Investment Themes - Precious Metals / Commodities

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June 25 2019

Commentary by Eoin Treacy

Fed Lowers Long-Run U.S. Rate Outlook as Growth Outlook Dims

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

“This is really important,” said Torsten Slok, chief economist at Deutsche Bank Securities, who expects a rate cut in July. “For many years, the Fed has been arguing that monetary policy was easy and accommodative and supporting growth and inflation. After a decade of easy monetary policy, the Fed has decided that policy is no longer stimulative.”

Reasons listed for the lower neutral rate include ongoing fallout from the financial crisis, weaker productivity, continued slackness in the labor market and an aging population, which when combined leave the economy structurally weaker and so more vulnerable to rate hikes.

The upshot is the Fed may have to lower rates if it wants to boost expansion to offset global headwinds, including slow global growth and trade disruptions from President Donald Trump’s tariff battles.

Powell will give his view of policy in a speech on Tuesday to the Council on Foreign Relations in New York.

Eoin Treacy's view -

The trend of the Fed Funds Rate is downwards. There is a clear succession of lower major rally highs since the early 1980s and the failure of the Treasury yield to hold the move above 3% late last year suggests another lower high is now in place. If we accept the conclusion the peak of the interest cycle has now passed the next big question is just how low can rate go?



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June 24 2019

Commentary by Eoin Treacy

Bitcoin Surpasses $11,000 as Memories of Popped Bubble Fade

This article by Eric Lam, Vildana Hajric and Joanna Ossinger for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin traded above $11,000 for the first time in 15 months, recouping more than half of the parabolic

increase that captured the attention of mainstream investors before the cryptocurrency bubble burst last year.

“The bounce-back of Bitcoin has been fairly extraordinary,” said George McDonaugh, chief executive and co-founder of London-based blockchain and cryptocurrency investment firm KR1 Plc. “Money didn’t leave the asset behind, it just sat on the sidelines waiting to get back in.”

Eoin Treacy's view -

When I got on the plane yesterday Bitcoin was trading at around $10,000. When I landed in London it was at $11,000. That’s a big move even for bitcoin. So, what’s going on?



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June 19 2019

Commentary by Eoin Treacy

Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view -

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

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.



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June 19 2019

Commentary by Eoin Treacy

Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view -

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.



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June 18 2019

Commentary by Eoin Treacy

The Man Who Inherited Australia's Downturn Just Isn't That Fazed

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

That’s all put the economy on track for its weakest fiscal year since the last recession in 1991. Even the Reserve Bank, which rarely wades into political territory, is urging more government stimulus after cutting interest rates for the first time in almost three years.

But whether boxed in by his sunny disposition or pledges to deliver a budget surplus made ahead of the government’s shock re-election last month, Frydenberg appears unfazed. While he’ll push to pass tax cuts when parliament resumes on July 2 and ramp up infrastructure spending, that’s about it, leaving the heavy lifting of stimulus to the central bank.

“I’ve found the treasurer to be remarkably sanguine,” said Danielle Wood, an economist at the Grattan Institute, an independent think tank in Melbourne. “When you’ve got the central bank governor coming out and talking about perhaps moving to stimulatory fiscal policy as well as the need for more long-term structural reforms, I’d be hoping for a more substantive response.”

Eoin Treacy's view -

The RBA cutting interest rates to previously unimagined levels, with more to come, is a bonus for consumers with floating rate mortgages, but the wider concern is about the health of the Chinese economy which Australia depends on for export demand growth.



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June 17 2019

Commentary by Eoin Treacy

Illinois farmers give up on planting after floods, throw party instead

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

Nationwide, farmers are expected to harvest the smallest corn crop in four years, according to the U.S. Department of Agriculture. The agency last week reduced its planting estimate by 3.2% from May and its yield estimate by 5.7%.

Farmers think more cuts are likely as the late-planted crop could face damage from hot summer weather and an autumn frost.

“An early frost will turn this world upside down,” Rock Katschnig, a farmer from Prophetstown, Illinois, said at the party.

Eoin Treacy's view -

It is one thing to have worries about being able to sell into overseas markets like China, it is quite another challenge not to have inventory at all. The failure to plant spring crops represents a significant risk for farmers if they plant late because of getting the wrong weather at the wrong time and potentially delaying winter crops.



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June 13 2019

Commentary by Eoin Treacy

Email of the day - on the USA's oil advantage:

Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view -

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.



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June 13 2019

Commentary by Eoin Treacy

Uranium Sector

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

Enviro Minister Schulze recently said that Germany will stick to its timetable to close the last nuclear reactor by YE22.  Some critics like Volkswagen CEO Herbert Diess believe that it should wind down coal before nuclear. A recent Forbes article “What Does It Actually Cost to Charge Up an Electric Car focused on cost of charging an EV.  We took it one step further and also determined the environmental impact of Germany’s decision.  Given that France’s electricity generation is 73% nuclear and Germany is only 12%, we compared estimated costs and emissions associated with charging a Tesla Model S with a 100-kWh battery. First off, electricity prices appear 45% lower in France.  Secondly, CO2 emissions from electricity generation to charge an EV in France is just 13% of what it is in Germany. Yes, Germans would see a 140% CO2 reduction by using EV’s versus that from an average ICE vehicle, but the French would see a 1,720% CO2 reduction.

Eoin Treacy's view -

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

For the green movement there is no greater cause celebre than to combat nuclear proliferation. That consideration more than any other fired the resolve of Angele Merkel to wind down Germany’s nuclear industry following the Fukushima disaster even though Germany is not a seismically active area.



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June 10 2019

Commentary by Eoin Treacy

Sunset of China's REE Dominance

Thanks to a subscriber for this report from Hallgarten & Co 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. 

China has overplayed its hand in the rare earth metals sector. Two years ago, it produced 80% of the worlds supply, now it produces 70%. The global economy is now alert to the fact that these metals represent vital components in all manner of new technology products.



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June 10 2019

Commentary by Eoin Treacy

Email of the day - on silver miners:

With the silver/gold ratio at multi-year lows, coupled with the adage that silver is high beta gold, I’ve been evaluating from a contrarian perspective whether to increase my exposure to silver whilst the market is in the depths of despair and await a possible turnaround. 

The problem is where to venture as the fundamentals of virtually every silver producer are pretty scary, including CDE, which has been mentioned from time to time in your Comment of the Day.

I came across this informative article which analyses in some detail the current state of the market and its various producers, the declining percentage of their production which is silver related, and their prospects of outperformance should the silver price recover. 

I would appreciate your insight into this analysis and which companies, or ETF’s, you feel might be worth considering for investment.

Eoin Treacy's view -

Thank you for this informative article which may be of interest to other subscribers. Here is a section:

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

This is readily evident in the top SIL miners’ production in Q1’19. SIL’s largest component in mid-May as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 15.0% YoY in Q1, but its gold output surged 41.1%! Just 17.5% of its Q1 revenues came from silver, making it overwhelmingly a primary gold miner. Its newest mine ramping up is another sizable gold one.

SIL’s second-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.



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June 07 2019

Commentary by Eoin Treacy

Bets on July Fed Rate Cut Gain Momentum After U.S. Jobs Report

This article by Susanne Barton, Katherine Greifeld and Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

Bond traders’ conviction that the Federal Reserve will cut interest rates within months in response to a weakening growth outlook and escalating trade tensions firmed after a batch of weaker-than-expected U.S. jobs data.

Fed funds futures show a quarter-point cut almost fully priced in for July, and indicate about 70 basis points of easing by the end of 2019. The two-year Treasury yield fell as much as 11 basis points to 1.77%, close to the 2019 low reached Wednesday, and it was on course for its fifth weekly decline.

The last time that happened was back in July 2016, when the U.S. central bank’s target range was 2 percentage points lower than right now.

Eoin Treacy's view -

Lead indicators for future problems are flashing orange. If the Fed were to persist in its policy of continuing to raise rates and reducing the size of the balance sheet it would contribute to recession risk. If it steps on the monetary accelerator once more it risks further inflating a bubble, not least in the nonbank lending and private equity sectors.



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June 07 2019

Commentary by Eoin Treacy

Beyond Meat's Forecast Wows Wall Street as IPO Darling Delivers

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

“As long as Street forecasts fail to properly reflect BYND’s remarkable potential, we remain overweight.” Notes that “eventually this stock’s hefty valuation will more than offset the fast-growing fundamentals.”

Notes the importance of CEO Ethan Brown calling the forecast “very conservative” and telling investors that the company doesn’t include foodservice customers in guidance until they are past the testing stage.

JPMorgan has a $233 million 2019 sales target -- vs the company forecast of $210 million -- and the analyst says his estimate may be conservative. “It is conceivable that Tim Hortons alone (a current customer with nearly 5,000 locations that is not yet in guidance) could account for most of that
gap.” Rates overweight, price target to $120 from $97

Eoin Treacy's view -

Meat alternative providers like Beyond Meat and Impossible Burger have a clear benefit in that they are providing a new product which is fashionable. The trendiness of vegan food products that are considered both healthy and taste good represents a significant market phenomenon which has been growing in importance at local eateries around Los Angeles for the last couple of years. The primary benefit of these products for fast food chains like McDonalds, Burger King or Jack in the Box is they attract a new demographic that normally avoid such establishments.



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June 06 2019

Commentary by Eoin Treacy

Is silver due to catch up?

Thanks to a subscriber for this report from UBS 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 Gold/Silver ratio is at rather extreme but not the most extreme levels seen historically. David long described silver as high-beta gold and poor man’s gold. The less liquid nature of silver trading and the various use cases for the metal contribute to it being more volatile than gold.



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June 03 2019

Commentary by Eoin Treacy

As China's Debt Balloons, Emerging Markets Fail to Take Off

This article by John Authers and Lauren Leatherby for Bloomberg may be of interest to subscribers. Here is a section:

Within China, all forms of debt have risen, reflecting a shift in the dynamics of its economy. Before the crisis, China had largely managed to finance its growth without recourse to much debt. The inflows from exports had done the job. The population, fast reaching middle-class living standards, still tended to fund itself conservatively. But household debt has almost tripled from 18.8% of China’s GDP before the crisis to 51.2%. All this debt has successively less impact in stimulating economic growth.

There are reasons why China’s debt is not creating greater fears. If countries want to avoid crisis, issuing a greater share of debt in their own currency is key. This avoids the risk that a devaluation can force them into default, and it leaves them with the option—not necessarily a good one—of printing money to escape difficulties.

China does more than 90% of its borrowing in local currency, which limits the risks somewhat. Meanwhile, almost all large emerging markets now do more than half of their borrowing in their own currency. But not all emerging markets have made uniform progress in converting to local market debt. The two biggest exceptions are Argentina and Turkey—and it is no coincidence that these two countries both slipped into crisis during 2018 as a strong dollar put pressure on their currencies.

Eoin Treacy's view -

Where the burden of debt resides in an economy gives us a clue as to where the greatest effect will be felt from a problem. When the credit crisis struck it was mortgage debt in the USA which led the market downwards and it was consumers who felt the brunt of the decline with the foreclosure crisis and erasing of savings. Today, debt resides on company balance sheets and in China’s regional banking sector in particular.

Successive attempts to wring leverage out of the regional banking sector have finally had the desired effect of ending shadow banking. However, without resource to government capital, Dollar loans or private lending clubs, the regional banks are in serious peril. This is a difficult sector to monitor because only a handful are listed on the stock market.



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June 03 2019

Commentary by Eoin Treacy

What Trade War? Africa Sidesteps Tariffs, Starts Free-Trade Pact

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

Africa, largely ignored in a U.S.-China trade war that could roil economies worldwide, is quietly piecing together the world’s largest free-trade zone.

The African Continental Free Trade Area comes into force on paper on Thursday after the required 22 countries ratified the deal a month ago. Once it’s passed by all 55 nations recognized as part of the African Union, it would cover a market of 1.2 billion people, with a combined gross domestic product of $2.5 trillion. The potential benefits are obvious, if the usual hurdles of nationalism and protectionism don’t yet stand in the way.

The deal would help the continent move away from mainly exporting commodities to build manufacturing capacity and industrialize, said Jakkie Cilliers, head of African Futures and Innovation at the Pretoria-based Institute for Security Studies. Boosting intra-regional trade would spur the construction of roads and railways, reducing the infrastructure gap in Africa, he said.

Eoin Treacy's view -

Africa is the global centre for population growth and represents an important demographic growth engine for the global economy over coming decades. The creation of a free trade area to promote transnational trade right across the continent is a positive development that will help spur growth for many economies.Building up trade that is not exclusively reliant on resource extraction is a major objective for just about every commodity producer but it is especially important in high population growth markets because people need jobs if their productive capacity is to be realised. That’s a long-term objective.



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May 31 2019

Commentary by Eoin Treacy

Energy Prices Crash in Europe as Old and New Fuels Vie for Share

This article by Mathew Carr, Jeremy Hodges and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

“LNG is now so cheap it’s competing with coal almost,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., who sees slowing demand for coal. “It’s not actually falling off a cliff. We think it’s going to be a long slow death rather than tomorrow.”

The price slump is one sign of Europe’s determination to phase out coal as it seeks to slash climate warming emissions without holding back the economy. Renewables are also in the fight for market share, with onshore wind and solar power “fast becoming cheaper than average power prices in Europe’s largest markets,” according to a research by BloombergNEF.

Front-month Dutch gas prices, a benchmark for Europe, plunged 50% this year as record volumes of LNG landed in northwest Europe. Coal for next year has dropped 30% after a mild winter left inventories at European ports unusually high.

“There’s too much coal,” said Hans Gunnar Navik, a senior analyst at StormGeo AS. As “natural gas out-competes coal,” renewable generation is replacing both of them, he said.

Eoin Treacy's view -

In the pricing of commodities supply is much more volatile than demand. Generally, bull markets don’t end because the market runs out of buyers but because new sources of supply appear to satiate demand. That is why we define secular bull markets in commodities in terms of a step up in the marginal cost of production.



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May 29 2019

Commentary by Eoin Treacy

Rare Earth Stocks Give Abundant Returns as Investors Pile In

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

The People’s Daily, a flagship newspaper of the ruling Communist Party, said in a commentary that the U.S. shouldn’t underestimate China’s ability to fight the trade war. The country is “seriously” considering restricting rare earth exports to the U.S., the editor-in-chief of the Global Times, a newspaper affiliated with the Communist Party, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

 

The U.S. relies on China for about 80% of its imports of rare earths, the group of materials that are used in everything from electric cars to high-tech military equipment. Rare earths, which include elements such as cerium and dysprosium, are relatively abundant in the Earth’s crust but mine-able concentrations are less common than other ores.

China produces about 70% of the world’s mined rare earths and its industry is dominated by a handful of producers including China Northern Rare Earth, China Minmetals Rare Earth Co., Xiamen Tungsten and Chinalco Rare Earth & Metals Co. Some of the country’s listed rare earths stocks are small caps, making them easy targets of speculation.

The country has taken a proactive approach to managing the global market, Bank of America Merrill Lynch said in a report, citing steady exports in the 1990s that depressed prices and a 40% reduction in its export quota in 2010 that led to a spike.

Eoin Treacy's view -

The last time rare earths were a political football in 2010, it was because China cut off exports to Japan in an effort to force high-end manufacturing to migrate. That set off a massive run-up in rare earth metal prices, investment in new mining facilities and a drive towards substitution. Faced with the threat of losing it dominant position China relented and began exporting again. Prices collapsed, most of the new miners went bust and some semblance of normality returned. How is this occasion different?



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May 28 2019

Commentary by Eoin Treacy

Gold in the Age of Eroding Trust

Thanks to a subscriber for this edition of Ronald Peter Stoeferle and Mark Valek’s always interesting report. Here is a section:

Trust is the basic value of interpersonal cooperation and the cement of our social order. The erosion of our “trust capital” can be observed in many areas of society.

The breakdown of trust in the international monetary order is manifesting itself in the highest gold purchases by central banks since 1971 and the ongoing trend to repatriate gold reserves.  

Gold reaffirmed its portfolio position as a good diversifier as trust in the “Everything Bubble” was tested in Q4/2018. While equity markets suffered doubledigit percentage losses, gold gained 8.1% and gold mining stocks 13.7%.

The normalization of monetary policy was abruptly halted by the stock market slump in Q4/2018. The “monetary U-turn” that we already forecasted last year has begun. 

Recession risks are significantly higher than discounted by the market. In the event of a downturn, negative interest rates, a new round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are to be expected. 

When it comes to trust in investments, our vote is clear. Trust looks to the future, forms itself in the present, and feeds itself from the past. Gold can look back on a successful five-thousand-year history as sound money.

Eoin Treacy's view -

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

Gold is a monetary metal and therefore is best valued like a currency rather than as a metal, stock or bond. Of course, currencies are generally income producing but if the last decade has taught us anything that is not always the case. One of the clearest arguments for owning gold in the aftermath of the credit crisis were the negative interest rates that prevailed which made gold alluring by comparison. With similar conditions arising now, the big question many people are asking is why gold hasn’t done better?



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May 28 2019

Commentary by Eoin Treacy

Incessant Rain Puts U.S. Farmers on Insurance-Deadline Watch

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

Claims known as prevented plant pay out when farmers are unable to sow crops at all. With unceasing rain keeping farmers out of fields, growers are increasingly weighing how best to get paid and ease the impact from the bad weather and an escalating U.S.-China trade war.

“You hate to farm for insurance, but in a year like this, you keep that in the back of your mind,” Nelson, whose farm is near the east-central town of Paola, said by phone. Storms across the Midwest and Great Plains have resulted in the wettest 12-month stretch on record in the U.S., with the deluge closing refineries and snarling Mississippi River traffic. Crucially for agriculture markets, it’s also hampered crop planting. Worries over tighter supplies due to the soggy weather drove Chicago corn futures to surge as much as 3.9% on Friday, topping $4 a bushel and rising to the highest level in almost a year.


The wet weather’s showing no signs of easing. Severe weather that broke out late Sunday across the Central U.S. and into the Midwest is expected to continue to cause havoc. The insurance deadline for sowing has already passed for some farmers in southwestern Missouri, southeastern Kansas and western Tennessee. They now have to decide whether to plant with less coverage, or make prevented-plant claims.

Eoin Treacy's view -

The cyclicality of grain prices, where old crop prices rise heading into the harvest of winter planting and fall thereafter is predicated on the assumption that there is a winter crop to harvest. There is likely to be significant volatility because hard red wheat crops are expected to be OK, but a significant rally appears to be getting underway in old crop contracts. The true test of the health of the new crop will come when it the front month July contract rolls.  



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May 23 2019

Commentary by Eoin Treacy

Bad News for Markets Offers Little Help to Gold as Metal Dithers

This article by Joe Richter and Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

With an equities rally wavering, trade relations between world’s two largest economies deteriorating and U.S. borrowing costs slipping, the commodity often seen as a haven in times of turbulence is encountering troubles of its own. Gold prices are headed for a fourth straight monthly drop, and have seesawed between weekly gains and losses since late April.

Bullion, which hasn’t posted more than three straight daily gains since March, has been stuck in a fits-and-starts pattern as signs of resilient growth and a rising dollar counter concern that the world economy is set to slow. Even increased wagers that the Federal Reserve will ease monetary policy this year haven’t been enough to sustain rallies in bullion, which can benefit from low rates because it doesn’t pay interest.

“Prices are kind of range bound, nobody is making any money, so on the margin, people are just disinterested,’’ said John Laforge, the head of real asset strategy at Wells Fargo Investment Institute, which oversees 1.9 trillion. “You really need something fearful out there, which is the scary part. You really need something that rattles markets for gold to take off.’’

Eoin Treacy's view -

I like to see these kinds of articles because they give us some perspective on what sentiment towards an asset class is like. As you can see from the above passage the broad feeling is this “market has no legs” and “can’t sustain a rally”. That tells us the majority of people are not in the market.



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May 22 2019

Commentary by Eoin Treacy

Franklin Says Aussie Bonds to Rally as RBA May Ease Four Times

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

Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

Eoin Treacy's view -

Australian mortgages are full recourse and floating rate. The Australian consumer is carrying some of the highest leverage ratios in the world, second only to Canadians in the G7. That’s fine as long as the property market is rising but when it starts to contract pressure starts to build on leverage at even a slight down turn in the ability of consumers to service their debts.



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May 20 2019

Commentary by Eoin Treacy

Google Cuts Off Huawei Smartphones From Some Android Services

This article by Dan Strumpf and Yoko Kubota - for the Wall Street journal may be of interest to subscribers. Here is a section:

From now, Huawei will be able to use only the public version of Android and won’t have access to proprietary apps and services from Google, according to a person familiar with the matter. Though existing phones are expected to keep functioning largely as usual for now, users could lose some app functions, including some artificial-intelligence and photography features, the person said.

In a separate move, German chip maker Infineon Technologies AG said it was terminating the delivery to Huawei of some components originating in the U.S., in a sign that even non-U.S. suppliers to Huawei are being swept up in the U.S. trade restrictions. Infineon didn’t specify which components were affected by the action but said the “great majority” of products it sells to Huawei aren’t subject to trade restrictions.

Separately, Qualcomm Inc., San Diego, has suspended shipments to Huawei of its chips, and some employees have been told not to communicate with the Huawei side, according to a separate person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

Eoin Treacy's view -

Huawei is a Chinese national champion, so the Chinese government looks on the efforts to excise it from competing internationally as a direct afront to the Made in China 2025 program which is one of Xi Jinping’s central policy objectives. There is no Chinese company with an operating system capable of replacing Android. Until now they never needed one but we can be sure this sequence of events is going to further accelerate the drive towards Chinese technological independence, however long that takes.



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May 16 2019

Commentary by Eoin Treacy

Stock Rally Gains Momentum on Risk Bet, Bonds Fall

This article by Randall Jensen and Vildana Hajric for Bloomberg may be of interest. Here is a section:

This has become a pattern where you get a big aggressive statement from the administration that might impact trade and then the market reacts aggressively as it did on Monday and then it seems to back off,” Chicago-based Susan Schmidt, head of U.S. equities at Aviva Investors, said in an interview. “Business is still doing well. I think if the market can stay focused on the facts and the data, then I think the market will hold.”

Strong economic data and earnings, along with hints from the Trump administration that it may be willing to compromise on trade has helped stocks rebound from the battering they took when the tariff battle with China flared. But the headlines have come fast and furiously, most recently President Donald Trump signed an order that’s expected to restrict Chinese telecommunications firms from selling in the U.S.

Eoin Treacy's view -

China’s dependence on global trade is far greater than the USA’s and the market has been voting with its feet by both supporting the Dollar, the bond market and the stock market since the trade war began.



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May 13 2019

Commentary by Eoin Treacy

A Fed Cut This Year Is Now Being Priced In as a Near Certainty

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

The rate on the January fed funds futures contract implies that the central bank’s benchmark will fall to 2.075% by the end of 2019. This is more than 25 basis points below where the effective fed funds rate stood Friday, showing traders are fully pricing in a quarter-point reduction. The implied rate on the contract ended last week at 2.15%.

This is happening as China threatens retaliatory tariffs on some American imports, an escalation in the trade war with U.S. President Donald Trump. The clash is fueling concern about economic growth, prompting a key part of the U.S. yield curve to invert again -- a sign to many that the risk of a recession has increased.

While “China/U.S. trade ripple effects certainly affect the Fed’s outlook, I think this is more of a macro move,” said Todd Colvin, senior vice president at futures and options broker Ambrosino Brothers in Chicago. “It’s not about whether or not the Fed sees policy shifts, that is, as much as it’s looking at
global growth woes, or increased market volatility.”

Eoin Treacy's view -

Jay Powell probably didn’t bargain for the environment he has been presented with since taking the helm of the Federal Reserve. Reducing the size of the balance sheet was supposed to be part of the re-arming of monetary policy to provide for the next crisis. It turned out to be the primary cause of the volatility last year and offered graphic evidence of just how addicted to liquidity the market is.



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May 13 2019

Commentary by Eoin Treacy

Funds Flock to Dollar on Bets Markets Underpricing Trade Divide

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

Uncertainty over how the dispute would be resolved in the one-month deadline set by Washington will reinvigorate a hunt for haven assets in a world already hampered by slowing growth.

An easy bet will be to short the expected losers: risk-sensitive currencies from Asia to South America, they say. “To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business.

“Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.” There’s a 60% chance that China and U.S. won’t reach a deal in the coming weeks, according to analysts at Australia and New Zealand Banking Group Ltd., after last week’s talks laid bare divisions including the removal of existing tariffs and a breakdown in trust. While both nations plan to continue negotiations, traders are waiting for Beijing’s retaliation measures after Washington slapped more duties.

Eoin Treacy's view -

The Chinese renminbi has long been used as policy tool and tariffs being imposed on a wider range of goods, there is a clear argument for having a weaker currency. The country is obviously going to experience some difficulties from tariffs imposed on exports to one its largest trading partners but the potential for domestic inflation to spike on the back of a weaker currency is likely to limit the scale of devaluation.



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May 09 2019

Commentary by Eoin Treacy

Trump, China Signal Harder Stands Ahead of High-Stakes Talks

This article by Shawn Donnan, Jenny Leonard and Miao Han for Bloomberg may be of interest to subscribers. Here is a section:

But the mood on both sides going into the talks appears to be hardening with Lighthizer calling members of Congress ahead of the discussions to warn that a deal this week is unlikely, according to people familiar with the conversations. While Trump on Wednesday insisted that Liu was coming to make a deal and dubbed him a "good man," he later told a rally of supporters that China "broke the deal" by backsliding on prior commitments, leading him to order higher tariffs.

China has disputed Trump’s characterization that the country reneged. But it has also sent its own signals that a deal could take time.

Unlike in some of his previous visits to Washington, Liu is not traveling with the designation "special envoy" of Xi Jinping, according to people briefed on his trip. Chinese officials’ public statements have also hardened in recent days with Beijing vowing to retaliate against Trump’s tariff increase and rejecting the idea that it has reneged on any commitments made during the months of tough negotiations that have led to this week’s showdown.

“China is credible and honors its word and that has never changed,” Commerce Ministry Spokesman Gao Feng told reporters on Thursday.

The Ministry of Commerce also announced it would soon publish details of new retaliatory tariffs.

Eoin Treacy's view -

Haggling is a part of Chinese culture and nothing is agreed until everything is agreed is a common tactic. Fawning over one item to distract attention from the real intent of the negotiation, only to introduce that object later in a backhanded manner, in order to get a better price is also common. Why would trade negotiations be any different. Reintroducing points already considered settled appears to be a central tactic in Chinese negotiating style but that is normal in all Chinese dealings rather than being an individual tactic to the trade negotiations. 



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May 09 2019

Commentary by Eoin Treacy

Trump Trade Tweets Send Grain Markets Diving to 42-Year Low

This article by Michael Hirtzer and Shruti Date Singh for Bloomberg may be of interest to subscribers. Here is a section:

“The U.S.-China deal sentiment is being unwound,” Joe Davis, director of commodities at Futures International LLC, said in a message. “There’s a zero percent chance of a deal by tomorrow -- it was almost a 100 percent chance last week.”

Soybeans have become something of a poster child of the trade dispute. China, the world’s biggest consumer, has mostly shunned imports from farms in rural American communities that voted for Donald Trump in 2016. Meanwhile, supplies from the 2018 harvest piled up in silos, bins and bags across the U.S. Midwest.

On Thursday, July soy futures in Chicago fell as much as 2.5 percent to $8.065 a bushel, the lowest since the contract debuted in late 2015.

Eoin Treacy's view -

China has been slow rolling or banning purchases of US grains has had a material effect on the price of these commodities and on the welfare of farmers dependent on selling them. With trade tensions still high these commodities came under renewed pressure today.



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May 08 2019

Commentary by Eoin Treacy

Why cheap coffee means more migrants at the border

This article by Paul Hicks and Dan McQuillan for the Houston Chronicle may be of interest to subscribers. Here is a section:

In recent years, their challenges have increased. Climate change stretches the dry season, or makes rainfall erratic. Last year some farms went up to 45 days without rain. The farmers watched their maize and bean plants wilt and die. Then they reaped only more debt from their meager coffee harvest.

Eoin Treacy's view -

In normal circumstances when the price of a commodity drops below economic production levels supply dwindles. That eventually contributes to recovery.



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May 06 2019

Commentary by Eoin Treacy

Can the gold industry return to the golden age?

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

Eoin Treacy's view -

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

Miners of all hues are in the extraction business and that comes at a cost which varies based on both internal and external factors. When the commodity price is low, they have no choice but to mine the richest ore bodies available because to do otherwise would likely lead to insolvency. When prices rise, they engage in M&A activity because they have to replace that ore because grades have deteriorated.



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May 03 2019

Commentary by Eoin Treacy

Gold Futures Rise as Traders Focus on Stalled U.S. Wage Growth

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

Gold, coming off three straight monthly losses, got a lift as the wage data reassured investors that signs of moderate inflation will continue to stay the Fed’s hand on rates. Low rates are a boon to gold, which doesn’t pay interest. Fed policy makers reiterated their patient stance this week as Chairman Jerome Powell noted “very strong job creation’’ and said low inflation may be transitory.

“There was disappointing data on the wage-inflation side, and just puts a hint of doubt into the idea that low inflation is transitory,” Ryan McKay, a strategist at TD Securities in Toronto, said by phone. “Gold has been under a lot of pressure since the Fed comments this week, and this helps ease some of that.”

Eoin Treacy's view -

The market was disappointed the Fed did not bring forward the end of quantitative tightening from September to June but one way or the other the process will be complete by the end of the summer. With the Fed on pause it is unlikely they are going to raise rates without a good reason and quantitative tightening’s end is being priced in. The volatility on the Dollar this week, suggests indecision among investors as to its ability to continue to rally.  



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April 29 2019

Commentary by Eoin Treacy

Perspectives for the Clean Energy Transition

This report from the International Energy Agency may be of interest to subscribers. Here is a section:

In contrast to current trends, the Faster Transition Scenario sets out a vision for an extremely ambitious transformation of the energy sector. Energy-related emissions peak around 2020 and drop 75% to around 10 gigatonnes of CO2 (GtCO2) per year by 2050. The carbon intensity of the power sector falls by more than 90% and the end-use sectors see a 65% drop, thanks to energy efficiency, uptake of renewable energy technologies and shifts to low-carbon electricity.

Electrification plays a major role in the transition, combined with clean power generation. Electricity’s share in final energy reaches about 35% by 2050, compared to less than 20% today. That growth is mainly due to adoption of heat pumps in buildings and industry, as well as a swift evolution in transport. Efficiency improvements keep electricity demand for other end uses, such as lighting and cooling, relatively stable, while access to electricity improves worldwide.

Eoin Treacy's view -

One of the biggest challenges facing the environment is the emotionality of the debate. It is almost impossible to discuss objective facts versus subjective opinion. Until this century there was no record of a hurricane in the South Atlantic, but now there have been three. Baobab trees that stood for thousands of years in Africa are dying and coral bleaching is taking over an increasingly large percentage of the world’s reefs. These are facts that point toward a changing climate.



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April 26 2019

Commentary by Eoin Treacy

April 18 2019

Commentary by Eoin Treacy

On Target

Thanks to Martin Spring for this edition of his ever-interesting letter. Here is a section on the coal market which I found particularly illuminating: 

While climate-change activists make a lot of fuss about the US, where emission of greenhouse gases has been in decline, they aren’t demonstrating loudly about China -- which attacks developed countries for not doing enough, while itself doing most to worsen it,

The New York Times reports that China, the world’s leading emitter of greenhouse gases from coal, now admits it’s burning up to 17 per cent more coal than its government previously claimed when it signed up for the Paris accord.

And it’s making things worse. Across China the government is building a fleet of new coal-fired stations with 259 gigawatts of capacity, while outside the country it’s financing even more new coal plants, providing $36 billion for 399 gigawatts.

“Chinese bankers and project planners like coal-backed projects because they are cheap,” says the energy consultancy IEEFA. “While they are restricted by Chinese pollution and emissions targets at home, they are free to fund coal-backed projects abroad.”

Eoin Treacy's view -

The standard of living attained by China’s middle class has resulted in a clear call for cleaner air and the government is intent on showing progress. However, there is no getting around the fact that coal fired power stations are cheap to build and run and are very reliable. Moreover, China has plenty of experience building them and there is a ready market for coal in emerging markets, not least in India and increasingly Africa.



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April 15 2019

Commentary by Eoin Treacy

Glencore's Congo Unit to Start Shipping Some Cobalt Again

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

Glencore Plc’s Democratic Republic of Congo unit will restart some cobalt exports after it halted sales last year due to low levels of radioactivity.

About 23 percent -- or 930 tons -- of the cobalt produced at Katanga Mining Ltd.’s Kamoto mine since January complies with regulations on uranium content, the company said in a statement. Katanga is controlled by Glencore and owns 75 percent of Kamoto.

The unit halted sales of cobalt in November after detecting radiation and said that a plant to remove the contamination would be ready this year. The suspension of sales came after prices for the metal used in rechargeable batteries collapsed on growing concerns about oversupply.

Glencore said at the time that it planned to stockpile cobalt supplies until the middle of this year. Kamoto is Glencore’s second-biggest source of the metal in Africa, producing about 11,100 tons last year.

Glencore has a long history of trimming mine supply to match demand, and has criticized rivals for producing too much and depressing prices. The Swiss commodity giant curtailed zinc output at mines in Australia, Peru and Kazakhstan in 2015 when prices languished at six-year lows.

Eoin Treacy's view -

Cobalt plummeted in value last year as substitution concerns, slowing Chinese car demand and a peaceful transition of power in Congo sapped the bubbly enthusiasm that had prevailed ahead of the peak. The relative strength of copper and nickel are additional considerations since cobalt is a by-product of mining those metals.



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April 12 2019

Commentary by Eoin Treacy

PBOC Support to Stay Even Amid Credit Upswing

This article by Chang Shu and David Qu from Bloomberg Economics may be of interest to subscribers. Here is a section:

The robust rate of credit expansion this year doesn’t rule out continued monetary easing. We think that’s still needed to help the economy find a solid footing, though the focus should increasingly shift to targeted measures.

Broad-based easing is still needed to provide liquidity to the banking sector so it can sustain the expansion in credit. The need is higher in 1H and we continue to see the possibility of reductions in the reserve requirement ratio, with the first potentially coming as early as in April.

There’s less of a necessity for an interest rate cut, in our view.

Targeted measures are important for channeling funding to sectors in greater need of funding -- small, private firms -- to lower their effective borrowing costs.

Eoin Treacy's view -

The result of the People’s Congress was to declare victory in the containment of the shadow banking sector and to signal a clear willingness to boost credit growth to reinvigorate speculative activity. That has resulted in the stock market popping on the upside, reversing the pattern of deterioration that prevailed for all of 2018.



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April 11 2019

Commentary by Eoin Treacy

Gold and Other Metals Decline on 'Surprise' U.S. Data

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

Most measures of the PPI are a bit stronger than expected, as well as jobless claims,” Tai Wong, head of base and precious metals derivatives trading at BMO Capital Markets, says in phone interview  With the “surprise positive economic data, especially the PPI, if you are thinking that the Fed’s next move is going to be a rate cut, this moves that further away” “It will probably keep the Fed neutral for longer”

Eoin Treacy's view -

The current economic environment represents the sweet spot between when the central banks of the world pause in raising rates and when economic activity continues to expand. Those are exactly the kinds of conditions in which we see cyclical sectors leveraged to the growth of the global economy turn to outperformance. So why were commodities weak today on the back of stronger economic news?



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April 05 2019

Commentary by Eoin Treacy

The great Steelmageddon debate

This report by Timna Tanners for BoA Merrill Lynch, dated March 25th 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 have been a lot of headlines about the surge in iron-ore prices but the chart tells a more nuanced story. Spot prices at Qingdao port have been ranging below $80 since early 2007 and have bounced from the $60 area since the initial rebound in 2016. The price is now trading back above $80 and a sustained move below the trend mean would be required to question recovery potential.



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April 04 2019

Commentary by Eoin Treacy

Production of battery grade cobalt blows up First Cobalt's stock

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

“Producing a battery grade cobalt sulfate is one of our most significant accomplishments as the majority of refined cobalt for the electric vehicle market is produced in Asia. With no cobalt sulfate production in North America today, First Cobalt stands to become the first such producer for the American electric vehicle market," Trent Mell, President & CEO said in the press release.

“Electric vehicle demand in North America will keep growing," Henrik Fisker, First Cobalt director and CEO of electric vehicle manufacturer Fisker Inc., said. "Companies such as Fisker continue to introduce new, affordable EV models to the market. Automakers and battery manufacturers have a responsibility to ensure any materials we use in our batteries are sourced in an ethical way.  The restart of the First Cobalt Refinery is an important step towards producing battery materials in America with a clean record from mine to machine.”

Eoin Treacy's view -

Cobalt has bubbly characteristics by the time it peaked last year. One of the oldest adages in the commodity markets is “the cure for high prices is high prices” and the surge in cobalt prices encouraged new production and a drive towards greater consumption efficiency. The peaceful transition of power in Congo, the world’s largest producer, represented an additional bearish sign and contributed to the crash.



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April 03 2019

Commentary by Eoin Treacy

Palladium Sags as Prices Gyrate on Auto Demand Concern

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

Palladium headed for the first decline in four sessions as U.S. President Donald Trump’s threat to shut down the border with Mexico added to concerns over the outlook for the auto industry, the biggest consumer of the metal.

Analysts said a border closing would rapidly ripple through a U.S. economy in which supply chains are closely integrated with Mexico, especially hitting the carmakers. Volatility in palladium, used in auto catalysts to curb pollution, has surged in the past week as investors assess slowing vehicle sales against the outlook for supply shortfalls that drove prices to record highs last month.

Eoin Treacy's view -

Something that does not get discussion any longer is the fact the platinum is primarily used in diesel catalytic converters but platinum and palladium are equally useful in petrol cars. The question of whether to use one over the other is down to the cost of retooling and the relative abundance of palladium over platinum. This was subject that got some coverage back in the early 2000s but I find it peculiar that is not a topic today.

Here is a section from a report by Johnson Matthey explaining the difference:

The role of platinum in catalytic converters is to oxidise carbon monoxide (CO) and hydrocarbons. Platinum is particularly effective at this under oxygen-excessive conditions, so is often the metal of choice for diesel applications. For petrol-powered vehicles (where there is a balance between reductants and oxidants in the exhaust gas), platinum and palladium can be equally effective, and so the choice is often made on the basis of relative cost. The three-way catalyst used for petrol vehicles must also be able to reduce NOx to nitrogen as well as oxidise CO and hydrocarbons – that is why rhodium is generally used in addition to platinum or palladium.



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April 01 2019

Commentary by Eoin Treacy

Flooding prompts criticism of way Missouri River dams run

This article from ky3.com may be of interest to subscribers. Here is a section:

"I was told point-blank, 'Flood control is not our top priority. It is not. Period.' They were very firm on that point," Hawley said. "I said, 'You've got to be kidding me.'"

Corps officials say they work to balance all the priorities Congress approved when operating the dams, but no single priority outweighs all the others. Their operating model tries to maximize the benefit to several priorities when possible.

Hawley said Congress should consider "serious reform," such as deciding if the Corps should be taken out of the Department of Defense and placed under direction of another agency, such as the Department of Transportation or the Department of the Interior.

The Corps manages the Missouri River's system of dams and locks and decides when and how much water is released from reservoirs into the river. The severe flooding this month in Nebraska, Kansas, Iowa and Missouri has renewed criticism of the Corps' management of the river.

Officials estimate that the flooding caused more than $1 billion of damage to farms in Nebraska and Iowa, destroying stored crops and killing livestock. And the damage total will grow as floodwaters recede and other states assess conditions.

Eoin Treacy's view -

Snow melt flowing directly into rivers because the ground was still mostly flooded, coupled with rain helped exacerbate the flooding. However, it is also worth considering that the predominance of the green movement is setting priorities for river management is an additional cause of the extent of flooding.



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March 28 2019

Commentary by Eoin Treacy

Lynas looks to WA, not Wesfarmers, for its Malay solution

This article by Hamish Hastie, Colin Kruger and Darren Gray for the Sydney Morning Herald may be of interest to subscribers. Here is a section:

"These discussions are preliminary in nature and no formal submission for any change has been presented to the EPA," a spokeswoman for the agency said.

The discussions could help solve the problems in Malaysia which threaten the company's future, and made it vulnerable to what analysts and investors described as a low-ball bid from Wesfarmers on Tuesday.

Lynas faces an uncertain future after the Malaysian  government imposed strict new conditions on its billion-dollar Malaysian operation which could force it to shut down in
September.

This includes the permanent removal of a residue with naturally occurring radiation, Water Leached Purification Residue (WLP), from Malaysia.

According to institutional investors, Lynas discussed plans last month to relocate some of its rare earths processing  back to Western Australia. All processing is currently handled
in Malaysia.

Lynas chief executive Amanda Lacaze denied there was any plan to extract and retain the controversial WLP residue in WA - the state where it is mined - but did confirm it planned to expand its processing operations outside of Malaysia.

Eoin Treacy's view -

A great deal of capital was invested in new rare earth metal projects after the price spike caused by China limiting exports in 2010. Lynas is the only one of those that made it to production and refining of heavy rare earth metals.



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March 27 2019

Commentary by Eoin Treacy

Palladium hit by 'Barrage of Selling'

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

The rally in the U.S. dollar triggered an investor exodus from precious metals on Wednesday. Spot palladium led declines as mounting concerns over global growth threaten the outlook for demand for the commodity used mostly in auto catalysts. The slump accelerated as the price of the least-liquid asset among its peers broke below the $1,500-an-ounce level, triggering “a barrage of selling,” Miguel Perez-Santalla, a sales and marketing manager at refiner Heraeus Metals New York LLC, said.

Eoin Treacy's view -

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March 26 2019

Commentary by Eoin Treacy

Gold: Ringing the bell

Thanks to a subscriber for this note from UBS 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 clearest rationale for a positive view on gold is when we have evidence of negative real interest rates. That is becoming an increasingly likely scenario since global central banks are desperate to stoke inflation and are willing to allow their economies to run hot in order to achieve a self-sustaining cycle. That further supports the argument we are at the top of the interest rate cycle.



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March 25 2019

Commentary by Eoin Treacy

Investment Strategy: 'Trading Sardines?'

Thanks to a subscriber for this note from Jeffrey Saut who I had the pleasure of meeting at the American Association of Professional Technical Analysts's (AAPTA) conference on Friday. Here is a section:

"When investors hear yield curve inversion, they automatically think 'recession.' That’s because every recession since 1962 has been preceded by an inversion. But, not every inversion has been followed by a recession, so keep that in mind."

Myth number two is that we are into the late part of the business cycle. If that is true why are the late cycle stocks acting so poorly? I have argued that the economic downturn was so severe, and the recovery so muted, that what we have done is elongate the mid-cycle. This implies there is much more time until the mid-cycle ends and the late cycle begins.

Myth number three has it that earnings are going to fall off a cliff. I do not believe it. Certainly earnings momentum has slowed, but earnings continue to look pretty good to me. And, if the earnings estimates for the S&P 500 are anywhere near the mark, the SPX is trading at 16.3x this year’s earnings and 15.5x the 2020 estimate. I think with 2Q19 earnings myth number three will evaporate.

As for Friday’s stock market action, readers of these missives should have found last week’s action as no surprise. I have talked about the negative “polarity flip” that was due to arrive last week for a few weeks. How deep the pullback/pause will be is unknowable, but I have stated I do not think it will be much. It was not only the economic data, and PMIs, that sacked stocks, but as I have repeatedly stated it was also the Mueller Report. The result left the senior index lower by ~460 points and the S&P 500 (SPX/2800.71) resting at the lower end of my support zone of 2800 – 2830.

Eoin Treacy's view -

As a brief aside. I am now the membership chair for the organisation, which is a member of IFTA. If anyone would like to pursue membership, has at least seven years of professional experience using technical analysis, and enjoys a collegiate environment for sharing ideas and methodolgy please reach out. 

The focus of Jeffrey’s Saut’s talk at the conference was to reiterate his view we are in a secular bull market. I felt a lot more comfortable when I went to conferences and was the only person making that call. It is not a majority opinion today but there are definitely more people espousing it.



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March 20 2019

Commentary by Eoin Treacy

Fed Sees No 2019 Hike, Plans September End to Asset Drawdown

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

“This was definitely a dovish outcome and even a bit of a surprise,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. “The Fed took out the entire rate hike scenario for this year.”

Reaction in markets confirmed the dovish interpretation. Stocks pared losses, the dollar turned lower and Treasuries rallied. Traders lifted the odds of the Fed cutting rates. In a separate statement Wednesday, the Fed said it would start slowing the shrinking of its balance sheet in May -- dropping the cap on monthly redemptions of Treasury securities from the current $30 billion to $15 billion -- and halt the drawdown altogether at the end of September. After that, the Fed will likely hold the size of the portfolio “roughly constant for a time,” which will allow reserve balances to gradually decline.

Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20 billion per month. The initial investment in new Treasury maturities will “roughly match the maturity composition of Treasury securities outstanding,” the Fed said. The central bank is still deliberating the longer-run composition of its portfolio and said “limited sales of agency MBS might be warranted in the longer run.”

Eoin Treacy's view -

The Fed has cemented its about turn around with today's statements. That confirms a somewhat bearish tilt in their reasoning since the only way a pause can be justified is if growth figures are downgraded.



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March 19 2019

Commentary by Eoin Treacy

Under "Basel III" Rules, Gold Becomes Money!

Thanks to a subscriber for this article from Zero Hedge which may be of interest. Here is a section:

If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money. It may be no coincidence that as March 29th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate 

And

The only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.

Eoin Treacy's view -

The Federal Reserve values the gold certificates it holds from the Treasury at $42 an ounce which is the statutory gold price set in 1973. It is unlikely that any change to the way the Bank of International Settlements treats gold will alter that valuation.  



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March 18 2019

Commentary by Eoin Treacy

China Wants Its Stock, Bond Markets to Step Up Funding Role

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

“We need to create a strong capital market,” Guo Shuqing, the country’s chief financial regulator, said at the National People’s Congress, China’s top legislative session which wrapped up last week. “We could do more work especially in the capital market -- stock market, bond market -- for direct financing.”

China is trying to transform how it funds its economy after decades of relying on state-run banks that benefit from the implicit backing of the nation’s treasury -- but tend to direct most loans to other government-owned companies. The difficulty that small and private firms have in securing funding was one reason for an explosion of shadow-banking, and the rapid increase in debt and risk that came with it.

Spurred to act by a record $34 trillion debt pile, authorities in recent years have cracked down on risky loans, squeezing businesses that relied on such funding. While leaders including Guo have called on the banks to do more to finance private companies, lenders are grappling with their own concerns about loan quality and default rates. Even so, outstanding banks loans in China have increased by about 27 percent since 2016, while capital-market funding rose by around 15 percent.

“We shouldn’t put all the pressure on banks,” Xu Kuijun, an NPC delegate and vice president at Bank of China Ltd. In Shanghai said in an interview at the sidelines of the gathering. “We have to rely more on direct financing, and capital markets should do more.”

Eoin Treacy's view -

There is nothing says “We are done with tightening” quite like the statement “capital markets should do more”. The dominant policy narrative in China for the last three years has been the need to curtail speculation and most particularly in the shadow banking sector.



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March 15 2019

Commentary by Eoin Treacy

China makes major U.S. pork purchase despite steep import tariffs, as hog virus takes toll

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

Buyers in the world’s biggest hog producer and pork consumer struck deals for the meat despite import tariffs of 62 percent imposed by China on U.S. pork as a consequence of the trade war between the two countries.

The duties had slashed China’s imports of U.S. pork from companies such as WH Group Ltd’s Smithfield Foods since last summer.

The sale of 23,846 tonnes of U.S pork in the week ended March 7 comes after a months-long outbreak of African swine fever in China that has spread to 111 confirmed cases in 28 provinces and regions across the country since August 2018.

Eoin Treacy's view -

Pork is one of the most popular proteins in China. Rising living standards have only boosted demand for what many people consider to be a staple and with so many pigs dead from disease there is a shortage.



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March 13 2019

Commentary by Eoin Treacy

Investors Are Still Waiting for a Gold-Mining Merger Wave

This article by Alistair MacDonald and Ben Dummett for the Wall Street Journal may be of interest to subscribers. Here is a section:

Miners and bankers give a variety of reasons for why the gold mining merger wave hasn’t come. The poor performance of gold miners’ shares means that sellers want to hold out for better valuations and buyers are reluctant to use shares they believe are undervalued for acquisitions.

The S&P TSX Global Gold Index is down 51% since its 2011. The S&P 500 has doubled in value in that time.

The industry as whole has a poor record in M&A. Miners overspent during the decadelong bubble that ended in 2011. That put off investors and made some executives wary of doing deals.

In 2016, PwC calculated that big miners had written off $200 billion of the value in acquisitions and projects over the previous five years.

Executives may be reluctant for another reason, investors say. They don’t want to put themselves out of a well-paid job by merging or selling their mines.

Eoin Treacy's view -

Ore grades at gold mines have been contracting for years but the massive investment in additional new greenfield sites during the bull market did not result in massive new sources of supply. Nevertheless, mining productivity remains high because production is more efficient today because of technological improvements.



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March 12 2019

Commentary by Eoin Treacy

Wheat Futures Climb Most Since August as Texas Ratings Decline

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

May wheat futures up as much as 4.4% to $4.47 1/2 a bushel in Chicago.
Intraday advance is biggest since Aug. 2
Prices are rebounding from May contract record low reached Monday
NOTE: Winter-wheat conditions in Texas drop, USDA data showed Monday
Texas good/excellent rating lowered to 28% from 36%
Futures also climb amid short covering, Terry Reilly, senior commodity analyst for grain and oilseeds for Futures International in Chicago, says by telephone

Eoin Treacy's view -

There was also news today that Ukraine’s wheat crop is coming in ahead of expectations so there is no global shortage of the commodity. Nevertheless, there is clear evidence of a short-term oversold condition and today’s upward dynamic is the first positive news for wheat in months. Potential for some additional short covering has certainly improved.



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March 11 2019

Commentary by Eoin Treacy

Rand Bears in Ascendance as Risks Rise From Moody's to Poll

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

Short Positions
Investors in the futures market are becoming more pessimistic, with non-commercial short-rand contracts outweighing longs, CFTC data show. That’s a turnaround from February, when traders were net long-rand for a brief period.

Selling Out
Foreign investors are getting out of South African bonds and stocks. Non-residents have been net sellers of government bonds at an average rate of 115 million rand ($8 million) a day over the past month -- not a huge number, but a turnaround from mid-February, when inflows averaged 434 million rand a day. And offshore investors have been net sellers of South African equities for the past 14 days, the longest streak since October 2017.

Eoin Treacy's view -

What I find particularly interesting about this article is it provides a very good example of a reporter providing details of what people have already done with their money.



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March 05 2019

Commentary by Eoin Treacy

Nickel Rallies as Steel Markets, EVs Lure Investors

This article by Mark Burton and Caleb Mutua for Bloomberg may be of interest to subscribers. Here it is in full:

Nickel climbed to a fresh six-month high in London as rallying steel markets, falling inventories and rising electric-vehicle sales bolster the outlook for the metal. Industrial commodities increased as markets were soothed by China’s announcement of a major tax cut and optimism that a resolution with the U.S. over trade is in reach. Prices advanced even as the world’s biggest consumer trimmed its growth target for the year. Steel futures are up this year and the outlook appears brighter as China plans to trim the value-added tax rate that covers the manufacturing sector and as the usage of electric-vehicle batteries gains momentum.

China policymakers seek to pull off a gradual deceleration while grappling with a debt legacy Nickel inventories in LME warehouses hit the lowest since 2013Copper inventories fall to 118,600 tons, the lowest since May 2008.


“We’ve seen that metals like nickel, zinc and tin, which feed into the ferrous sector, have all been on a bit of a tear recently,” Robin Bhar, an analyst at Societe Generale, says by phone from London “Nickel could still be the darling of the complex, given the uplift that you have from batteries”“ Chinese stimulus measures are aimed at goosing consumption and helping manufacturing, so the best-positioned metal is probably copper,” Tai Wong, head of base and precious metals derivatives trading at BMO Capital Markets, says by email “I think nickel is a spec play and if the rolling ball of money is back, it can definitely drive it a long way”

Eoin Treacy's view -

8:1:1 battery chemistries in the Tesla Model 3 are going to be deployed in just about all electric cars in the coming years. That represents a significant growth story for nickel but most particularly for nickel sulphide which is a purer form of the metal that falls outside of the delivery parameters set for futures trading at the LME. That suggests there is going to need to be substantial investment in higher grade production of the metal.



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March 04 2019

Commentary by Eoin Treacy

Does anyone still ask about silver?

Thanks to a subscriber for this report from UBS. Here is a section:

Eoin Treacy's view -

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

Interest in precious metals has perked up over the last six months as economic figures have deteriorated which increased the scope for monetary and fiscal intervention. The potential for the trade war to ease is weighing on gold because of a perception that a hedge is not as necessary. However, the trend towards fiscal laxity may be boosted by this development rather than restricted so there is a clear reason to think about precious metals as they dip.  



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March 01 2019

Commentary by Eoin Treacy

February 28 2019

Commentary by Eoin Treacy

Rio Tinto investors partying like it's 2014

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

Rio Tinto’s (ASX, LON:RIO) investors will be celebrating Christmas in February, as the miner is giving them a $4 billion special dividend, or $2.43 cent a share, after posting its highest annual underlying earnings since 2014.

The world’s second largest miner reported Wednesday a 2% increase in underlying profit, up to $8.8 billion, beating market forecasts of $8.5 billion on the back of rising revenue of $40.5 billion. The special dividend also came after a string of asset divestments, including Rio’s entire interest in Indonesia’s Grasberg mine for $3.9 billion.

Since Jean-Sébastien Jacques took the helm in July 2016, Rio has focused on cutting costs, generating cash and returning as much of it as possible to investors through dividends and share buybacks.

Last year, the company waved all its coal assets goodbye and is now the only major miner with a fossil-fuel-free portfolio. In total, Rio has sold $12 billion worth of unwanted assets since 2015.

Eoin Treacy's view -

The special dividend got shaved off the share’s price in the last couple of days as it tests the region of the June peak near 4500p. Nevertheless, a sustained move below the trend mean would be required to question medium-term scope for continued upside.



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February 27 2019

Commentary by Eoin Treacy

Barrick-Newmont merger would leave up to $7B of assets up for grabs

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

Canada’s Barrick Gold's (TSX:ABX)(NYSE:GOLD) hostile $17.8 billion bid for rival Newmont Mining (NYSE:NEM) could free up a group of assets the combined company would no longer consider key, such as their Kalgoorlie super pit 50/50 joint-venture in Western Australia.

After launching the offer on Monday, Barrick chief executive officer Mark Bristow said he had already been contacted by parties that have expressed interest in the company’s Australian assets.

The divestment goals announced by the Newmont-Goldcorp tie-up and the recent Barrick-Randgold merger provide “a significant opportunity” for ASX-listed names to acquire assets, according to UBS analysts.

“Australian gold producers have stronger balance sheets than their North American peers. We think Evolution and Northern Star are best placed to make accretive acquisitions given their strong track records in this area,” said UBS in a note last month.

Market rumours indicate that one of the potential buyers could be Melbourne-based Newcrest Mining (ASX:NCM), especially after Bristow said there was “a very good chance” of some Australian operators becoming involved.

Eoin Treacy's view -

The pace of M&A activity in the gold mining sector remains brisk. There is a good reason for that. Many miners have all-in sustaining costs in the order of $800-$900 and the price of gold is north of $1300. Considering the share prices of many gold miners are still reasonably close to multi-year lows it makes a lot more sense to buy and established company with production capacity already paid for than to engage in the expensive and risky business of exploration and development of greenfield sites.



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February 22 2019

Commentary by Eoin Treacy

U.S. Bets on China's Special Envoy in Trade Talks

This article by Lingling Wei and Bob Davis for the Wall Street journal may be of interest to subscribers. Here is a section:

While Chinese negotiators offered to stop providing government subsidies that distort prices and put Western rivals at a disadvantage, they haven’t so far produced a list of subsidies they would be willing to eliminate, the people said.

Instead, the Chinese side so far has focused its offer on greater purchases of U.S. agricultural and energy products such as soybeans, crude oil and liquefied natural gas, they said.

Whatever deal is struck, the U.S. is also seeking guarantees it will be enforced and a means to resolve disputes.

“It’s one thing to write something on a piece of paper,” said Secretary of State Mike Pompeo on Fox Business Network on Thursday. “It’s another thing to have enforcement mechanisms. And I know our trade team is hard at work, making sure that the American people get that.”

Eoin Treacy's view -

How likely is it that the USA and China will reach a trade agreement? I think it comes down to two factors. What is it that the USA wants from a deal and what is China willing to give up?



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February 22 2019

Commentary by Eoin Treacy

South Africa Mining Industry Warns on Week-Long Strike Threat

This article by Paul Burkhardt and Renee Bonorchis for Bloomberg may be of interest to subscribers. Here is a section:

South Africa’s precious-metals mines are among the world’s deepest and most labor intensive and companies are under constant pressure to contain costs. Yet high unemployment and inequality mean labor relations are inevitably fraught.

AMCU’s plans for an industry-wide strike marks a return to escalated conflict between South African mining companies and workers. In 2014, the union held the longest-ever strike in the world’s largest platinum industry. Wage negotiations for producers of the metal are expected this year.

“It is unfathomable that AMCU would willingly call for secondary strikes in an industry that is already in jeopardy,” Minerals Council Chief Executive Officer Roger Baxter said in an emailed statement on Friday. “This would undermine employment and the livelihoods of millions of dependents.”

 

Eoin Treacy's view -

The primary reason there is an uptick in South African worker activism is probably more to do with the impending election in May rather than any other single factor. There is a war going on for the heart of the ANC and Ramaphosa has a clear challenge ahead of him in trying to improve the efficiency of the economy. The mining unions are a significant force politically, but also have a vested interest in securing as good a deal as they can from mining companies before the uncertainty of the election.



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February 21 2019

Commentary by Eoin Treacy

On Target February 23rd 2019

Thanks to a Martin Spring for this edition of his letter which may be of interest to subscribers. Here is a section:

Central banks seem to reckon that the yellow metal is a good investment. They’re buying it for their reserves at the highest rate for almost half a century. Last year their net purchases reached $27 billion – 74 per cent more than in 2017.

Russia, Turkey and Kazakhstan were the biggest purchasers as the deteriorating political climate spurred them to convert some of their foreign reserves out of dollars. Hungary increased its bullion holdings tenfold. Even Poland is buying tons of gold.

It’s clear that the down-trend in gold prices since 2011 came to an end last year. The metal’s price has been rising steadily since mid-August. Where is it heading this year?

“The macroeconomic and geopolitical climate is conducive to continued gains in both gold and silver, and the precious metals equities,” says American stockbroker Cantor Fitzgerald, given:

Gold’s recent and historical strong performance in a rising interest-rate environment.

Should inflation expectations rise, this typically is a very bullish leading indicator for gold and silver.

The inflection point where physical gold outflows from ETFs ceases and inflows resumed was reached in the final quarter of last year and inventory holdings have continued to climb.

Uncertainty and volatility in global equity, debt and currency markets draw investors to safe havens. There is considerable upside potential as “precious metals equities are still widely under-owned by sophisticated international investors.”

Eoin Treacy's view -

Gold is one of the most popular and yet misunderstood of all alternative assets. It is commonly perceived as a hedge against inflation but also does well during periods of deflation. It is perhaps better to think of it as a hedge against stealth inflation when negative real interest rates prevail.



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February 20 2019

Commentary by Eoin Treacy

Email of the day - don't pay up for commodities

I hope we can continue this discussion if we see further money flows into the gold sector. Taking note of Fullerisms " Never pay up for resources", "the need to be invested in case mania/euphoria occurs" and with reference to speculative investments "buy when sold down & sell when towering high above their EMA." As other subscribers will know, gold bull markets have strong drawing power and many of us need a sign on the wall "what the wise man does in the beginning the fool does in the end" from Howard Marks "Mastering the Market Cycle."

Eoin Treacy's view -

Thank you for this summary of adages focusing on the commodities sector. Gold continues to march towards the upper side of its seven-year base formation just below $1400. Investors are understandably getting excited about the prospect of a bull market that persists for more than a few months. That is particularly true because of the hedge gold offers against the potential for governments to blow out the debt markets with deficit spending and the impact that will have on their currencies.



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February 20 2019

Commentary by Eoin Treacy

Global Tin Giant Urges Government to Start Stockpiling Program

This article by Eko Listiyorini and Yoga Rusmana for Bloomberg may be of interest to subscribers. Here is a section:

“Indonesia wants exports to be more properly managed, if there’s an excess supply it’s better to set them aside as state reserves,” Jabin Sufianto, secretary-general of the Association of Indonesian Tin Exporters, said in an interview in Jakarta on Monday. “We currently export 100 percent of production, which means that we accept spot prices even if prices are bad.”

Southeast Asia’s largest economy has tried repeatedly in recent years to shore up prices of the metal used in electronics and tins by curbing production and sales, as well as making it mandatory for exporters to trade the commodity on a local exchange before shipment. Exports must also be inspected by government-appointed surveyors to check the quality and origin of ore used.

The plan from the association for a stockpiling program comes at a time of rising prices and predictions for a run of global deficits. It’s also been made just ahead of a presidential election in which resource nationalism is expected to feature as an issue in the campaigns. The trade minister will review the proposal and “there’s still a lot of discussion,” according to Jabin.

 

Eoin Treacy's view -

Producers don’t generally campaign so hard for market controls and supports unless their profitability is in danger. 



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February 18 2019

Commentary by Eoin Treacy

Central Banks and other institutions

This article from the World Gold Council may be of interest to subscribers. Here is a section:

Central bank net purchases reached 651.5t in 2018, 74% higher y-o-y. This is the highest level of annual net purchases since the suspension of dollar convertibility into gold in 1971, and the second highest annual total on record.1 These institutions now hold nearly 34,000t of gold.

Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and re-focus their attention on the principal objective of investing in safe and liquid assets. 

Eoin Treacy's view -

Many investors now pay a great deal of attention to ETF holdings of gold but governments remain significant accumulators of the metal. That is particularly true of Russia and China which are acquiring gold to insulate themselves from the US Dollar as geopolitical tensions bubble up.



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February 18 2019

Commentary by Eoin Treacy

China Stock Rally Accelerates as Momentum Hits Three-Year High

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

A rally in Chinese equities steepened Monday as bumper credit figures for January added to signs of increased stimulus.

The Shanghai Composite Index jumped 2.7 percent by the close, taking its rebound since a Jan. 3 low to 12 percent, as turnover on mainland exchanges reached a 10-month high. The small cap ChiNext index in Shenzhen, typically the most speculative part of the market, soared more than 4 percent. The surge weighed on government bonds, with the 10-year yield climbing the most in two months.

The nation’s equities, which were the world’s worst performing in 2018, are starting to take off as the new securities regulator eases curbs on trading and an economic slowdown spurs monetary easing. In a sign of how broad the rally has been, the relative strength of four major indexes have all climbed above 70 -- a level that signals to some traders an asset may be overheating. The last time that happened was May 2015, when the equity market was in a bubble.

Eoin Treacy's view -

I posted this chart of the impact tightening measures have had on the Chinese shadow banking sector a month ago. It is a clear signal both of the reasons for the slowdown in economic activity and the rationale the authorities now have to declaring the policy a success. It is increasingly likely that the Chinese authorities are now willing to start stimulating the economy again.



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February 15 2019

Commentary by Eoin Treacy

Email of the day on gold miner mergers

Thank you for your efforts in providing this valuable information and analysis of the markets to the collective. With the expectation of increasing M&A activities in the gold miners, what would you look for as candidates for take overs can you provide some suggestions.

Eoin Treacy's view -

Thank you for your kind words and this email which raises a question I have also been pondering. When we think about where the tide of M&A activity is heading in the gold mining sector, we can look at potential acquirers and their motivations for why they are buying. We can then look at what they might be interested in buying and whether there is likely to be competition for that asset.



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February 14 2019

Commentary by Eoin Treacy

For This Top Gold Miner, Joining M&A Rush Is A Last Resort

This article by David Stringer and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Newcrest Mining Ltd. could jump aboard the multi-billion dollar, deal-making rush that’s reshaping the top ranks of the gold sector -- but only if it has to.

The No. 3 gold producer by market value has set a deadline for the end of 2020 to increase its exposure to five so-called tier-one assets, meaning that it’s hunting for a project or mine to add to a roster of four mainstay operations and investments in Australia, Papua New Guinea and Ecuador.

Mergers and acquisitions are ranked as a “final pathway” to growth behind exploration work and partnerships with smaller companies on early-stage projects, Chief Executive Officer Sandeep Biswas said Thursday on an earnings call with analysts.

“We don’t need to do M&A, we are in the enviable position of owning two of the world’s premier long-life gold assets.”

Eoin Treacy's view -

New long-life, high grade gold assets are like unicorns. You just don’t see them very often. That is why the major gold miners have been so active in M&A recently. On top of that mines are wasting assets so miners have a proclivity for shopping for replacements. It seems inevitable Newcrest will deal at some stage but if they continue to wait, they will likely end up paying more for attractive assets later.



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February 07 2019

Commentary by Eoin Treacy

Thorburn Quits as National Australia Bank CEO After Inquiry Lashing

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

The yearlong inquiry uncovered a litany of wrongdoing across the industry, from charging dead people fees to advisers pushing customers into bad investments to meet bonus targets. National Australia staff accepted cash bribes to approve fraudulent mortgages and misled the regulator over a fees-for-no-service scandal.

“I acknowledge that the bank has sustained damage as a result of its past practices and comments in the Royal Commission’s final report,” said Thorburn, who will leave Feb. 28. “I recognize there is a desire for change.”

His replacement will have to restore customer trust in the lender and steer it through a tougher landscape of falling earnings, a sinking housing market and rising funding and compliance costs. The nation’s big-four banks also face more muscular regulators intent on punishing wrongdoers in court.

In further fallout from the inquiry, National Australia said it will delay the planned IPO of its MLC wealth management unit as fee income and commissions come under pressure.

Eoin Treacy's view -

David used to say he would not invest in banks on moral grounds. That is a clear reflection on the rather nefarious reputation of the industry to fall victim to its worst impulses to generate profits. Nevertheless, banks are important sources of credit for the economy; in every country. When they are under pressure either from reputational, regulatory or market risk their ability to create credit is inhibited and that represents a challenge for the market. The integral part they play in supplying credit also contributes to their knack of avoiding hefty fines.



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February 06 2019

Commentary by Eoin Treacy

Email of the day on lithium battery components

Following up to your recent post on Nickel strength, this article highlights the potential for major upcoming demand in the industrial metal and is potential good news for the related Sherritt & Norilsk shares noted in your post. 

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. Here is a section from the article:

“This means the supply of lithium, cobalt, nickel and manganese to produce the cathode for these cells, alongside graphite to produce battery anodes, needs to rapidly evolve for the 21st century," Moores testified.

Moores presented a chart based on the assumption that all of these megafactories are built and run at 100% capacity utilization.

"Under this scenario, lithium demand will increase by over eight times, graphite anode by over seven times, nickel by a massive 19 times, and cobalt demand will rise four-fold, which takes into account the industry trend of reducing cobalt usage in a battery," Moores testified.



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February 06 2019

Commentary by Eoin Treacy

Iron Ore Rises Near Two-Year High as Vale Disruption Spreads

This article by Jake Lloyd-Smith and Lynn Thomasson for Bloomberg may be of interest to subscribers. Here is a section:

As Vale’s troubles spread, analysts have said iron ore could keep heading higher and drive up costs for steelmakers. Commonwealth Bank of Australia predicted prices could rise above $100, adding that the move would be temporary if Vale successfully challenged the court order.

“Iron ore prices are likely to continue trending higher, as production is clearly being impacted above and beyond just the roughly 8 million tons per year from the Feijao mine, where the tragedy first occurred,” Jeremy Sussman, an analyst with Clarksons Platou Securities, said in an email.
Shares of other iron ore producers have rallied in response to higher iron ore prices. For example, Rio Tinto Group is on a 10-day streak of gains, with the shares up 15 percent this year.  Ferrexpo Plc has notched a 26 percent advance since the Vale dam breach.
 

Eoin Treacy's view -

The chances are that the damage done to Brazilian supply is temporary in nature and Vale will get back to close to full production at is other mining facilities relatively quickly. The broader point, however, is that the market is relatively tight following a quiet couple of years since the early 2016 rally.

 



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February 05 2019

Commentary by Eoin Treacy

Email of the day on Modern Monetary Theory

Thank you for mentioning MMT in the service

The most of us agree that applied MMT not necessarily leads to more growth (especially because in the reality part of the government spending is wasted in less than transparent submission processes, bureaucracy and corruption, hence it does not flow 100% into the economy process) but to more debt for future generations

However, it gives a useful framework for investors to better understand our modern world of FIAT currencies. A world in which classic economical doctrine and orthodoxy as I (we) learnt at university (pure monetarism, Fisher Theory and Schumpeterist “creative destruction”) fails to explain the modern world and the political influence

As you point out populism gels perfectly with MMT. And as long as populism is on the rise, we should maybe devote more time to understand MMT and try to profit as investors.

Interesting are the aspects related to the effect of interest rate hikes by the FED which MMT claims are inflationary and not disinflationary because hikes add income to the private sector that holds the government securities. In the same way they claim QT add interest bearing securities to the economy (via the banking system) and are also not disinflationary.

Also interesting is the stress on government spending as a source of Aggregate Demand and not just on the Debt with which this demand is financed. So national debt is the “private sector” asset.

I don’t know if I am a correct but from the perspective of an investor MMT is insofar useful as it opens a new perspective and try to explain markets behavior by looking at what is happening.

For example, from an MMT perspective we should continue have a strong economy as long as government spending is on the rise (i.e. the corporate sector profits and equities are a buy), the USD should weaken the more debt is added and the more the FED tries to stem inflation by hiking rates and engaging in QT (latter is counterintuitive) because it adds income to the system. Likewise, Bonds are a sell because of rising inflation while gold and hard assets are a buy.

Actually, if we look at reality and at countries that control their own currency that involve in profligate fiscal policies, they all tend to have depreciating currencies, high interest rates and a rising national debt. To me Turkey, Argentina, Venezuela come to mind first. However even the US under Trump is moving in this direction. Hence the USD bearishness (the US have still a big advantage though i.e. that they are reserve currency)

On the other end countries with a tight fiscal discipline, that apply QE and ZIRP or NIRP tend to have deflationary economies, zero or negative yields and strong currencies. Examples are Switzerland and the EU (where the leading countries impose deflationary austerity and real deflation on the weakest Union members). Indeed, notwithstanding all the problems in some members of the EU, the EUR has been extremely resilient over the years.

What do you think?

Eoin Treacy's view -

Thank you for this wide ranging and thought-provoking email. I agree with most of the points you make although I believe the reason for the Euro’s stability has to do with a lack of supply rather than inherent strength in the domestic Eurozone economy. The biggest issue right now is there is a clear trend towards profligate spending, fiscal stimulus, deficit spending or however you might wish to describe it. Modern Monetary Theory is the academic rationale for this spending which is being latched onto by politicians. In ages past this was referred to as devaluing the currency to point where it causes a rebellion from the bond market. 



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February 04 2019

Commentary by Eoin Treacy

Nickel Extends '19 Surge as Supply Concerns Mount

This note from Bloomberg may eb of interest to subscribers. Here is a section:

Nickel prices rose Friday, extending gains from the best January in more than two decades, amid signs stockpiles would decline further. A robust U.S. jobs report eclipsed weak Chinese economic data to bolster the industrial-metal demand outlook.

Nickel holdings in Shanghai Futures Exchange warehouses fell for a fifth week to the lowest since June 2015, according to data from the bourse. Nickel prices climbed this week amid speculation a fatal dam disaster at one of Vale SA’s Brazilian iron-ore operations could have a ripple effect on other metals supplied by the miner. U.S. stocks climbed Friday morning on the better-than-expected jobs report and signs of progress in trade talks.

Eoin Treacy's view -

Nickel was the best performing industrial metal until the middle of last year when it succumbed to global growth fears and the wider malaise in the industrial metals complex. It subsequently gave up the majority of its advance before finding support in December with the wider stock market.



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January 31 2019

Commentary by Eoin Treacy

Everything you wanted to know about MMT (but were afraid to ask)

Thanks to Kevin Muir for this post from his themacrotourist.com blog which is relevant to the current discussion on Fed policy, fiscal policy and political jockeying. Here is a section:

If I am correct, I suspect we will see many Democrat candidates (perhaps all?) adopt MMT as a tenant of their platform. And here is a crazy thought for you - what if Trump beats them to it?

I have long argued that eventually we will hit a period where governments will spend and Central Banks will facilitate their deficits. MMT provides academic justification of where we all know we are headed anyway.

In one of the interviews I watched with Professor Kelton, she said that the idea of deficits being funded with bond issuance is purely a self-imposed limitation. It’s required by law, but in reality, it doesn’t need to be done. The law can be changed. The government could simply spend $100 while only taking in $90 and directly writing cheques against the Federal Reserve to pay for the $10.

Think about how inflationary this will be! But isn’t that the whole goal?

I have always chuckled at the idea that governments were powerless to create inflation. If they want to create inflation - they can. There just needs to be the political will. And it looks like that will has finally arrived.

Eoin Treacy's view -

Left-wing politicians in the USA are jockeying for who can announce the largest tax on the “super-rich”. Last week the media were discussing an upper band of 70%, today Bernie Sanders is suggesting a 77% tax and the re-imposition of a heavy estate tax on fortunes over $3.5million. Meanwhile more and more politicians are adopting President Trump’s mantra that deficits don’t matter.



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January 31 2019

Commentary by Eoin Treacy

Email of the day on gold and UK listed gold miners

With gold sustaining its position above $1300, and also holding its own against the other major currencies, as you have highlighted in recent audios, can you please comment on the UK listed gold miners and their potential for some improvement p.s. the service has its finger on the market pulse, and the written and audio delivery is spot on.

Eoin Treacy's view -

Thank you for your kind words and this email which I believe will be of interest to subscribers. Barrick Gold acquired Randgold Resources recently so that removes one of the more attractive gold miners from the universe of UK listed miners. Of course, the UK is one of the most active markets for resources shares so there are plenty of others to choose from.



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January 31 2019

Commentary by Eoin Treacy

BAT Upgraded to Overweight at Piper; Risks Look Priced In

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

Philip Morris’s patent lawsuit against British American Tobacco in Japan, which is seeking a sales injunction of BAT’s Glo heated tobacco product, is still a risk, but BAT has “several methods of defense” and the earnings impact would probably be modest, Piper Jaffray analyst Michael Lavery writes in a note.

Risk on possible U.S. menthol cigarette ban looks priced in and Piper doesn’t see any operational impact “for years and years”

Also notes that consumers can adapt

Piper doesn’t see any risk to dividend growth, allaying concerns from investors; says BAT’s cash flows don’t seem to be at risk in a way that would hurt the dividend

Upgraded to overweight from neutral; PT kept at GBP30

NOTE: BAT shares down 51% in last 12 months vs 19% drop for Imperial Brands, 31% decline for Philip Morris and 35% fall for Altria

Eoin Treacy's view -

The tobacco sector is not for everyone but it is inherently defensive considering they are selling an addictive product and therefore have reliable cashflows. The performance of defensive sectors is something that is important to monitor in the latter stages of a cyclical bull market because they typically tend to be depressed by disinterest when growth stocks are outperforming but turn to outperformance when investors start to value security.



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January 29 2019

Commentary by Eoin Treacy

Iron Ore Market Shudders as Dam Disaster Spurs Supply Concerns

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

Iron ore investors are attempting to gauge the fallout from the dam burst at one of Vale SA’s mines, amid concerns the disaster will have ramifications beyond the affected operation in Brazil that could tighten the market in the short term and offset weakness from a slowdown in China.

Futures on the Dalian Commodity Exchange extended gains on Tuesday to head for the highest close in more than a year, after the benchmark price for immediate delivery surged to $78.80 a ton on Monday, the highest level since March. Shares of Australia-based miners rallied, with gains for BHP Group, Rio Tinto Group and Fortescue Metals Group Ltd.

In Brazil, “it seems likely that there will be an extensive increase in safety tests over the coming weeks and months,” Capital Economics Ltd. said in a note, raising its end of first quarter forecast to $75 a ton. “These tests may highlight other vulnerabilities in the system that could lead to temporary
cutbacks at one or more mines until the issues are addressed.”

Eoin Treacy's view -

This is not the first time a dam breach has impacted Brazilian supply and led to loss of life. In fact, BHP and Vale have only just reached a settlement with the communities affected by the Samarco accident in 2015. 



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January 29 2019

Commentary by Eoin Treacy

Gold: 32 trading days and counting

Thanks to a subscriber for this report which highlights increasing speculative interest in gold and growing competition to become the biggest bull. 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. 

There are lots of reasons to own gold but one I think is more relevant than others right now. The governments of the world are getting ready to spend their way out of trouble and historically that has meant debasing their currencies. Gold cannot simply be lent into existence and is therefore a supply inelasticity asset compared to the rapacious appetite for debasement the world’s governments represent.



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January 28 2019

Commentary by Eoin Treacy

Industrial Metals & Precious Metals

Thanks to a subscriber for this report from Eight Capital which may be of interest. Here is a section on battery related resources:

Eoin Treacy's view -

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

There are very clear logical reasons for why lithium demand should continue to trend higher for the foreseeable future and they were equally relevant six years ago when it was a truly supply constrained market. Since then there has been a great deal of investment in additional lithium recovery projects with the result supply has increased substantially.



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January 25 2019

Commentary by Eoin Treacy

Email of the day on the Rand and governance:

Hello Eoin, First of all I would just like to say I have no problem with the way you have organised your video commentaries. I find them very perceptive and thought provoking. I would hazard a guess that 95% of your subscribers are of the same opinion.

On your comments on South Africa, having spent the past 16 years here, I would advise investors not to hold their breath as regards the new president Cyril Ramaphosa instituting much in the way of improved governance here. Corruption in this country is all pervasive and is now penetrating certain personnel in the judiciary. I know this from various contacts I have with regards to the Rhino poaching problem. The Zuma faction still wields huge influence within the ANC. The black economic empowerment policy has led to totally unsuitable and unqualified people being placed in key positions both in government and in the private sector. Given the current state of the world economy, I would indeed be surprised if the ZAR is not the currency to lose most in value among the emerging markets over the next year.

Eoin Treacy's view -

Thank you for this informative email and your on the ground perspective from South Africa.

The simple conclusion reached by investors is Ramaphosa is better than Zuma which is good news. The monumental challenge of tackling corruption is a long-term challenge and if the trend toward deterioration can be allayed that can be considered progress. It is too early to conclude whether the new administration can make progress on that front but I think everyone is aware of just how difficult that could be.



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January 23 2019

Commentary by Eoin Treacy

Lego: The Toy of Smart Investors

This report by Victoria Dobrynskaya and Julia Kishilova may be of interest to subscribers and answers the question why Lego prices have been the subject of asset price inflation.  

It is posted without further comment but here is a section:

We study a new alternative investment asset - LEGO sets. A huge secondary market for LEGO sets with tens of thousands of transactions per day has developed since the turn of the century. We find that LEGO investments outperform large stocks, bonds, gold and other alternative investments, yielding the average return of at least 11% (8% in real terms) in the sample period 1987-2015. Small and huge sets, as well as seasonal, architectural and movie-based sets, deliver higher returns. LEGO returns are not exposed to market, value, momentum and volatility risk factors, but have a unit exposure to the size factor, suggesting that this asset performs similarly to small stocks. A positive multifactor alpha of 4-5%, a Sharpe ratio of 0.4, a positive return skewness and a low exposure to standard risk factors make the LEGO toy an attractive alternative investment with a good diversification potential.

Eoin Treacy's view -

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January 18 2019

Commentary by Eoin Treacy

Billionaire Zell Buys Gold for First Time in Bet on Tight Supply

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

For the first time in my life, I bought gold because it is a good hedge,” Sam Zell, the founder of Equity Group Investments, said in a Bloomberg TV interview. “Supply is shrinking and that is going to have a positive impact on the price.”

Spending on new mines began to dry up after prices of the metal tumbled from a record in 2011, clouding the outlook for production. With gold still down by almost a third from its peak, the biggest miners are just looking at buying their competitors in a bid to bolster their output pipeline.

“The amount of capital being put into new gold mines is a most nonexistent,” Zell said. “All of the money is being used to buy up rivals.”

Eoin Treacy's view -

Tightening global liquidity and the slowdown in China is restricting the capital available to the mining sector. Additionally, prices for many commodities have been under pressure this year so it is more difficult for miners to make the case to lenders that they should be afforded more leeway. That has led to reduced spending on exploration and development. The fact that when prices are high and liquidity available banks line up to extend credit to miners contributes to the cyclicality of the sector.



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January 17 2019

Commentary by Eoin Treacy

Palladium Reaches Another Record as JPMorgan Sees More Upside

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

 

Palladium rose as much as 5.4 percent to $1,439.29 an ounce. It traded at $1,394.97 by 1:39 p.m. in New York. At the Comex exchange, palladium for March delivery climbed 2.3 percent.

Investors are shrugging off signs of automotive weakness in key markets, with annual car sales in Europe falling for the first time since 2013. China also declined last year and sales in the U.S. barely rose.

The metal will remain in a supply deficit for an eighth straight year, according to Metals Focus Ltd. Palladium’s status as a byproduct of mines in South Africa and Russia means output levels aren’t adjustable to meet short-term demand, despite the surging price.

“Investors appear to be ignoring the fact that weak sales figures have been reported for all major auto markets in recent days,” Commerzbank analysts including Daniel Briesemann said in a note. “Instead, they are seeing news such as the planned widening of a strike to include the platinum mines of a major South African gold and platinum producer as being a good reason to buy.”

Eoin Treacy's view -

Palladium has been rallying impressively while the other precious metals have been side-lined in terms of investor interest for the last couple of years. The collapse of platinum demand following the diesel scandal made the case for more gasoline vehicles and a demand growth cycle for palladium. However, that is not a sufficient reason for the scale of the move in palladium.



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January 15 2019

Commentary by Eoin Treacy

Gold hits an all-time high in 72 currencies

Thanks to a subscriber for this article which leads with a sensational headline that stretches the truth somewhat. However, there is no doubt gold is firming in an increasing number of currencies. Here is a section:

Using the dollar gold price, as most of us do, has disguised what is actually quite a powerful bull market. If my memory serves me right, we saw the same phenomenon - a stealth rally in minor currencies - ahead of the last major gold bull run (in dollars) in the late 1990’s. Arguably this may be a very good leading indicator.

Faulty yardsticks also takes us onto wealth management. Measuring our net worth in local currencies, we might be rather pleased with ourselves - smug even. However we chose to ignore the fact that the yardstick is not a constant … it is shrinking and sometimes really quite fast. It’s the natural corrosive effect of inflation. Knowing this, governments give us a gauge for yardstick shrinkage to use such as RPI or CPI, to reassure you that the shrinkage is minimal… and then lie about it.  

There are alternatives.

In the US, the Chapwood Index is highly regarded as it reflects the true cost-of-living increase. Plainly and simply, the Index shows that incomes can’t keep up with expenses, and it explains why people increasingly have to turn to the government for entitlements to bail them out. The basis of the Index is fully open to scrutiny and if correct suggests Americans have been losing roughly 10% of their wealth each year since 2014. Half of it gone. This compares with the official government figure of 1.9%. Ronald Reagan called inflation “the thief in the night” and it is built for times just as this. It gives the appearance of being wealthy (maintaining high nominal values) while eroding your actual position - which manifests itself in far higher costs on the other side. 

Interestingly, gold has seen an average year-on-year gain of about 10% compounded since 2000 - off-setting those real losses - which reaffirms in our mind that it continues as a reliable yardstick against which to measure costs or indeed wealth. In short, gold has maintained what economists call “purchasing power parity” for millennia. So not only is it an excellent yardstick - its actually quite a useful thing to own - especially if you fear wealth erosion. If you haven’t already read this, you must - see :Jastram’s Golden Constant

Many crises invariably start with stealth inflation and then follows currency weakness - so gold gets expensive and then it blows out significantly higher in your local currency. Then you realise that the lifeboat has sailed … the choo-choo train has left the station. 

Eoin Treacy's view -

Governments’ fetish for fiscal stimulus is once again being engaged on a global basis and that is raising the same old questions about the integrity of their currencies and the loss of purchasing power associated with efforts to inflate the debt away. Gold is not making new highs against all of the currencies mentioned in this article but it is certainly firming against many of them.



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January 15 2019

Commentary by Eoin Treacy

Canada's Canopy Growth shares jump 11% on deal to develop industrial hemp farms in New York

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

Canopy Growth has been granted a license by New York state to process and produce hemp with the help of efforts by Gov. Andrew Cuomo and U.S. Sen. Charles Schumer.

Canopy Growth hopes to establish large-scale production capabilities focused on hemp extraction and product manufacturing within the United States. Depending on board approval of a specific site, Canopy plans to invest between $100 million and $150 million in its New York operations, "capable of producing tons of hemp" on an annual basis.

The company is currently evaluating a number of sites in the Southern Tier of New York, which will become one of its first extraction and processing facilities outside Canada. Management hopes to announce the specific location within 100 days.

Eoin Treacy's view -

The outlook for US Federal legalisation or reclassification of cannabis took a hit with Donald’s Trump’s electoral success, given his antipathy towards the sector. However, Canada went ahead and became the first major economy to legalise cannabis and its companies have a head start on possible US competitors in the event the political climate in the USA changes.



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January 14 2019

Commentary by Eoin Treacy

Newmont's Goldcorp Gamble May Need "Drastic Surgery" to Pay Off

This article by Danielle Bochove, Caleb Mutua and Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

The cost to create the world’s largest gold company: A 17 percent premium for a $10 billion all-shares acquisition that faces some big-time challenges down the line.

Newmont Mining Corp.’s deal for Goldcorp Inc. stands in stark contrast to the recent zero-premium merger between Barrick Gold Corp. and Randgold Resources. The key question: Why? In October, Goldcorp shares fell to their lowest since 2002 after the miner reported lower output and higher costs than expected.

Since then the stock improved only marginally before today. The merged company will have the world’s largest production and reserve base, and the kind of liquidity and diversified assets required to attract institutional investors. At the same time, "Newmont has some difficult times ahead with drastic surgery needed at Goldcorp,” according to John Ing, an analyst at Maison Placements Canada.

"In the short term and medium term, the deal is not good for Newmont," Ing said in an interview with Bloomberg News on Monday.

Eoin Treacy's view -

When the price of both the acquirer and the target fall following an M&A announcement, that is generally a sign investors are not all that happy with the price being paid and/or the prospects for the merged entity. The market’s conclusion therefore is that shareholders are on the hook for the cost of the merger.



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January 09 2019

Commentary by Eoin Treacy

Outlook for 2019: The Game Has Changed

Thanks to a subscriber for this report from KKR which may be of interest to subscribes. 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. 

The broad global adoption of fiscally stimulative policies is unlikely to be as coordinated as the monetary response to the credit crisis was. The big arbiters of how much liquidity is provided to the global economy and eventually the markets will be in which large countries adopt fiscal stimulus. Germany, China and Brazil are the big additional potential sources of stimulus so it is their political machinations that are most worth watching.



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January 03 2019

Commentary by Eoin Treacy

Brazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

This article by Mario Sergio Lima and David Biller for Bloomberg may be of interest to subscribers. Here is a sectionBrazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Eoin Treacy's view -

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.



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December 28 2018

Commentary by Eoin Treacy

Gold in different currencies

Eoin Treacy's view -

Gold is a monetary metal and therefore attracts the most interest when it is appreciating against most currencies. We have added charts for Gold in US Dollar, Euro, British Pounds, Japanese Yen, Australian Dollars, New Zealand Dollars, Swiss Francs, Indian Rupees, Chinese Renminbi, South African Rand, Brazilian Real, Turkish Lira, Swedish Krona, Singapore Dollars. These can be found using the Bloomberg ticker for gold XAU in the search or in the Metals section of the menu.



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December 27 2018

Commentary by Eoin Treacy

To Help Put Recent Economic & Market Moves in Perspective

Thanks to a subscriber for this note from Ray Dalio which may be of interest to subscribers. Here is a section:

For all of the previously described reasons, the period that we are now in looks a lot like 1937.

Tightenings never work perfectly, so downturns follow.  They are more difficult to reverse in the late stage of the long-term debt cycle because the abilities of central banks to lower interest rates and buy and push up financial assets are then limited.  When they can’t do that anymore, there is the end of the long-term debt cycle.  The proximity to the end can be measured by a) the proximity of interest rates to zero and b) the amount of remaining capacity of central banks to print money and buy assets and the capacity of these assets to rise in price.  

The limitation in the ability to print money and make purchases typically comes about when a) asset prices rise to levels that lower the expected returns of these assets relative to the expected return of cash, b) central banks have bought such a large percentage of what there was to sell that buying more is difficult, or c) political obstacles stand in the way of buying more.  We call the power of central banks to stimulate money and credit growth in these ways “the amount of fuel in the tank.” Right now, the world’s major central banks have the least fuel in their tanks since the late 1930s so are now in the later stages of the long-term debt cycle.  Because the key turning points in the long-term debt cycle come along so infrequently (once in a lifetime), they are typically not well understood and take people by surprise.  For a more complete explanation of the archetypical long-term debt cycle, see Part 1 of “Principles for Navigating Big Debt Crises” (link).

So, it appears to me that we are in the late stages of both the short-term and long-term debt cycles.  In other words, a) we are in the late-cycle phase of the short-term debt cycle when profit and earnings growth are still strong and the tightening of credit is causing asset prices to decline, and b) we are in the late-cycle phase of the long-term debt cycle when asset prices and economies are sensitive to tightenings and when central banks don’t have much power to ease credit.

Eoin Treacy's view -

Both the Dow Jones Industrials and the S&P500 posted large upside key day reversals yesterday to signal lows of at least near-term significance. Neither followed through on the upside today but they did hold the moves. Considering just how much they fell since early this month there is certainly scope for a rebound but the true test of whether more than near-term support has been found will be in the extent to which they hold their lows.



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December 20 2018

Commentary by Eoin Treacy

Dollar Weakness Is Coming, or Is It? A Familiar Call Returns

This article by Austin Weinstein and Katherine Greifeld for Bloomberg may be of interest to subscribers. Here is a section:

If you look at outlooks published by the sell-side, I think that 80-85% percent of what I read is looking for a weaker dollar,” said Ed Al-Hussainy, currency strategist at Columbia Threadneedle Investments. “And in my experience, when all the forecasts are looking the same way, the currency generally doesn’t behave the way these forecasts predict it will.”

The narrative for dollar bears is roughly as follows: The U.S. can’t keep up its better-than-everyone-else economic performance. America’s growth rate will get closer to the rest of the world, the Fed will stop or slow interest-rate hikes and the advantage an investor gets from holding dollars will diminish.

However, this story of global growth convergence may sound familiar to those who have seen it trip up forecasters before.

Around this time last year, the prevailing view was bearish on the dollar for similar reasons, and the median forecaster in a Bloomberg survey thought the greenback would slide to $1.21 against the euro from $1.18, the spot price at the time.

Instead, the dollar rallied to $1.14. (For the record, Norddeutsche Landesbank and Sumitomo Mitsui Trust Bank predicted a move to $1.14 late last year.)

Eoin Treacy's view -

The Fed thinks it is going to be able to raise rates twice next year and continue on its balance sheet run off. That is the primary reason to be bullish of the Dollar. The stock and bond markets are signaling investors are unwilling to give much credence to that view.



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December 19 2018

Commentary by Eoin Treacy

Here is the text of a bulletin from Bloomberg on today's Fed Meeting.

Here are the Key Takeaways from today's FOMC events:

The FOMC hiked rates a fourth time this year to a decade high, ignoring President Trump’s criticism, and lowered its outlook to two hikes from three next year.

Powell specifically endorsed the dots, citing them in his press conference as a guideline for the committee and a useful tool.

The committee tweaked its guidance to ``some further gradual increases’’ -- a more hawkish development compared with the alternative of dropping the guidance.

Powell said all meetings are live for possible moves next year, but gave no strong hints as to when the Fed would raise next.

There was unanimous support for the hike.

Powell said that Trump's comments had no impact on policy and that the Fed is committed to doing what it thinks is best.

Powell said financial conditions caused a slight downgrade in 2019 forecasts but no real change in the outlook.

Markets took FOMC and Powell as hawkish, with the yield curve flattening and stocks falling.

Eoin Treacy's view -

The dot plots suggest two interest rate hikes next year but Jay Powell basically said they are going to be data dependent next year. The one thing that stood out to me from the press conference was that no one asked questions about the pace of balance sheet run off. That says a lot.



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December 19 2018

Commentary by Eoin Treacy

Low Coffee-Bean Prices Brew Trouble for Farmers

This article by Julie Wernau and Robbie Whelan for the Wall Street journal may be of interest to subscribers. Here is a section:

“When the price is good, we have work, but when it isn’t, we have no money to pay the rent, no money for food, no money for the doctor,” said Ms. Poló, 56, standing on the side of the road in Baja California state, where the bus she was riding had broken down about three hours from the border.

Coffee prices have been stuck below the cost of production for the longest stretch since the global financial crisis, leading some producers to abandon crops and some to migrate for new jobs. The shift is being driven by currency fluctuations that are encouraging sales and production in Brazil, the world’s largest coffee producer, spurring a record crop that is driving down prices for other coffee-growing nations.

“We’re now back in real terms to where we were 20 years ago, when farmers abandoned land because they couldn’t make ends meet,” said Paul Rice, president and chief executive of Fair Trade USA, which works with 1 million coffee producers in 42 countries.

A 2017 study by Cornell University for Fair Trade USA placed the average cost of coffee production at $1.40 a pound. Coffee prices have been below that price for 20 straight months, the longest stretch since 2008, according to FactSet data.

Eoin Treacy's view -

When commodity prices fall below the cost of production supply destruction takes place and the lowest cost producer gains market share. For Robusta coffee the question is whether central America can remain competitive with larger producers like Vietnam and Brazil for Arabica.



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December 18 2018

Commentary by Eoin Treacy

Oil Crashes to 1-Year Low as Dark Clouds Envelop Demand Outlook

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

“Oil has gotten caught up in all the panic you’re seeing,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC in St. Louis. “This is all about fears of a recession. It’s risk-off everywhere.”

A U.S. government report Monday forecast surging shale-oil production, adding to worries about a glut. In Moscow, Russian Energy Minister Alexander Novak said production is rising, although the country is preparing to implement output curbs to conform with an OPEC+ accord.

Crude’s mired in a bear market amid growing skepticism that cuts by the Organization of Petroleum Exporting Countries and its allies will be deep enough to prevent a surplus in 2019. The group’s efforts to balance the market have been undermined by the relentless growth in U.S. shale, which veteran crude trader Andy Hall said is making it harder to predict global supplies.

Eoin Treacy's view -

It’s all well and good to talk about the relentless growth of US shale but West Texas Intermediate at $46 is uneconomic for a substantial proportion of shale drillers. The response is going to be less drilling as soon as any hedges on supply run off. That is the great strength of unconventional wells. They are more capital intensive to bring online but their supply is elastic because continuous drilling is required to sustain production after initial prolific period. That give companies the ability to more closely match supply to demand than conventional wells.



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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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