Investment Themes - Precious Metals / Commodities

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December 14 2018

Commentary by Eoin Treacy

Platinum price gets $6 billion shot in the arm

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

Korean carmaker Hyundai on Tuesday announced a $6.7 billion program to raise production of fuel cells 200-fold going from 3,000 this year to 700,000 per annum by 2030.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful 

Toyota was the first to back the technology for passenger vehicles, launching its Mirai – "future" in Japanese – back in 2015. Honda is bringing the Clarity back to its line-up and Hyundai’s Nexo SUV is launching in North America next year. Hyundai also inked a collaboration on fuel cells with Volkswagen in June.

The hydrogen society is probably further into the future than its promoters want you to believe, and detractors are plentiful. (Elon Musk was not only talking his book when he called fuel cell cars "extremely silly".)

Alongside Hyundai's announcement, the Korean government also made a commitment to roll out a fuel cell fleet and charging stations. But Canada, for example, got its first and so far only public hydrogen fuelling station only in August and California’s years long backing for fuel cell cars have hardly moved the needle on consumer and business uptake.

Nevertheless, the impact on platinum could be enormous.

There’s a simple reason – today's fuel cell cars need a full ounce of platinum versus a 2 – 4 grams PGM loading for your average gasoline (primarily palladium) or diesel vehicle.

Eoin Treacy's view -

The automotive sector has been investing in fuel cell technology for years so one of the reactions to the collapse of demand for diesel engines has been the acceleration of commercialisation efforts. The other factor in the development of fuel cells is dependent on ready availability of hydrogen. The low natural gas price, particularly in the USA is a major enabler of that evolution.



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December 13 2018

Commentary by Eoin Treacy

Uranium price: best performer of 2018 set for more gains

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section: 

Struggling French nuclear giant Areva (rebranded as Orano this year) slashed production more than a year ago. In August Paladin put its Langer Heinrich mine in Namibia on care and maintenance, although this week the Sydney-based miner said it's working on a possible restart of operations with vanadium as a byproduct (vanadium is trading at record highs and the only metal outperforming uranium).

In a research note on Kazatomprom, BMO Capital Markets says the production discipline from top miners will break the trend of rising global uranium inventories following the Fukushima nuclear disaster in Japan in 2011 and prompt the first production deficit in more than a decade.

And

China has 42 operating nuclear reactors, 16 reactors under construction and a further 43 planned. At the end of November, the country's national uranium corporation bought control of the Rossing uranium mine in Namibia. China is also behind the only sizeable uranium mine to come into production in the past few years, the Husab mine in Namibia, although ramp there has been slow.

Eoin Treacy's view -

Japan is steadily firing up its shuttered nuclear plants and considering China’s demand for clean energy it is unlikely to be deterred from continuing its construction program. Meanwhile when the world’s major producers find it more cost effective to buy in the spot market than produce the metal themselves then we know prices are depressed.



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December 07 2018

Commentary by Eoin Treacy

One Fed official suggested on Friday delaying a December rate hike, the first to do so

This note by Thomas Franck for CNBC may be of interest to subscribers. Here is a section: 

St. Louis Federal Reserve President James Bullard reportedly said on Friday that the central bank could consider postponing its widely anticipated December rate hike because of an inverted yield curve.

“The current level of the policy rate is about right,” Bullard said in a prepared presentation to the Indiana Banker’s Association, according to Reuters.

Bullard is the first member of the Fed to speak publicly about a delay in December. The Fed president — while not a Federal Open Market Committee voter in 2018 — will be able to participate in rate hike decisions in 2019.

Eoin Treacy's view -

10-year Treasury yields dropped below the trend mean this week and despite a short-term overbought condition on the futures, a meaningful catalyst is now likely required to check the rally.



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December 04 2018

Commentary by Eoin Treacy

Palladium Sets Fresh Record as Metal Clashes With Gold

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

Palladium jumped for a second day as it tussled with gold for designation as the most valuable metal.
Parity between the two last happened in 2002. Palladium has surged in the past four months on speculation there isn’t sufficient supply to meet increasing demand for the metal used in vehicle pollution-control devices.

Drivers

Holdings of exchange-traded products backed by palladium are at their lowest since February 2009 as investors pull the metal and offer the commodity for lease to users scrambling for supply. The cost to borrow palladium for a month surged to a record 22%, more than seven times higher than the 10-year Treasury yield.

While palladium keeps rising, it’s a different story for platinum. Palladium’s premium to its sister metal is at the biggest since 2001. Platinum is used mostly in autocatalysts for diesel vehicles, where demand has slipped. The outlook for gold remains positive with Goldman Sachs expecting inflows to gold ETFs next year as investors seek an alternative portfolio diversifier.

Prices

Palladium futures for March delivery +1.3% to settle at $1,180.20/oz at 1:01pm on Nymex in N.Y. Spot palladium +2.4% to $1,234.29/oz; earlier climbed as high as $1,240.01/oz, a fresh record. Gold rises as much as 0.9% to $1,241.97/oz, highest price intraday since Oct. 26

Market Commentary

“Palladium continues to steal the show from all other precious metals,” say Commerzbank analysts including Daniel Briesemann“ The high price premium on palladium is not justified in our opinion because car sales have been fairly weak on all key markets of late” Gold prices are supported “as the U.S. dollar index has backed off,” Jim Wyckoff, senior analyst at Kitco Metals, says in note to clients.

Eoin Treacy's view -

Palladium has surged higher since the August low and a short-term overbought condition is now evident. However, a break in the sequence of higher reaction lows, currently near $1100, would be required to question momentum beyond a pause.



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December 03 2018

Commentary by Eoin Treacy

G-20 Gives Markets a Short-Term Respite

This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

For the economic reasons discussed here, the most likely outcome was in the middle of that range: a cease-fire with a pathway to a more decisive de-escalation of tensions – or, to use a recent historical parallel, an agreement similar to the one that followed the White House visit of EU President Jean-Claude Juncker in July. And that is what materialized, with the important addition of a three-month deadline for progress.

At the end of almost three hours of what the White House called “highly successful” discussions, the U.S. agreed to refrain for 90 days from implementing additional tariffs on $200 billion of imports from China. In return, China promised to use the time to make progress in three areas of concern to the U.S. and other countries: relaxing an array of nontariff barriers, including joint-venture requirements, that result in forced transfers of technology, operational models and other proprietary information and business practices; combatting intellectual property theft and other cyber interferences; and reducing the bilateral trade surplus by importing “very substantial” quantities of certain goods from the U.S.

Eoin Treacy's view -

The G-20 ended as expected with smiles all round but with not a great deal to report other than a hiatus in the trade war and commitment to go back to talks. There is a little chance of China making anywhere close to the concessions demanded of the USA so it is quite likely the market will be back on tenterhooks by the time late January comes around.



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November 29 2018

Commentary by Eoin Treacy

Long-term themes review October 29th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities.

2018 has represented a loss of uptrend consistency for the S&P500 following a particularly impressive and persistent advance in 2016 and 2017. Many people are therefore asking whether this is a medium-term correction or a top. There is perhaps no more important question so let’s just focus on that for the moment.



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November 08 2018

Commentary by Eoin Treacy

Glencore's radioactive news may help give cobalt its buzz back

This article appeared in mining.com and may be of interest to subscribers. Here is a section:

Glencore plans to stockpile cobalt supplies until the middle of next year, while it builds a special plant to remove radioactivity. Caspar Rawles, an analyst at Benchmark Minerals, described the timing of the announcement as "opportunistic" because Glencore is currently negotiating 2019 supply deals.

Glencore-controlled Katanga Mining Ltd. would have produced about 30,000 tons of cobalt next year, roughly 25 percent of global supply, according to RBC Capital Markets. Holding this off the market should tighten supplies and support Glencore’s other mine in Congo, which also produces cobalt.

“Assuming there are no uranium issues that this uncovers elsewhere, this production will benefit from any positive price impact,” RBC said.

Katanga boasts one of Congo’s biggest reserves of copper and cobalt, but the mine has underperformed for decades. In 2015, Glencore suspended operations to address the problems and upgrade the facilities. Production restarted in December and the mine is scheduled to hit 300,000 tons of copper next year, when it will account for about a fifth of Glencore’s global production.

Eoin Treacy's view -

Cobalt went up in a straight line until its peak in the summer and has since experienced a significant correction. The metal is essential in the designs of all batteries currently in the market but the demand growth argument is predicated on that condition persisting. Considering how insecure global supplies of cobalt are, a race is on to use less of it, substitute it and to develop additional sources of supply from less politically insecure areas.



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November 07 2018

Commentary by Eoin Treacy

Trump's Trade War a Win for Fertilizer If Farmers Seed More Corn

This article by Jen Skerritt and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section:

The feud between the U.S. and China that’s withered sales for American soybeans will probably result in farmers shifting acres to corn, said Chuck Magro, chief executive officer of Nutrien Ltd., the world’s top crop-nutrient supplier. Corn acres require about twice the amount of fertilizer and crop chemicals than soybeans, he said.

“The corn acres are worth more to companies like us,” Magro said in a telephone interview. “This could be actually a short- term win for us. It depends on what actually gets planted next year.”

The last time the U.S. saw a dramatic surge in corn acres was a decade ago after Congress approved the Renewable Fuels Standard, which expanded the mandate to blend ethanol into gasoline. That season, the corn area rose by more than 15 million acres, according to U.S. Department of Agriculture data.

Eoin Treacy's view -

The trade war is having a number of knock-on effects for a whole host of markets from iron-ore demand to copper and fertilisers. Since China is a major consumer of just about all commodities the outlook for its economy has a significant impact on demand. The potential for more corn plantings because reduced soy planting is a potentially an important catalyst for agricultural shares which have until recently been quite depressed.



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November 05 2018

Commentary by Eoin Treacy

Which individuals may be impacted by the ALP franking credit proposal?

This article by Dr.Don Hamson for Livewire may be of interest to subscribers. Here is a section:

Mrs H was a fully self-funded retiree, owning a modest home in the outer northern suburbs of a capital city, living off the income from a portfolio of direct shares and some bank deposits. Her assets, other than the home, totalled $650,000, with $50,000 in non-income bearing assets. Of her investments, $500,000 are invested in fully franked dividend paying Australian companies and $100,000 invested in term deposits and cash. Mrs H is ineligible for a part aged pension, since her assets exceed the maximum assets test level (currently $564,000 for a single homeowner).

Mrs H currently has a taxable income of $30,571. The $100,000 in deposits only earns $2,000 in interest, while the share portfolio yielded an average 4% cash dividend providing $20,000. Importantly the dividends were all fully franked, receiving $8,571 in franking credits (these are included in taxable income). With no tax payable due to the Seniors tax offset, Mrs H received a full refund of her franking credits, considerably boosting her cash income from $22,000 to $30,571.

Since Mrs H is not eligible for any pension entitlements, she would no longer receive those franking credits under the ALP proposal. The loss of $8,751 would reduce Mrs H’s income by 28%, reducing her weekly income by $165, from $588 per week to just $423 per week.

This means her income would actually fall below the full aged pension for a single homeowner ($23,889 p.a. or $916.30 per fortnight /$458.15 per week).

Eoin Treacy's view -

Full franking on dividends is the number one topic of conversation that comes up when I have conducted The Chart Seminar in London. It has been one of the primary factors in Australian investors tending to favour their domestic market’s dividend paying stocks. Significant changes to the tax structure for dividends and pension could have a significant knock-on effect for the banks in particular because so many investors own them for income.



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November 02 2018

Commentary by Eoin Treacy

Email of the day on the platinum/gold ratio:

Thanks a lot for a very informative comment of the day today. Can you please share your opinions on platinum/gold at your convenience. Thanks in adv. best rgds.

Eoin Treacy's view -

Thank you for this question which is topical considering the recent turn to outperformance by the precious metals sector.

Platinum is trading at a substantial discount to gold which is unprecedented in the last 35 years.



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November 01 2018

Commentary by Eoin Treacy

Dollar Hits Wall at 17-Month High, Set for Worst Day Since July

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

“We’re thinking more broadly that this is another peak in the dollar, and we’re going to see it drifting lower in the next year,” Mark McCormick, head of North America FX strategy at TD, said in an interview. “The market has priced in an excessive amount of global stress.”

The S&P 500’s nearly 7 percent drop in October likely fueled rebalancing flows back into U.S. stocks, which are now reversing, McCormick said.

But yuan strength is also a factor, he said, after China’s leadership signaled more stimulus measures are being planned to shield the economy from repercussions of U.S. trade protectionism. And Brexit developments may lift the euro and the pound, which are undervalued relative to their cyclical drivers, TD says. The dollar, meanwhile, is more than 3 percent rich to the bank’s global factor model.
 

Eoin Treacy's view -

The Euro found support today in the region of its August low and posted its largest rebound in months to check near-term supply dominance. However, a sustained move above $1.18 will be required to question the medium-term downward bias.



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October 30 2018

Commentary by Eoin Treacy

Copper Going Ballistic

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

Unlike metals like Zinc/Lead and Nickel, there was some copper development during the downtime (e.g. Las Bambas, Constancia etc) but this is not sufficient to replace mines that have exited or reduced production and deal with even conservative forecasts of growth in consumption.

Now that the uptime has arrived (came and went and is coming again) the small to medium projects that are dependent on gold credits (or vice versa) are having a tougher time gaining traction (or even attention as gold’s prospects look so murky). That leaves the larger projects to attempt to fill the gap in the pipeline caused by so many years of the Copper price being in the dumpster. 

It was surprising to recently review a listing of the top twenty western copper mines and see that two date back to the 19th century and more than half of the large producing mines date back to pre-1950s. On the next page we list the major projects that could make a difference to the copper supply situation though with the caveat that most are potentially only replacing existing production that is declining or being shuttered.

The list of upcoming mines of size by its very nature is exclusively composed of projects that are in the multi-billion dollar capex category. This means that they tend to be the hands of majors or will ultimately have to gravitate to majors to ever get off the starting blocks. 

Eoin Treacy's view -

The Chinese copper stockpile has been a significant overhanging concern for the price for most of this year. It was accumulated to preserve the economy from the potential for higher prices. The broader issue is that many investors regard copper as a barometer of the global economy because it is used in every country in the world and is integral to infrastructure and technology build out. The fact that prices have been falling over the last six months has shaded perceptions of the health of the Chinese economy and questions the wisdom of building up a stockpile in the first place.



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October 25 2018

Commentary by Eoin Treacy

Long-term themes review October 4th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.



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October 19 2018

Commentary by Eoin Treacy

These ten mines will make money even if gold price falls to $550

This article by Vladimir Basov may be of interest to subscribers. Here is a section:

These Top 10 lowest cost gold mines are all below all-in-sustaining costs (AISC) $550/oz level and will prove profitable – even if the price falls 50%.

Mining Intelligence looked at costs at primary gold mines and found 10 operations that would still make money, even if gold halves in value from today's levels. AISC metrics has been taken as a basis of comparison and ranking.

Since the World Gold Council (WGC) published a Guidance on AISC in June 2013, which introduced a transparent standardised production cost estimation metrics intended to be used commonly by the global gold industry, a majority – yet not all – of the leading publicly-trading gold producing companies successfully adopted WGC’s recommendations and implemented AISC to their official reports.

AISC metrics provide a more comprehensive look at mine economics than the traditional "cash costs" approach that many companies may interpret arbitrarily – and it includes such important expenses as overhead outlays and capital used in ongoing exploration, mine development and production.

Eoin Treacy's view -

All in sustaining costs are certainly a useful metric for addressing the prospects for any mine. However, when we address the list above what we are presented with are the lowest cost of production mines but they are mostly the legacy properties companies started with before they had to spend more money to acquire additional properties which generally do not have the same attractive cost structure.



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October 17 2018

Commentary by Eoin Treacy

'Wake 'n Bake,' Plunging Stocks Greet Canada's Legal Pot Debut

This article by Kristine Owram, Doug Alexander and Jen Skerritt for Bloomberg may be of interest to subscribers. Here is a section:

“The eyes of the world are on Canada and Canadians should feel very proud, because people have been fighting for decades to make this moment a reality,” said Brendan Kennedy, chief executive officer of Tilray Inc., the largest cannabis company by market value.

After running up dramatic gains in the lead-up to legalization, cannabis shares failed to join the party Wednesday. Aurora Cannabis Inc. had slumped as much as 15 percent by 10:17 a.m. in Toronto for the worst drop since February, before paring losses. Canopy Growth Corp. was down 3.4 percent at 1:15 p.m. and Tilray Inc., the world’s largest pot company by market value, fell 6 percent.

Medical marijuana has been legal in Canada since 2001 but it’s only been about four years since the first cannabis companies began to list on Canadian exchanges. In that short time, about 140 pot companies have gone public in Canada, with a combined market value of more than C$60 billion ($48 billion).

Eoin Treacy's view -

I’m reminded of Mark Twain’s quip that reports of his death are greatly exaggerated. There was certainly some evidence of buy the rumour, sell the news today as some people took the day of legalisation as an opportunity to realise profits but the declines seen need to be put in the context of the advances seen over the last couple of months and the broad consistency of the medium-term trends.



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October 16 2018

Commentary by Eoin Treacy

Email of the day on investing in soft commodities

I'm a big fan of your service. I would like to buy soft commodities somehow but not sure what good vehicles there are to do so. I think if I buy futures there are high costs involved? Do you have any ideas? I already own water/fertiliser/agricultural equipment companies. All the best

Eoin Treacy's view -

Thank you for this email and I am delighted you are enjoying the service. I agree, investing in futures carries the considerable risk of loss if contangos are not managed; particularly if prices range or trend lower. The ETFS Agriculture ETF is a good example of that phenomenon and has been trending lower since early 2011.



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October 12 2018

Commentary by Eoin Treacy

Tesla's Model 3 Sedan Production Cruises Past the 100,000 Mark

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

Expanded production comes with downsides, however. Tesla posted on its website Friday that buyers must place their orders by Oct. 15 to get their car by the end of the year and qualify for the expiring U.S. federal tax credit. Tesla was the first company to sell 200,000 electric cars cumulatively in the U.S., which triggers the gradual phase-out of the subsidy. The $7,500 credit will drop by half for Tesla on Jan. 1.

Musk boasted in 2016 that Tesla would make more than 100,000 Model 3s by the end of 2017. It didn’t work out that way. As often happens on Musk time, Tesla arrived late to an impossible goal. But Model 3 production now appears to be cruising—from the first cars off the line in July 2017, it took about 14 months for the company to build the initial 100,000 Model 3s. At the current rate of production, it will build the second 100,000 in less than six months.

Eoin Treacy's view -

This is a good news story for Tesla. Getting production numbers up is essential if the company is going to reach the economies of scale necessary to ever make a profit. The big question which I have seen addressed is what that number is? Musk has stated on more than one occasion that he wants to get the price of a Model 3 down to around $35,000 but how many of them will the company have to make to make a profit at that price?



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October 12 2018

Commentary by Eoin Treacy

Fear Not, ETFs Control the Price of Gold

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

That matches the big picture portrayed in demand statistics from the World Gold Council, an industry group. Bar and coin investors, industrial users and jewelry buyers purchase the yellow metal year-in and year-out; and central banks have been doing the same thing ever since they gave up their selling spree in 2009. As a result, ETFs and related funds are the key swing factor in the gold market, driving its slump from 2013 through 2015 when they became net sellers, and helping support its modest revival by turning into buyers in the years since.

That relationship seems to have intensified of late. The raw beta when gold is the dependent variable jumped to 1.65 in the past three months, suggesting moves in ETF holdings are now having an even bigger influence on the spot metal than usual. 

In some ways this doesn’t change the old argument for investing in gold, which is that the important beta isn’t related to ETF holdings but to stock-market returns. When fear rises and the value of your equity portfolio falls, the yellow metal still has a mild tendency to climb and offset the losses
elsewhere.

Still, those who look on gold as a refuge from the madness of crowds shouldn’t get ahead of themselves. These days, the crowds are in the driver’s seat.

Eoin Treacy's view -

ETF Holdings of gold peak at 72 million ounces in May and the total fell by 5 million ounces by early October. That represented a 6.86% decline in the total but perhaps more significantly it represented the reversal of what had been a source of demand for the metal.



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October 11 2018

Commentary by Eoin Treacy

Gold Gets a Second Look as Equities Reel and Inflation Cools

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers.

Gold may have finally snapped out of its inertia.

Prices headed for their biggest gain since March 2017 as of 10:51 a.m. in New York after a slump in global equity markets and data showing slower-than-expected U.S. inflation stoked demand for the metal as a store of value. Futures were set for a third straight gain, the longest rally since Aug. 22.

Bullion, which touched a six-week-high $1,218.60 an ounce on Thursday, has traded near $1,200 since late August as traders weighed geopolitical risks that could boost the metal’s allure as a haven against rising interest rates that dampen its appeal.

The inflation data may spur the Federal Reserve “to pump the brakes on further hikes,” Phil Streible, a senior commodity broker at RJO Futures, said in a telephone interview. The slump in global equities is also luring investors to “safe-haven” assets, he said.

Eoin Treacy's view -

Gold has been trading in an inert manner for more than a month following a persistent decline from this year’s peak near $1350. To pause in such a narrow band is not characteristic for such a volatile instrument, and gold finally broke up and out to new recovery highs today.



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October 10 2018

Commentary by Eoin Treacy

Email of the day on Brazil's upcoming Presidential election

Lula, Dilma and the labor party known as Partido Trabalhista PT, ruined Brazil. They robbed state companies and pension funds blind and ruined them. They instituted massive corruption as a means to collect funds in order to stay in power. They used the Development Bank BNDES to finance tin pot dictators in Africa and Latin America so as to be able to siphon off money for the party. PT caused Brazil’s worst recession in history, the highest rate of unemployment ever and a large reduction in GDP per capita. Wide spread corruption in all three branches of government and large scale hiring of public servants for electoral purposes were made a state policy. Public schools and universities were used for ideological purposes. Their quality dropped to astonishing levels, such that students are science ignorant and can neither interpret a text nor think clearly. They are unemployable. Laws were put up for sale. Of 1000 Medidas Provisorias (express approval laws) proposed by PT, 900 correspond to the sale of privileges (exemptions, subsidies, etc) The media was put under control through the tap of state publicity so that PT and sympathizers control TV, newspapers all NGOs and opinion pollsters. PT allied itself with Organized Crime which now controls Rio, is a major threat all over the country and recently tried to murder Bolsonaro. All this has caused a massive revolt, so that the Bolsonaro vote is far more an expression of anti-PT disgust than for the candidate himself. He was the only one to voice matters clearly. By far the least bad choice.

Eoin Treacy's view -

Thank you for this on ground perspective from Sao Paolo. A bull market paves over a lot of cracks in people’s willingness to tolerate declining standards of governance. No one was worried about all of the issues you detail above when commodity prices were surging and there was money for everything. It was only when commodity prices collapsed and funding evaporated that the extent of corruption was revealed. This is about as close to Warren Buffett’s adage “you don’t know who has been swimming naked until the tide goes out”.



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October 09 2018

Commentary by Eoin Treacy

Rocketing vanadium price primed for 'Elon Musk moment'

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

Vanadium pentoxide (V2O5) which makes its way into so-called vanadium redox flow batteries used in energy storage systems breached $20 a pound for the first time since 2005 this month. That’s a four-fold increase from the start of 2017.

Simon Moores of Benchmark Mineral Intelligence, a battery materials research and price discovery provider based out of London, says the recent success of lithium ion batteries being deployed in increasing larger systems that are exceeding 1GWh has brought to light the huge potential of the market for all types of battery technologies.

Vanadium flow batteries have lifespans of over 20 years without capacity loss, are non-flammable and can operate at any temperature. Another advantage over lithium ion is that this type of battery can be charged and discharged simultaneously making it highly suitable for large-scale storage from renewable sources such as solar and wind when connected to an electricity grid. Main downside is low energy density which means comparatively large installations needed.

“If a vanadium battery producer steps forward with bold plans to produce vanadium flow at mass scale, giving the industry its Elon Musk or lithium ion moment, the potential for the technology to be the second most deployed ESS battery in the world is there,” says Moores.

“Raw material self-sufficiency is a critical component to this. At least a third of the cost of a vanadium flow battery is vanadium pentoxide which makes up the liquid electrolyte.

“If companies are thinking of creating the Gigafactory of vanadium flow batteries, they will either need to own a mine or implement a new pricing system where the fully recyclable vanadium in the battery is leased."

Eoin Treacy's view -

Battery technology is improving all the time and a race is on to develop models which will be the foundation of an electric vehicle. Concurrently, efforts are underway to develop batteries that can perform at scale for utilities which are increasingly reliant on renewables are inherently intermittent sources of energy. Those are two completely different growth trajectories and given the different priorities it is quite likely there will be a number of potential solutions that eventually make it to market. 



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October 03 2018

Commentary by Eoin Treacy

Long-term themes review August 15th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities. 



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October 02 2018

Commentary by Eoin Treacy

Beijing axes coal and steel production curbs as economy slows

This article by Emily Feng for the Financial Times may be of interest to subscribers. Here is a section:

However, experts said that even the lower targets were ambitious because last year’s air pollution levels had already dropped significantly. 

“Both a 3 per cent or 5 per cent reduction from last winter’s PM2.5 levels would be a tough target to reach because levels already fell 25 per cent last winter thanks to very strict policies and very favourable weather conditions,” said Lauri Myllyvirta, a campaigner at Greenpeace, the environmental group. 

The easing may have been prompted by a public outcry. Winter curbs on coal, including on heaters used by many residents in smaller cities and villages, left millions freezing as local governments scrambled to provide gas heating. 

By imposing emissions targets rather than specific production cuts, China shifted responsibility to local rather than central officials which could also weaken enforcement. “Notably, policies and enforcement this year is left largely to local governments, leaving them to choose between the risk of missing pollution targets or disrupting the newest construction splurge,” said Mr Myllyvirta.

Eoin Treacy's view -

Just how committed is China to environmental protection? China does not have the same green lobby we have in the West. Rationing coal without supplying alternatives was a heavy burden for people in Northern China last winter. That makes the point clearly to consumers that if they want clean air it comes with sacrifice. On a day to day basis most people would rather be warm with bad air than freezing.



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October 02 2018

Commentary by Eoin Treacy

Brazil Coffee Supplies Swell After Ships for Exports Dwindle

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

Brazil’s coffee growers just can’t catch a break.

In May, a national strike by truckers stranded beans on the farm, and prices last month tumbled to a 12-year low amid a global glut. Now, a dearth of container ships at Brazil’s top ports is stalling exports of a bumper coffee crop.

For the world’s top exporter, a shift in the global freight market means container ships arrive at ports less frequently, limiting space for less-appealing commodity cargoes including coffee, and warehouses are bulging with bean inventory.

“Shipments have been postponed for days or weeks,” Nelson Carvalhaes, the president of export group CeCafe in Sao Paulo, said in a telephone interview.

Luiz Alberto Azevedo Levy Jr., the superintendent director at Minas Gerais-based Dinamo, one of the largest warehouse operators, said, “If shipments won’t flow faster, we’ll see storage issues escalating in the next 30 days” at terminals scattered across the country, he said. “The harvest has been finished, but most of the beans are still being dried and prepared,” leaving a “huge volume” heading for depots in the coming months, he said in a phone interview.

 

Eoin Treacy's view -

There is no shortage of coffee but bottlenecks in the supply chain from the rising cost of fuel for truckers to the dearth of ships is contributing to a lack of available supply which is finally beginning to pressure shorts.



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October 01 2018

Commentary by Eoin Treacy

Australia's Property Downturn Chalks Up One-Year Anniversary

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

Australia’s property slump has reached the one-year mark as the nation’s two major cities have become the biggest drag.

National dwelling values dropped 0.5 percent last month, weighed by declines in Sydney and Melbourne, according to CoreLogic Inc. data released Monday. Prices in the two east coast cities, which make up more than half of the national value of housing, have fallen 6.1 percent and 3.4 percent respectively from a year earlier.

“Sydney and Melbourne are now the primary drag on the national housing market performance,” taking over from regions that were impacted by the mining downturn, CoreLogic’s head of research Tim Lawless said. Values have fallen greatest among the most expensive properties as lenders curb their appetite for high debt to income ratio lending, he said.

Eoin Treacy's view -

The RBA has been reticent to raise interest rates because the Australian mortgage market is dominated by floating rate loans. With prices already elevated and private sector debt as a percentage of GDP among the highest of any developed market the fate of the property market is a major arbiter in how well Australia’s economy can be expected to perform.



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September 28 2018

Commentary by Eoin Treacy

Italy's government agrees sharply higher public spending plan

This article by Miles Johnson and Davide Ghiglione for the Financial Times may be of interest to subscribers. Here is a section:

Mr Di Maio hailed the agreement as a “historic day”. “We made it!,” he said as he emerged from a balcony at Rome’s Palazzo Chigi, where the meeting took place.

“Today we have changed Italy! . . . For the first time the state is on the side of the citizens,” he said as ministers and members of parliament from his party hugged each other on the square outside.

Matteo Salvini, leader of the hard right League, part of the coalition and deputy prime minister alongside Mr Di Maio, also welcomed the agreement on spending, saying he was “fully satisfied with the objectives achieved”, which would include his party’s pledges for tax cuts and a reversal of unpopular pension reforms dating back to 2011.

Mr Tria, who is not affiliated with either party and was installed only after Italian president Sergio Mattarella rejected the coalition’s first choice for finance minister, had been pressing for a deficit number as low as 1.6 per cent of GDP going into the meeting.

A 2019 deficit of 2.4 per cent of GDP would represent a significant fiscal expansion from the 1.6 per cent target for this year agreed by the last centre-left government, and would be three times the 0.8 per cent number previously planned for next year.

Eoin Treacy's view -

Italy’s debt is BBB, which is still investment grade, but the yield trades like it is rated BB which is not investment grade. The populist administration has stated they are not afraid of the spread but one wonders if they have any conception what a downgrade to junk would do to demand for Italian debt. Large pension funds which have been gobbling up Italian debt to capture the higher yield would be forced to sell in the event of a downgrade. Meanwhile the ECB is winding down its purchase program so there will be a hole in demand for the bonds.



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September 26 2018

Commentary by Eoin Treacy

Neutral Fed Funds, Dead Ahead

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

Given the lagged and variable impact of monetary policy on economic conditions -- further complicated in the current cycle by the Fed’s balance-sheet unwind -- policy makers will need to navigate with caution when in the proximity of neutral. Fed Chairman Jerome Powell, in his Jackson Hole speech, sounded dual warnings about this: First, he stressed economists’ inability to estimate the neutral level of interest rates in real-time and cautioned against the “mistake of overemphasizing imprecise estimates of the stars”; second, he invoked the Brainard principle, which advocates moving conservatively on policy when the effects of action are unknown.

If growth is moderating toward trend and inflation appears to be centering around policy makers’ objective as the fed funds rate probes neutral territory, a significant portion of the FOMC should be willing to slow -- if not pause -- the pace of interest-rate increases in order to assess economic conditions. Policy makers may not be able to precisely identify the neutral policy rate in real time, but a continual decline in the terminal fed funds rate over the past several tightening cycles (shown below) serves as a cautionary reminder that, as Powell quipped at Jackson Hole, a “smaller dose” of normalization may prove adequate.

Eoin Treacy's view -

The PCE Core inflation gauge, which is the Fed’s preferred measure currently stands at 2%. Chained PCE inflation is at 2.3%. The Fed’s Funds rate is now 2.25% so it is becoming increasingly clear that after 8 rate hikes policy is moving from accommodative to neutral.



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September 26 2018

Commentary by Eoin Treacy

Glencore to double size of $1B share buyback program

This article by Cecilia Jamasmie for Mining.com which may be of interest. Here is a section: 

Glencore’s move falls in line with what an increasing number of top miners have been doing lately, that is, handing money back to shareholders. The trend follows a recovery from the commodity rout of 2015-16 and increasing pressure from investors to not buy assets that may never deliver returns.

Less than a week ago, world’s second largest miner Rio Tinto (ASX, LON:RIO) unveiled a $3.2 billion share buyback following an asset-sale spree. Previously, BHP paid out a record dividend and promised it would give its shareholders most of the $10.5 billion it obtained from the sale of its US shale oil and gas assets.

Glencore said it has almost completed its first buyback, acquiring $940 million of its own stock after the shares fell to a 14-month low in September as part of a wider commodity sell off.

Eoin Treacy's view -

The big takeaway from the trend of miners buying back their own shares and increasing dividends is they are spending less on capital investments. That means they are more profitable but also that their ability to rapidly increase supply will be constrained in future should the need arise.



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September 25 2018

Commentary by Eoin Treacy

Gold Is Cheap. Inflation Is Coming. You Do the Math

Thanks to a subscriber for this article from Barron’s which may be of interest. Here is a section:

Compared with stocks and other financial assets, gold looks inexpensive. More important, inflation is starting to pick up in the U.S. and in much of the world as central banks shrink their enormous balance sheets. And gold has represented a good defense against inflation eroding the value of a stock or bond portfolio. Over time, it has held its value against the dollar. Gold was $20.67 an ounce 100 years ago and that bought a good men’s suit. At $1,200 an ounce, the same is true today.

“Gold is rare, and it’s hard to rapidly increase the supply of it,” says Keith Trauner, co-portfolio manager of the GoodHaven (ticker: GOODX) mutual fund, which holds Barrick Gold(ABX), a leading mining company. “People have historically viewed it as a hedge against government depreciation of local currency.”

There are an estimated six billion ounces of gold in the world, worth more than $7 trillion, about 30% of the value of the S&P 500. Annual new mined supply adds less than 2% to the global total.

“Virtually every government in the world is trying to promote inflation partly because there is so much sovereign debt,” Trauner says. When there is so much debt, he contends, governments have three choices: default, restructure, or inflate the currency. “Politicians, when given the chance, will choose the latter.”

Naysayers point to higher interest rates as a negative for gold because it increases the allure of holding cash. But gold had one of its best decades during the inflationary 1970s, when rates soared.

Eoin Treacy's view -

Whereto for precious metals? A big decline has taken gold back to the $1200 level from it’s January peak of $1366 and sentiment is torn between those hungry for bargains and those worried about the trajectory of interest rates and the strength of the Dollar.



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September 21 2018

Commentary by Eoin Treacy

Commodities Set for Best Week Since April, Fueled by Copper, Oil

This article by Rupert Rowling and Mark Burton for Bloomberg may be of interest to subscribers. Here is a section:

After a months-long rout, commodities are starting to show signs of life.

The Bloomberg Commodities Index has climbed 2.1 percent this week, on track for the best performance since April. Copper, oil, soybeans and silver are all poised set to end the week higher, helped by a combination of tight supplies, speculation that recent losses are overdone and a weaker dollar.

The gains are small, but it’s clear that the selloff that started in May has dissipated and sentiment is turning bullish. Barclays Plc said in a report today that copper has bottomed. Commodity bull Goldman Sachs Group Inc. predicted gains in raw materials through the end of the year.

“The two main factors behind commodities rising are the end of the dollar strength, with the dollar seeming to have peaked, and risk appetite rising,” said Carsten Fritsch, commodity analyst at Commerzbank AG.

It’s a shift from earlier this year, when the Bloomberg Commodities Index plunged about 10 percent over three months. Copper entered a bear market in August, and assets like arabica coffee and platinum are still near decade-lows.

Eoin Treacy's view -

The Continuous Commodity index has been ranging between 400 and 450 since early 2016. Its failed upside break out in May is a good example of a rule of thumb from The Chart Seminar; when the dynamic of the failure is greater than the dynamic of the breakout, the chances are it will go back down and test the lower side of the range.



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September 18 2018

Commentary by Eoin Treacy

September 18 2018

Commentary by Eoin Treacy

Midpoint Danger Line Stops

Eoin Treacy's view -

At The Chart Seminar which is next due to be held in London on November 12th and 13th at the Army & Navy Club in London, one of the topics we cover is how to place stops. The Midpoint Danger Line (MDL) stop is appropriate in a staircase step sequence trend and considering how rhythmic the downtrends have been in the precious metals I thought it would be a good time review it.

In a staircase step sequence downtrend, we observe a series of ranges one below another. That rhythmic movement of distributions followed by a fresh breakdown is deleterious to sentiment. The people making money in such an environment are short sellers who are selling into rallies. When they look at the best opportunities to increase their positions they will observe that prices encounter resistance at the lower side of the overhead range so that is the most opportune time to sell.

In a downtrend most people will have stops just above the most recent lower rally high. If that level is surmounted a sharp rally can ensue on short covering. Therefore, the first signal of a change of trend is when a rally pushed back up into the overhead range. That means the strategy which worked best in the downtrend is no longer working. If the price then moves beyond the midway point of the overhead range, a failed downside break is evident.

A rule of thumb from The Chart Seminar is that in a failed downside break, when the dynamic of the failure is greater the dynamic of the breakdown, the price is likely to rally right back up to the upper side of the range. In a downtrend that is where it is reasonable to assume the majority of stops reside.

Platinum has been trending lower in a staircase sequence fashion. It rallied back up into the overhead range today but has not yet crossed in midpoint of the overhead range which is at approximately $825. A sustained move above that level would enhance potential for at least a reversionary rally back up towards the trend mean.



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September 17 2018

Commentary by Eoin Treacy

How an Aussie miner and American tech company plan to extract lithium quickly in Argentina

This article by Valentina Ruiz Leotaud may be of interest to subscribers. Here is a section:

What sets this partnership apart is that both the miner and the techie claim they can produce lithium carbonate or lithium chloride more rapidly and at a lower cost than others. According to Lilac, this is possible because its system eliminates the need for sprawling evaporation ponds, which are expensive to build, slow to ramp up, and vulnerable to weather fluctuations.

“Even for the world's best lithium reserves in the Atacama desert, conventional evaporation ponds take many years to ramp up and remain vulnerable to weather volatility. Lilac's projects will run at full capacity from year one of commissioning and maintain that output regardless of weather or brine chemistry. We have done benchtop testing in other brines and we saw recoveries over 95% in less than 2 hours versus 9-24 months in evaporation ponds,” the company’s CEO, Dave Snydacker, told MINING.com.

Snydacker explained that the reason why the processes run by his company are so fast is that his engineers have developed ion exchange beads that absorb lithium directly from the brine. Once they do that, the beads are then loaded into ion exchange columns and brine is flowed through such columns. As the brine contacts the beads, the beads absorb the lithium out of the brine. Once the beads are saturated with lithium, the alkali metal is recovered from them as a lithium solution, which is later on processed into battery-grade lithium carbonate or lithium hydroxide using streamlined plant designs.

Eoin Treacy's view -

I described the lithium market as an example of supply inelasticity meets rising demand as early as 2013. What is apparent today, following massive investment in additional supply, is that is no longer true. In fact, as demand for the commodity ramps up technological innovation is contributing to the ability suppliers to more than keep pace.



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September 12 2018

Commentary by Eoin Treacy

Ray Dalio Spells Out America's Worst Nightmare

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

“We have to sell a lot of Treasury bonds, and we as Americans won’t be able to buy all those Treasury bonds,” Dalio said. That means foreign investors will have to step up. And they probably would, as long as the dollar remains strong.

Otherwise, Treasury’s dollar-denominated interest payments to buyers in China, Europe and Japan will be worth less and less.

But, to Dalio, that’s not going to happen. “The Federal Reserve at that point will have to print more money to make up for the deficit, have to monetize more and that’ll cause a depreciation in the value of the dollar,” he said. Pressed by interviewer Erik Schatzker, he said “you easily could have a 30 percent depreciation in the dollar through that period of time.” For context, the Bloomberg Dollar Spot Index fell 8.5 percent in 2017, and that was considered massive.

It all leads up to this critique of how the U.S. has gone on a borrowing binge in recent years. Remember, the $15.3 trillion Treasury market was the $4.9 trillion Treasury market a decade ago.

“We have the privileged position of being able to borrow in our own currency because we have the world's leading reserve currency. We are risking that by our finances — in other words, borrowing too much.”

Eoin Treacy's view -

Unfunded liabilities are not only a US problem but are something that governments right across the OECD will need to eventually address. Ray Dalio’s view that the rise in populism we are seeing today is a symptom of a wider problem gels with my own. Considering we are seeing this disaffection with the status quo during an economic expansion where unemployment is low, it is likely that the jump to the fringes of the political spectrum will only intensify during a recession.  



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September 12 2018

Commentary by Eoin Treacy

FDA Threatens to Pull E-Cigarettes to Fight Rise of Youth Vaping �

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

“There is no question that a lot of the youth use is being driven by Juul,” Gottlieb said.

Produced by San Francisco-based Juul Labs Inc., Juul devices resemble a USB thumb drive and have become popular among students. The company has more than two-thirds of the U.S. e- cigarette market, according to Nielsen data. The FDA is currently developing a survey to determine what percentage of youth vapers are using Juul products, Gottlieb said.

A nationwide sting operation from June through August resulted in more than 1,300 warning letters and fines to retailers who sold Juul products and other e-cigarettes to kids.

It was “the largest coordinated enforcement effort in the FDA’s history,” according to the agency.

Gottlieb recently began to ask whether the use of Juul and other similar products by kids is overshadowing any benefit to adult smokers using the devices to help them quit cigarettes. He said in June tobacco companies “better step up and step up soon” but he didn’t divulge what consequences the industry could face -- until now.

In July 2017, the FDA said it was considering lowering nicotine levels in traditional cigarettes. In addition, the agency pushed back until 2022 a deadline for electronic- cigarette companies to submit applications to the FDA. Gottlieb said at the time he was trying to ease the regulatory pathway for products that are potentially less harmful sources of nicotine than smoking. Critics of pushing back the deadline raised concern that more kids would take up vaping.

Congress gave the FDA the authority to regulate tobacco products in 2009. The agency extended that reach to other tobacco products, including e-cigarettes, in August 2016 and allowed those products that were already on the market to continue sales while preparing an application for FDA clearance.

The FDA is investigating whether some products on the market were introduced after the 2016 date and may need to halt sales, though didn’t name which ones may be violating the law.

Eoin Treacy's view -

I had a discussion with my children about addiction and the cashflow seepage from their savings that would occur were they to take up vaping. We also looked at the cashflow of tobacco companies and talked about how much money they make from addiction. I’ve found it is not much use talking to children about their long-term health because it is no relatable. However, talking to them about not being able to afford a squishy or computer game because of an addiction gets a lot more traction. This conversation resulted from the fact that many of the videos they have encountered on YouTube or iFunny highlight children and young teenagers engaging in vaping.



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September 10 2018

Commentary by Eoin Treacy

Cotton, Hog Futures Jump as Florence Heads for East Coast

This article by Mario Parker, Megan Durisin and Shruti Date Singh for Bloomberg may be of interest to subscribers. Here is a section:

Cotton, corn and soybean fields along with massive hog and poultry facilities lie in the projected path for Hurricane Florence.

The storm’s U.S. landfall could come Friday between Charleston, South Carolina and Norfolk, Virginia, the Hurricane Center said. As much as 15 inches (38 centimeters) of rain could flood cotton fields in parts of North Carolina, according to AccuWeather Inc. The state is also home to several pork- processing plants from major producer Smithfield Foods Inc.

Florence will likely bring “wind and flood damage” for corn and soybeans in the region, Commodity Weather Group said in a report Monday.

“Cotton is one of the largest commodities that can be affected by Florence,” Terry Reilly, senior commodity analyst for grain and oilseeds at Futures International in Chicago, said in an email. “Too much rain is never a good thing for any crop, unless it’s rice.”

Eoin Treacy's view -

This has been a very quiet hurricane season particularly compared to last year but that is about to change with Hurricane Florence due to make landfall later this week. This article from NOAA raises some important questions from what we might expect from hurricanes in future. Here is a section: 

Our regional model projects that Atlantic hurricane and tropical storms are substantially reduced in number, for the average 21st century climate change projected by current models, but have higher rainfall rates, particularly near the storm center. The average intensity of the storms that do occur increases by a few percent (Figure 6), in general agreement with previous studies using other relatively high resolution models, as well as with hurricane potential intensity theory (Emanuel 1987).



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September 07 2018

Commentary by Eoin Treacy

MIT study sees nuclear power as integral to a low-carbon future

This article by David Szondy for NewAtlas.com may be of interest to subscribers. Here is a section: 

Much of this is a matter of intense debate, but one big problem is that if the world is to invest in a policy of deep decarbonatization by the year 2050, there is a real chance it can only be done at either massive expense or the price of much less electricity being available at higher costs, lower standards of living in both the developed and developing world, and even a shrinking global economy.

To prevent this from happening, the MIT study says that nuclear power with its zero-carbon emissions must play a much larger role in electricity generation on a global scale. Today, the total share of global nuclear power as a primary energy source is a mere five percent, with very little growth in the West and some countries actually abandoning the technology.

Eoin Treacy's view -

If we wish to cut down on carbon emissions then renewables are certainly a way to do it but they do not get around the questions of sustaining base load when the wind does not blow or the sun does not shine. That means we need to have a lot more industrial sized batteries to store energy for the proverbial “rainy day” or we need additional back up conventional generators. Nuclear is carbon neutral but is also prone to massive cost overruns and accidents, however rare, tend to influence public opinion for decades.



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September 05 2018

Commentary by Eoin Treacy

UN holds emergency meeting as swine fever spreads in China

This article by Hudson Lockett for the Financial Times may be of interest to subscribers. Here is a section:

While ASF is not a direct threat to human health it is a highly contagious viral disease that can devastate pig populations in regions where it has never before spread, including Asia. 

China has seen six outbreaks of the disease stretching from the first discovered in the country’s northeast at the beginning of August down to the province of Zhejiang, just south of Shanghai. The FAO said officials in China, which produces half the world’s pigs annually, had culled as many as 40,000 pigs so far in an attempt to control the disease.

“It’s critical that this region be ready for the very real possibility that ASF could jump the border into other countries,” said Wantanee Kalpravidh, regional manager in Asia for the FAO Emergency Centre for Transboundary Animal Diseases. “That’s why this emergency meeting has been convened – to assess where we are now – and to determine how we can work together in a coordinated, regional response”.

Eoin Treacy's view -

In an industry the size of China’s 40,000 pigs is not a large number but the virulence of the disease and the geographic spread of cases suggest that this is a situation that has the potential to represent a significant challenge for animal health authorities, particularly if it continues to spread.



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September 04 2018

Commentary by Eoin Treacy

August 28 2018

Commentary by Eoin Treacy

Today's interesting charts August 28th 2018

Eoin Treacy's view -

Finland’s HEX Index remains in a consistent medium-term uptrend and bounced impressively from the region of the trend mean two weeks ago to test its May peak today. While somewhat overbought in the short-term a sustained move below the trend mean would be required to question medium-term uptrend consistency.



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August 23 2018

Commentary by Eoin Treacy

Gold caught in the Trump Trade War crossfire; Stress-testing producers at $1,100/oz

Thanks to a subscriber for this report from Canaccord Genuity 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 US Dollar Index trended lower for most of 2017 and over the course of the last few months has unwound about half that decline. However, the Dollar’s relative strength against some of the most liquid emerging market currencies such as the Turkish Lira, Argentinean Peso, Venezuelan Bolivar, Brazilian Real, Chinese Renminbi is what is animating investors right now. That story is more about the weakness of their respective economies and their exposure to US Dollar denominated debt that the particular strength of the US Dollar.



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August 22 2018

Commentary by Eoin Treacy

Major lithium-ion battery manufacturer planning output that may rival entire 2015 LIB market: analysts

This article by Michael Allan McCrae for Mining,com may be of interest to subscribers.

LG Chem, a major South Korean lithium-ion battery manufacturer, is increasing its cell manufacturing capacity to such an extent that it may surpass the entire LIB market in both output and raw material consumption from just three years ago.

Roskill, industry analysts that ran the numbers on LG Chem's planned output, says that South Korean manufacturer plans to increase capacity to 90GWh in 2020 from a previous forecast of 70GWh.

"Assuming 100% of output was to be NMC532, 90GWh would require around 100kt of cathode, containing 40kt nickel, 22kt cobalt, 16kt manganese and 50kt lithium (carbonate equivalent), and 90kt of anode materials which could be 100% graphite," writes Roskill.

"If producing at capacity, LG Chem’s LIB output and raw material consumption would be greater than the entire LIB market in 2015."

LG Chem, South Korea's largest chemical company, is one of the top five LIB manufacturers. It makes batteries for the Ford Focus, Chevrolet Volt and Renault ZOE.

LG Chem has been making deals to ensure it has raw material. This past spring Zhejiang Huayou Cobalt and LG Chem announced they are planning a cathode material facilities with capacity of 40,000tpy and 100,000tpy capacity planned for future. It also signed deals other raw material deals with Nemaska Lithium and Ganfeng Lithium.

While cobalt and lithium prices are currently falling, Roskills says cell manufacturers are locking in supply and ". . . that activity in the sector continues at a rapid pace."

Eoin Treacy's view -

The auto-manufacturers sector remains under stress because of continued issues with revelations about emissions cheating; most recently in Japan. The cost of meeting current emissions standards not to mention the tightening of regulations slated for the next few years represents a significant cost for just about all conventional car manufacturers. The fact the majority of manufacturers are planning on releasing electric vehicles is as much about responding to Tesla’s success as it is about the challenge of meeting regulations that are now going to be enforced.



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August 21 2018

Commentary by Eoin Treacy

Email of the day on ETF Holdings of gold

A question Do we need to see a clear change of trend in the chart for Total known ETF holdings of gold before we take any uptick in the gold price seriously?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. ETF holdings of gold are an important source of demand for the sector and had been trending higher for almost 18 months before the recent drawdown. That was indicative of retail investors coming back into the market and the drawdown suggests at least some have left. 



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August 17 2018

Commentary by Eoin Treacy

Uranium: Time "U" move?

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

August 14 2018

Commentary by Eoin Treacy

Eoin's personal portfolio August 10th 2018

August 03 2018

Commentary by Eoin Treacy

A tiny tweak to sugar is about to make the world's sweets a lot healthier

This article by Chase Purdy for Quartz may be of interest to subscribers. Here is a section:

In order to enjoy the sensation of sweetness, sugar molecules have to land on our sweet-tasting receptors, most of which sit on the tip of the tongue. But sugar is notoriously bad at actually hitting those receptors, so bad that only 20% actually makes it, the rest washing down our gullets and into the digestive system. This is one reason why many foods contain so much sugar. It’s also why a lot of food companies, in spite of their efforts, have found it difficult—even impossible—to reduce the amount of added sugar in their products while also maintaining the tastes people expect.

But a relatively new startup headquartered near Tel Aviv, Israel has developed a super-tiny method that may have cracked what has been an impossible code. In doing so, it sits on the cusp of changing the landscape of food manufacturing by making sugar so efficient that food companies can use 40% less while keeping tastes the same.

Eoin Treacy's view -

If companies can transition to using 40% less sugar that’s good for consumer health and the fight against diabetes but it’s really bad news for the sugar price over the medium term.



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August 01 2018

Commentary by Eoin Treacy

China trip report July 2018

Eoin Treacy's view -

This was another highly enjoyable and educative trip to China for the Treacy family. One of the reasons we love visiting Guangzhou is because it is close to the factories Mrs. Treacy deals with but is also the gastronomic capital of China. The city is replete with wonderful dining options and the quality of food on offer is of a high standard. I’ll write a separate review of restaurants on another occasion.

This poster is in just about every public space from railway stations to the tube, to the barriers around building sites in Guangzhou. The first question I asked myself is why it needs to be in English as well as Chinese. Internet searches using English language terms do not return results even if one is using Baidu or other Chinese search engines and the vast majority of the domestic population does not read English. Therefore, the message is meant for a wider audience or the use of English is intended as a form of legitimisation of the ideals expressed.



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July 20 2018

Commentary by Eoin Treacy

This is usually a good month to buy gold but it's a tough call this year

Thanks to Niru Devani for this article on Gold.

Gold broke down below a key technical support level of 1236 which was the low in December 2016. The trigger was the yield on the three month Treasury Bill which broke through 2%, a level not seen since the summer of 2008. This followed the Fed chairman's testimony on Capitol Hill to reiterate that the Fed remains on track to continue to raising interest rates. In an environment of a rallying U.S. dollar and still positive real interest rates, gold does not prosper.

I thought the article below, by Dominic Frisby at Moneyweek.com, would be of interest to other subscribers as it offers a contrarian point of view. 

Summertime, and the gold investing ain’t easy

Wisdom has it that the summer months – June, July and August – are the best time of year to buy precious metals (and their related stocks) with a view to offloading the following winter or in early spring.

It’s one of those trades that seems to work better in the rear-view mirror than it does in real time, however.

If you look back at a chart of gold you can usually find a low sometime in July, and then find a point between the following October and April, where the gold price was 10% or 20% higher, and then declare that the trade worked.

Buying the low and selling the high in real time is a rather trickier proposition. That said, it is do-able.

However, gold itself is currently in freefall. In April, gold was re-testing five-year highs at $1,360-$1,370 per ounce. There was a nice uptrend in place. Each low was higher than the last. Talk of inflation was doing the rounds again, and the solution was shiny, yellow-y metal.

Now it is some $130 lower at $1,227. Each low is lower than the last. Every attempt at a rally is anaemic. The trend is strong and the trend is down. To be buying now and attempting to play the “summer trade” is to try and catch a falling knife. Sometimes it works and the audience applauds – however the risk of self-injury is high.

Tuesday was particularly brutal. Gold’s enemy number one, the chairman of the Federal Reserve Bank, Jerome Powell, said that the economy was growing at a “solid pace”, that the unemployment rate was expected to fall further, that the recent pickup in inflation, toward the Fed’s 2% target, was “encouraging”.

The Fed has already raised interest rates twice this year and Powell pencilled in two more quarter-point moves. Stocks duly rallied (a bit), the dollar rallied – and gold took a $20 wallop in the face, sending it to two-year lows.

 

Eoin Treacy's view -

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July 17 2018

Commentary by Eoin Treacy

Long-term themes review July 17th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.



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July 16 2018

Commentary by Eoin Treacy

Long-term themes review June 22nd 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

I realise this summary at 4600 words is getting rather lengthy which is why I decided to right another book to more fully explore the issues represented by the rise of populism and what that means for markets and the global economic order. I’ve agreed an August/September deadline so hopefully it will be available this year.



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July 11 2018

Commentary by Eoin Treacy

Goldman Says Market Melancholy Is Recipe for Big Earnings Season

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

Relax, says Goldman Sachs -- enough has changed that a replay is unlikely. Bulls should take heart, says David Kostin, the firm’s chief U.S. equity strategist, because whatever euphoria infected markets in the first part of the year has long ago dissipated. Hedge fund clients who were aggressively positioned heading into April are more conservative now, with exposures sitting near the bottom of their 12-month range.

“Going into Q1 earnings season, it was peak optimism,” Jeff Schulze, an investment strategist at ClearBridge Investments in New York, said by phone. “Now you have exactly the opposite situation where that optimism has been converted to pessimism.

As long as companies can hit those estimates, I think the market will reward those, rather than punishing them.”

Fundamentally, the second quarter will look a lot like the first as far as results go. S&P 500 companies are forecast to report 20 percent growth from a year ago and sales are likely to rise 8 percent, mirroring the previous period, which was the best since 2011.

Eoin Treacy's view -

The media’s number one story today has been the tariffs and the prospect of an all-out trade war between China and the USA. At the same time the USA is entering into this situation while engaged in fiscal stimulus while China is tightening to close out speculation in the shadow banking system. That has contributed to very different performance in their respective stock markets.



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July 10 2018

Commentary by Eoin Treacy

Shipowners on Pace to Scrap $1 Billion in Oil Tankers This Year

This article by Costas Paris for the Wall Street Journal may be of interest to subscribers. Here is a section:

Some 1,000 vessels are broken up every year and their steel and other metals are melted or simply stacked up and sold to factories. The yards in the Indian subcontinent recycle around 80% of all ships, with the remainder going to China and Turkey, although Beijing has said it will suspend scrapping starting next year.

The average age of VLCCs going to scrap this year is 18.8 years, the youngest since 2013, according to VesselsValue. A ship’s average operational age is around 25 years, but after 15 years in the water, the vessel has to go through an extensive survey to determine if it is seaworthy. “An average survey costs about $2 million, and you have to do it again at 20 years, so a number of owners opt to scrap instead,” Mr. Sharma said.

The oil glut is also sending offshore rigs to scrapyards. It is a relatively new business that has boomed over the past five years, as the cost of drilling at sea is much higher than inland exploration. At least 18 rigs have been broken up so far this year, compared with 46 last year, according to GMS.

Eoin Treacy's view -

The cost of maintaining a fleet of aging ships has risen considerably over the last few years because of the imposition of the long-awaited restrictions on bilge water discharge and environmental restrictions on diesel fuel. That is in addition to the cost of supporting vessels in a hostile maritime environment. These costs are helping to remove excess inventory from the market after a lengthy bear market.  



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July 06 2018

Commentary by Eoin Treacy

Email of the day on the marginal cost of production for silver:

The average marginal cost of production for gold is currently about USD1,000 per troy ounce. What is it for silver? And its also per troy ounce? Thanks in advance.

Eoin Treacy's view -

Thank you for this question which other subscribers may also have an interest in. This article from AmericanBullion.com may be of interest. Here is a section:

By the 20th century, however, silver mining changed. A relatively small percentage of silver originates from traditional silver mines (approximately 25-33%, depending on the year). Nowadays, most of the world’s new silver comes from mines that focus on other metals. For example, a zinc mine in Mexico may pull out 65% zinc, 25% silver, and 10% lead. Since this mine would categorize as a “zinc mine,” the silver production is referred to as “byproduct metal.” Most new silver is byproduct.



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July 05 2018

Commentary by Eoin Treacy

Email of the day on gold and David's health

Was that not a key-day reversal by London spot gold on July 3? Wonderful service. News about David would be welcome.

Eoin Treacy's view -

Thank you for this email and I am happy to say David is increasingly active and up to walking a few miles a day. He is as interested in the markets as ever but internet connections are not all they might be in rural Devon where he is convalescing. His heartfelt wish is to return to commenting on the market in a limited capacity at some stage but is not up to that challenge just yet.



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July 05 2018

Commentary by Eoin Treacy

With Tariff Deadline at Hand, Businesses Brace for the Fallout

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

And China has been shifting soybean purchases to Brazil, from which it bought nearly 30% more beans in May than it had a year earlier, according to research firm CEIC. Chinese importers have mostly stopped buying U.S. soybeans, said Paul Burke of the U.S. Soybean Export Council, and agricultural giant Cargill Inc. worries about a longer-term shift to other suppliers.

By value, soybeans are the top item targeted by Beijing’s proposed tariffs; China imported around $14 billion in U.S. soybeans last year, according to Wind Information

In all, China’s tariffs would cover 545 categories of U.S. products, while the U.S. tariffs would cover 818 categories of products from China.

Eoin Treacy's view -

The USA and Brazil are by far the largest exporters of soybeans in the world and if China is no longer buying soybeans from the USA it will soon run out of places to buy. What happens when Brazil’s stores run out? China is not about to stop consuming tofu, soybean oil, soy sauce or other soy products. With prices at such low levels, farmers are going to be planting fewer soybeans and that will create a supply shortage at some point.



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July 04 2018

Commentary by Eoin Treacy

Copper May Need a Very Hot Chile to Save it From a Cool China

This note by Benjamin Dow for Bloomberg may be of interest to subscribers. Here it is in full:

Looking at LME copper's current price levels, ie near a 10-month low, it seems it would take more than the risk of labor conflict in Chile to keep the red metal from slipping further to $6,000 per tonne -- especially considering the state of the Chinese economic path, which is currently searching for answers.

Verbal intervention in the tumbling yuan and the do-or- don't nature of the deleveraging debate don't give copper longs much of a handle to grasp. In addition, there's the tense wait for the global trade-war boot to drop, and the fact that copper has risen for seven of the past ten quarters. Chilean mine strikes may have to be acrimonious and long to save Dr. Copper.

Eoin Treacy's view -

China is the world’s largest consumer of industrial resources and its markets are currently in a state of flux as measures to contain speculation are being complicated by worries about trade tariffs. Meanwhile the trend of workers demanding higher pay is not isolated to any one country so there is scope for labour disruptions but that is a not a predictable outcome.



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July 03 2018

Commentary by Eoin Treacy

Email of the day on volume at major peaks and troughs

I hope this email finds you and yours in fine spirits, especially ahead of your holiday in China. In August 1982 it was pointed out to me that the Dow Jones had undergone its largest volume in transactions ever. The argument was that people had held on and held on in the hope that something would change, remembering that the Dow had traded sideways, basically between 1000 and 500 for 16 years, since the 1966 peak. That those who sold had given up the ghost and those who bought were a whole new generation of optimists. Obviously, the new generation where proved correct, as apart from a minor hiccup in 1987 the market went on a secular bull market until the year 2000.

Since that time, I have always used market volume indicators, both for stock markets and individual share prices as short and medium-term indicators of sentiment and any change therein. During today’s check through my favourite charts I noticed that 3 weeks ago the Russel 2000 and the DJ Wilshire 5000 float had their largest volume spikes in at least 5 years.

I was using your weekly charts. Do you think we might be entering a similar change in sentiment which seems to be encapsulating the majority of global stock markets at the moment?  FYI global stock market trading peaks gave me the confidence to increase my equity exposure in 2003 and 2009. Personally, I do not think that volume spikes at a low or a high are coincidence, but indicate a change of investor sentiment in this ever-intriguing global market

Eoin Treacy's view -

Thank you for this interesting observation and I agree that spikes in volume, particularly following accelerations can be indicators a panicky buying or selling.



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July 02 2018

Commentary by Eoin Treacy

Mexico's young democracy is facing its sternest test yet

This article by Ana Campoy for Quartz may be of interest to subscribers. Here is a section:

The most troubling and tragic threat to Mexico’s democracy is violence. Since campaigning began in September 2017, 132 politicians (jpg), including 48 official and aspiring candidates, have been killed, according to Ellekt, a consulting firm.

The most recent murder happened on June 25 in the southern state of Oaxaca. Emigdio López Avendaño, a candidate for local representative from AMLO’s party, MORENA, was gunned down along with four of his supporters.

The level of violence represents a huge spike from the run-up to last presidential election, in 2012, when less than a dozen politicians were killed, according to Ellekt. The firm’s director, Rubén Salazar, attributes the increase to state governors’ waning control over municipalities. Thanks to free elections, voters have been kicking out incumbents from governor’s offices around the country—a step forward for democracy. But at the municipal level, it’s had the perverse result of clearing the way for local strongmen to hijack the election process, sometimes at gunpoint.

“These changes have happened faster than the transformation of the political and democratic culture at the local level ,” he said in an interview in Artistegui Noticias (link in Spanish).

Eoin Treacy's view -

The three primary tenets of improving governance that we look for in an investment destination are that it have respect for minority shareholder interests, an independent judiciary and a free press. Those attributes increase the potential that economic growth will flow through to the stock market and that you will be able to get your money out when it comes time to sell.



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June 21 2018

Commentary by Eoin Treacy

Long-term themes review May 16th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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June 14 2018

Commentary by Eoin Treacy

Email of the day on UK listed gold shares:

Fresnillo and Hochschild, both on LSE, have had a waterfall downdraft of about 10 pc this month, whereas many gold/silver miners on the HUI or in Sydney are going sideways or upwards, and even Randgold seems to be bottoming. Would you care to comment on why this is happening? Yours anon

Eoin Treacy's view -

Thank you for this email and as it happens it is a subject I was looking into last night. There is certainly an anomaly evident where UK listed precious metal miners are underperforming while those listed elsewhere appear to be doing better on aggregate.



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June 13 2018

Commentary by Eoin Treacy

Email of the day on Total Known Holdings of Gold:

On Total Known ETF holdings of Gold. The charts are telling us that after a long period of ranging Gold and the precious metals are poised to break to the upside. I was rather alarmed therefore on the one- day plunge by about 7% of the above chart. Should I be, or is this some explainable aberration?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. The Total Known ETF holdings of Gold is reported with a one-day lag but it is also prone to spikes since the data is accumulated from so many sources. I checked this out with Bloomberg this morning and adjusted the chart to the up to date value. Unfortunately, while imperfect this index is about as accurate reflection as I can find of the interest investors express in holding gold-backed ETFs.



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June 12 2018

Commentary by Eoin Treacy

WPM acquires cobalt stream

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

Eoin Treacy's view -

A link to the full report and section from it is posted in the Subscriber's Area.

Generally speaking streaming companies provide funding for struggling mines when prices are low. By historical standards cobalt prices are not low. Of course, if accepts the near mania of bullish prognostications, then cobalt is cheap.



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June 06 2018

Commentary by Eoin Treacy

Gold Investing Goes AWOL As Google Searches To 'Buy Gold' Hit 11-Year Low

Thanks to a subscriber for this article by Adrian Ash which may be of interest. Here is a section:

The giant SPDR Gold Trust (NYSE Arca: GLD) shrank 4% across May, erasing the previous two months of share issuance growth with the heaviest 1-month outflow since August last year.

The US Mint meantime reports selling 24,000 ounces of American Eagle gold coins, up sharply from April's 10-year low as dealers re-stocked inventory but still barely half the last 5 years' average for May.

Here at BullionVault, last month saw the lowest number of new precious-metal investors since May 2014. Down 27.7% from the previous 12-month average, the number of people using our online gold, silver and platinum market for the first time totalled just 57.2% of the last 5 years' average monthly count of new customers.

Overall, the number of people starting or increasing their gold holdings rose 12.1% from April's 27-month low, but the number of gold sellers on BullionVault rose 22.8% to a 4-month high.

Eoin Treacy's view -

Some people buy gold because it is the “anti-Dollar”. Some people buy gold because it is a monetary metal. Some people buy gold because it is store of value. Some people buy gold because it is in relatively short supply. Some people buy gold because it is lasts forever and cannot be printed into existence.



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June 05 2018

Commentary by Eoin Treacy

Cobalt, Uranium, and The Four Horsemen of Opportunity

Thanks to a subscriber for this note from Polar Capital LLC which may be of interest. Here is a section:

In summary, world trade friction is growing.  More countries are beholden to the kindness of others for those commodities in high concentrations from nations that can employ them as weapons of response to adversarial tariffs.  What is that worth per pound of cobalt?  Nothing.  Until it is.  What is it worth that the DRC is a political quagmire and the country is about to be 75% of world production?  Nothing.  Until it is. What is it worth that China dominates cobalt chemical refining for batteries and western auto companies are still generally open on supply?  Nothing.  Until it is.  It is likely that spot prices are about to soften a bit after an ungodly strong, unabated run. We believe that weakness is merely prelude to new highs when the Fall “mating season” begins.  How do we play it?  Besides our relatively small physical positon, we own Cobalt 27 (KBLT CN) because they hold 3,000 metric tons of cobalt metal safely housed in western warehouses, and we believe they will further execute their business plan by acquiring a stream or streams before the end of the year and share that cash flow with shareholders in the form of a dividend.  We think cobalt prices can trade past the old high of $50 in 2008, a period during which battery demand from electric vehicles did not exist.

Eoin Treacy's view -

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

I’ll never forget the bull market in uranium that took place between 2003 and 2007. It was the easiest market in the world to monitor. The price only went up. It highlighted just how useful point and figure charts are in monitoring a runaway bull market. When the consistency of the advance changed the easy conclusion was that a peak of at least medium-term significance had been reached.



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June 04 2018

Commentary by Eoin Treacy

Cobalt price: Congo production surges

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

Supply risks for cobalt are centred on the Democratic Republic of the Congo which is responsible for two-thirds of world output. And the country’s share will only increase over the next five years as Chinese investment in new mines come on stream.

The central African nation's output of cobalt – as a byproduct of copper production – is already soaring as top producer Glencore's operations in the country ramps up again after a refurbishment period.

The DRC produced 296,717 tonnes of copper in the first quarter of 2018, up 8.2% over the same period last year, the central bank said in a report on Thursday. Cobalt production in the first quarter of 2018 rose 34.4% to 23,921 tonnes. Global production last year was around 117,000 tonnes.

Eoin Treacy's view -

The oldest adage from the commodity markets is the cure for high prices is high prices. Cobalt is up 400% already so on the supply side there is real pressure to increase supply. On the demand side consumers are investing heavily in coming up with new chemistries to reduce cobalt intensity.



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May 31 2018

Commentary by Eoin Treacy

In Gold We Trust

Thanks to a subscriber for this report from the team at Incrementum which may be of interest. Here is a section:

 

A

Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

lso most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

 

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

 

My view – Rather than think so much about a risk to the dollar’s position as the reserve currency, perhaps the bigger point is that China has a well-telegraphed decision intention to internationalise the renminbi. That holds out the long-term prospect of a true bi-polar world where competing economic bloc compete against one another.

 

If one were to think about a truly bullish case for gold that kind of scenario is definitely high in the realm of possibilities to drive investor demand. The gold price is currently holding in the region of $1300 but the medium-term pattern is one of a saucering pattern similar to the base put in during the early 2000s. However, a sustained move above $1400 will be required to confirm a return to medium-term demand dominance.

 
Eoin Treacy's view -

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

Rather than think so much about a risk to the dollar’s position as the reserve currency, perhaps the bigger point is that China has a well-telegraphed intention to internationalise the renminbi. That holds out the long-term prospect of a true bi-polar world where competing economic bloc compete against one another.



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May 31 2018

Commentary by Eoin Treacy

Nickel Poised for Best Month Since December as Supplies Tighten

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

Nickel’s rally has been underpinned by resilient demand from the traditional stainless-steel industry, as well as predictions that it stands to benefit from growing use in the emerging electric-vehicle sector. This month, Goldman Sachs Group Inc. gave the metal a ringing endorsement over the next half-decade, although the bank cautioned prices may retrace near term. Stockpiles tracked by the SHFE and the LME have slumped to multi-year lows.

“Stockpiles kept falling,” said Wu Xiangfeng, an analyst at Huatai Futures Ltd. in Shanghai, adding that environmental checks in China are also reducing the output of nickel pig iron, a low-grade alternative to refined metal. “Prices can only rise if there’s no new supply.”

The market will remain in deficit this year as destocking is seen in both Shanghai and London, Ricardo Ferreira, head of market research at the International Nickel Study Group, told a conference in Shanghai on Tuesday. Even after the recent rally, the metal’s yet to reach a price that’ll incentivize new investment in class 1 primary production, he said.

Eoin Treacy's view -

I found it almost amusing that in all the commentary about how Elon Musk called Wall Street analysts boring at the Tesla earnings meeting, no attention was paid to his statement that 8:1:1 battery chemistries are already in use in the Model 3.



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May 25 2018

Commentary by Eoin Treacy

Renewable energy: A green light to Copper Demand

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

Eoin Treacy's view -

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

There is always a new demand led story in any bull market and renewables do represent such an opportunity. However, the success of that new idea is dependent on the conventional sources of demand remaining on a steady trajectory and it is in that regard that doubts tend to be raised about copper.



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May 24 2018

Commentary by Eoin Treacy

Petrobras Punished by Wall Street for Caving on Fuel Prices

This article by Peter Millard for Bloomberg may be of interest to subscribers. Here it is in full:

The reaction was swift and severe. Petrobras Chief Executive Officer Pedro Parente woke up this morning to a wave of downgrades from the same Wall Street analysts who had been praising him since he took the helm of the state-controlled oil producer two years ago.

Bank of America Merrill Lynch, Morgan Stanley and Credit Suisse Group AG all cut their recommendations after Parente announced a 10 percent cut in wholesale diesel prices late Wednesday to help the government negotiate an end to a nationwide truckers strike that has wrought havoc on Latin America’s largest economy.

“The just announced diesel price reduction in response to truckers’ protest is likely to materially damage Petrobras’ perceived independence in a way that may be difficult to recover,” Frank McGann, an analyst at Merrill Lynch, wrote in a report where he cut his recommendation on the company’s American depositary receipts to neutral and his price objective to $17.

“We think that the investment case for Petrobras has been seriously damaged, and the risk profile has risen.”

While Parente said Petrobras isn’t bowing to pressure and that the temporary measure doesn’t mean a change in its pricing policy, shares extended losses in after hours trading to as low as $13.40 in late New York trading.

Eoin Treacy's view -

Petrobras is a major constituent in global high yield benchmarks so its decision to cut price against a rising oil price environment is not especially good news. Along with Turkey and Argentina, the risk in the high yield sector has increased this year.



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May 23 2018

Commentary by Eoin Treacy

Interesting charts May 23rd 2018

Eoin Treacy's view -

10-year Treasury yields fell back to test the psychological 3% today. The Fed’s Minutes highlighted less urgency to tackle the inflation rate coming in mildly ahead of target. That eased fears the yield would surge higher imminently. An overextension relative to the trend mean is evident, so there is scope for an additional pause in this area but a sustained move below 2.7% would be required to question supply dominance.



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May 23 2018

Commentary by Eoin Treacy

Metals and mining rising to the challenges of EV revolution

Thanks to a subscriber for this report from Platts which may be of interest. Here is a section on the global steel market:

Eoin Treacy's view -

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

China’s steel industry demonstrates how quickly the country can ramp up supply when the central government makes a decision to champion a sector. It did exactly the same in solar and wind and it’s doing it today in artificial intelligence and battery manufacturing. Nevertheless, the extent to which it went to any lengths to build out steel capacity now represents a challenge as the infrastructure led boom transitions to focusing on services and domestic demand.



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May 21 2018

Commentary by Eoin Treacy

Email of the day on valuations, Dow/Gold and anti-trust:

Thanks for your comments which are very interesting, especially your focus on technology and its potential to alter radically the investment landscape.

I have 2 points of my own to make. Using gold as the standard of value for stocks is interesting but I would think valuation metrics are more useful. As you know the Shiller PE, derived by comparing the S&P to the 10-year moving average of real corporate earnings- GAAP (not adjusted)- is at the highest level since the TMT bubble popped in 2000. The ratio of market value (the Wilshire 5000+) to GDP was at all-time highs in January. We have lived through a decade of extraordinary monetary policy (almost zero interest rates and QE), which is now being reversed. I think S&P market value to S&P sales may also be at all-time highs, but I may be wrong about that.

So the starting point is pretty rich. The PE is at 25 times 4 quarter GAAP earnings, implying a 4% earnings yield. The Moody's Baa 20-year bond yield is around 4.6% so the equity premium has been negative the last 5-6 years for the first time since 1961 when the Bloomberg series started. On average equity holders over this period have earned a premium of 1.62% to reward them for investing in the riskier part of the capital structure, but now they must pay for the privilege.

However, this does not address your major point about the enormous earning potential of companies involved in future technology. Now a standard criticism of your point is that competition between businesses will reduce the excess profits to "normal profits". What economists call "consumer surplus" consists of the extra value that is transferred from businesses to consumers for free due to the operation of the competitive market which eliminates excess profits.

This flows from the ideal world of independent competitive enterprises. Anti-trust laws in the USA have been around since 1890 (Sherman Anti-Trust Act) and were designed to cause real world behaviour to better approximate the theoretical. 

What I have found interesting is that Anti-Trust is no longer as big a deal as it was when I was a student. In fact, when Mark Zuckerberg testified he named 5 or 6 tech companies that are competitors of Facebook's. In this list he mentioned WhatsApp and another company (Telegram?) that he has already bought and perhaps one or two others. He also mentioned Skype, which Microsoft has bought. The big tech companies have the where with all to buy smaller rapidly growing companies and maintain tight oligopolies and thus earn outsize profits. I doubt whether many of these purchases would have passed muster from the Department of Justice's Anti-Trust division one or two generations ago.

So the key may be to watch politics and see whether the populists at some point turn their attention to Anti-Trust.

Eoin Treacy's view -

Thank you for this detailed email which has given me much food for thought. As you point out there is a tendency among the producers of widgets to encounter competition which reduces the price to often unprofitable levels. At that point some of the weaker producers go out of business and a process of consolidation unfolds. The competitive Amazon marketplaces is a good example of this where producers of widgets compete on price to gain market share only for many to disappear after a relatively short time to be replaced by lower cost producers.



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May 21 2018

Commentary by Eoin Treacy

Email of the day another email on the CAPE and the merits of cash

In your 30th April response to my email, you say as follows "The only problem I have with comparing the current environment to that which prevailed from the early 1960s is that the market spent 13 years ranging from 2000 to 2013 so it would be unusual to begin another similar range so soon after the last one ended"

My response:  Yes, it is true that it would be unusual to "commence a similar such range so soon after the last one ended."  However, in this circumstance, there are a range of other very unusual related circumstances.

In the last 10 years, we have had a unique period of historically extreme money printing with very little consumer prices inflation as measured by the official CPI number, but this extreme period of money printing has caused very high asset price inflation - pushing many sectors back up into fairly extreme valuations as measured by historical norms.

We can also look at this phenomena from another. If we look at Professor Robert Shiller’s cyclically adjusted price/earnings ratio series commencing 1880, we can see that secular bear markets have typically ended with a single digit CAPE - at the end of a secular bear market, the cyclically adjusted P/E has been in the range of 5-7 in 1982 and 1921.

By contrast, the January 2018 peak in the US cyclically adjusted P/E of 33 was the second highest instance since 1880 - only being surpassed by the dot com peak in 2000 but surpassing the 1929 peak by a small margin.

So, by this (Shiller CAPE) normally fairly reliable valuation measure, the US share market on broad averages is at a fairly extreme level. I think it is fair to say that if you buy expensive assets, you should expect poor to bad average real returns over the following 10 years or so.

One last point to you 30th April comments, to the section where you say "The stock market is a better hedge against inflation than bonds because companies have the ability to raise prices and therefore dividends while bond coupons are fixed."  In a period of rapidly rising inflation like the 1970s, all listed securities including shares and bonds tend to do poorly because of the rapidly rising discount that needs to be applied when valuing such assets. By contrast, in Australia at least, during the 1970s, cash and hard assets like gold and commercial property were better investments. 

Eoin Treacy's view -

Thank you for this riposte to my answer to your original question posted in Comment of the Day on April 30th.



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May 15 2018

Commentary by Eoin Treacy

Hands Tied and Swords Bent, Emerging Markets Battle the Dollar

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

But that’s not the ominous undertone. It’s about how the traditional fortifications of emerging markets -- strong oil and commodity prices -- are failing to protect developing-nation currencies from the onslaught of a stronger dollar.

Look at the chart below. In January, developing-nation currencies and commodities fell together and rose back in tandem. But this time, while the Bloomberg Commodity Index is extending gains, currencies have collapsed. This divergence suggests that a strong U.S. dollar is more decisive for risk appetite than commodity prices.

That’s bad news for countries such as South Africa and Russia. The ruble, for instance, is now moving in the opposite direction to oil even though it’s the country’s biggest export earner. Their usual positive correlation was destroyed by a four-day decline in the currency in the wake of enhanced U.S. sanctions.

Eoin Treacy's view -

The Dollar’s rally is resuming with some of the most pressured emerging markets being forced to raise rates aggressively to stem declines. Argentina’s 40% repo rate is beginning to have the desired effect but it is one of a very small number of currencies that was able to squeeze out a rally against a resurgent Dollar today.



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May 15 2018

Commentary by Eoin Treacy

Long-term themes review April 10th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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May 14 2018

Commentary by Eoin Treacy

RBC Electric Vehicle Forecast Through 2050 & Primer

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

Eoin Treacy's view -

The outlook for electric car adoption is a central theme in the outlook for lithium miners and other suppliers of the growing battery market. Going from 0.8% in 2017 to 7.5% in 2025 is not far of a 10X growth rate and while ambitious is realizable. There are massive construction projects underway, particularly in Asia to build out production capacity of batteries.



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May 11 2018

Commentary by Eoin Treacy

Trump Gives Americans the Gift of High Lumber Prices

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

Lumber prices are really high right now! The Chicago Mercantile Exchange futures contract for the softwood two-by-fours used in framing houses closed at its highest price ever on Tuesday, in fact.

If one adjusts for inflation, current prices are no longer record-setting. But an interesting pattern does appear if one adds in a few other key data points.

It appears that every time the U.S. picks a fight with Canada over its alleged subsidies of softwood lumber — which comes from coniferous trees such as pines, firs and cedars — U.S. lumber prices go up. The match is likely even closer than the chart above indicates, given that threats of tariffs (“countervailing duties,” to be precise) and follow-up tariff increases also affected prices.

The U.S.-Canada softwood lumber war first flared up in the early 1980s. Imports of lumber from Canada had been on the rise as environmental restrictions cut back on logging in U.S. National Forests, and the U.S. timber industry began to complain that Canadian local, provincial and national governments, which own almost all of the country’s forest land, were charging such low prices for timber that it amounted to an unfair subsidy.

Eoin Treacy's view -

How long before the homebuilding lobby starts to complain about an inability to pass on higher input costs to the end consumer? So far, the rising real estate market has meant that hasn’t been an issue, but it is inevitable at some stage. When that happens the reduction in tariffs on Canadian timber will represent a significant headwind for lumber prices. After all, the oldest adage in the commodity markets is “the cure for high prices is high prices”.



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May 11 2018

Commentary by Eoin Treacy

Elysis: A New Era for the Aluminum Industry

This press release today announcing a joint venture between Rio Tinto and Alcoa, with technical input from Apple, may be of interest to subscribers. Here is the key point apart from being carbon free:

A NEW ERA FOR THE ALUMINUM INDUSTRY

There’s a new, revolutionary way to make aluminum. It eliminates all direct greenhouse gases. And it produces pure oxygen.

 The technology can create more aluminum in the same size smelting cell as the traditional process. And it can be installed in new facilities or retrofitted for existing ones.

Eoin Treacy's view -

What I think will surprise many people is that a test facility has been running at Alcoa’s Pittsburgh test facility since 2009 so this is not some far-off pipe dream but it already has a proof of concept and is primed for commercialization. The first commercially oriented industrial project is expected to begin producing aluminium in 2024.



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May 04 2018

Commentary by Eoin Treacy

War on coal making the world's top mine owners a lot richer

This article appeared in Mining.com and may be of interest. Here is a section:

Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

“It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

Eoin Treacy's view -

Coal is about as unfashionable as one might imagine and it must be very difficult for companies to raise capital to increase supply considering how negative sentiment is. At the same time, coal is one of the world’s most popular sources of energy and is indispensable in the production of steel. A good many coal companies when bust before prices started to recover in 2016 and supply is still constrained.



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May 03 2018

Commentary by Eoin Treacy

Tesla Supercharging Its Model 3 Means Less Cobalt, More Nickel

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

Tesla Inc. may have some bad news for those betting on cobalt to continue its record-breaking rally, and good news for nickel bulls.

While the weight of its Model 3 is on par with gasoline- powered counterparts, its battery cells are of the highest energy density used in any electric vehicle, the Palo Alto, California-based company said Wednesday in a letter to shareholders.

“We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability,” Tesla said.

Cobalt prices have more than tripled in the past couple of years as companies like Tesla strive to bring electric vehicles into the mainstream car market, and with supply largely dependent on a few mines in the politically volatile Democratic Republic of Congo. Nickel, which has gained about 50 percent in the same span, is far more widely available.

Tesla says the cobalt content in its nickel-cobalt-aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a nickel- manganese-cobalt ratio of 8:1:1.

Eoin Treacy's view -

In the last six months I have seen estimates for when the 8:1:1 ratios of nickel : manganese : cobalt would be achieved in commercial batteries that ranged from 5 to 10 years from now. Tesla has these batteries in the limited number of Model 3 cars it is putting out today. That is a testament to exponential pace of technological innovation because it represents another powerful enhancement to energy density.



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April 30 2018

Commentary by Eoin Treacy

Email of the day on the long-term outlook and potential for inflation

In your 10/April long-term themes review, you said: "So, the big question many people have is if we accept the bullish hypothesis how do we justify the second half of this bull market based on valuations where they are today? ..... However, the answer is also going to have to include inflation. "

My thoughts, not in any particular order:

If we look at Robert Shiller's research ~1870-now, on the US share market, his studies show that historically, extreme valuations in the US share market (as assessed by cyclically adjusted P/E ratio) have always been followed by poor average real return over the following 10-20 years."
You point to inflation as to how a secular bull market (in nominal terms implied) can now occur for the US share market (by implications I think you are reflecting on the US share market) over say the next 10-15 years (say).  You use the experience of Argentina and Venezuela as justification for your argument - where from memory, there was hyperinflation in the periods to which you refer.

First, I do not think you are suggesting hyperinflation for the USA .... mismatch 1.
For Argentina and Venezuela, I think their currencies also crashed. I do not think you are suggesting the US dollar is going to crash. Possible mismatch 2.
Rather than a comparison with Venezuela and Argentina, perhaps a better analogy is to the period in the USA following the late 1960s, when US share markets where at quite high valuations (though not nearly as expensive as now on a CAPE basis). Following the peak valuations of the late 1960s, the US share market went sideways (with some large dips) over the next 16 years or so.

In summary, I am not sure that your argument is particularly robust.  Yes, the technological revolution is a critically important new phase which will have a huge impact over the next 10 and 20 years..... and there may well be a secular bull market in that sector ... but does that really mean that the technology sector by itself will take the whole S&P500 with it in a secular bull market for the next 10 or 20 years?

Your thoughts?

Eoin Treacy's view -

Thank you for this question which gave me plenty of room for thought. My first reflection is that one of the benefits of this service is the Socratic dialectical method unfolds in real time as these big topics offer endless room for discussion and revision. I spent a good deal of time talking about long-term cycles in the Big Picture Video on the 27th which you may find of interest. 



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April 27 2018

Commentary by Eoin Treacy

World's lithium king is ready to unleash a flood of new supply

This article from Bloomberg appeared in Mining.com and may be of interest. Here is a section:

“There is a legitimate concern on the side of battery manufacturers about long-term availability of supply,” said Daniel Jimenez, an SQM vice president who recently estimated that the industry will require a capital investment of $10 billion to $12 billion in the next decade to meet demand.

The green light to mine vastly more lithium, combined with pending changes in its ownership structure, has suddenly put SQM in the sights of several global mining companies, including London-based giant Rio Tinto Group. Among the most aggressive bidders is China’s Tianqi Lithium Corp., which has offered to buy SQM shares at a 20 percent premium, Eduardo Bitran, the former head of government development agency Corfo, said earlier this year.

“Tianqi owning the stake would be another step towards overall Chinese consolidation of the lithium industry,” Chris Berry, a New York-based energy-metals analyst and founder of House Mountain Partners LLC., said in an email.

Eoin Treacy's view -

SQM’s growth projections have been among the chief catalysts in the decline of lithium miners over the last few months. The big question is how quickly demand picks up over the next decade to absorb additional supply. Lithium was a supply inelasticity meets rising demand market from 2013 but really only garnered interest in the last couple of years as the shares turned to outperformance. Supply is now increasing so we are likely to see more volatility in the respective shares. This story further highlights China's intention to be the dominant force in the electric car sector. 

 

 



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April 25 2018

Commentary by Eoin Treacy

Why High-Flying U.S. Home Prices Are About to Get Another Jolt

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

The framing of homes, or putting up roofs and walls, accounts for 15 percent of the cost of construction. A composite measure of the cost of lumber for framing rose 16 percent from December to March, according to data from Random Lengths, a publisher of information on wood products.

And it’s not just lumber. A Labor Department gauge of prices paid at the producer level for construction inputs -- everything from particleboard and plumbing to concrete and insulation -- was up 5.1 percent in March from a year earlier, the biggest annual advance in nearly eight years.

So far, neither higher home prices or a four-year high in mortgage costs have been enough to dissuade buyers. Results of the Conference Board’s consumer confidence index on Tuesday showed 1.7 percent of the group’s respondents in April planned to purchase a new home in the next six months, matching the highest share in this expansion.

Eoin Treacy's view -

The falling cost of mobile phone tariffs are what helped to keep inflationary pressures under wraps last year. However, that effect will fall off the gauge for the March reading which will be released on May 1st. Meanwhile, the range of new inflationary pressures on the horizon continue to increase.



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April 25 2018

Commentary by Eoin Treacy

Controversial New Milk Shakes Up Big Dairy

This article by Mike Cherny for the Wall Street Journal may be of interest to subscribers. Here is a section:

Both are following the success of a2 Milk Co., a New Zealand-based company that has found fans in its home country, as well as Australia and China, and has recently entered the U.S. market. The company’s revenue is expected to grow some 70% in the year ending in June, according to S&P Global Market Intelligence. It already has more than 10% of the milk market in Australia. A similar share in the U.S. would be about $1.5 billion in annual sales, according to Euromonitor International.

A2 milk differs from regular milk because the latter contains both A1 and A2 proteins. Supporters of A2 milk contend it is the A1 protein that causes indigestion for many people, a problem that lactose-free milk won’t solve. Skeptics say there hasn’t been enough independent research to show there is any real benefit to A2 milk, which is naturally produced by cows with a particular set of genes. A DNA test can determine which cows in a herd produce A2-only milk.

Although the science behind so-called A2 milk remains disputed, the entry of big companies into the market shows how changing consumer preferences create new opportunities that dairy giants can’t afford to ignore—especially as profits have been eroded in recent years by everything from almond milk to dairy-free ice cream. In the U.S., traditional milk sales have fallen about 7% annually on average over the last four years, according to the most recent data from Nielsen.

Eoin Treacy's view -

A2 Milk is a remarkable success story and it represented part of the discussion at the recent Melbourne venue for The Chart Seminar. There is evidence of a clear acceleration for what has already been an impressive trend and the share has now posted its largest reaction to date.



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April 23 2018

Commentary by Eoin Treacy

Email of the day on what to own in the latter stages of a bull market

Hello Eoin, Whatever age you happen to be, it is always salutary to lose a parent. A constant pillar in one's life has gone and no more questions can be asked. It brings into relief one's own fragility and mortality in a way that few, if any, other deaths will do. I hope your mother's passing was a comfortable one. My condolences to you and your family.

While it is probably improper to revert immediately to business, I am sure you will want to re-immerse yourself in the observation and interpretation of markets without delay. On this basis, I have a question:

Given that we believe we are heading for monetary contraction, a rise in interest rates and accelerating inflation how should we be positioning portfolios? Banks and resources should be well bid for the time being and Japan should benefit from inflation.

But how about India, China and the other economies of North and South East Asia? What sectors and markets are best avoided? At what point does one accumulate cash? Gold is much talked about as an inflation hedge but that will be a shooting star - it might soar in the near future but it will then weaken once more. It is to be regarded as a hedge or a trade, not as an investment - at least that's my view.

In my own portfolio, I've trimmed China and India, reduced or eliminated high flying 'big-tech' stocks (but not touched PCT), increased my Japan weighting and increased cash. I'm probably underweight gold. I plan to accumulate more cash but at this stage, I've no idea what holdings I shall reduce or sell over the coming months. Providing one is not losing money, investment is fun but over the next two or three years, I suspect there will be plenty of opportunities to lose money which we should try to avoid. It's a tough time for you and you have plenty on your plate but if you care to comment on these musings it would be much appreciated. All best.

Eoin Treacy's view -

Thank you for your condolences. The outpouring of warmth and compassion from subscribers has been enormously gratifying for my whole family and I. My mother’s passing leaves a hole in the wider family, since she was the matriarch in no uncertain terms, but it has also encouraged us all to work harder at communicating.

This is a detailed question and there is no one simple answer. I’ll attempt to more fully explore these issues over the course of the next few days and weeks but here are some of my current thoughts.



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April 23 2018

Commentary by Eoin Treacy

Trade War and its effects on commodities

Thanks to a subscriber for this report by Barnabas Gan from OCBC which may be of interest. Here is a section:  

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

Fears about trade wars are ebbing and flowing with optimism a détente will be reached one week superseded by fears tit-for-tat measures will deteriorate further the next. The banning of ZTE from selling phones in the USA is an escalation while the potential for Mnuchin to visit China is seen as a positive. What this suggests, at least to me, is this is an ongoing situation which is still some way from a resolution. If that is the correct assumption then it is not ideal for investor sentiment.
 



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April 17 2018

Commentary by Eoin Treacy

April 16 2018

Commentary by Eoin Treacy

Historical charts of gold

History is not repeated but it does tend to rhyme. One of the biggest factors behind gold’s advance from the early 2000s was because of a lack on faith in the ability of fiat currencies to hold their value. The growth of markets like China and India then contributed an additional demand driver.

I am intrigued by the similarity in the saucering base formations gold put in during the early 2000s and what it is doing now. History need not repeat itself but these charts are certainly evidence that this is not the first-time gold has put in a lengthy period of ranging.

Smaller gold miners like St Barbara, Evolution Mining are outperforming at present as production ramps up and costs are kept under control.

April 12 2018

Commentary by Eoin Treacy

Metal Matters

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

Funds turn buyers again on Comex
The net long fund position (NLFP) has up until recently been declining, but this has mainly been a result of stale long liquidation, as seen by the drop in the black line in the chart above. But, while the longs have cut exposure (until recently); shorts have not been getting bearish, as seen by the declining red line. This has suggested longs have grown impatient as Gold prices have failed to break higher, but lack of upside has not encouraged bears to increase exposure. More recently, fund longs have started to increase exposure again. The gross long fund position has climbed to 259,032 contracts as of 27th March, from a recent low of 223,882 contracts. The NLFP has returned to 203,354 contracts from a low of 148,731 contracts on 20th March. This latest change was driven by 35,150 contracts of fresh buying and 19,473 contracts of short-covering.

Investors increase exposure to ETFs
Holdings in Gold ETFs are edging higher with investors adding 18.5 tonnes in March. Holdings now stand at 2,162 tonnes, up some 39 tonnes so far this year. Holdings averaged 2,068 tonnes in 2017. Given the lukewarm investor interest in Gold ETFs, it may be that the market is waiting for prices to break higher above the $1,366-$1,388/oz resistance area before increasing exposure.

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

ETF Holdings of Gold have shown surprising resolve over the last 18 months. The fact that all those long positions, opened when gold rallied to break its downtrend in 2016, hung around until now, and are adding to the total outstanding long position, is a testament to the bullish interest in the metal. Considering how volatile the price has been over the same period this is a particularly noteworthy development.



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April 12 2018

Commentary by Eoin Treacy

Email of the day on guest publications and lithium miners

What are your current views on lithium and lithium miners?

I continue to enjoy your tour de force reporting and analysis. Nothing stops you, not even airline travel. Amazing.

Eoin Treacy's view -

Thanks for this question which I’m sure will be of interest to other subscribers. It’s been a busy few weeks, what with an enjoyable and educative trip to Japan last week and the upcoming flight to Melbourne for The Chart Seminar and another conference next week, where I’m looking forward to chatting with Marc Faber.

Sometimes I look back with a sense of yearning on the days when David could still take a month off in August to cycle from Land’s End to John O’Groats and back again. In fact, part of the reason he brought me onboard in 2003 was to ensure the service could move to a seamless daily publication schedule.

I’m beginning to think about how to arrange taking a holiday over the summer. David used to invite guest writers to contribute copy to the site when he was away and I would like to do the same thing while I am away for perhaps two weeks in July or August. If any subscribers are interested in submitting an article during that time please let me know and I would be happy to discuss the conditions under which that might be appropriate.

Now let’s turn to lithium miners.



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April 10 2018

Commentary by Eoin Treacy

Saudi Arabia Is Said to Signal Ambition for $80 Oil Price

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

Saudi Oil Minister Khalid Al-Falih has also sounded increasingly hawkish in public, suggesting that OPEC should keep tightening the oil market even through the cartel is close to meeting its goal of cutting crude inventories in industrialized countries back to their five-year average.

In an interview in New York last month, he said today’s price near $70 a barrel hadn’t been sufficient to stimulate investment in the industry, which remains significantly below levels seen before 2014’s price crash.

"That tells me that the pricing signals that have come out of the recovery haven’t been sufficient," he said, without giving a target for prices.

The Saudi Ministry of Energy didn’t immediately respond to a request for comment.

Domestic Policy
Riyadh’s desire for higher prices is driven by domestic policy imperatives. Although Saudi Arabia’s budget deficit has narrowed sharply as oil has recovered, Prince Mohammed has set out an ambitious and expensive economic and social reform program. He also needs to pay for the kingdom’s increasingly drawn-out military entanglement in Yemen.

While there’s little indication the Saudis are prepared to deepen their oil cuts to achieve $80, at the very least the aspiration suggests they’ll keep with the current measures until the price goal is closer. Riyadh is counting on declining Venezuelan oil production, the likely imposition of new U.S. sanctions on Iran, and continued demand growth to absorb U.S. shale production.

Eoin Treacy's view -

In addition to sanctions on Iran, the deteriorating relationship Europe and the US have with Russia is exerting an influence on oil prices which closed above $70 today and in dynamic fashion. That is going to act as an incentive to increase supply among various higher cost producers such as shale properties, tar sands and deep water, though that supply is going to take time to come to market.

 



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April 09 2018

Commentary by Eoin Treacy

Two major crop scourges are hybridizing to produce a new mega-pest

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

Helicoverpa armigera, commonly known as the cotton bollworm, and Helicoverpa zea, the corn earworm, are two types of very hungry caterpillar that cause billions of dollars of damage to crops every year. Corn, cotton, tomato and soybean are just some of the many crops these pests can attack, with the cotton bollworm having developed resistance to all pesticides targeted at it.

In 2017, an eight-year project that mapped the entire genome of both caterpillars was completed. The study was designed to help researchers identify specific genes that cause the pests to become resistant to pesticides. A new paper has now been published showing evidence that the two moths are clearly hybridizing in a variety of novel ways.

"No two hybrids were the same suggesting a 'hybrid swarm' where multiple versions of different hybrids can be present within one population," says one of the researchers on the study, Tom Walsh.

Eoin Treacy's view -

A plague of locusts, let alone moths, is not currently a problem. However new varieties of insects that are immune to the most commonly used pesticides represents a threat to supply. That’s an important consideration for crop prices particularly since oversupply has resulted in the sector underperforming the broader commodity complex over the last few years.



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April 03 2018

Commentary by Eoin Treacy

Goldman Sachs: 20 Years Left of Mineable Gold

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

"The combination of very low concentrations of metals in the Earth’s crust, and very few high-quality deposits, means some things are truly scarce." He wrote in the report.

King notes that the intention behind the report was to highlight the areas of scarcity, and demonstrate how scarcity is the ultimate driver of value and investment.

"Perhaps unsurprisingly, these are the so-called precious metals (and diamonds), and that their value is derived from the fact they are rare." He writes, "Gold has been used as a measure of wealth for more than 4,000 years, as the ancient Egyptians soon worked out that gold was not only shiny and heavy, but rare."

He adds that the relative scarcity of the commodity, and "the market’s belief that new discoveries will be limited, is what drives the price of these super-rare commodities."

King’s report falls in line with the forecast made last year, estimating that 2015 will be the year when gold production would reach its peak in the mining industry, a concept known as Peak Gold.

Eoin Treacy's view -

Mineral discoveries are a function of geology, technology and price. Shale oil was known about for over a century but was completely uneconomic until technology improved and that changed the pricing structure of the gas, and later the oil markets, beyond recognition.



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March 29 2018

Commentary by Eoin Treacy

Anti-Corruption Crusader Is Eyeing Brazil Presidential Bid, Sources Say

This article by Simone Preissler Iglesias and Samy Adghirni for Bloomberg may be of interest to subscribers. Here is a section:

Barbosa, a 63 year-old black man raised in poverty, became a household name in Brazil during the Supreme Court’s handling of the so-called "mensalao" corruption scandal in the government of President Luiz Inacio Lula da Silva. Of all the potential candidates for October’s presidential elections, Barbosa has one of the lowest rejection ratings, at just 14 percent, according to Datafolha polling company. That compares with 60 percent for President Michel Temer and 40 percent for Lula.

The former judge is a presidential candidate "with potentially the best profile in the field," according to a note published by Eurasia Group on March 29, adding that he has a good mix of experience, anti-corruption credentials, and credibility on social issues.

"It’s a huge movement on the electoral chess board," said Richard Back, a political analyst at XP Investimentos.

Eoin Treacy's view -

The Brazilian iBovespa Index has been the best performing major market globally over the first quarter. It has been assisted by improving perceptions that the crusade against institutional and political corruption is gaining traction and the relative stability of the Real over the same period.



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March 26 2018

Commentary by Eoin Treacy

Fear of trade war between US and China

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

Eoin Treacy's view -

A link to the full note and a section from it are posted in the Subscriber's Area.

ETF Holdings of gold has been remarkably steady since the initial surge in 2016 suggesting investors were willing to continue to hold gold despite a lengthy period of consolidation. Holdings are now hitting new recovery highs and a clear move below 70 million ounces would be required to question the return to demand dominance.



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March 22 2018

Commentary by Eoin Treacy

Long-term themes review March 7th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.



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March 21 2018

Commentary by Eoin Treacy

Policy focus shifted to sustainability from stability

Thanks to a subscriber for this note from Deutsche Bank which may be of interest. Here is a section:

March 16 2018

Commentary by Eoin Treacy

Precious Metals Review

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

Capital allocation: We are nearing 5 years since the significant gold price (~$1,600/oz down to $1,360/oz) correction in early April 2013. The period since has largely been characterized by cost cutting, capex reduction and de-leveraging of Balance Sheets. With an average ND/2018E EBITDA ratio of 0.5x for Precious stocks under coverage, companies are largely finished with debt reduction and must now decide on the right mix of project capex (brownfield and greenfield) /exploration /dividends/buybacks/further debt reduction/M&A opportunities. Management decisions to define companies will likely diverge over the coming years and we believe this is a key consideration for investors, particularly for a sector that does not have a good record of deploying capital. In terms of dividends, companies will need to define policies that are both sustainable but also representative of variation in cash flow through the cycle, e.g., a base dividend with a supplementary dividend is most likely.

Cost pressure starting to come back: A number of companies on recent conference calls mentioned cost pressure that is entering the industry either through macro factors or through mining sector specific areas.

Examples include the increase in energy costs (mainly due to higher diesel/gas prices), some currency moves, consumables, equipment and contracting. It does not appear to be significant at this stage but the opportunities for cost-cutting initiatives seem to have largely ended (with the potential exception of technology impacts, e.g., Barrick's initiatives medium- to long-term). As an example of cost pressure, Barrick's nearterm All-In Sustaining Costs (AISC) are expected to be ~$765-815/oz for 2018, ~$50/oz higher than previous guidance of $740-760/oz. Longer term, Barrick has alluded to the fact that its target of $700/oz is going to be more difficult to achieve.

Eoin Treacy's view -

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

The Gold/NYSE Arca Gold BUGS Index ratio hit an important peak near 10 in late 2015 which presaged the recovery rally in the metal price which broke the five-year downtrend. That undervaluation of the miners relative to the gold price represented a period of deep stress for the sector as companies scrambled to pay down debt and to keep their operations afloat. However, as the gold price rallied the miners exhibited high beta characteristics which saw them double relative to the gold price.



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March 16 2018

Commentary by Eoin Treacy

New study rips into cobalt, lithium price bulls

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

Prominent commodities research house Wood Mackenzie this week released a report on battery materials that forecasts a decline in the price of cobalt and lithium this year which would turn into a rout from 2019 onwards.

Woodmac is not lowballing demand growth for lithium and the authors expect demand to grow from 233 kilotonnes (kt) in 2017 to 330kt of lithium carbonate equivalent in 2020 and 405kt in 2022, but:

… the supply response is under way. Yet it will take some time for this new capacity to materialise as battery-grade chemicals. As such, we expect relatively high price levels to be maintained over 2018. However, for 2019 and beyond, supply will start to outpace demand more aggressively and price levels will decline in turn.

According to Woodmac data, spot lithium carbonate prices on the domestic market in China are already down 6% from December levels to around $24,500 a tonne while international market prices have remained robust rising to $16,000 at the end of February.

Eoin Treacy's view -

Lithium and cobalt represent the freshest iterations of the supply inelasticity meets rising demand condition that contributes to the cyclicality of mining ventures. Batteries are now big business and with Volkswagen saying this week that it is willing to outspend Tesla on batteries by the early 2020s the demand portion of the market is well affirmed.



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March 15 2018

Commentary by Eoin Treacy

Deep Thaw Below Arctic Circle Risks $30 Billion Nordic Industry

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

The forest floors below the Arctic Circle are usually frozen solid this time of year, hard enough to support the giant timber machines needed to harvest their wood.

But that’s changing, according to the foresters who work the land in Finland and Sweden. Unusually mild winters are turning once icy grounds into thick layers of mud capable of swallowing up the 25-ton vehicles used to gather the materials that go into pulp, paper and packaging.

“We will see more and more of these difficult conditions,”

Uno Brinnen, head of forestry at Sweden’s BillerudKorsnas AB, said in an interview. “It will always shift between warm and cold winters, but the long-term trend seems clear.”

Temperatures across large swathes of Sweden were as much as 3 degrees Celsius (5.4 degrees Fahrenheit) higher than normal in December and January, according to the Swedish Meteorological and Hydrological Institute. That warming forms part of a trend that’s likely to persist, according to SMHI, whose scientists expect temperatures to continue rising over the next six decades because of climate change.

The travails increasingly experienced by Nordic foresters underscore the economic impacts of climate change. Even as warming temperatures in and around the Arctic Circle frees waterways and reveals new paths to exploit natural resources, countries and companies in the region are being forced to adopt new ways of conducting traditional business.

Eoin Treacy's view -

Lumber prices have pulled back over the course of the last month but are still holding the breakout from a 25-year range. The renegotiation of NAFTA rules on trading lumber across the US/Canadian border, the long-term impact of mountain pine beetle infestations, which are themselves a result of milder winters, coupled with warmer weather in Scandinavia and stronger economic growth are driving a supply inelasticity bull market in lumber.



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