Big Picture Long-Term video October 29th 2021
Commentary by Eoin Treacy
The Macro Case for Precious Metals
Thanks to a subscriber for this chart-laden article from Crescat Capital. Here is a section:
As inflation continues to develop in the economy, see below the incredible link between gold and CPI since the GFC.
Note how after the pandemic lows, gold front ran the potential risk of a rise in consumer prices and the entire precious metals market appreciated sharply.
It is important to remember that before recently peaking, gold had been going on a streak for two years already.
The metal was up more than 75% from August 2018 to August 2020 and even reached historical highs during this period.
Back then, with CPI around 1%, very few investors foresaw inflation as a risk to the economy. Now it is a real problem.
We think gold likely appreciated too quick and too fast becoming what some thought as an obvious trade.
Extreme sentiment probably explains the reason for its recent weakness after signaling way earlier than any other asset the possibility that an inflationary environment could be ahead of us.
We are now on the other side of this extreme.
Eoin Treacy's view
I have a lot of sympathy with the view that gold ran ahead for almost two years so it was due a pause. We also know that medium-term corrections in gold can last up to 18 months so it is a good time to start looking at the sector again since the peak was in August 2020.
There is no question that gold shares are cheap and have enviable free cash flow yields. At some stage there will need to be a new exploration and development cycle, but there is no sign of appetite for that kind of financial risk at present.
Company boards have been chastened following a crushing bear market and want to ensure they are in a financial position to survive regardless of what may come. That suggests, it will be a while before we see them scrambling to buy. That supports the argument they will become magnets for value investors looking for bargains and potential for dividend increases.
Let’s also examine the counter argument. If gold priced in the rise in inflation by rallying so impressively to the peak almost 15 months ago, doesn’t that also imply inflationary fears are going to ease in the coming year? Since gold has been ranging rather than significantly declining that’s pricing in a lull rather than a reversal.
Gold has been forming a triangular pattern for the last five months and volatility has moderated. That suggests a war between supply and demand is underway where we still see stabs on the downside but they are getting smaller and are not being sustained. Those willing to buy the dip are stepping in at successively higher levels even as sellers are willing to provide supply at $1800. Eventually, one side or the other is going to gain precedence and a big breakout will occur, as the opposite side scrambles to unwind leverage and new participation is encouraged.
I remain of the view the breakout will be on the upside because I don’t see people suddenly accepting lower wages and I believe inflationary pressures are here to stay. It is going to be very difficult for central banks to raise rates because the quantity of outstanding debt has increased so much during the pandemic.
The biggest risk to that view is a slowdown in Chinese growth. The effort to unwind overleverage in the property sector is part of a wider effort to gauge just how much outstanding debt there is. Municipal governments have been issuing off balance sheet paper for years and no one knows how big the liability is. Debt is now officially a national security issue so this question is not going away.
If China decides a voluntary deleveraging is preferable to an enforced one, it represents a significant short-term deflationary shock. It also represents a medium-term inflationary shock because the cost of producing just about everything would increase. The Renminbi would have to be devalued.
Copper is being supported by demand from the global electrification theme, but Chinese demand is also a significant portion of the market. The extent to which it continues to hold the $4 area will be a big signal as to how healthy the Chinese economy is.
Commentary by Eoin Treacy
Higher For Longer Oil Prices?
This podcast from Morgan Stanley (NYSE:MS) may be of interest to subscribers. Here is a section:
Underlying our structurally bullish view on EEMEA is an assumption of higher for longer oil prices due to supply constraints on the path to net zero. Marina speaks to Martijn Rats about his bullish near-term and long-term outlook for oil and the questions EM investors have been asking on this theme.
Eoin Treacy's view
The shock of negative prices during the pandemic killed off speculative appetite among exploration and production companies in the oil sector. Few new wells were dug and the sector has been relying on the stock of drilled but incomplete wells over the last intervening year. That has curtailed the sector’s ability to respond quickly to higher prices.
Then the success of activist investors in installing their representatives on Exxon Mobil’s board has proved to be a pivotal event for the trajectory of exploration budgets. The oil majors are no longer spending for fear of be excoriated in the media for raping the planet. That reluctance to spend is handing greater market dominance to OPEC+ and swelling the balance sheets of major oil producers. That improves potential for buybacks and dividend increases.
The near-term risk is in the determination to combat the exaggerated advance in natural gas prices. That is weighing on the sector at present and particularly for the major natural gas producers in Europe.
Commentary by Eoin Treacy
Global Carbon Markets
Thanks to a subscriber for this report from Citi which may be of interest. Here is a section:
The world is a mess when it comes to carbon regimes — there are currently 64 carbon pricing systems globally, with another 30+ in development. Thirty of the existing systems are carbon markets, with the remaining 34 carbon tax regimes. Not only is there no agreement on a mechanism, but the prices within these regimes vary from the meaningless $0.10/tonne to an eye-watering $142.40/tonne — against a price widely seen as necessary now for Paris-alignment of $40-$80/tonne. This fragmented approach is clearly inefficient, and evidence tells us that so far, it is proving ineffective at a global level. Accordingly, to achieve real progress, we must find some way of integrating these individual regimes into one globally-fungible system. There are essentially four ways we could achieve this, using one, or a combination, of the methods mentioned below:
The first option is essentially via command and control directives, where governments/regulators simply mandate the amount of emissions that are allowed when and from which industries, with non-compliance penalized severely. While potentially effective, this is unlikely to be efficient, and almost certainly would not provide the lowest cost solution. This leads us to the three other, market-based solutions (which, it should be pointed out, are not mutually exclusive):
The first of these is a carbon tax on emissions, which could either be applied as a flat rate globally, or with differing rates for emerging and developed markets, potentially with differing ratcheting up speeds, to eventually bring the world into alignment.
The second option involves cap and trade systems, whereby allowances for emissions are granted and/or auctioned up to a (reducing) limit, with parties showing faster than prescribed progress allowed to sell their excess allowances to other slower moving parties — while still reaching the same cap.
The third option involves baseline and credit systems, whereby parties earn credits for reducing emissions, which could be sold to others in deficit, potentially within one of the two preceding mechanisms.
Each of these is fraught with complexities, both technical, and perhaps more importantly, political. Discussion of the pros and cons of each of these methods, the pitfalls and stumbling blocks, as well as how they might be implemented, forms the basis of this report.
Eoin Treacy's view
With the latest big climate conference scheduled for this month there is a great deal of speculation about the possibility of world changing regulations being implemented. If the past conferences are any guide, the possibility of the world’s governments agreeing on an achievable zero- carbon goal by 2030 has to be treated as a low probability outcome.
Emerging markets may be willing to sign up to a global trading mechanism but only to the extent they get a significant discount on their own emissions. A globally fungible carbon price sees a very tall order and not least because China’s new emissions trading scheme massively underprices the commodity relative to Europe. When we add to that the EU’s intention to tax imports based on carbon intensity in manufacturing them, we get an idea of how far apart the sides are.
The most likely scenario appears to be a hodgepodge of uncomplimentary policies which will raise tax revenue, boost politically favoured projects, contribute to lower standards of living, higher costs and ultimately will fail to reach the goal of zero carbon emissions.
It would be a very welcome development if the world were suddenly to embrace next generation nuclear energy. Donating reactors, which cannot easily be used to develop weapons, to emerging countries would have an immediate effect on coal demand growth. Unfortunately, that seems as unlikely as a cohesive global carbon trading scheme.
Meanwhile, the European carbon future continues to unwind its overbought condition as natural gas prices come down. Any significant pull back is likely to be a buying opportunity considering how eager Europe is to achieve energy independence.
Commentary by Eoin Treacy
Eoin's personal portfolio: leveraged profits taken September 7th
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
I bought back into both bitcoin and ethereum last on August 6th. I took the profit in both positions today at $47,935 and $3,477 against my purchases at $42,427 and $2,866 respectively. I’ve been happy to buy back on weakness but remain of the view that the risk in the sector is substantially higher since the peak in March. Therefore, my policy was to sell on the first sign of trouble. That was delivered today with large downward dynamics.
I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.
I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.
I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.
I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.
With baby steps trading one has to have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.
Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.
My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce has not participated in the stock market rebound of late and continues to form a first step above the Type-2 base formation.
Commentary by Eoin Treacy
The Chart Seminar 2022
Eoin Treacy's view
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location.