future "extra oil" not eight years from now, but rather.... today. In other words, the additional 3 mbpd (million barrels per day) of crude oil and the 1 mbpd of NGL (natural gas liquids) that the IEA forecasts for 2020 have suddenly been booked into the "readily-available" column and are already being factored into US growth projections. That is premature, to say the very least.

In contrast to the IEA's report was the grim outlook recently offered up by legendary investor Jeremy Grantham, of GMO in Boston. Mr. Grantham has been increasingly sounding the alarm on a future of significantly lower growth rates for some years now. It is rather obvious, as well, that Grantham has been methodically making his way through the reading list of resource scarcity scholarship over the past five years, taking in the views of everyone from Joseph Tainter to Jared Diamond. Combined with the available data, Mr. Grantham has come up with the rather unsurprising conclusion that the rate of future growth is set to be much lower than most anticipate. In Grantham’s view, there will be no return to normal growth as was enjoyed in the US in the post-war period (after 1945).

Reactions to Grantham were predictable. Has he lost his mind? And of course: Grantham goes Malthusian was another common refrain. Many of the media outlets covering Grantham’s letter, On the Road to Zero Growth (link to PDF here; free registration required at GMO website), also engaged in predictable reductio ad absurdum, claiming incorrectly that he was calling for the end of the world. Indeed, no such call by Grantham was made.

It leaves the rational observer wondering: Why is the media so breathless in its exultation of any optimistic forecast, no matter how poorly supported? And why does it vilify those who attempt to argue the other side?

Where has our objectivity gone?

Grantham's Actual Message

It's clear that very few understood what Grantham was really saying.

Moreover, many were mistaken that Grantham has adopted an ethos of negativity or that he has become ideological in his views. Quite the contrary. He is working with the same data observed by many hedge funds, international organizations, and academic research that shows that, as we entered the past decade, the extraction and production rates of many critical resources began to slow – and slow significantly.

Just to kick off this discussion, let's start with the master commodity, oil:

12-20-12-pp-1-global oil production

In the ten years leading up to 2004, global crude oil supply grew at a compound annual growth rate (CAGR) of 1.71%. This rate of supply growth started during the strong economic phase during the 1990s, and only strengthened after the recession of 2000-2002 when countries like Russia came online with fresh oil supply.

.....read more HERE



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Energy & Commodities

Punished Uranium a Top Pick For 2013

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Posted by Chris Berry Discovery Investing Morning Notes

on Wednesday, 19 December 2012 09:12

It appears that a positive catalyst for higher uranium prices has unfolded as the citizens of Japan have voted to put the Liberal Democratic Party (LDP) back in power by a large margin. This is significant as the party has voiced support for a return to nuclear energy in the country (as well as aggressive monetary policies which should be positive for commodity demand).

Only two of the 50 reactors in Japan are currently operating, but given the high cost of importing fossil fuels (estimated to be ~ $100 million per day), once can see why a return to nuclear- generated electricity holds an appeal. Nuclear generation costs are largely sunk. Plants, though aging, have been built and the typically large up front capital expenditure for new technology and extensive regulatory delays are not a deterrent in Japan as they are elsewhere in the world.

Not So Fast!

To be clear, if and when a re-start of the Japanese reactors commences, it may take longer than many anticipate as each nuclear plant must be inspected and cleared to resume operations. Reportedly, the Japanese Nuclear Regulation Authority is actively inspecting six plants to determine if they were built on active fault lines. Additionally, there is still ardent opposition to restarting the nuclear power plants in Japan.

From a recent Bloomberg article:

“People who voted for the LDP are supporting their economic-stimulus measures, not nuclear power policy,” said Toshihiro Inoue, a member of the “Goodbye Nuclear: the Action of 10 Million” civil movement, whose online petition to stop atomic reactors in Japan has so far received about 8.2 million signatures.

The fact that there is still opposition to reactor restarts is something investors should not dismiss in formulating an opinion on investing in uranium. Could local opposition to nuclear energy be the “black swan” for the uranium business the same manner that local opposition continues to hamper Lynas in the rare earth business? While we think it is too early to know for sure, any balanced appraisal of uranium investing must consider this.

That said, we are of the belief that it’s not a matter of if but when and how many of Japan’s reactors are restarted. A country such as Japan that must generate such a large portion of its electricity via nuclear power cannot afford not to.

Two other issues with the nuclear industry circle in our minds. We are concerned that the continual “refit” of old technology is one of the most dangerous issues. This is the current case in Japan as well as the U.S. It is, of course, prohibitively capital intensive to build new large scale reactors. Modular, lower cost reactor technology in the field still seems a few years away. Second, storage of spent uranium byproducts is still a problem without a solution. Would a transition in Japan (and elsewhere) to a thorium fuel cycle make more sense?

However Other Uranium Catalysts Are Lining Up

In a recent presentation at the San Francisco Hard Assets Conference I made the case for higher uranium prices in 2013 based on a looming supply and demand imbalance comprised of:

1. The “producers” are headed to the sidelines. These include BHP Billiton, Areva, Paladin, and Cameco who are either delaying or mothballing projects due to a low U3O8 price rendering projects uneconomic.

This trend collectively removes at least 20 million pounds of uranium from the market. A higher U3O8 price will, no doubt, bring many of these companies back into the market. However will they be able to do so in time to satisfy increased demand from countries such as China, India, the UK, the UAE, Slovakia, and Poland? There are ~ 436 nuclear reactors on line globally with 63 under construction and another 150 planned. The need for additional uranium to power the existing reactor fleet plus the additional reactors coming on-stream paints, we think, a particularly bullish picture for uranium exploration and production plays in 2013 and beyond.

2. The looming end of “Megatons to Megawatts” – the agreement between Russia and the United States to use uranium from Russian nuclear warheads a fuel in the 104 nuclear reactors in the United States. The agreement is set to expire at the end of 2013 and if it is not renewed, wholly or in part, could remove 24 million pounds of U3O8 from the market. This is 50% of USA consumption in a given year (a good sign for US-based uranium producers). While we cannot speculate as to whether or not the M-to-M Agreement will be renewed under different terms or at all, one must consider the possibility of a uranium supply disruption here.

3. As we mentioned above, Japanese reactors coming back on line will require additional uranium supply – reportedly 10% of global supply (approximately 15 million pounds). Again, when, not if this occurs, this will be bullish for uranium investors.

Uranium Is One of Our Top Picks For 2013

The uranium sector has been punished since the accident in Fukushima in 2011 and we submit that investing in junior miners involved in uranium is one of the great contrarian investment themes for 2013. A beaten down sector, unloved by the investing populace at large and shunned by major producers in the space is poised for a spike in demand. How that spike 

in demand will be met is unclear. The low cost exploration and near term production stories would appear best positioned to deliver above average returns in the coming months.

Ideally, choosing a basket of stocks with different risk profiles would seem to offer the optimal risk-reward profile. We have written on and still like European Uranium Resources (EUU:TSX-V) as an early stage developer in Slovakia and also view favorably UR-Energy (URE:TSE) and Uranerz (URZ:NYSEAMEX ) for their low cost near term production profiles in the Western United States.

Screen Shot 2012-12-19 at 3.54.47 AM

Source: u3o8.biz

As you can see above, despite the general downward trend in the U3O8 spot price, the election results in Japan have helped the price tick upwards. We think this could be the turning point in the sector many have been waiting for and reiterate our affinity for select uranium names in 2013.

Chris Berry of Discovery Investing 

 

The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. I own shares in EUU. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin. 



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Energy & Commodities

The Impressive Dr. Copper

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Posted by Mad Hedge Fund Trader

on Tuesday, 18 December 2012 18:16

Is Copper the New Red Gold?

12-18-12-tmhft-7-1-resize-380x300Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminal. Thousands of illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $20,000 at black market recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of the “fiscal cliff”.

Demand for American home construction is slowly crawling out of the basement, and demand from China is starting to turn around as well. On Friday, we received further confirmation of this reversal when the Middle Kingdom announced its Purchasing Managers’ Index was at 50.9, a 14 month high, and its third month over the boom/bust level of 50.

It helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. This is a problem, because the opening of a new mine can take as long as 15 years when the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to, end user demand.

12-18-12-tmhft-6-1The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), the world’s largest copper producer. And you can look at Freeport McMoRan (FCX), the world’s biggest publicly listed copper producer (click here for Time to Get Back Into Copper?). And yes, you can even buy .999 fine copper bullion bars at Amazon by clicking here.

I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If it doesn’t work out, I guess they can always eat their inventory by pursuing a new career as electricians. Hey, a good union and a steady $70/hour paycheck, what’s so bad about that?

12-18-12-tmhft-1-JJC

12-18-12-tmhft-2-ECH

12-18-12-tmhft-5-COPX

 

 

From the Diary of a Mad Hedge Fund Trader.

John Thomas writes the Diary of a Mad Hedge Fund TraderThe Mad Hedge Fund Trader



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