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Jaime Macrae
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Jaime Macrae is an Account Executive at Friedberg Mercantile Group. He has been actively involved in trading currency and commodity futures for several years, and has spent most of his career working for one of Canada's largest investment banks. He is also an active blogger, writing daily about... More
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Futures Commentary
  • Silver as an Energy Play?
    Is silver the next energy play? It seems like a strange idea, but then again a decade ago the thought that corn would be considered an energy commodity would also have seemed off. Much like with corn, the race to develop alternative sources of energy is making strange bedfellows of seemingly unrelated commodities and the energy sector. In the case of silver, it is the construction of photovoltaic solar panels that is the culprit. While silver is often viewed as a precious metal, unlike gold a significant portion of demand comes from the industrial and fabrication sector. Until recently, when digital technology displaced old fashioned film, video and photography was a major user of silver. As the demand from Kodak and Fujifilm has waned, solar panel makers have soaked up the excess supply. Last year as much as 11 percent of the total global supply of silver went into solar panels. 
     
    It takes roughly 0.1 gram of silver for each watt of generating capacity. The metal is used in a paste as the front-side contact material. With estimated total supply of silver reaching 1.06 billion ounces last year, that means more that 100 million ounces of the metal went into solar power capacity generation. There is plenty more room to grow as well. The Solar Energy Industries Association in the U.S. (SEIA) says that solar represents less than 1 percent of domestic power supplies, but is growing fast. Last year about 1 gigawatt of capacity was added, but their goal is to see 10 gigawatts added annually by 2015. That is just the United States; other countries like Germany are heavy users of solar energy. 
     
    The demand for silver may not last however, since the high price is squeezing margins and pushing producers to look for alternative technologies that do not use silver, or significantly reduce the amount of silver required.  Thin-film solar technology could displace the traditional photovoltaic cells in some functions; they use cadmium-telluride rather than polysilicon, and no silver at all. Other companies like DuPont are developing new silver pastes with reduced silver content.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jun 24 10:36 AM | Link | Comment!
  • G20, Speculators, and Corn
    Grain markets are once again under pressure this morning, especially the corn market. The violent selloff cannot be justified by good weather alone, so what is going on? 
     
    French President Nicolas Sarkozy has been very outspoken about reducing the volatility in grain prices, blaming speculators for driving up food prices, something he describes as a ‘plague’. As France currently holds the presidency of the G-20, they have over the past two days hosted a meeting of farm ministers in Paris to tackle the issue. It was reported this morning that they had reached some sort of agreement, though the details are still somewhat sparse. The bullet points of the agreement are greater transparency in global agricultural markets by way of a central database, a call for greater international market regulation (with the aim of curtailing the involvement of purely financial players), and the development of emergency food reserves. More detailed information will become available soon, and I will certainly discuss them here in the future. 
     
    Why has this spooked the markets? Non-commercial large traders, mostly hedge funds and other speculators, hold an enormous long position in the corn market. As of Tuesday last week, the last data available from the CFTC, these traders held a net long position of 460,200 contracts in corn. This represents about 31 percent of the total market (see chart).
     
    Non-Commercial Large Traders vs. Price (Corn)
    Courtesy of Bloomberg
     
    Since that time, prices have fallen by 78 cents per bushel to yesterday’s close of 677 ½ basis July futures, a 10.3 percent decline. During that same period, open interest in the corn market has fallen from 1.482 million to 1.414 million, a 67,683 decline or 4.5 percent. I suspect that when the more recent Commitment of Traders report is released tomorrow afternoon it will reveal that these non-commercial large traders have significantly reduced their long positions. 
     
    What does this mean for future prices? When big positions are entered or liquidated, it distorts the market price, taking it away from the fair market value. A prolonged liquidation of a position this size will certainly bring corn prices down below where they should be based on the tight supply and ravenous demand. This is not to say that corn is a buy at this price, but once these traders stop selling their longs, I suspect we can expect a rebound. Keep an eye on the open interest for a halt to the decline.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jun 23 11:16 AM | Link | Comment!
  • China Wants Gold
    As with many commodity markets, Chinese demand is a driving force in the gold market. China is the largest producer of gold (last year extracting 340.9 tonnes of the metal) and until 2007 it was largely self-sufficient, since then however, demand has been steadily outpacing supply, forcing China to import progressively more gold. Last year, imports are estimated (no official numbers are released) to have been over 200 tonnes, after stripping mine production and recycled gold from the total demand. 
     
    China is fast becoming the new India, the world’s most enthusiastic gold consumer. Indian households are estimated to hold more than 18,000 tonnes of gold, and the Chinese private sector is estimated to own around 5,000 tonnes. The trend is certainly up; first quarter demand was up 47 percent from last year to 291.8 tonnes. Jewellery is by far the biggest source of demand, accounting for 64 percent of gold purchased last year, followed by investment demand (27%) and then industrial/technological use (9%). Since 2001, gold demand has grown at an average of 14 percent per annum, and has accelerated in recent years. China is now the world’s top market for physical bar and coin investment. 
     
    Over the past few years, the Chinese government has made it a lot easier for everyday citizens to accumulate gold, possibly in an effort to increase the country’s total holdings without triggering a big price spike through heavy purchases by its central bank. The central bank holds one of the world’s largest stockpiles at 1,054 tonnes as at the last disclosure (these numbers may not be accurate given the source), but as a percentage of assets it is a mere 1.6 percent. In absolute terms, China holds roughly one-tenth the amount of gold as the Euro zone countries, and roughly the same amount as Switzerland. In its latest report, the PBOC expressed a positive view on gold demand.
     
    Chinese culture is in some ways very similar to Indian culture, particularly with regards to gold. The yellow metal is associated with good luck, and it is considered auspicious to give gold as a gift when a child is born, on birthdays, and as part of wedding jewellery. As the middle class grows, so too does the domestic market for gold; in 2005 just 15 million households made more that US$4,300 per annum, which is expected to increase to 75 million households by 2015. Considering the curbs the Chinese government has put in place to cool speculation in the housing market, and the limited supply of other investment opportunities, investment demand for gold should continue to rise apace. 
     


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    May 27 11:48 AM | Link | Comment!
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