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July 27 2020

Commentary by Eoin Treacy

Everything You Need to Know About Ethereum 2.0

This article by Christine Kim for CoinDesk may be of interest to subscribers. Here is a section:

The culmination of over five years of research and development, Ethereum 2.0 is a highly ambitious upgrade.

Never before has the cryptocurrency industry seen a blockchain of the same size and value as Ethereum attempt to transition all users, as well as assets, to an entirely new decentralized network while keeping all operations on the old network active and running. 

It will likely take many years for the Ethereum 2.0 upgrade – in all its complexity – to be complete. However, developer commentary featured in this report suggests the biggest hurdle (and perhaps most important milestone) in the Ethereum 2.0 roadmap is its initial launch.

Eoin Treacy's view -

The breakout to new recovery highs by Ethereum last week and bitcoin this week suggest a return to demand dominance following a multi-month hiatus. The coincident surge in precious metals suggests this is more about the demand for a hedge against the debasement of fiat currencies than the range of impending innovations in the cryptocurrency sector.



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July 27 2020

Commentary by Eoin Treacy

Three Gorges Dam deformed but safe, say operators

This article by Frank Chen for AsiaTimes.com may be of interest to subscribers. Here is a section:

The deformation occurred last Saturday when the flood from western provinces including Sichuan and Chongqing along the upper reaches of the Yangtze River peaked at a record-setting 61,000 cubic meters per second, according to China Three Gorges Corporation, a state-owned enterprise that manages the dam and the sprawling power plant underneath it.

The company noted that parts of the dam had “deformed slightly,” displacing some external structures, and seepage into the main outlet walls had also been reported throughout the 18 hours on Saturday and Sunday when water was discharged though its outlets.

But the problem of water seeping out did not last long, as the dam reportedly deployed floodgates to hold as much water as possible in its 39.3 billion-cubic-meter reservoir to shield the cities downstream from the biggest Yangtze deluge so far this year.

And

Meanwhile, Wang Hao, a member of the Chinese Academy of Engineering and an authority on hydraulics who sits on the Ministry of Water Resources’ Yangtze River Administration Commission, has also assured that the dam is sound enough to withstand the impact from floods twice the mass flow rate recorded on Saturday.

Eoin Treacy's view -

It is still raining in southwest China and that means the dam will be letting out more water to control the level behind the wall. Therefore, it is unlikely to be able to curtail the risk of flooding downriver.



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July 24 2020

Commentary by Eoin Treacy

July 24 2020

Commentary by Eoin Treacy

Panic Selling Grips Chinese Stocks After U.S. Tensions Worsen

This article from Bloomberg may be of interest to subscribers. Here is a section:

The escalation in tensions comes at a particularly volatile time for China’s stocks, with the government taking steps to manage a debt-fueled frenzy that had pushed equities to their highest since 2015. Bullish traders have pushed leverage to an almost five-year high.

“Worries over China-U.S. relations will dominate the market,” said Raymond Chen, a portfolio manager with Keywise Capital Management (HK) Ltd. “People will be closely watching how the U.S. reacts to the closure of Chengdu consulate. I expect more panic selling in the near term.”

China’s yuan fell as much as 0.28% to 7.0238 versus the greenback, the weakest since July 8. China’s government bonds extended gains, with futures contracts on 10-year notes climbing as much as 0.36% to the highest since July 3. The yield on debt due in a decade dropped 5 basis points to 2.86%, the lowest since July 1.

Overseas investors sold 16.4 billion yuan of China stocks Friday, the most since a record 17.4 billion yuan was dumped on July 14. Turnover rose to 1.3 trillion yuan, the 17th session over the 1 trillion yuan mark.

Eoin Treacy's view -

The Chinese government has been trying its best to paper over the cracks in the economy. The boom in IPOs and the efforts to repatriate foreign listings of its tech champions are all aimed at creating a façade of capital market strength and stability. It fulfills the secondary purpose of trying to protect Hong Kong’s status as a major financial hub despite the destruction of its legal freedoms.



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July 24 2020

Commentary by Eoin Treacy

Email of the day - on cryptocurrencies

Please refresh my memory about your stance on Bitcoin & Crypto Currencies. Regarding Bitcoin, one of the best hedge fund managers, Mark Yusko loves it an suggests it likely reaches $100K within the next 12-18 months, and much higher going forward. AVI GILBURT, the Elliott Waver says if you want to be safe, wait until it breaks out above 10,000. Warm Regards

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. Bitcoin’s halvening, when the reward for mining a new coin halves about once every four years, passed off without a hitch in May. In the past, these events have resulted in investors refocusing on the limited supply argument and prices have rallied meaningfully both ahead and after the halvening.



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July 24 2020

Commentary by Eoin Treacy

Intel Plunges as It Weighs Exit From Manufacturing Chips

This article by Ian King for Bloomberg may be of interest to subscribers. Here is a section:

Outsourcing is the norm in the $400 billion industry nowadays, but for 50 years Intel has combined chip design with in-house production. And until recently, Intel was even planning to churn out processors for others.

“To the extent that we need to use somebody else’s process technology and we call those contingency plans, we will be prepared to do that,” Swan told analysts on a conference call, after the company warned of another delayed production process.

“That gives us much more optionality and flexibility. So in the event there is a process slip, we can try something rather than make it all ourselves.”

Pursuing this option would represent a huge shift in the industry and the end of Intel’s biggest differentiator, Cowen & Co. analyst Matt Ramsay said.

Design can only do so much for semiconductor performance. The manufacturing step is crucial to ensuring these components can store more data, process information faster and use less
energy. Combining the two helped Intel improve both sides of its operation for decades.

Eoin Treacy's view -

Intel has lagged in its ability to deliver 10nm chips at scale and is also having difficulty in getting its 7nm manufacturing up and running. The reality is as the width of a single silicon atom is approached the difficulty in manufacturing chips increases exponentially. That means the cost and focus required to succeed is progressively more difficult to maintain. Intel’s willingness to entertain the idea of subcontracting represents a significant defeat. 



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July 24 2020

Commentary by Eoin Treacy

July 23 2020

Commentary by Eoin Treacy

Video commentary for July 23rd 2020

July 23 2020

Commentary by Eoin Treacy

Tech's Perfect Profit Record Fails to Impress Spoiled Bulls

This article by Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section: 

For a view of just how high the bar is set for technology stocks, consider this: Every single one of their earnings reports this season has topped forecasts. Yet the sector has recently gone from being 2020’s best performer to one of its biggest laggards.

Not that beloved tech companies have crumbled. Since the reporting season began July 14, the S&P 500 technology sector is up 0.7% while the Nasdaq 100 is virtually unchanged. But both have trailed the broader S&P 500 over the period, and tech’s performance is the second-worst of S&P’s 11 main sector groups.

That’s a change from earlier in 2020 -- a year in which megacaps and tech firms have been viewed as coronavirus havens because of their strong balance sheets, healthy profit pictures and the fact that some have actually benefited from the stay-at-home economy. Still, with the tech-heavy Nasdaq 100 up 22% this year, investors want proof that those stocks are worth the high prices they’re fetching.

“On the positive side, there are so many reasons why tech should be okay,” said Gene Goldman, chief investment officer at Cetera Financial Group. “But on the negative side, it’s just valuations and earnings. It’s a high bar that companies are going to have to beat.”

Eoin Treacy's view -

Stay-At-Home stocks have been the clear winners from the lockdowns. The concentrated number of winners coupled with a surge in liquidity and punters eager to participate resulted massive outperformance over the last few months. 



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July 23 2020

Commentary by Eoin Treacy

Email of the day - gold attracting momentum traders

How far could the "Robinhooder's" distort the precious metal markets?

So far today the GDX/GDXJ do not seem to be confirming the upward movement in gold prices.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. There is a tendency among precious metals investors to expect a full bull market to unfold in a short period of time. That is because the price tends to range for lengthy periods before experiencing explosive breakouts. These tend to go faster and farther than anyone has been conditioned to expect during the range.



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July 23 2020

Commentary by Eoin Treacy

Tesla's $200 Billion Question Remains Unanswered

This article by Chris Bryant for Bloomberg may be of interest to subscribers. Here is a section:

And yet the earnings call — where Musk has in the past ranted about “fascist” virus lockdowns and attacked analysts for asking “boring, bonehead” questions — was a bit of a snooze. It even featured a long discussion about insurance and Musk’s appreciation for the actuarial profession.

In the current economic environment, such steadiness is an achievement. Most car companies will probably suffer huge losses because of the recent closures of factories and showrooms, even if things won’t be quite as bad as feared initially. By contrast, Tesla reported $104 million of net income in the April to June period, bringing its total profit over the past four quarters to $368 million.

Still, these are modest amounts for a company that’s valued at an inexplicable 800 times trailing earnings, giving it a $295 billion market capitalization. 

The profits are also more than accounted for by $1 billion of regulatory credits that Tesla sold to other carmakers during the 12 months to June, including $428 million in the latest quarter. It’s only able to earn this income because rivals haven’t gotten their act together yet on building enough electric vehicles and have to buy credits from Musk’s company to satisfy emissions regulators. Tesla acknowledges this good fortune won’t last forever.

Eoin Treacy's view -

Without clear support from green regulations the company would be incapable of generating a profit. That effectively means Tesla’s competitors are being forced to fund its expansion. It’s an odd situation which runs contrary to the basic conditions of capitalism, but it is the reality provided by the market. It’s part of Elon Musk’s genius that he realised that fact before everyone else.



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July 22 2020

Commentary by Eoin Treacy

Video commentary for July 22nd 2020

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Dollar weakens but Renminbi weakens more, gold, silver and gold shares extend breakouts, stock market quiet but China weakens. India eases, geopolitical tensions rise but tech earnings positive with Tesla's positive surprise. 



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July 22 2020

Commentary by Eoin Treacy

Email of the day on thematic investing

Congrats on your positioning for this continued rerating of all things precious metals related. Today I had a bit of an epiphany. I was re-reading Jim Collins Good to Great, and in particular about the Hedgehog Principle (lasering in on one thing and making sure its very well understood and its done better than anyone else does it), compared to the Fox which is more scatty, and tends to be here, there and everywhere, often distracted.

There's a lesson in there for investors too. For years I have been a Hedgehog, owning 12 of the world's best companies each with significant competitive advantages in their respective fields, and done very well. The last four months though have seen me be a Fox, trading more than I should have, often in stocks I have never traded in before, and often the volatile market has shaken my conviction. As you might expect, I have done far less well and often felt trapped in no-man's land. I've decided you're a Hedgehog, and I expect that your strong focus on all things precious metals related will continue to stand you in good stead, and hopefully me too now that I've finally had that Eureka moment!

Eoin Treacy's view -

Thank you for your kind sentiment and I had to admit that, like a hedgehog, I can be prickly from time to time. The bigger point here is that from an investor’s perspective it is often best to try and identify a secular trend early and ride it as long as it stays consistent.



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July 22 2020

Commentary by Eoin Treacy

The Big Cycle of the United States and the Dollar, Part 2

This latest chapter of Ray Dalio’s book includes a number of interesting titbits to chew over. Here is a section:

The US dollar accounts for over 50% of reserves held and has unwaveringly remained the primary reserve currency since 1945, especially after it replaced gold as the most-held reserve asset after there was a move to a fiat monetary system.  European currencies have remained steady at 20-25% since the late 1970s, the yen and sterling are around 5%, and the Chinese RMB is only 2%, which is far below its share of world trade and world economic size, for reasons we will delve into in the Chinese section of this book.  As has been the case with the Dutch guilder and the British pound, the status of the US dollar has significantly lagged and is significantly greater than other measures of its power.

That means that if the US dollar were to lose its reserve status and significantly depreciate in value it would have a devastating effect on the finances of those countries holding those reserves as well as private-sector holders of dollar-debt assets.  Who would be the winners?  Those with dollar-debt liabilities and those with non-dollar assets would be the big winners.  In the concluding chapter, “The Future,” we will explore what such a shift might look like. 

Eoin Treacy's view -

The massive increase in the supply of currency since the end of the quantitative tightening regime last year is a headwind for the US Dollar. The fact the monetary and fiscal assistance programs deployed by the USA are much larger than in other countries is certainly a near-term headwind for the Dollar but the big question is whether this is a secular change?



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July 22 2020

Commentary by Eoin Treacy

Europe Readies MiFID Rollback to Increase Recovery Investment

This article by Alexander Weber and Silla Brush for Bloomberg may be of interest to subscribers. Here is a section:

“The current crisis makes it even more important to not impose burdens where they are not strictly necessary,” the commission said in the document. “Many stakeholders believe that increasing small and midcap research would lead to greater liquidity in those issuances.”

The change could take effect in early 2021, according to an official familiar with the plans, but still needs approval from the European Parliament and the bloc’s 27 member states. When the coronavirus pandemic brought Europe’s economy to a grinding halt in March, politicians, regulators and central
bankers focused first on facilitating bank loans to keep companies afloat. Now the goal is to avoid an excessive reliance on debt, which is seen as keeping firms from investing in their future and could even threaten their survival.

Eoin Treacy's view -

The coronavirus has been a clear accelerant for trends in just about every asset class the changes being wrought in the Eurozone are among the most momentous. In the last few months, we have seen a clear evolution of the cooperation inside the Eurozone, a willingness to dispense with the fiscal strait jacket, willingness to implement shared fiscal responsibility, a willingness to donate funds to debt stricken southern countries and now the relaxation of strict financial sector regulations. This is the clearest signal in a decade that the EU is once more moving towards closer cohesion.



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July 21 2020

Commentary by Eoin Treacy

Video commentary for July 21st 2020

July 21 2020

Commentary by Eoin Treacy

Wall Street Is Throwing Billions at Once-Shunned Gold Miners

This article from Bloomberg may be of interest to subscribers. Here is a section:

But junior miners are now starting to benefit. Take the case of American Pacific Mining Corp., an exploration and gold-mining firm with market capitalization of less than $20 million. The company raised $3 million in the second quarter, six times more than it had initially planned. Interest was so big that it had to turn away offers for more, said CEO Warwick Smith.

“The big boys play first, and then that money trickles down to the smaller companies, exploration companies,” he said. Revival Gold Inc., a Toronto-based exploration company, said Tuesday it was increasing its previously-announced public offering by C$3 million ($2.2 million) amid “strong demand” from investors. Spot gold prices rose 1.3% Tuesday to $1,841.94 an ounce, trading near the highest level in almost nine years.

The reasons that boosted the appeal of gold miners are the very same pushing investors away from companies digging for metals like copper or lithium, which are more dependent on economic growth. Base and industrial metals firms raised just $34 million in the second quarter, data compiled by Bloomberg showed. That’s a 40% decrease from the same period a year earlier.

Eoin Treacy's view -

Free cash flow became the bane of miners during the latter stages of the last gold bull market. They were borrowing money at such a prodigious rate and were so eager to build new production that any hope of profitability fell by the wayside. That contributed to significant underperformance relative to the gold price.



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July 21 2020

Commentary by Eoin Treacy

Hydrogen - breathing new life into the platinum market

This article from Heraeus may be of interest to subscribers. Here is a section:

The hydrogen industry is gaining momentum from unprecedented political and economic support. Shares in some electrolyser, hydrogen and fuel cell companies are up more than 50% this year. Investors have become more bullish over the past year as several large companies have announced investments or joint ventures with hydrogen players. There are now major opportunities for players throughout the PGM sector to capitalise on the strong legislative backing of the hydrogen economy, providing a long-term positive demand signal for platinum.

Eoin Treacy's view -

The EU has just announced a new €500 billion green energy stimulus package which is the biggest effort yet to wean the continent off of imported energy. The intermittency of renewables, coupled with their short lives compared to conventional fossil fuel power plants suggests clear efforts need to be made to tackle efficiency, longevity and costs if the sector is to have a long-term future beyond outright government support. Meanwhile, the considerable support from subsidies and regulations is a sufficient catalyst to fuel a significant bull market.



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July 21 2020

Commentary by Eoin Treacy

Frackers Are in Crisis, Endangering America's Energy Renaissance

This article by Bryan Gruley, Kevin Crowley, Rachel Adams-Heard and David Wethe for Bloomberg. Here is a section:

Texas oil people who’ve lived through past busts remain resolute. This spring the Railroad Commission of Texas, which regulates the oil industry, considered limiting crude production in the hope of bolstering prices amid the Saudi-Russia price war. Some Texans reacted with disdain. “Texas, out of all states, represents a humble, steadfast resolve that refuses to sacrifice its principles due to foreign influence,” David Dale, a Houston-area land manager for oil and gas producer Ovintiv Inc., wrote to the commission. Troy Eckard of Eckard Enterprises LLC in Allen, Texas, told regulators that Russia and Saudi Arabia are “terrorists” whose “game of supply hostage is not the time to bow down and sell out. Let the weak go broke. Let the overpaid, poorly run private equity-back[ed] companies fall by the wayside. Leave us to our own free-market solutions.” The commission stood pat.

As oil historian Daniel Yergin has observed, companies go bankrupt, rocks don’t. Assuming prices slowly recover, producers will begin to turn wells back on—a process that’s never been tried at this large a scale—and maybe drill some new ones. Whether they start paying pumpers better remains to be seen. Opportune LLP, a Houston energy advisory firm, says pumpers and other service companies face “a test of survivability, not profitability.” Consolidation seems likely, with producers themselves possibly acquiring the smaller service companies on the cheap.

Eoin Treacy's view -

The initial surge in production from shale oil reserves was driven by wildcatters and the viability of the business model was predicated on high prices persisting. The reality that much of the USA’s shale production is higher cost is now leading to many of these companies going bankrupt or experiencing significant problems.



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July 21 2020

Commentary by Eoin Treacy

Hong Kong Bourse Soars on Ant's Dual Listing With Shanghai

This article by Kiuyan Wong for Bloomberg may be of interest to subscribers. Here is a section:

Ant Group is seeking a valuation of more than $200 billion as it goes public, and could raise more than Saudi Aramco’s record $29 billion if market conditions are favorable, according to a person familiar with the matter. The Hong Kong portion could raise about $10 billion, according to people familiar with the matter, which would make it the sixth-largest initial public offering in the city.

The listing is a boost to exchanges in Hong Kong and Shanghai, while dealing a blow to U.S. bourses as more Chinese firms look to raise money closer to home amid rising U.S.-China tensions. Hong Kong-listed Semiconductor Manufacturing International Corp. raised $7.5 billion from a Shanghai share sale in July, while Chinese internet firms JD.com Inc. and NetEase Inc. added secondary listings in Hong Kong this year.

Ant’s IPO is also a major lift for the city of Hong Kong, which is facing mounting challenges from a sharp recession, political turmoil from year-long protests and a new national security law that has prompted concerns about an exodus from the financial hub.

“Ant Group’s listing in Hong Kong will be a vote of confidence in the city,” according to Bruce Pang, head of macro research at China Renaissance Securities Hong Kong.

Eoin Treacy's view -

Western media has been filled with coverage of the negative ramifications of the Hong Kong security law and with good reason. The reality on the ground is that personal freedoms are being curtailed and that represents a significant decision point for many companies. If China’s approach to gaining tighter control of Hong Kong might be considered in terms of carrot and stick leverage, then the security law is the stick and listing of some of the country’s most prized companies on the domestic Hong Kong market is the carrot.



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July 21 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: stock market index long initiated July 6th 2020

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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July 20 2020

Commentary by Eoin Treacy

July 20 2020

Commentary by Eoin Treacy

Out to pasture!

This is potentially Edward Ballsdon’s final post for his Grey Fire Horse blog and may be of interest to subscribers. Here is a section:

Recently there has been discussion about yield curve control (YCC), and whether the FED will introduce a new policy on managing interest rates. Do not be fooled - this is a rather large red herring, as the debt is now too large in the US (as it is in most major economies) to raise rates without the increased interest cost having a debilitating effect on annual government budget figures.

There is no longer $ 1trn of outstanding US federal Bills - in June the outstanding amount surpassed $ 5trn. If rates rise from 0.2% to 2%, the ANNUAL interest cost just on that segment of the outstanding $19trn debt would rise from ~$ 8.5bn to ~$ 102bn. Naturally you would also need to also factor in the impact of higher interest rate costs on leveraged households and corporates.

This is the red herring - the size of the debt will force monetary policy. To think that the central bank can raise rates means ignoring the consequence from the debt stock. And this is the root of my lower for longer view, which is obviously influenced from years of studying Japan, and which is now almost completely priced in to rates markets. Remember that the YCC in Japan led to a severe reduction of the BOJ buying of JGBs - it just did not have to.

Eoin Treacy's view -

The Japanification of the developed world represents a massive challenge for investors in search of yield. 90% of all sovereign bonds have yields below 1% and the total of bonds with negative yields is back at $14 trillion and climbing.



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July 20 2020

Commentary by Eoin Treacy

Silver Futures Step Out of Gold's Shadow in Surge to 3-Year High

This article by Justina Vasquez, Krystal Chia and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

“Silver is currently trading at close to a record discount to gold, which should attract demand,” Goldman Sachs Group Inc. said in a note this month. “Silver often tends to lag gold at the beginning of a precious rally, and catch up to it as the rally continues and investors look for ways to diversify.”

During the week through Tuesday, hedge funds and other money managers added to their bullish bets on silver, boosting net-long positions to the highest since late February, according to government data Friday. That amounted to “a larger-than-usual” US$638 million bullish flow spurred by the trifecta of rising haven demand, recovering industrial activity, particularly in China, and South American supply disruptions, according to Societe Generale SA analysts including Michael Haigh.

Green Stimulus
Unlike gold, silver’s price is largely driven by a host of manufacturing applications. Morgan Stanley estimated that industrial demand makes up 85 per cent of silver demand. The metal may be poised to benefit from a push toward less-polluting energy technologies such as solar power, according to BMO Capital Markets.

With eyes on recovering industrial demand in countries including China, the world’s largest consumer of industrial commodities, some investors may be buying silver as a bet on new technology. U.S. Democratic presidential nominee Joe Biden outlined a goal last week of “a carbon pollution-free power sector by 2035” -- a move that would require rapid acceleration in the deployment of renewable wind and solar power as well as electricity storage, while continuing to rely on emission-free nuclear power.

“Silver-intensive areas such as 5G and solar technology could well benefit from any fiscal impulse,” BMO analysts including Colin Hamilton said in a research note. “More than US$50 billion of green stimulus has been approved by governments thus far this year, over which roughly three-quarters has been in Europe. But perhaps more impactful has been the recent Biden campaign Clean Energy plan, most notably a zero-carbon power grid by 2035 which would see new wind and solar capacity built to displace thermal generation.”

Eoin Treacy's view -

The price of any asset is influenced by the actions of marginal buyers. Therefore, new sources of demand and limitations on supply tend to have an outsized influence on the prevailing trend. Silver is used in solar panels, electronics and communications equipment. It also has healthcare applications as an antibacterial.



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July 20 2020

Commentary by Eoin Treacy

EU Closes In on Stimulus Deal With Major Obstacle Overcome

This article from Bloomberg may be of interest to subscribers. Here is a section:

After negotiating through the night, the Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros ($450 billion) of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations. The total size of the recovery package is in flux, but an earlier proposal was for 750 billion euros.

The bloc’s 27 leaders will gather again at 4 p.m. in Brussels to settle the outstanding issues such as the overall size of the fund and the mechanisms for controlling its spending. A French official said that their delegation now see a path to a full deal.

“After lengthy talks last night, we worked out a framework for a possible agreement,” German Chancellor Angela Merkel said on Monday. “It’s progress and gives hope that perhaps today an agreement will be made, or at least that an agreement is possible.”

Eoin Treacy's view -

€750 billion is a substantial aid package, but is rather small when compared to the measures taken by the USA. The reluctance of creditor nations to give money away, the length of time taken to negotiate the deal, and the fact the agreement has been reached following the peak infection point for Eurozone countries have contributed to the tailored size of the package.



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July 17 2020

Commentary by Eoin Treacy

July 17 2020

Commentary by Eoin Treacy

Chapter 4: The Big Cycle of the United States and the Dollar, Part 1

This is the most recent instalment of Ray Dalio’s book on big cycles. Here is a section:

Like Germany, Japan was also hit exceptionally hard by the depression and became more autocratic in response to it.  Japan was especially vulnerable to the depression because, as an island nation without adequate natural resources, it relied on exports for income to import necessities.  When its exports fell by around 50% between 1929 and 1931, it was economically devastated.  In 1931, the depression in Japan was so severe that the country went broke—i.e., it was forced to draw down its gold reserves, abandon the gold standard, and float its currency, which depreciated it so greatly that Japan ran out of buying power.  These terrible conditions and large wealth gaps led to fighting between the left and the right.  In 1932 that led to a massive upsurge in right-wing nationalism and militarism to forcefully restore order and bring back economic stability.  To that end, Japan’s military took control and pursued military options to get Japan the resources it needed by taking them away from other countries.  Japan invaded Manchuria in 1931 and later expanded through China and Asia to obtain natural resources (e.g., oil, iron, coal, and rubber) and human resources (i.e., slave labor).  As in the German case, it could be argued that this path of military aggression to get needed resources was the best path for the Japanese because relying on classic trading and economic practices wouldn’t have gotten them what they needed.   

Shifting to more autocratic, populist, and nationalist leaders and policies during times of extreme economic stress is typical, as people want strong leadership to bring order to the chaos and to deal strongly with the outside enemy.  In 1934, there was severe famine in parts of Japan, causing even more political turbulence and reinforcing the right-wing, militaristic, nationalistic, and expansionistic movement.  

In the years that followed, this movement in Japan, like that in Germany, became increasingly strong with its top-down fascist command economy, building a military-industrial complex with the military mobilized to protect its existing bases in East Asia and northern China and its expansion into other territories.  As was also the case in Germany, during this time, while most Japanese companies remained outside government ownership, their production was controlled by the government.

Eoin Treacy's view -

It makes sense that no one would enter a war under the assumption they are going to lose more than they gain. Therefore, it is reasonable to conclude the increasing competition between China and the USA will not result in a war until one side clearly believes they can win. Nuclear weapons obviously complicate the calculus.



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July 17 2020

Commentary by Eoin Treacy

Silver Strategy - Price momentum building as macro fundamentals improve

Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

Physical deficits forecast in 2020 and 2021. We have updated our supply-demand forecasts for silver, which now see physical deficits in 2020 and 2021, from modest surpluses previously. This primarily reflects a stronger rebound in economic activity than we had expected and we now forecast demand in 2020 down -4% vs. -17% previously. We have also incorporated a material ETF inventory build, resulting in even larger net deficits. Our near-term supply forecasts were relatively unchanged.

Underlying industrial & commercial demand more robust. In the initial stages of the COVID-19 pandemic, Industrial Production (IP) on a period-over-period basis went to a highly negative level, driving a sharp move lower in silver prices. While we continue to assume YoY declines in global GDP and IP, we now think there could be a better outcome than previously expected, reflecting recent strength across industrial sectors in China, supportive global central bank stimulus and apparent rebounds in global PMIs. As such, our forecasts for industrial and commercial demand have improved.

Investment demand accelerating. Silver offers many of the same investment qualities as gold even with 50-55% of demand coming from industrial use. This means it is similarly attractive in the current supportive gold macro environment. Notably, physically backed silver ETF holdings have risen +140 Moz over the past 3 months and this appears to have continued to support prices in recent weeks. We now add significant ETF build into our demand forecast to reflect likely further investment interest.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Silver is high beta gold but it takes time for investors to get the message that a new gold bull market is in the offing. Therefore, it is quite normal for silver to underperform, often by a wide margin, until investors begin to think about how they can gain leverage to the gold price. Therefore, the return to outperformance of silver relative to gold is a significant transition in the psychological make-up of the market.



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July 17 2020

Commentary by Eoin Treacy

Asymptomatic Spread Has Become Oddly Controversial

This article by Faye Flam for Bloomberg may be of interest to subscribers. Here is a section:

“What we found,” she says, “was actually similar to what WHO said.” Asymptomatic people can transmit the disease to others — the risk is not zero. The so-called attack rate, which measures the fraction of contacts infected was, in high-risk settings, less than 1% for asymptomatic cases versus 75% for those showing symptoms. Among members of the same household, the attack rate was 15% for symptomatic cases and 2% for asymptomatic ones. She and colleagues published their conclusions as a response to the Annals of Internal Medicine article.

“As a clinician, this really bothers me because we really have to get this right,” she says.  That means getting a better handle on the range of symptoms — including the inability to smell, which happens in as many as 60% of mild cases. It means making sure people recognize these symptoms, stay home, and ideally, allow contact tracers to stop chains of transmission.

A paper published last week in the Proceedings of the National Academy of Sciences conclude that isolating sick people isn’t enough, and that’s true. But tracing their contacts and isolating them seems a better option than giving up in defeat.

Many countries from Japan to Ethiopia have been successfully stopping chains of transmission this way. Ultimately, science can’t tell people what to do. There should be a political side to deciding how to balance risk of death and quality of life, health hardship and economic hardship. Those are value judgements. But politicizing the science ensures the public will suffer the worst of both.

Eoin Treacy's view -

How COVID-19 is contracted and containing the spread are two separate but related topics. I go to the post office every day. I wear a mask and wash my hands with sanitiser as soon as I get back to the car. The people working in the post office wear masks and gloves and none of them have gotten sick. We are also not seeing large numbers of grocer store workers collapsing from infections. Therefore, it is reasonable to assume that even for people who are in high risk professions, who are indoors all day and constantly deal with the public, the spread has been contained.



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July 17 2020

Commentary by Eoin Treacy

July 16 2020

Commentary by Eoin Treacy

July 16 2020

Commentary by Eoin Treacy

Worst China Stocks Selloff Since February Caps Brutal Reversal

This article by Jeanny Yu for Bloomberg may be of interest to subscribers. Here is a section:

The impact showed in Wednesday’s smallest increase in stock leverage since late June. The CSI 300, which was up almost 17% for the month on Monday, has now given up half those gains.

An attack from the People’s Daily newspaper on Moutai was taken as another sign of Beijing’s desire to slow the recent run-up, after government-backed funds sold shares or announced plans to so in the past few days. Increasing tensions with the U.S., the central bank’s clampdown on easy money and a drop in retail sales are also adding up as reasons to start selling.

Data Thursday showed the Chinese economy returned to growth in the second quarter, expanding a better-than-expected 3.2%. While industrial output rose 4.8% from a year earlier, retail sales shrank 1.8%, weaker than a projected 0.5% increase. That suggests the recovery is still largely industry-driven, with consumer sentiment remaining fragile.

“Retail sales came worse than expected, which hurts sentiment towards some consumer stocks,” said Daniel So, a strategist at CMB International Securities Ltd. “A stabilizing economy means the scale of monetary easing may be smaller than expected. Ample liquidity was one of the key reasons for markets to jump.”

Overseas investors continued to trim their holdings of mainland-listed shares, selling nearly $4 billion worth of the stocks through exchange links in the past three days.

Eoin Treacy's view -

The CSI 300 pulled back sharply today to test the upper side of the underlying range. This represents the first area of potential support so evidence of demand returning in the next day or two will be required if the benefit of the doubt is to be given to the breakout.



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July 16 2020

Commentary by Eoin Treacy

Gold adjusted for Purchasing Power Parity in USD, GBP, AUD, CAD, EUR and CHF

Eoin Treacy's view -

Gold is a monetary metal because it has been viewed as a store of value for millennia. The question therefore is how do we best measure its performance as a store of value? Afterall, the simply looking at its value in different currencies gives us an historical perspective but it does not illustrate how much the purchasing power of currencies has been degraded over time. In order to do that we need to create charts of gold adjusted for the purchasing power parity of various currencies.



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July 16 2020

Commentary by Eoin Treacy

U.K. Says Russians Seek to Steal Virus Vaccine Research

This article by Kitty Donaldson, Ryan Gallagher and Chris Strohm for Bloomberg may be of interest to subscribers. Here is a section:

In a dramatic statement on Thursday, Britain’s National Cyber Security Centre (NCSC) said vaccine and therapeutic sectors in multiple countries have been targeted by a group known as APT29, which it said is “almost certainly” part of Russian state intelligence. Security agencies in the U.S. and Canada later issued their own statements backing up the findings.

“It is completely unacceptable that the Russian intelligence services are targeting those working to combat the coronavirus pandemic,” British Foreign Secretary Dominic Raab said. “While others pursue their selfish interests with reckless behavior, the U.K. and its allies are getting on with the hard work of finding a vaccine and protecting global health.”

The intelligence bombshell came at a delicate time in geopolitics with a combative U.S. election looming in November and the pandemic plunging the world economy into recession. Coronavirus has launched a global race for a vaccine, in which researchers in the U.K. have made progress recently.

Eoin Treacy's view -

The geopolitical dividend of being the country that develops a viable solution for the coronavirus first is obvious. That is regardless of the fact that most countries and companies have clearly stated they are willing to do everything possible to made a vaccine widely available.



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July 15 2020

Commentary by Eoin Treacy

July 15 2020

Commentary by Eoin Treacy

July 15 2020

Commentary by Eoin Treacy

Musings From the Oil Patch July 15th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. This issue includes a comprehensive discussion on the viability of a hydrogen economy. Here is a section:

The conclusion that comes from our examination of hydrogen is that without some major technological breakthrough that reduces the cost of producing it substantially, the economic hurdle will not be overcome.  That means the only way hydrogen could become an important energy source is with government intervention in the energy market and assigning a price to carbon, or subsidizing the hydrogen fuel.  At this point in time, as governments around the world struggle to reopen their economies and repair the financial damage done to their citizens and businesses by the response to the pandemic, it is difficult to see them embracing carbon prices, which raises energy costs for their people and companies.  This is why the strong push, especially in Europe, for tying net-zero carbon emission policies in government stimulus efforts to rebuild their economies following Covid-19.  We suggest energy executives, analysts and investors worry more about the debates over the economic rebuilding efforts than the short-term moves in oil prices, demand and supply.  The long-term future of the oil market will be impacted by the success of governments instituting carbon prices.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Natural gas and coal prices are low in both nominal and relative terms. Economics 101 dictates that when the price of a vital commodity falls, consumers will naturally migrate towards it and find new uses for the resource.



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July 15 2020

Commentary by Eoin Treacy

As US Seeks Sourcing, Sole US Rare Earth Miner Goes Public

This article from the Associated Press may be of interest to subscribers. Here it is in full:

The sole miner of rare earths in the U.S. is becoming a public company amid elevated trade tensions with China, the dominant global supplier of the material used in everything from computers to cars.
MP Materials, which runs a mine and processing facility in Mountain Pass, Calif., near the border of Nevada, will be listed on the New York Stock Exchange in a deal with the blank-check company Fortress Value Acquisition Corp.

“This business combination and becoming a public company is a key milestone in MP Materials’ mission to restore the full rare earth supply chain to the United States of America," said James Litinsky, a co-chairman who will become chairman and CEO. MP Materials can produce refined neodymium-praseodymium, a rare earth material used in magnets that help power electric vehicles, wind turbines, robotics, drones and defense systems. China currently controls more than 80% of that market. MP Materials Corp. will be listed under the ticker symbol “MP."
 

Eoin Treacy's view -

A decade ago, the price of rare earth metals surged to unimaginable heights because China restricted exports in a mercantilist effort to force investment in its high-end manufacturing sector. The effort created significant efforts to develop alternative sources of supply but most failed to reach production when China started exporting again.



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July 15 2020

Commentary by Eoin Treacy

Aphria-Aurora Combo Would Post Over C$1 Billion in Sales

This note by Michael Bellusci for Bloomberg may be of interest to subscribers.

A combined Aphria and Aurora Cannabis entity would suggest a company with over C$1 billion in sales in 2021, with over C$600 million in net cannabis sales, Stifel analyst W. Andrew Carter wrote in note.
 

* Stifel says “headset market share data suggests” a combination would produce a leader in Canada’s adult-use market, with 30% share
* Stifel questions whether a potential deal would garner regulatory scrutiny
* Separately, Scotiabank analyst Adam Buckham wrote in note a potential deal makes sense
** Positives for Aurora holders would be annual cost savings and improved credit position
** Could spark pot sector M&A
* Aurora shares in Toronto rose as much as 6.3% intraday; Aphria rose 7.7%
* NOTE: Earlier, Aurora-Aphria Merger Talks Are Not Just Smoke: React (BI)
* NOTE: July 14, Aphria and Aurora Explored Merger, Talks Failed: BNN Bloomberg

Eoin Treacy's view -

The legalisation of cannabis in Canada was a buy the rumour, sell the news phenomenon. The prices of related shares surged ahead of the transition but did not improve on that performance subsequently and have since declined meaningfully.



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July 14 2020

Commentary by Eoin Treacy

July 14 2020

Commentary by Eoin Treacy

Global Macro Outlook: Virus curve flattening, markets stabilizing, slow recovery

Thanks to a subscriber for this report from Deutsch Bank by Torsten Slok. It is loaded with thought provoking charts which may be of interest.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

I found the chart comparing the Swedish and US COVID-19 infection rate to be particularly interesting. It suggests that anything less than total adherence to social distancing, effective testing and contact tracing is ineffectual. That’s a challenge because while some Asian countries have been able to implement these types of protocols swiftly, not least because of their prior experience with SARS, it seems beyond the ability of most countries to do. With cases in Hong Kong and Australia rising it is looking increasingly likely this is going to be a long hard slog until a vaccine is widely available.



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July 14 2020

Commentary by Eoin Treacy

Ten Thousand Day Traders an Hour Are Buying Tesla Shares

This article from Bloomberg may be of interest to subscribers. Here is a section:

The frenzy in interest means that as of the end of Monday’s trading session, there are now roughly 457,000 users on the Robinhood app that hold shares of the company in some form. That makes it the 10th-most popular stock on the platform, ahead of even Amazon.com Inc., which is held by 358,000 users.

It isn’t at all clear that day traders are the main driver for the nosebleed rally in Tesla shares over the past few weeks. Indeed, there are myriad other possibilities, from the potential reveal of a new battery technology, to short covering, to conjecture over the possibility for the stock’s addition to the S&P 500 Index.

Eoin Treacy's view -

The rise of the day trader is another late cycle signal that we are now in the speculative excess phase of the bull market. When regular people make more money from trading than from their regular jobs it is an anomaly that does not last indefinitely.



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July 14 2020

Commentary by Eoin Treacy

Equities & The Rise of Inflation: How Much Inflation Before Repression?

Thanks to a subscriber for this report from Russell Napier which may be of interest. Here is a section: 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Governments are engaged in a massive nationalization of private assets. Whether its buying sovereign, corporate or mortgage bonds, equities, repos and commercial paper it all represents an accumulation of private assets. Indirectly, property taxes and rising payments to public sector workers represent an additional confiscation and redirection of private property to sustaining the status quo. 



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July 13 2020

Commentary by Eoin Treacy

July 13 2020

Commentary by Eoin Treacy

Party Like It's 2020, Not 1999

Thanks to a subscriber for this report from Mike Wilson at Morgan Stanley. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Rather than compare the pace of the current advance with what we saw in 1999, I think it is more appropriate to highlight the COVID-19 fear mongering to what went on ahead of Y2K. Back in 1999 there was palpable fear all computers, everywhere, would stop working on January 1st 2000. That catalysed spending decisions in corporations globally to frontload technology upgrade decisions into 1999. Y2K effectively pulled forward sales from 2000. 2001 and 2002 and tech sales looked like they would go on forever.



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July 13 2020

Commentary by Eoin Treacy

The Thucydides Trap and the Rise and Fall of Great Powers

Thanks to a subscriber for this report from Geopolitical Futures by Jacak Partosiak which may be of interest. Here is a section:

Political scientist Joseph Nye believes that the key trigger in the Thucydides trap is an excessive reaction to the fear of losing one’s power status and prospects for future development. In the case of Washington and Beijing, the relative decline of America’s power and the rapid rise of China’s power destabilizes their relationship and makes it difficult to manage. Gen. Martin Dempsey, then-chairman of the Joint Chiefs of Staff of the U.S. Armed Forces, even admitted in May 2012 that his primary task was to ensure that the United States did not fall into the Thucydides trap.

As a result of the slow but noticeable erosion of the U.S. position in the Western Pacific, it is highly conceivable that a scenario could emerge in which the current hegemon is tempted to conduct a strategic counteroffensive in response to an incident, even a trivial one, in the South China Sea or East China Sea, believing falsely that it has the edge over its inferior rival. This would trigger a modern Thucydides trap.

An in-depth reading of Thucydides’ work reveals a second trap, even more complex and dangerous than the first. Thucydides clearly warned that neither Sparta nor Athens wanted war. But their allies and vassal states managed to convince them that war was inevitable anyway, which meant that both city-states would need to gain a decisive advantage at an early stage of the escalating confrontation. Thus, they decided to enter the war after being urged to do so by their vassal states.

Eoin Treacy's view -

The discussions of the Great Game between China and the USA and many interlinkages across the global economy has been fodder for analysts for much of the last five years. I believe a much greater intensification of the competition between the USA and China is likely. Arguably it is already underway. However, for outright war to take place a number of additional conditions would need to be met.



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July 13 2020

Commentary by Eoin Treacy

U.K. Can't Inflate Debt Away, New Head of Fiscal Watchdog Says

This article by Alex Morales for Bloomberg may be of interest to subscribers. Here is a section:

The chancellor and Prime Minister Boris Johnson have repeatedly said they’re not planning on pursuing austerity policies to rein in government spending, and for now Sunak has focused on preserving jobs to avoid long-term scarring of the economy. He unveiled a 30-billion pound stimulus program last week, and plans a wider package in a budget in the fall.

Hughes said while there are upside and downside risks to inflation, they’re tilted toward it remaining below the Bank of England’s 2% target. He also warned that the debts being built up by companies to tide them over the pandemic could end up becoming a burden that leads to scarring of the economy.

“One of the concerns that we’ve had is that the longer the crisis goes on for, the more likely government-guaranteed loans becomes less of a facilitator of the recovery and more of a burden,” he said. “The more the debt is a burden on companies the less they will invest. We know from past crises that one of the reasons you see longer-term scarring on the economy is you have foregone investment, and that scarring can be significant.”

He suggested one way to mitigate for that effect would be to tie repayments of the government-backed loans to a company’s earnings and profitability.

Hughes said high frequency data pointed to a “a bit of good news,” with April representing the low point for the economy and output contracting by about 25% instead of the 35% initially forecast by the OBR. The question is how quickly the economy gets back that loss.

Current OBR projections are based on Britain and the European Union striking a free-trade agreement. If talks fail and Britain is forced onto WTO rules when the current transition period ends in December, there will be adverse “consequences” for growth and the public finances, he said.

Eoin Treacy's view -

The biggest challenge for every country as we look beyond the coronavirus-induced crisis is in what manner the debt will be paid back and how a drag on recovery can be avoided. The clear answer is to refuse to raise interest rates regardless of how powerful the economy is. Following that up with additional spending measures, to placate restive populations is also likely to be part of the solution.



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July 10 2020

Commentary by Eoin Treacy

July 10 2020

Commentary by Eoin Treacy

Skai revises targets for its liquid-hydrogen, long-range eVTOL

This article by Loz Blain for NewAtlas may be of interest to subscribers. Here is a section:

One challenge for anyone who wants to work with liquid hydrogen is that you need to keep it extremely cold to keep it in its liquid state. At atmospheric pressure levels, we're talking just 20.28 kelvins above absolute zero (−252.87 °C, or −423.17 °F).

That temperature can rise a little if you're willing to pressurize as well as cool (using a cryogenic system running between 250 and 700 bar of pressure), but Gunter says that's not part of Skai's plans, as "even a moderately pressurized system has significant weight penalties."

So, super-cooling it'll be, and while that entails extra energy losses in the liquefaction stage, the cooling equipment, the conversion back into gas for use in the fuel cell and in boil-off in the tank itself, the net result will still be a much longer range aircraft than anyone dealing with gaseous hydrogen – or certainly lithium batteries – will be able to deliver.

It'll be interesting to see how Skai gets the job done, as really you've got to look to NASA and other space programs to find liquid hydrogen being used in serious volumes.

"The good thing in all of this," says Gunter, "is the notable developments that occur in this space on an increasing basis. The efficiencies we’ve seen in fuel cells and the same the industry is seeing regarding H2 production all point to increasing effectiveness of any form of H2 as a future focused solution."

"There's a number of naysayers about what we're doing with hydrogen," says Hanvey, "but we believe we've gone from the question to the possible, and it's now the probable. We know we can fly with hydrogen, and the question is just how quickly we can get it to the market. And based on our experience, we think we can get there a lot quicker than perhaps the market will give us credit for."

Eoin Treacy's view -

Hydrogen’s energy density is orders of magnitude greater than any other fuel currently used in the global economy. The only reason we don’t already use it is because of the technological difficulty of containing what is a highly combustible material. The whole world knows about the Hindenburg accident 83 year ago, which put an end to transatlantic zeppelin travel. It did to the hydrogen industry what the Fukushima accident did to nuclear.



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July 10 2020

Commentary by Eoin Treacy

Record Lows Await for U.K. Money Market and Gilt Yields

This article by Richard Jones for Bloomberg may be of interest to subscribers. Here is a section:

U.K. yields’ march to record lows will gather momentum in the coming weeks as traders’ conviction in
negative BOE rates grows.

It’s happening today, with short-sterling contracts in 2022 printing 100 for the first time. This implied a 3-mo. GBP Libor fixing at 0%, with the March 2022 contract implying an unprecedented fix of -0.01%. Moreover, MPC-dated OIS rates currently have a cut to zero fully priced by the June 2021 meeting and 15bps of reductions priced by September 2021, which would take the rate negative.

In the gilt curve, 2-yr and 5-yr yields are already comfortably below zero and a negative yield in the 10-yr maturity is only a matter of time. The underwhelming fiscal package unveiled this week, with the furlough scheme unlikely to be extended, has spurred investors to bet the BOE will pick up the bulk of the stimulus slack. With that, new superlatives await for the depth of U.K. yields.

 

Eoin Treacy's view -

The Bank of England is facing the same quandary as many other central banks. Do they push rates into negative territory or do they greatly increase monetary stimulus to offset the inability to cut rates? The first hamstrings the banking sector, because they will see margins on loans disappear or even go negative. The second risks debasing the currency and fueling asset price inflation.



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July 10 2020

Commentary by Eoin Treacy

Franco-Nevada Eyes $1 Billion Deals as Base Metals Lag Gold

This article by Danielle Bochove for Bloomberg may be of interest to subscribers. Here is a section:

“Right now, on the precious metals side, we’re entering a bull market even for the junior companies,” Harquail said. “People are doing financings and they’re upsizing the financings.”

Franco-Nevada’s investors want the company to focus on precious-metal deals, he said, as gold continues its ascent. The pandemic has created some headwinds, mainly around doing on-site due diligence for new investments. But Franco-Nevada has been able to work around that with “installment deals” that are subject to doing that work once it’s safe.

The company’s biggest investment, in First Quantum Minerals Ltd.’s Cobre Panama mine, was shut for most of the second quarter but is now reopening.

Harquail said the possibility of supply interruptions in Chile or Peru is serious but that so far governments have treated mining as an essential industry. The company has a stake in Lundin Mining Corp.’s Candelaria mine in Chile.

So far, miners have been able to take advantage of their ability to control sites to contain the virus, he said. While Franco-Nevada doesn’t expect full production this year, he’s comfortable if assets are performing at 85% to 90% of optimal volume.

”I think the industry is going to be able to manage this quite well,” he said.

Eoin Treacy's view -

In the early stages of a commodity bull market investors are focused on dividends. They want the security of the payout to offer some form of compensation for the perception of risk. As prices improve, priorities change. A desire to buy at a discounted price to try and gain leverage to the rising price environment supersedes the desire for yield. By the time the bull market climaxes investors are willing to pay anything to capture supply for fear of missing out on future returns.



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July 10 2020

Commentary by Eoin Treacy

July 09 2020

Commentary by Eoin Treacy

Video commentary for July 9th 2020

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: megacap tech extends uptrend, China extends breakouts, industrials resources firm but energy eases, agricultural commodities steadying at previous support, Dollar steadies, Europe eases. US regional banks weak.



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July 09 2020

Commentary by Eoin Treacy

Email of the day on China's ascendency:

Your excellent piece today focusing on the China question arrived at the same time as an interesting counter-narrative to the "China-supreme argument". From the Telegraph. If correct, China's is not going to have it all its own way. Here is a section:

"The Huawei saga has exposed just much the country still lags, a surprise to some who have bought into the media narrative of Chinese hi-tech ascendancy. China is not yet capable of making the advanced semiconductor chips used for telecommunications or for FGPA circuits that can be programmed.

Nor has it mastered the electronic design automation needed for circuit design. It lacks the critical raw material needed to sustain its ambitions for global dominance of G5 mobile and the coming “internet of things”.

The Centre for Strategic and International Studies estimates that China has yet to crack the materials science that goes into the latest microscopic chips, despite hurling money at the challenge in successive programmes, the latest one commanding more than $20bn. Its high-end chip industry is ten years behind, but in ten years the infrastructure of global cyber dominance will already be in place.  

In short, the US controls the world’s semiconductor ecosystem, working tightly with Japan, Korea, and Taiwan. All Washington had to do in late May was to flick its fingers and Taiwan’s TCMS instantly cut off chip supplies to Huawei, dooming the company’s G5 global quest at a stroke."

Eoin Treacy's view -

Thank you for your kind words and this article which I’m sure will be of interest to the Collective. The significant investment China is making in its domestic semiconductor industry will need to be long-term and ongoing in nature to achieve the level of sophistication currently available to other countries. By some accounts they have sunk $20 billion into the project so far and it may take recurring investments of at least that much to develop the tools required to achieve technological superiority over coming decades.



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July 09 2020

Commentary by Eoin Treacy

The Gold-Oil Ratio Revisited

Thanks to a subscriber for this article from Goehring & Rozencwajg which may be of interest. Here is a section:

However, looking only when the gold-oil ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), crude has returned 32% on average over the next twelve months (over four times its long-term average), while gold has returned 4% on average. Oil was lower only 13% of the time (70% less often). On average, oil outperformed gold by 28% during these periods compared with 2% normally.

At the other extreme, when the gold-oil ratio was less than 10:1 (i.e., oil was expensive relative to gold), crude lost 7% on average over the next twelve months and was negative nearly 60% of the time. Gold returned 18% on average during these periods, outperforming oil by 25%. Since 80% of all observations occur when the ratio is between 10 and 30 you should expect the relative returns of both gold and oil to be like their long-run averages and that is exactly what occurred. When the ratio was between 10 and 30, oil returned 5% on average in the following 12 months, and was lower 41% of the time while gold returned 4% and was lower 33% of the time, roughly in line with long-term averages.

We last used this analysis in early 2016 to justify our investments in oil-related securities. At that point, the gold-oil ratio hit a then-record 47:1. We argued that oil prices were set to surge and invested in oil-weighted E&P securities as a result. Over the next 30-months, oil rallied by 191% from $26 per barrel to $76 per barrel by October 2018. Gold on the other hand fell by 4% over the same period. Oil stocks (as measured by the XLE ETF) advanced by 56%, well in excess of gold stocks (as measured by the GDX) which rose only 3% but lagging the S&P 500 which advanced 69%.

Eoin Treacy's view -

The gold/oil ratio spent much of the last couple of decades ranging mostly between 10 and 30. On the small number of occasions is veered outside of those bands the move was quickly reversed. It has therefore been reliable indicator of where value was present on repeated occasions. However, the current reading questions that conclusion. 



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July 09 2020

Commentary by Eoin Treacy

Torrid Heat and Empty Acres to Help Offset Corn's Demand Slump

This article by Michael Hirtzer, Tatiana Freitas and Elizabeth Rembert for Bloomberg may be of interest to subscribers. Here is a section:

In 2012, the last time corn supply dropped that much, the U.S. crop was hit by a combination of heat and drought, sending Chicago futures to their all-time peak of over $8 a bushel. The weather isn’t quite as drastic this year and grain prices are starting from a much lower level. But U.S. Department of Agriculture data last week made things more interesting, showing American farmers planted 3 million fewer acres with corn than expected.

The surprise drop in acreage makes any decline in yields due to record-high temperatures this week more acute -- and a potential turning point in a corn market that has suffered from a massive glut. The USDA in a monthly report on Friday is expected to shave off 600 million bushels from its supply
forecast, the biggest change since 2012, according to analysts polled by Bloomberg.

“One of the things we’ve talked about for a number of years is that supply has overtaken demand,” said Stephen Nicholson, senior grains and oilseeds analyst at agriculture lender Rabobank. “To rectify that imbalance, we have two things: some sort of weather event or produce less.”

Eoin Treacy's view -

The knock-on effects of the lockdowns and reduced economic activity has yet to be full seen. Whether that is in less demand for fuel additives, greater demand for snack foods, fewer acres planted or inclement weather affecting yields. The one thing we know for certain is that commodity prices are low. Therefore, supply disruptions have the capacity to shift the balance in favour of the bulls.



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July 08 2020

Commentary by Eoin Treacy

July 08 2020

Commentary by Eoin Treacy

China Has Already Declared Cold War on the U.S

This article by Niall Ferguson for Bloomberg may be of interest to subscribers. Here is a section:

Yet the book that has done the most to educate me about how China views America and the world today is, as I said, not a political text, but a work of science fiction. "The Dark Forest" was Liu Cixin’s 2008 sequel to the hugely successful "Three-Body Problem." It would be hard to overstate Liu’s influence in contemporary China: He is revered by the Shenzhen and Hangzhou tech companies, and was officially endorsed as one of the faces of 21st-century Chinese creativity by none other than … Wang Huning.

"The Dark Forest," which continues the story of the invasion of Earth by the ruthless and technologically superior Trisolarans, introduces Liu’s three axioms of “cosmic sociology.”

First, “Survival is the primary need of civilization.” Second, “Civilization continuously grows and expands, but the total matter in the universe remains constant.” Third, “chains of suspicion” and the risk of a “technological explosion” in another civilization mean that in space there can only be the law of the jungle. In the words of the book’s hero, Luo Ji: The universe is a dark forest. Every civilization is an armed hunter stalking through the trees like a ghost … trying to tread without sound … The hunter has to be careful, because everywhere in the forest are stealthy hunters like him. If he finds other life — another hunter, an angel or a demon, a delicate infant or a tottering old man, a fairy or a demigod — there’s only one thing he can do: open fire and eliminate them.

In this forest, hell is other people … any life that exposes its own existence will be swiftly wiped out. Kissinger is often thought of (in my view, wrongly) as the supreme American exponent of Realpolitik. But this is something much harsher than realism. This is intergalactic Darwinism.

Of course, you may say, it’s just sci-fi. Yes, but "The Dark Forest" gives us an insight into something we think too little about: how Xi’s China thinks. It’s not up to us whether or not we have a Cold War with China, if China has already declared Cold War on us. 

Eoin Treacy's view -

The Three Body Problem is an excellent read and The Dark Forest follows on well from where it left off. The third book in the series, Death’s End, was too meandering for me and I did not finish reading it. For a non-Chinese reader, the names can be a bit of an obstacle but the story is compelling.



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July 08 2020

Commentary by Eoin Treacy

Commodities and Predominant Deflation

Thanks to a subscriber for this report from Bloomberg’s economists. Here is a section on gold:

Quantitative Easing Is Strong Gold Tailwind. Gold is in the early days of resuming the bull market that started about 20 years ago, in our view. The financial crisis and inception of central-bank quantitative easing (QE) accelerated the metal's upward trajectory then, and we see parallels that are likely more enduring this time. Our graphic depicts the potential upside in spot gold toward $3,000 an ounce vs. about $1,770 on June 26, if simply following the trajectory of the G4 central-bank balance sheet as a percent of GDP. Central banks essentially printing money to spur inflation is a solid foundation for the benchmark store of value.

Gold bottomed at about $700 in 2008 and peaked near $1,900 in 2011. A similar-velocity 2.7x advance from this year's low-close near $1,470 would approach $4,000 by 2023. Rising Stock-Market Volatility a Gold Launchpad. If gold's relationship with equity volatility that's mean-reverting higher and the financial crisis is a guide, the metal has plenty more upside potential vs. downside risks. Our graphic depicts the 100-week moving average of the CBOE Volatility Index (VIX) bottoming from the life-of-index low in 2018, like it did in 2007 before the financial crisis and which accelerated gold's rally. There are potential parallels to about a decade ago. A key difference is the metal has had a substantial correction and appears to be in the early days of resuming a bull market.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Gold does best with negative real interest rates. That occurs when interest rates are held down because of fears of deflation, like now, and it also occurs when inflation advances quicker than central banks are willing to raise interest rates. That’s a scenario that could easily unfold in future considering the long-term repercussions of massive civil unrest and debt monetisation.  



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July 08 2020

Commentary by Eoin Treacy

Data-mining Firm Palantir Files for Stealth Public Offering

This article from The Associated Press may be of interest to subscribers. Here is a section:

The Silicon Valley data-mining firm Palantir Technologies confidentially filed to go public, setting up what could be the biggest stock offering from a technology company since Uber’s debut last year.

Founded in 2004 by investors including Peter Thiel, the company works with governments, law enforcement agencies and the defense establishment to organize and analyze huge volumes of data. The technology can be used to disrupt terrorist networks or battle human trafficking. Most recently, it was used by the White House to track coronavirus infections. Last year, Palantir won army contracts potentially worth hundreds of millions of dollars.

Palantir’s clients include major banks and the U.N.’s World Food Program.

The company has stirred controversy for upgrading Immigration and Customs Enforcement software that has been used in the Trump administration’s deportation crackdown, which led to on-campus campaigns to discourage recruitment and the picketing of CEO Alex Karp’s home.

The Palo Alto company has attracted venture capital from investors including In-Q-Tel, the Central Intelligence Agency’s investment arm. It has been weighing going public for years, with reluctance coming from the added scrutiny to the secretive nature of much of its business.

In a prepared release late Monday, Palantir said it had submitted its filing to the Security and Exchange Commission for confidential review and that a public stock listing is expected afterward “subject to market and other conditions.”

With the U.S. stock market rallying in recent weeks, a number of tech companies have gone public including Vroom, which sells used vehicles online, and Lemonade, an insurance start up.

Eoin Treacy's view -

Going public is not for everyone. If a company’s margins and market niche would attract attention and competition there is a clear incentive to stay private. Therefore, when a group of companies that have long eschewed the opportunity to list decide to do so, it is often a signal of the wider market environment not least because it affords early investors an opportunity to exit the business.



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July 07 2020

Commentary by Eoin Treacy

July 07 2020

Commentary by Eoin Treacy

White House Wants Stimulus by August Recess With $1 Trillion Cap

This article by Jordan Fabian and Kevin Cirilli for Bloomberg may be of interest to subscribers. Here is a section:

President Donald Trump and senior White House officials have said a payroll tax cut, liability reform, tax incentives for businesses to adapt to the pandemic and a potential back-to-work bonus are priorities for the administration.

Short said the White House views liability protections as “essential” for companies to bring workers back and fully re-open the economy.

The administration wants to be sure it’s “striking the right balance between income replacement on the one hand, and ensuring that we don’t have excessively high implicit tax rates on the return to work, on the other hand,” Tyler Goodspeed, acting chairman of the president’s Council of Economic Advisers, said in a separate interview with Bloomberg Radio.

Implicit tax rates can’t exceed 100%, he said, meaning it can’t be more lucrative for workers to stay at home. But any plan will require “not allowing a big blow to household income,” which is core to the economy, Goodspeed added.

Ohio Republican Brad Wenstrup, a member of the House’s tax-writing committee, said the package should address the ability of working parents to find childcare and helping schools to reopen.

“We have a shortage of day care providers,” he said in another Bloomberg Radio interview. “I am going to look for incentives for those type of programs.”

Congress in March passed a $2.2 trillion pandemic relief program, with carve-outs for small businesses and the airline industry as well as multiple lending programs for corporations and Main Street businesses through the Federal Reserve. Treasury Secretary Steven Mnuchin sent out nearly $1 trillion in the first month after that bill became law, through checks directly to American families, forgivable loans to companies and unemployment insurance.

Still, much of that money remains unused. The Treasury Department has yet to disburse any loans from a $25 billion pool for airlines, and most of a $17 billion carve-out for firms deemed critical to national security remains untapped.

Eoin Treacy's view -

The idiosyncrasy of how data sets are reported means the rebound in economic activity probably looks better than it is. If an historic decline occurs it will necessarily result in a deep decline. If the rebound from that low is in the order of 10% it will come through as an historic percentage advance and yet the absolute level of activity may still be well below the peak.



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July 07 2020

Commentary by Eoin Treacy

Bank Indonesia Agrees to Buy Government Debt to Fund Budget

This article by Grace Sihombing and Tassia Sipahutar for Bloomberg may be of interest to subscribers. Here is a section:

Governor Perry Warjiyo said at Monday’s briefing that inflation is under control and the central bank regularly assesses price and growth dynamics.

“We see so far that demand is not yet strong and inflation is low,” he said. “However, if inflation recovers and the economy picks up, Bank Indonesia has the tools ready, we have
the policies.”

The agreement between the Finance Ministry and central bank allows the bonds to be tradable and marketable, Indrawati said, so Bank Indonesia can use the securities for its monetary
operations.

The burden-sharing scheme caps the upside risk for bond supply in the near term, as the bulk of the securities will be privately placed with Bank Indonesia, according to Citigroup Inc. economist Helmi Arman. There’s less likelihood of the central bank unwinding the securities this year or next even
though the notes are tradable, he said in a report.

Bank Indonesia already had been taking a more aggressive role in providing stimulus to the economy, buying sovereign notes directly from the government at primary market auctions since April. Under the latest agreement, Indrawati said the government will double the size of its auction, held every two
weeks, to 40 trillion rupiah.

Eoin Treacy's view -

Emerging markets are currently free to engage in quantitative easing because they are experiencing the same deflationary forces of developed markets. That’s an odd set of circumstances but it speaks to the deleterious effects of the global response to the coronavirus and the impact it has had on near-term inflationary expectations.



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July 07 2020

Commentary by Eoin Treacy

Great Bear Expands LP Fault Gold System at Depth: 10.06 g/t Gold Over 31.25 m, Within 4.07 g/t Gold Over 80.50 m, and 57.32 g/t Gold Over 3.95 m, Within 7.26 g/t Gold Over 53.50 m

This press release may be of interest to subscribers. Here is a section:

Chris Taylor, President and CEO of Great Bear said, "The most recent drilling along 650 metres of strike length of the multi-kilometre LP Fault gold system has shown mineralization typically expands at depth. As the system broadens, we generally observe an increasing number of high-grade gold intervals within broader halos of moderate gold grades.  Gold mineralization continues to show excellent continuity within and between drill sections in all locations tested to date.  A new gold zone adjacent to the LP Fault zone was also discovered at approximately 750 metres vertical depth, consistent with our model of a greater than one kilometre wide structural zone at Dixie that has the potential to host additional new gold discoveries."

The Company has completed 120 of approximately 300 planned drill holes into the LP Fault target, as part of its 5 kilometre long by 500 metre deep grid drill program.  Current drill hole locations and results are provided in Figure 1, and in Table 1, respectively.

Eoin Treacy's view -

Great Bear’s resource base is next door to the historic Red Lake mine in Ontario. However, the company’s marketing department is almost as valuable as the resource they are proving up. Every time the results of a new drill hole are found, they issue a press release. Those eye-catching results continue to spur interest in the share as a high probability project that will eventually deliver on gold to the market.



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July 06 2020

Commentary by Eoin Treacy

July 06 2020

Commentary by Eoin Treacy

Chinese Stocks Surge as Individual Investors Pile Into Market

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

A front-page editorial in China Securities Journal said fostering a “healthy bull market” is important given China’s increasingly complicated international relations, intense financial and technological competition, and the challenge of controlling internal financial risks.

Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong, said the editorial had bolstered investor confidence. He said some mainland investors were also buying shares anticipating that coming changes, such as an overhaul of the Shanghai Composite, would attract more global investment.

Eoin Treacy's view -

“China’s bull markets are state sponsored” has been my short hand for analysing the Chinese market for much of the last decade.

The primary indices have inconsistent trends, where large surges have been followed by collapses and volatile ranging. The defining characteristic of broad advances has been overt government support for prices.



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July 06 2020

Commentary by Eoin Treacy

Email of the day on psychological perception stages of a new bull market

Your comment on psychological perception stages. I find it most interesting that in the financial press in the UK at this point in time, the "g" word is very rarely mentioned by any of the financial journalists I follow, let alone recommending any gold mining companies. I wonder if this could be a sign that we are still in the latter stages of the "disbelief" phase regarding gold as an investment despite all the signs that a bull market is now underway.

Eoin Treacy's view -

Thank you for this question. There is a ‘stealth’ bull market underway in gold and a number of miners have posted impressive returns over the last 18 months. That is being overshadowed, right now, by the continued outperformance of large cap technology companies which are now accelerating higher.



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July 06 2020

Commentary by Eoin Treacy

Prospering in the pandemic: the market winners

Thanks to a subscriber for this article by Tom Braithwaite for the Financial Times. Here is a section:

We also ranked them. It would have been nice to use profits or sales as the gauge of success. But the lag in reporting and different calendars made that impractical, even for public companies. So we stuck with a market measure, accepting that — in the saying attributed to value investing doyen Benjamin Graham — the market is only a “voting machine” in the short run, rather than a “weighing machine”.

But which market measure? For the main rankings of the top 100, we opted for equity value added. That list included some of the clear “winners” from the pandemic, such as Netflix and Zoom Video. But it has one obvious flaw: it favoured those that were already large. Companies including Nestle, L’Oréal and Alibaba made the cut despite single-digit percentage gains in value.

If we had used percentage gains, the list would have had the opposite problem, favouring smaller companies, penny stocks that can swing wildly on trades of modest value. However, we still wanted to assemble an alternative ranking to highlight some less known but still significant winners. To do this, we used percentage gains but with a $10bn floor for market cap.

This brings into the top 100 companies that escaped the original list such as Ocado, the UK online supermarket that has reinvented itself as a global tech supplier to other grocers, and Peloton, whose stationary bikes equipped with video screens for online classes have surged in popularity as gyms closed. But otherwise the top 100 has a lot of the original big names such as Tesla, Pinduoduo and PayPal.

If the floor is $1bn, there is a lot more shuffling around. On this measure, Novavax comes top, with a 1,900 per cent rise in value. There is little mystery behind this: Novavax has a vaccine candidate for Covid-19 and is racing to expand its manufacturing capacity. 

Eoin Treacy's view -

There is no doubt that for some companies the COVID-19 crisis has been a gift. It accelerated customer acquisition efforts while also lower lowering borrowing costs and boosting liquidity. High growth companies that reside online, instead on Main Street, were already gaining market share from brick and mortar. That process has not gone into overdrive as the number of retail bankruptcies surges.



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July 03 2020

Commentary by Eoin Treacy

July 03 2020

Commentary by Eoin Treacy

Psychological Perception Stages of Major Bull Markets

Eoin Treacy's view -

At The Chart Seminar we discuss the progression of investor psychology through disbelief, acceptance and into mania as bull markets develop, evolve and eventually end.  John Templeton’s quote “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” Is relevant to that discussion.



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July 03 2020

Commentary by Eoin Treacy

A Quick Survey of "Broken" Asset Classes

Thanks to a subscriber for this report from Research Affiliates which may be of interest. Here is a section:

We recognize the substantial survivorship bias in our survey, having personally survived most of these episodes ourselves! So, to be more comprehensive, we also plot other periods when these asset classes fell within their lowest decile of historical three-year rolling absolute returns.6 A similar pattern unfolds. A large majority, or 88%, of all observations (43 of 49) deliver a positive five-year return. The average five-year cumulative return across all observations is 80%, or approximately 12% a year, suggesting both the presence and strength of mean reversion.

How do the asset classes perform on a relative basis? Recall that the broken asset classes in our survey had mostly fallen short of the performance of the S&P 500 in the years leading up to the proclamation they were broken. In the subsequent three years, these asset classes surpassed the performance of US stocks on a cumulative basis by an average of 45%, or 13% a year. After five years, the cumulative excess return of REITS, commodities, small value stocks, and high-yield bonds versus the S&P 500 averaged 101%, or 15% a year. Over this five-year span, the four asset classes fared significantly better than US stocks, with cumulative excess returns ranging from 10% (high-yield bonds) to 158% (commodities).

The press is often quick to label asset classes broken. Rarely is this the case, although exceptions do exist. For instance, the German and Russian stock markets during World War I, Japanese and German stock markets during World War II, and the Egyptian stock market in the early 1950s all collapsed. The near-obliteration of a stock market has happened, but it is an extraordinary occurrence.

Eoin Treacy's view -

The epicentre of risk in a crash is the most likely to experience a lengthy Type-3 base formation following the big decline. However, even within the crashing sector, there will be companies that come through the crisis relatively unscathed. They most often show early relative strength and come to dominate in the following years. However, there will also be times when leaders underperform. That occurs most often when the weak sector convalesces. That’s when value propositions become compelling and even deeply troubled companies can do well for a while; not least because of the base effect of low prices. 

Let’s look at some examples.



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July 03 2020

Commentary by Eoin Treacy

Are you reframing your future or is the future reframing you?

Thanks to a subscriber for this report from Ernst and Young. Here is a section on financial statistics:

To some extent, technology can help meet these new challenges. The costs of data collection and analysis are falling rapidly thanks to Internet of Things and AI. Satellites and sensors, for example, can generate highly accurate real-time data. A broader corporate data strategy aimed at collecting social and environmental cost data, in addition to the well-being of employees and local communities, might help fill significant gaps in measurement. Useful new corporate reporting that details progress toward a broader business purpose means building the prerequisite data capabilities first.

Governments also have an opportunity to leverage data generating technologies to enhance feedback. More than 20 countries from Singapore to Sweden have “smart city” initiatives, demonstrating how better measurement through data can improve public safety and citizen services, albeit not without risks. The UK’s National Health Service has dozens of partnerships with leading technology companies analyzing the vast troves of patient data to support the provision of its services.109 And big data techniques have also proved a significant part of the policymaking process when fighting the COVID-19 pandemic. Countries that successfully implemented track and-trace techniques using smartphones fared better in managing the deadly outbreak.

An inflection point is approaching, driven by necessity. Our industrial-era metrics are misaligned with the needs of a knowledge-based economy characterized by widespread technological disruption. We are on the cusp of a significant change in the way societies make policy and conduct business. Companies will either evolve to realign with new values, or risk dissolving as their social contract is withdrawn. There is no looking back.

Eoin Treacy's view -

The way in which we collect data about the economy is deeply flawed. That’s a well understood fact but we have not yet come up with a more effective way of measuring economic activity and potential. The problem with changing the status quo is it would completely upend the way in which economies are managed. That might well be inevitable because the populist uprising that continue to  spread are challenging the establishment already.



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July 03 2020

Commentary by Eoin Treacy

Hong Kong Files First Charges Under New Law, Bans Rallying Cry

This article by Iain Marlow and Natalie Lung for Bloomberg may be of interest to subscribers. Here is a section:

“Hong Kong should be able to continue to enjoy the freedom of speech, freedom of press, of publications, protest, assembly and so on,” Chief Executive Carrie Lam told reporters after it took effect, adding international agreements on civil rights allowed restrictions to ensure national security. “Where it is for the protection of national security, then sometimes some of these rights could be restrained in accordance with the law.”

The Hong Kong Bar Association said this week it was “gravely concerned” about the law and its broadly defined criminal offenses.

“These are widely drawn and absent a clear and comprehensive array of publicly accessible guidelines and basic safeguards as to legal certainty and fair treatment, are capable of being applied in a manner that is arbitrary, and that disproportionately interferes with fundamental rights,” the group said in a statement. “Lawyers, judges, police and Hong Kong residents were given no opportunity to familiarize themselves with the contents of the new law, including the serious criminal offenses it creates before it came into force.”

Eoin Treacy's view -

China’s nine dashed line in the South China Sea, border clashes with India, overriding of the Hong Kong handover agreement and increasingly strident statements towards reuniting with Taiwan, all points towards an expansionist foreign policy. 



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July 03 2020

Commentary by Eoin Treacy

July 03 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: stock market short stopped out a small profit June 16th

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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July 02 2020

Commentary by Eoin Treacy

Video commentary for July 2nd 2020

July 02 2020

Commentary by Eoin Treacy

Email of the day - on a stay at home index

“Are you able to create a Work From Home/Stay at Home index for you/us to track on a regular basis. Today has been another big day for many of these stocks with Shopify for example up another 7% in here today, clearing the $1,000 level, Netflix up 5%, Amazon 4%, Peloton up 4, DocuSign up 4, and Wayfair 11%! Regretfully I’m not involved in any of these as I can’t get my head around valuations. When will this madness stop?”

Eoin Treacy's view -

Thank you for this email which highlights the dilemma of many people on the side-lines of the broad market rebound. There is always a crisis of confidence for anyone who has missed a rebound and is presented with the choice of buying a breakout or waiting for a pullback. That is amplified during accelerations where the fear of missing out is weighed against the fear of sitting through a reversal.



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July 02 2020

Commentary by Eoin Treacy

China in counterfeit gold scandal as Wuhan company uses fake bars to gain $4.1bn in loans

This article from smallcaps.au may be of interest to subscribers. Here is a section:

The story broke after a Beijing-based website investigated complaints and then posted the news under the headline: “The mystery of [US]$2 billion of loans backed by fake gold”.

Kingold is denying it lodged fake bars with Chinese lenders such as China Minsheng Trust, Hengfeng Bank, Dongguan Trust and Bank of Zhangjiakou. The trust companies involved are largely what are known as “shadow banks”.

The alleged scam came to light earlier this year when Kingold defaulted on loans to Dongguan Trust. The gold bars pledged as collateral turned out to be gilded copper alloy. Minsheng Trust’s “gold” bars have also turned out to be copper alloy under the gilded surface.

 

Eoin Treacy's view -

Veteran gold watchers will remember the case of gold-plated tungsten bars which began to turn up in New York a few years ago. 82 tonnes of gold is a substantial total and highlights the lack of governance in China’s financial system.



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July 02 2020

Commentary by Eoin Treacy

Email of the day on contrasting life experience between generations

When I read that high house prices are a problem for the younger generation, I wonder whether the historical context is considered. I bought my first house in 1974 and I finally paid off the mortgage on my current home in1999. Over the 25 years that I had a mortgage the lowest interest rate I ever paid was 10% and the highest was 15%. Yes, for a quarter century I paid 10-15% interest on my mortgage, which frequently used up more than half my monthly income. Many of my age group went through a similar experience. My wife and I hardly ever ate out, and our children were treated to many years of cheap camping holidays. I had little spare cash at any time until the mortgage was gone.

Do today's new home buyers have any idea how we lived and struggled with finances? House prices today mirror the very low mortgage interest rate and I suspect that very few (if any) 20-40 year olds are using 50% or more of their income to pay their mortgage as we did. Their money goes on things we could not afford and did not regard as essentials. It's a matter of priorities.

Eoin Treacy's view -

Thank you for this perspective which I’m sure will be of interest to other subscribers. The personal experience you highlight is a testament to what can be achieved through resilience and frugality. If more people were willing to practice delayed gratification we would be in the very different world. As I see it there are two important trends that the younger generation face relative to the older generation. These are disinflation and globalisation.



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July 02 2020

Commentary by Eoin Treacy

Email of the day on hydrogen

I loved your article but why don't you mention the rise of hydrogen and the use of green hydrogen as being a valuable alternative as an energy storage tool for the future (we are talking about 2040!)? It's also more logical as energy source for trucks as batteries alone are far too heavy...

Eoin Treacy's view -

Thank you for your kind words and this email which raises some important points. I have been of the opinion for years that the low price of natural gas would seed a hydrogen economy. That now appears to be coming to fruition. Ultimately, the production of hydrogen will be replaced with less reliance on fossil fuels, but we are reliant on gas for at least the next decade to deliver supply.



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July 01 2020

Commentary by Eoin Treacy

July 01 2020

Commentary by Eoin Treacy

The FDA Wants a Covid-19 Vaccine That Really Works

This article by Max Nisen for Bloomberg may be of interest to subscribers. Here is a section:

The path the FDA outlines is a long one. It’s going to take a while to recruit and enroll 30,000 people in a trial and give half of them two shots in the arm — as Moderna Therapeutics Inc. intends to do to test its candidate. And until a sufficient number of subjects in the placebo arm of such a trial contract Covid-19, there won’t be any firm results. Any number of variables could cause further delays: bad luck, a poor vaccine performance, or slowing case growth.

The FDA is by no means ignoring the urgency of the moment. Its guidance includes a variety of concessions on safety data and other issues that are meant to speed the process. But the world can be grateful the agency is willing to bend only so far.
 

Eoin Treacy's view -

Setting a high standard for a vaccine that will be administered to hundreds of millions of people is imperative. It is the minimum requirement to instill faith in the population that it is worth accepting. I have every expectation that the advances in genetic sequencing and editing will deliver a positive result this year and that a true second wave will be avoided.

The impatience many people feel is perhaps the biggest obstacle to containing the spread before a vaccine has been delivered. I even find myself being less vigilant now than I was a few months ago. That is despite the massive swell of community spread and the greater likelihood of contracting it as a result. That’s a good example of how even the most extreme situation can assume an air of normalcy after a relatively short period of time. That’s one of humanity’s greatest survival instincts, although it is not especially helpful in the short term.



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July 01 2020

Commentary by Eoin Treacy

Tesla China Plant Might Have Come to the Rescue Last Quarter

This article by Dana Hull for Bloomberg may be of interest. Here is a section:

“The lesson learned by now is that TSLA shares tend to ‘work’ when something new has launched,” Jeffrey Osborne, a Cowen Inc. analyst with the equivalent of a sell rating on the stock, said in a report Tuesday. “At this point both the Model Y and China built cars are ramping up.”

Musk, 49, suggested to Tesla employees early this week that the company could manage to avoid a quarterly loss.

“Breaking even is looking super tight,” the CEO wrote to staff in an email seen by Bloomberg. “Really makes a difference for every car you build and deliver. Please go all out to ensure victory!”

Eoin Treacy's view -

Tesla has done an admirable job of keeping production on line globally even as sporadic shutdowns at home impaired manufacturing. The decision by California to mandate emission free trucking by 2040 is an additional tailwind for the battery producer. 



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July 01 2020

Commentary by Eoin Treacy

Musings from the Oil Patch June 30th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. Here is a section on Chinese and Indian coal demand:

India has auctioned 41 coal mines with 17 billion tons of geological coal reserves to enable private companies to commence commercial extraction. All of these mines are largely fully-explored, enabling them to come into production quickly. Four of the mines will be dedicating their coal for use by steel-making plants. The 41 mines represent both large and small mines with peak-rated capacities (PRC) of 0.5 to 40.0 million tons annually (mmt/y). These mines will provide a total PRC of 225 mmt/y when in operation. Given the sizes and locational challenges of some of the mines, we can expect to see more pictures of women hauling baskets of lump coal from the mine to shipment points. This is one way to help the nation’s employment situation.

The increased use of coal is designed to help India deal with its economic challenges, of which employment is one aspect. However, lowering, or at least keeping stable, the cost of energy is also crucial for political peace. The impact on India’s climate goals remains an open question. The long-term outlook for India’s energy mix suggests that fossil fuels will remain the dominant supplier. Even if coal, which accounted for 56% of India’s energy in 2017, were to fall below 50%, and all of that decline went to renewables, it would only triple its contribution – rising from 3% to 9%. Making further gains in reducing carbon emissions will become a huge challenge for government policymakers.

The China story has become more interesting, given that it has become the largest emitter of carbon dioxide and other pollutants, while still paying lip-service to its environmental commitments to the 2015 Paris Climate Accord. China still consumes more than half the world’s coal, and that seems likely to remain the condition for a while, despite the large push for renewable power.

China recently approved two new coal mines with a combined output of 3.6 mmt/y, at a cost of $566 million (4 billion yuan). Those two new mines will have nearly as much output as China’s current coal production, which in 2019 was 3.75 mmt/y. Behind approving the new mines is the government’s plan for shutting down small and outdated mines in favor of larger ones located in coal-rich provinces.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Energy security is a major consideration for every consuming nation. Neither India not China have any hope of achieving energy independence any time soon. The virtue signalling China, in particular, engages in at climate conferences contrasts starkly with the reality on the ground. China is building more coal fired power stations all over the world than ever.



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June 30 2020

Commentary by Eoin Treacy

June 30 2020

Commentary by Eoin Treacy

Gold Climbs Above $1,800 for the First Time Since 2011

This article by Justina Vasquez for Bloomberg may be of interest to subscribers. Here is a section:

Goldman Sachs Group Inc. said gold could climb to a record $2,000 an ounce over the next 12 months, while JPMorgan Chase & Co. recommended investors stick with bullion.

“The Fed is being extremely accommodative and because these shutdowns are starting to reoccur globally, more central bank measures are probably going to be initiated,” Phil Streible, chief market strategist at Blue Line Futures in Chicago, said by phone.

Eoin Treacy's view -

Gold’s front month futures traded above $1800 today while the spot price has yet to achieve that goal. The difference between the short-term patterns may give us some insight into what is animating the market in the short term.



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June 30 2020

Commentary by Eoin Treacy

IOTA Takes Step Towards Decentralized Network

This article by Sead Fadilpašić for cryptonews.com may be of interest to subscribers. Here is a section:

IOTA is continuing its path towards the so-called 'Coordicide' - the death (that is, the removal) of the Coordinator, which is a node run by the IOTA Foundation for network protection and transaction confirmation. The goal of this act is to make the network decentralized.

In order to "solve blockchain’s biggest issues with scalability and decentralization," as the Foundation said in their announcement, they are launching the first testnet of the decentralized network. It is a new protocol called Pollen.

Pollen's goal is to enable the community, researchers and developers to "test and validate the concepts of IOTA 2.0, which will serve as IOTA’s Coordinator-free network," the press release said. People can now test and work independently on the components such as rate-limiting, Mana (reputation-based system), and Fast Probabilistic Consensus (new consensus algorithm that doesn't need the centralized Coordinator).

"IOTA has spent the last year researching a solution that will ultimately replace its current network in the first half of 2021," they said.

Whether the Coordinator will indeed be killed in the first months of 2021 is "always hard to say," Dan Simerman, Head of Financial Relations at the IOTA Foundation, told Cryptonews.com. "Right now IOTA's actually ahead of schedule, so it’s very well possible it could be sooner. But, IOTA always like to be safe and ensure things are at their best."

Eoin Treacy's view -

The holy grail for cryptocurrency acolytes is to have a fully automatic network, without relying on any one group that might theoretically exert control, while also being quick enough to compete with payment networks like Visa and Mastercard.



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June 30 2020

Commentary by Eoin Treacy

'Build, Build, Build' for U.K. Virus Recovery, Says Johnson

This article by Alex Morales and Tim Ross may be of interest to subscribers. Here is a section: 

The 5 billion pounds Johnson allocated to hospital maintenance, school repairs and road improvements on Tuesday is not new money and is a fraction of the infrastructure spending announced in March.

What Our Economists Say:
“There was a lot of inevitable political bluster in Prime Minister Boris Johnson’s speech today, but for the economy there were two key takeaways. First, his pledge to accelerate 5 billion pounds worth of capital projects is money already allocated in the March Budget. He left plans for any further stimulus to Chancellor of the Exchequer Rishi Sunak’s update on the economy next week. Second, Johnson distanced himself from a quick return to austerity. That’s good news for the outlook.”

--Dan Hanson. For the full insight, click here

Carolyn Fairbairn, director general of the country’s biggest business lobby, the Confederation of British Industry, described the intervention as “first steps” only.

“Foundations are there to be built on,” Fairbairn said in a statement. “More is needed to prevent the uneven scarring unemployment leaves on communities.”

She called for more details on Johnson’s guarantee of apprenticeships and in-work placements for younger workers, as well as an extension of wage support to protect jobs and more funding for “future skills in high-potential areas such as digital, low carbon and health.”

Johnson described the planning reforms as the most “radical” since World War II. They include greater freedom for developers to change the use of buildings and land in town centers without planning permission, and would make it easier to convert unused commercial buildings into homes, his office said in a briefing.

Eoin Treacy's view -

Focusing more on regulatory reform to boost growth, rather than relying solely on big ticket spending is an encouraging sign the Johnson administration understands where the big gains are to be made once the UK is unshackled from the EU.

The spending measures in the March budget already imply significant spending. The challenge for the UK is in overcoming the raft of bureaucratic roadblocks to growth that focus on regulations for regulations sake, rather than prioritising productivity.



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June 30 2020

Commentary by Eoin Treacy

China Opens Wealth Tap to Hong Kong Amid Political Crackdown

This article from Bloomberg may be of interest to subscribers. Here is a section:

The plan “has strategic importance, reinforcing Hong Kong’s position as a wealth management hub,” Sally Wong, chief executive officer of Hong Kong Investment Funds Association, said by phone. “It provides important investment channels for mainland investors to achieve diversification.”

As Beijing seeks to quash a year of unrest in Hong Kong with the introduction of a new security law, authorities have also sought to tamp down concern over the city’s status as an international finance hub. Mainland investors have boosted stock purchases through the stock connect link over the past weeks and a string of high-profile Chinese companies have listed shares in the city.

Local authorities have also sought to reassure investors that Hong Kong will remain a stable place to invest, with Chief Executive Carrie Lam lobbying for more financial integration to build the city’s presence as a global hub for private wealth and make it a more prominent offshore renminbi center. While there has been no sign of an exodus of cash, Hong Kong’s rich are increasingly hedging their bets amid the worst economic and political crises since the handover.

The U.S. overnight escalated pressure on China over its crackdown on Hong Kong by making it harder to export sensitive technology to the city as Beijing is poised on Tuesday to pass the security law. The Commerce Department said it’s suspending regulations allowing special treatment to Hong Kong over things including export license exceptions.

Eoin Treacy's view -

As China attempts to draw a line under the protests that have plagued Hong Kong over much of the last couple of years, they are likely to continue to meet with resistance on the streets. The new security law is an affront to the one country, two systems agreement. It presages an acceleration of trend of absorption with the mainland than was envisaged by the framers of the handover.



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June 29 2020

Commentary by Eoin Treacy

Video commentary for June 29th 2020

June 29 2020

Commentary by Eoin Treacy

Australian lawmaker says he isn't a suspect in China probe

This article by Rod McGuirk for APNews may be of interest. Here is a section:

The secret service, best known as ASIO, confirmed in a statement that “search warrant activity occurred in Sydney on Friday as part of an ongoing investigation,” but would not comment on Moselmane or its involvement.

Less than two weeks ago, Morrison said that a “sophisticated state-based cyber actor” was targeting Australia in an escalating cyber campaign that was threatening all levels of government, businesses, essential services and critical infrastructure.

Most analysts said Morrison was referring to China, but the prime minister would not name the country.

Already high tensions between Australia and China have been raised by the pandemic.

China in recent weeks has banned beef exports from Australia’s largest abattoirs, ended trade in Australian barley with a tariff wall and warned its citizens against visiting Australia. The measures have been interpreted by many as punishment for Australia’s advocacy of an independent probe into the origins and spread of the coronavirus.

Australia’s foreign minister has accused China of using the anxiety around the pandemic to undermine Western democracies by spreading disinformation online, prompting China to accuse Australia of disinformation.

Eoin Treacy's view -

Australia depends on China’s demand for many of its exports. That’s represents a difficulty for the country in attempting to assert independence from China. For its part, China has a clear interest in securing its supply chains. That means ensuring Australia is at least amenable if not fully subservient to its wishes.



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June 29 2020

Commentary by Eoin Treacy

Growth of Working-Age Adults Hasn't Kept Up With Graying America

This article by Alex Tanzi for Bloomberg may be of interest to subscribers. Here is a section:

The aging population is pushing up the insolvency dates of the major trust funds that many seniors reply on. The CRFB now sees the Medicare Hospital Insurance trust fund going bust by 2023, and the combined Social Security trust funds depleted by 2031.

Almost 13 million Americans are older than 80, and the number of centenarians almost doubled from 2010 to more than 100,000 last year, according to the data.

The aging of America and low births mean that the U.S. dependency ratio has increased. The ratio looks at the size of the population younger than 15 (60,570,846 in 2019) and the 65-and-older population (54,058,263) and how their combined size compares to the population age 15 to 64 (213,610,414).

In 2019, the dependency ratio showed that for every 100 people of working age, there were almost 54 other Americans potentially needing support.
 

Eoin Treacy's view -

The age group most at risk from the coronavirus is well reported to be the over 60s. This group staying at work beyond the traditional retirement age was one of the primary reasons the US economy was able to contain inflation despite peak employment and a rising participation rate. If many of these people fail to return to work, they go from being contributors to beneficiaries of state supports.



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June 29 2020

Commentary by Eoin Treacy

Chesapeake's Collapse Is Latest in Long Line of Shale Busts

This article by David Wethe for Bloomberg may be of interest to subscribers. Here is a section:

More than 200 North American oil and gas producers, owing over $130 billion in debt, have filed for bankruptcy since the beginning of 2015, according to a May report from law firm Haynes & Boone. This month alone, seven oil and gas companies have gone under, tying December 2015 for the busiest on record after crude prices plunged amid the Covid-19 pandemic, according to data compiled by Bloomberg.

The shale boom spearheaded by the likes of Chesapeake a decade ago was fueled by debt. Profitability and shareholder returns have been consistently disappointing, and investors had already grown wary of throwing more money into shale before this year’s oil crash. The rate of default on high-yield energy debt stood at 11%, Fitch Ratings said in a June 11 report, the highest level since April 2017.

Eoin Treacy's view -

Unconventional drilling is capital intensive. Arguably, it would not have been a viable development option for new supply without the tailwind of very low interest rates and abundant liquidity. The challenge the sector faces is once a well begins producing, there is a very steep increase in supply, followed by a steep decline. That ensures companies are very exposed to near-term oil prices. The significant volatility in commodity prices has been a headwind for the sector, because most operations are profitable in the region of $60-$80 a barrel.



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June 29 2020

Commentary by Eoin Treacy

Merkel Throws Her Support Behind Radical European Recovery Plan

This article by Ania Nussbaum and Arne Delfs for Bloomberg may be of interest to subscribers. Here is a section:

German Chancellor Angela Merkel made a pitch for a radical recovery proposal for the virus-ravaged European Union and warned her cohorts that there was no time to lose.

Her words carried extra weigh, spoken in person on Monday alongside Emmanuel Macron. The French president is the other heavyweight in the euro. He is a long-term advocate of ever-closer collaboration for a common position on international relations and a joint fiscal policy.

Germany has always been the more reluctant partner on both fronts, but there are signs the famously cautious Merkel is letting up.

“Talks won’t fail because of us,” Merkel told reporters in Meseberg, Germany. “But there will be no new proposal.”

Merkel’s exhortation comes before all 27 EU members gather in Brussels on July 17 to discuss a stimulus package that would see the bloc issue 750 billion euros ($845 billion) in joint debt and make 500 billion euros of that in grants to the nations most affected by the coronavirus crisis.

The plan, which needs the unanimous approval of all EU members, seeks to tackle divergences in the region’s internal market that have widened as a result of the uneven impact of the outbreak and differing national responses.

Eoin Treacy's view -

Here is a summary of what the director general of the WHO had to say today:

Tedros Adhanom Ghebreyesus, director general of the World Health Organization, said that living with Covid-19 is the “new normal” and that “we will need even greater stores of resilience, patience, humility and generosity in the months ahead.” He spoke Monday at a press briefing in Geneva. 



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June 26 2020

Commentary by Eoin Treacy

June 26 2020

Commentary by Eoin Treacy

Befuddled by the Bull? The Primacy of Free Liquidity and Risk-Love

Thanks to a subscriber for this report from Bank of America/Merrill Lynch which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The biggest existential question in financial markets today is how likely are global interest rates to trend towards zero in aggregate. To date the Anglosphere countries have been adamant in their determination to avoid negative interest rates.

However, there is no avoiding the fact that interest rates are falling all over the world. Additionally, Poland, Ghana, Philippines, Chile, Turkey, Colombia, Thailand, South Africa, Egypt, Hungary, Romania, Indonesia and South Korea are all now engaged in quantitative easing.



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June 26 2020

Commentary by Eoin Treacy

Email of the day - on island reversals

Looking at the daily charts of the Dow Jones and S&P there appears to be potential "island reversals". Do these "islands" carry much weight in charting terms?

Eoin Treacy's view -

Thank you for this question which I believe will be of interest to the Collective. In order for an island reversal to form we need to first see a breakaway gap form which is generally consistent with a burst of enthusiasm. That has to be followed shortly afterwards by a breakdown gap which is consistent with a sudden bout of fear which nullifies the initial surge.



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June 26 2020

Commentary by Eoin Treacy

Silver Price Forecasts Increased

Thanks to a subscriber for this report from TD Securities which may be of interest. Here is a section

Eoin Treacy's view -

A link to today's video commentary is posted in the Subcsriber's Area. 

The extent to which mine supply has been impacted by the spread of COVID-19 in Latin America is something that had more of an effect on iron ore prices than silver. The bigger question is how much of an impact a return to production will have on prices. The supply deficit may have at least supported prices without contributing to an outsized gain. The return of supply could create a surfeit.



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June 25 2020

Commentary by Eoin Treacy

Video commentary for June 25th 2020

June 25 2020

Commentary by Eoin Treacy

The RBC Macroscope

Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The Dollar tends to attract interest because the USA is the largest capital market and the Federal Reserve is highly active in deploying support measures for the economy. The supply inelasticity argument supported its value until last year and the subsequently, desire for a safe haven has been a support.



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