Tom Szabo

Commodities: On the Downhill Slope?

Some studies suggest an allocation of 1/3rd to stocks, 1/3rd to bonds and 1/3rd to gold will actually increase overall portfolio performance while reducing volatility. This is over the long term, which is what most investors who are looking to invest for retirement would care about. I know gold isn't the same as commodities but the point is that you need more than a mere 5% to make much of a difference in any allocation strategy.

Bob Moriarty: Gold is Safe Haven for Looming Crash

Given all the gold detractors that still appear to dispense their "can't eat Gold" wisdom in these forums, I'd say the bull market in the Midas metal has a ways to go. Well, guess what, you CAN eat gold (as many a Vietnamese or Cambodian refuge found out the hard way when they had to literally eat their entire wealth--I'm talking about gold jewelry--in order to hide it as they fled their countries in rickety boats launched into the ocean).

Gold Price Plunges: Might as Well Hold Stocks

Mr. Amberger, I seem to recall back in the Taipan days you were more friendly to gold when it was still languishing at sub-$300. Why the change of heart now in its moment of triumph? It seems to me you hold a personal grudge against the Midas metal, possibly the result of one too many disappointments. You're right, gold is not a true hedge against inflation. That's why it's price went from $42 to $250 between 1971 and 2001 (an increase of 500%) while the CPI (1982 = 100) went from 40 to 177. Ooopss . . . gold must not be a true inflation hedge, it outperforms inflation by too much! Note that I'm using the longest time frame and absolute lows, so unless you are a hopeless case, the results would have been better. In fact, the more you think in terms of decades not days, the better those results will be. Unless you're saying the world's monetary and financial system is about to undergo a paradigm shift of lower credit, less banking, less spending, lower entitlements, less consumption, etc. In that case, why would you want to hold banking stocks?

Seven Reasons To Avoid Gold - And Why You Should Ignore Them

Excellent piece Tim! Although you are generalizing in a few places (the gold price in dollars will always change by an equal amount as the price of the dollar changes, although this is often masked by changes in the gold price for other reasons), the comments are pretty much spot on. Perhaps one important point you missed is that unlike the 1970's, the current inflationary environment is much more commodity driven with virtually no labor component due to rapid globalization. In addition, we are actually getting close today to reaching per capita production peaks for many natural resources with the net result being that commodity prices have reversed a centuries long decline and will most likely now start a centuries long advance. This is merely the first upward blip. In the near term, solving the credit mess worldwide will take an order of magnitude upward adjustment in the amount of fiat currencies in circulation. I'm not talking about M3 but rather the kind of money with which one can actually service debt (M2 and below). In effect, it's inflate or die. Gold does well under both options.

The Bear Reaches Out for Commodities

Dux, I refer to the global business cycle, which is very real and has not been vanquished. Think-About-It, the standard of living for the average Chinese cannot equal or pass our current level due to a number of preventive factors. A clumsy way of summarizing these would be to say China simply has too many people, but I'll try to add in some nuance. (1) China's one child policy has created incredible demographic headwinds that will become very fierce in the years ahead. Basically, the population is aging at such a rapid rate that the majority of consumer income will be spent supporting the hundreds of millions of elderly. You think the $50 trillion social security liability facing the U.S. is a big deal? China's problem is an order of magnitude larger, and not only is it off-balance sheet but it isn't even acknowledged. (2) The Chinese economic miracle has failed to reckon with the environmental, social, health, safety, social and other costs attendant to industrialization. These all have to be factored into standard of living, and when you do that, the Chinese are actually further behind then raw per capita income or GDP figures would suggest. (3) Absent weird science, there will never be enough energy or beef (just 2 examples) produced on Earth to satisfy Chinese consumption were it to equal the current level enjoyed in the U.S. (4) Chinese growth has been accompanied by gross misallocations of capital. A large portion of the nation's wealth has been squandered on "investments" with zero merit. We too overbuilt in New York, California and Miami, but that excess will eventually be absorbed by domestic dreamers, immigrants, or foreign bargain hunters. But how many people are going to buy that empty, crumbling office building or shopping center in a Beijing or Shanghai suburb? I'd say it's about par with Detroit. And as nuts as the building craze got in the U.S. over the past few years, we weren't doing a lot of building in Detroit. This will haunt the domestic Chinese economy for decades. (5) Political change in China will be required at some point for advancement past a certain "achievement plateau" that looms in the not-to-distant future. The struggle for control of the government will likely create major upheavals that will periodically stall economic progress. The Chinese have set up a system with zero flexibility. That's okay if you're a Communist, but dangerous when you are a Capitalist.

The Bear Reaches Out for Commodities

Everyone in China, India and other emerging economies will never have the current standard of living as the U.S, etc. The numbers simply make it impossible. Perhaps OECD living standards will decline and meet the emerging economy standards in the middle sometime in the distant future. No matter, the commodity cycle will continue to exist and it isn't based on "profit-taking, bargain-shopping, and silly panic" but rather on the very real business cycle that impacts supply and demand. Simply put, we may have entered that part of the commodity cycle where supply balances or exceeds demand. This is a temporary condition, a small cycle within a larger cycle if you will.

That larger cycle is what's really important and often gets missed. Probably because it is so large, spanning centuries as it does. I'm not talking about Elliott Waves, Kondriateff theory or anything like that. Rather, what I'm talking about is a mega-shift in the entire global system where commodity prices are in the midst of reversing their centuries long decline (driven by technological improvements that increased yield, access and efficiency) and starting a climb that may last centuries as well. If not centuries, at least until nanotechnology or some science we haven't event dreamed of will allow humankind to cheaply manipulate matter at the elemental level and thus create unlimited supplies of just about any material.

Commodities: On the Downhill Slope?

I don't understand why moderate amounts, or only 5%, should be allocated to the commodity theme if you think they continue to be in a secular bull market. Just because they are volatile and can drop 50%? What about financials, home builders, high-tech, retail? What about a strategy of increasing exposure during a pullback and then reducing it during periods when commodities are soaring? What else is currently in a confirmed bull market? If allocating only 5% to commodities, that means 95% is being allocated potentially to sectors in a bear market! Yes, it's very possible there is still some ways to go until commodities reach a bottom--I for one wouldn't be surprised by oil trading under $100--but one could utilize put options to protect against the worst case scenario while still maintaining a reasonable exposure to the sector. But don't bother with a constant 5%, it ain't worth the effort unless you are talking about gold buried in your back yard.

Hecla Mining Company Q2 2008 Earnings Call Transcript

It is hard to believe that increases in transportation and smelting costs have added $3 per oz. to production costs at Lucky Friday and $5 per oz. at Greens Creek. That is just massive and pretty much wipes out whatever gains silver has had in the past year. It seems to me the higher lead-zinc production at Lucky Friday may have substantially reduced the silver grade of the concentrates, leading to higher transportation and smelting costs simply by virtue of greater units (weight and volume) involved. If so, someone made a pretty big blunder in financial planning and I can understand Hecla not being too eager to talk about it.

China & Copper: Prepare for Crisis

buyitcheap, many metals have already had a "downward gap" of 60% or more from their peaks--lead, zinc, nickel, uranium. Platinum, palladium and silver are down about 25-40% and may not have much more to go. Gold and copper are down only around 15% each. Gold will catch a crisis bid, copper will not. Copper, along with oil, is a bellwhether for the commodity sector and has been historically very sensitive to shifting market sentiment. Copper is a great short bet even if it has the best fundamentals out of all the metals.

As for ags, where have you been? Corn, wheat, soybeans, rice, OJ, sugar and many others are already down 30-40% and may be on their way to 60% losses before it is all over. The exception seems to be meats which never went up several hundred percent and therefore they probably don't have as much downside.

One way to play an ag correction is put options on DBA, the PowerShares Ag ETF. For some reason, these ETF options seem to have both pretty good volume and fair pricing. For example, you can buy the Jan 09 33 puts for $200. With a DBA target of 26, that's a 250% return. As a side bet in case ags are set to romp once again, the Jan 09 40 call will set you back $100. A recovery to the March and July double tops should get you about a 200% return, more than covering the cost of the put.

China & Copper: Prepare for Crisis

To those who think shorting copper is moronic or that it will never again go to $1.75, tell that to the longs in zinc, lead and nickel, each of which have already crashed 60% or more from their highs. Yeah, but copper is different, even unique. Riiiighttttttttt... 40% of global copper demand is related to construction. Let's see if speculators can pick up that slack in the months ahead. Or what about the single trader who holds most of the LME warrants? How long will he/she continue to do so?

Already the copper miners have made substantial declines from their highs--some even trading near 52 week lows. They should not be so weak if copper prices are going to stay above $3/lb. since that still gives them excellent operating margins.

The way I'm playing the potential decline in copper is with COMEX put options. Hard to buy and not a lot of volume, but relatively cheap and great upside if copper does come down to join the other base metals in the reality camp. I'm also long silver so I'm not worried if a crash in copper does not pan out--I've got both angles covered.

Safe Haven Investments Amid a Global Crisis

Let's say Iran cannot be persuaded to give up nuclear enrichment. Then, at some point, Israel and/or the U.S. will probably bomb, bomb, bomb, bomb Iran. Even under President Obama. A conventional air campaign followed by no fly zones and a naval blockade intended to force regime change or else totally isolate it. There would be global fallout, but no WWIII. The FACT is that even if Iran ever came to possess a nuclear weapon or a dozen, it could only ever use it for threats or blackmail since actual deployment would result in its total annihilation. Russia, China and other nuclear powers would idle sit by. Iran knows it, we know it, everybody knows it. The current row is nothing more than mistrust amid a regional struggle for power, blown way out of proportion even considering the possible impact on oil production. It is most definitely not an appropriate investment theme.

Leveraging Up on Precious Metals Ahead of Fed Meeting

If the market does not expect the Fed to do anything at Tuesday's meeting, why would confirmation of that put any sort of fire under gold and silver prices, which are at the moment in free fall mode?

The example of copper mining is not quite correct. At 80 cents copper the miners were basically breaking even. Now at $3.00 plus copper they make a margin around $1.50 to $2.00 or more per pound. That is huge and has already propelled many copper miners to multi-bagger gains. It could be the same in reverse on the way down, assuming copper prices collapse as have already lead, zinc, nickel, etc.

We don't see this as much in gold and silver mining because the mentality is somewhat different--the gold miner wants to extend the life of his/her mine as long as possible and therefore will go after lower, previously uneconomic, grades that are now profitable to extract thanks to the higher gold price. This, too, works in reverse, allowing the gold miner to somewhat cushion profit margins. The problem here is not with the gold mine manager's attitude but rather with the gold mine investor's attitude.

Silver Wheaton is a fine company with a great business model but it has risks as well and there are also limits to its leverage to silver prices. With respect to risks, consider that the mines contracted to deliver silver streams are primarily base metal operations (with the exception of Penasquito). If base metal prices fall far enough while silver prices remain high or even rise, these mines may not be profitable and could face shutdown or decreasing production (to conserve cash), thus depriving SLW of silver production. As far as leverage, I recently wrote a comment on a Seeking Alpha piece and don't wish to repeat it here, but suffice it to say that the leverage is something like 70% (ie., if silver prices go up 100%, SLW should go up 170%). Good but certainly not legendary.

What's Wrong With Gold Stocks?

First, spiraling production costs are due to (1) higher energy, equipment and labor costs and (2) miners going after lower grades (even within "first tier" deposits) as justified by the higher gold price. The equipment and labor costs are high in part due to shortages caused by the unprecedented fast pace of new mining activity after a long period of industry contraction. The shortage issues will be resolved in due course. Gold (and silver) prices will continue to outperform inflation (in particular, the rise in energy, labor and equipment costs). This is a plus, not minus, for gold stocks.

Second, ETF demand has not deprived gold stocks of positive investment flow. ETF investors are not reformed gold stock investors fleeing from high risk behavior. Rather, the sheer number of gold stocks and the tremendous amount of financing raised to fund exploration and development have sucked up whatever cash investors have thrown at the sector. Add all the base metal and uranium exploration plays, and you are talking about a huge pile of money that has gone "poof". It takes a while to pay penance for these necessary sins.

Third, as another commenter has pointed out, gold stocks actually thrive in a climate of poor stock market conditions. They actually prefer a bear market in general equities but will get along well if there is just a malaise hanging over Wall Street. History provides plenty of evidence, such as 1929-1936, 1973-1981, 1987 and 1996-7.

So, what's really "wrong" with gold stocks? Nothing. They are just fine, reacting to the ebb and flow of the market and patiently waiting for the next opportunity to dash higher. The wait could be a few more months or even a year or two. But when they next move, it should be a beauty to behold.

Nine Stocks Selling Under $3 a Share

Things will be challenging at CDE for quite some time. Palmarejo is the key to unlocking value but there is about a 1-in-100 chance that initial results will live up to the hype. In other words, there should be plenty of opportunity in the months ahead to buy CDE at fire sale prices. Once Palmarejo is a stable producer and the stock is over $3.50, I'd consider that a safe buy zone. Between now and then, this is a trading stock.

Safe Haven Investments Amid a Global Crisis

Sell silver, buy cobalt? PGM bottom is in? PAL and SWC as safe haven investments? Cold fusion? World War III with Iran? Auto sales not declining? Coke and Pepsi are good shorts? Stocks being manipulated from short side when a long trade goes against him but from the long side when a short trade goes against him? This is a highly unusual set of beliefs and I wish Mark plenty of good luck--he will need it.