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Education: Engineer (Ms. Sci. Eng.) and PhD My investment interests are focused on the global "macro picture" - with particular emphasis on resources and commodities. I am only interested in long-term positions - typically 4-10 years.
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  • What Happens To A Currency When The Rate Of Monetary Inflation Is Suddenly Dropped To Half?

    With many fretting over the fact that helicopter Ben under QE3 is increasing the monetary base by nearly $1 million every minute (!!) there is a currency where the opposite is about to happen.

    In five days and a few hours from now, the block reward will drop from 50 BTC to 25 BTC which - exactly as planned - means that the annualized rate of monetary inflation in the bitcoin currency will drop from 33%/yr to 12.5%/yr.

    This event (which roughly coincides with the four-year birthday of the bitcoin system) marks the historic turning point when exactly half of all the bitcoins - to ever exist - have been issued. The other half will be issued asymptotically over the coming decades with the next 25% in coming four years and 12.5% in four years after that and so on.

    (click to enlarge)Fig 1. Deterministic money. - Total bitcoin vs. time.

    Fig 1: Bitcoin vs. time. The supply of bitcoin is entirely deterministic - and cannot be printed by any central bank or otherwise inflated by decree.

    The fact that the bitcoin supply rate is about to be cut in half may naturally be the cause for the recent increase in the bitcoin price, but we can't know for sure about cause and effect. The reason is that Wordpress - which according to Alexa ranking is the 22-most visited website globally - recently started accepting (enthusiastically suppoting, actually) bitcoin and such great news might also be helping bitcoin along. But then again - it could also be a reaction to the fact that ECB now has started to discuss bitcoin in a serious way.

    Whatever the cause(es) - the bottom line is that the future is bright for bitcoin and its purchasing power.

    (click to enlarge)Open source, deterministic-supply, borderless money - vs. government decree money. Which is more "solid" in the long run?

    Fig 2: Government decree money (Zimbabwe- and US-dollars) vs. open source-, deterministic, borderless and frictionless money.

    Bitcoins are currently worth roughly 12 USD/BTC (up 140 % YTD) and may be bought in 700,000 locations.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long Bitcoin.

    Tags: UUP, UDN, Bitcoin, Forex, USD, EUR, BTC
    Nov 23 1:14 PM | Link | 6 Comments
  • Best currency in 2011
    The end of the year is a good time for a pause and for making a status. 

    Despite a turbulent year in the Forex markets, where currencies like Swiss Francs, Euros and gold all went up sharply against the USD they have all come right back down to almost exactly the level where they started the year. Only gold has given a slight return (in USD terms) having increased from 1,420 USD/ tr oz. to 1540 USD/ tr oz or so - a modest 7.7% return after a wild ride!

    But there is a currency which after an even wilder ride ends the year with solid gains (no - its not the Yen) - I refer of course to Bitcoin.

    Starting the year at 0.30 USD the exchange rate for Bitcoin has done pretty well ending the year at something like 4.2 USD for a respectable 14x return (1400%).

    This performance comes in spite of a mania in the spring and early summer which caused the price of Bitcoins to accelerate much faster than the Bitcoin economy grew and by June, the Bitcoin price was clearly in a bubble.

    The bubble coincided with two blows to Bitcoin when turned out to be a scam (classic case of third party risk) and there was a hacking incident on (a major Bitcoin exchange). However - unlike what many internet sites have reported - there was no security flaw in Bitcoin itself and despite hacking attempts and DoS attacks on the network in the fall the Bitcoin network has proven itself highly robust and has now remained "unhacked" for over three years running.

    The sharp correction in price (deflating the bubble) and the two incidents spurred an array of "I told you so - Bitcoin is dead" posts on the internet:
    Tim Worstall from Forbes on The end of bitcoin I and II
    Paul Krugman from New York Times on Bitcoin's "deflationary" flaws
    Charles Babbage from the Economist about Bitcoin's troubles
    and my personal favorite by Jon Nadler from Kitco with a sarcastic suggestion to pay Greece in Bitcoin
    (Nadler's critique is so amazingly uninformed that it is actually quite funny).

    But the data disagrees with all this gloom and doom!
    Since Dec. 31st, 2010 there has been:
    a 14x (1.400%) increase in the USD price of Bitcoin and
    a 6x (600%) increase in the average daily volume of Bitcoin (more than 60x when volume is measured in USD) and
    an 8x (800%) increase in the number of daily transactions in Bitcoin and
    a 72x (7.200%) increase in the computing power (hash rate) of the Bitcoin network (making the Bitcoin network the worlds greatest supercomputer by far).

    So in Dollar terms - 2011 has seen the Bitcoin economy grow by something like 6.000% despite all Krugman's nonsense about deflation leading to hoarding. The data proves him wrong (as does logic).
    The sheer number of new, great innovations in the world of Bitcoin in just the past 4 months is staggering and the marketplace is getting bigger and more reputeable all the time.

    Happy new year!

    Dec 29 6:32 AM | Link | 1 Comment
  • The new paradigm for palladium
    It is official: The Russian state stockpile has finally been depleted!

    The depletion was entirely predictable and anticipated. See for instance
    The case for palladium, blogs and SA.

    Long term Pt and Pd prices

    So why is this event a game-changer for palladium?

    Well, let's take a look at supply and demand...
    Global demand for auto-catalysts reached 5,450,000 oz in 2010 (up from 4,050,000 oz in 2009) out of which 1,350,000 oz was met by recycling giving a net demand for the automotive sector of a healthy 4,125,000 oz.
    Major demand-growth in the all-important auto-catalyst sector is happening in the Chinese market due to the combined effect of the ever increasing car sales in China and the introduction of the China-4 emissions standard this year which will require higher loadings of palladium (and rhodium) in the catalytic converters henceforth.

    Other (net) demand in 2010 includes the electrical sector (970,000 oz) - in no small part due to growing demand for high-quality multi-layer ceramic capacitors for portable electronics such as smart-phones, the chemical sector (395,000 oz),
    palladium jewelery (540,000 oz) and other sectors which include the dental sector 
    with a combined 665,000 oz demand. Finally, for 2010 the net investment demand
    (mostly from ETFs backed by physical metal) came to a net 1,090,000 oz.

    In total, the net demand for palladium in 2010 was 7,780,000 oz (242,000 kg).

    On the supply side there are three main sources:

    1) Palladium byproduct from platinum mining in South Africa. This source delivered 2,575,000 oz during 2010. It is important to note, that since the main economic product is platinum this source is quite inelastic to the price of palladium.
    2) Palladium byproduct from nickel and copper production in Russia. Again, inelastic by nature, this source delivered an estimated 2,720,000 oz last year - marginally beating the South African supply.
    3) Sales from the Soviet-era Russian state stockpile of palladium delivered an estimated 1,000,000 oz (31,100 kg) every year for the last decade - but this is now over!
    Other minor sources of palladium (such as production in North America and Zimbabwe (!!)) brought a combined 995,000 oz to the market last year.

    Total primary palladium production was therefore about 6,290,000 oz (or 7,290,000 oz if we include the Russian stockpile sales as “primary” supply). To put things in perspective 6,290,000 oz, is equivalent to 196,000 kg and corresponds to just 7.8% of the 2,520,000 kg of global primary gold production last year. Palladium is indeed a very rare metal!

    For the year 2010, we thus conclude, that the global palladium market was in a fundamental deficit of 7,780,000 oz - 7,290,000 oz = 490,000 oz - and that the deficit would have been a staggering 1,490,000 oz without the Russian stockpile sales. This kind of deficit (22-25%) is what the market will be facing by next year! In percentage terms this is a larger deficit than that which drove rhodium over $9,000/ oz back in 2008.

    Rhodium price

    Palladium will not go to $9,000 just because rhodium did, but it is a realistic that it will approach price parity with platinum which currently trades at the $1,500 /oz level. Pricing above platinum seems unrealistic as platinum can be used instead of palladium in auto-catalysts if the price of palladium were to explode. By the way, rhodium (which serves a different purpose (DeNOX) in the three-way catalyst) cannot be substituted with anything in gasoline cars, which is why it could go so much higher in price than platinum in the face of a rhodium deficit.

    One-year palladium price
    Keep in mind that tightening of emissions regulations has so far been irreversible and that once the law is in effect the car makers have no choice, but to increase the metal loading of the catalyst if they want to keep selling cars in any given market. The ultimate form of inelastic demand!
    So to summarize. Despite its nice run from under $200 /oz during the darkest days of the crunch in early 2009, palladium remains a bargain at $600 /oz under almost any scenario.

    How to play palladium?

    I prefer physical bars or coins in my own possession, but ETFs backed by physical such as PALL might be a better option for some investors. The risk-takers might prefer playing the futures or CFD markets. Finally there are a couple of pure-play mining companies SWC (in the USA) and PAL (in Canada) that investors might want to consider.

    Disclosure: I am long PALL.

    Additional disclosure: I own physical palladium.
    Tags: PALL, PAL, SWC, Palladium, Pd
    Oct 20 2:33 AM | Link | 2 Comments
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