Wednesday, April 13, 2011

Its All Going Bunker Hunt


No kidding - just as Australia looks to be passing a carbon tax that will bury one of their larger Australian assets, a brown coal power station that kicks out more carbon per MW than any other power source. Sometimes you just can't get a break.

Anyone got any conviction out there? Feels to us as if the market is floating around weightless and unable to grab hold of anything? Just like inside one of those parabolic-flying-Zero-G-simulating planes? The sort of feeling you get as you go over the crest of a roller-coaster? If so we know what happens next. The inflation expectation trade that we mentioned yesterday is picking up more interest today as we are beginning to detect price falls in unexpected places like China. Headline data from here is starting to trend downwards but how much of this is seasonal and due to some fairly heavy handed persuasion to cap prices from the government is anyone's guess. All we know is that if veggie prices are down ~15% in Heilongjiang those cabbage speculators got stopped out.

The one place that isn't seeing price falls is Silver, but we really are no good at it and would appreciate any guidance. While ETF oz are up the ETF action (see below) can't account for half of what one is seeing in open interest or volume trading on Comex.

Its recent moves appears to be driven by the new Far East mania for "things" as "things" are harder to make and more durable than bits of paper. But just because they are harder to make does not make them any more valuable at the end of the day. TMM find it hard to make a hand crafted jug out of used Nicorette gum, though they did manage it once, but that doesn’t mean that Nicorette crafted crockery will be the next big inflation hedge. Just as Tulips weren't, though TMM are planning on opening a florists in Shanghai. TMM find silver particularly hard to understand because so much of it is produced as as by product of other metals not least of all gold - in general, there is more of this stuff around than people generally know what to do with but we are hearing anecdotal purchases in China of 250 koz. Spillover from a now heavily regulated property sector? TMM thinks so - and thus we are not stepping in front of this freight train just yet.

There does seem to be a collective move ex-China though to "Bunker Hunt" Silver and TMM had a quick look at what happened then. The first thing they noticed was the general topicality of the man having discovered that he also played a very significant role in opening up the Libyan oil fields, which Colonel G would later nationalise. The second thing we noticed was that his ultimate down fall in cornering the market was marked by the the implementation of "Silver rule 7" blowing him up through margin calls. Another casualty of leverage. So why Silver? We only need to look at the Gold/silver ratio to realise that this is beyond the precious metals general move.

Once again, like the Nasdaq in early 1999 this is one of many things that look entirely out of kilter and yet it is not something TMM would endorse fading just yet - for that we'd need to see some breakdown in autocorrelation, which we will discuss tomorrow.


Bob_in_MA said...

I think the one near certain bet for the next few year is agriculture commodities. Stocks are very low, meat consumption in emerging markets is jumping and global warming seems to be real enough to give them a kick now and then.

I realize your time frame is drastically different, but I would think twice about betting against ag even in the very short term. The most likely cause for an eventually change in the outlook will be a new green revolution based on genetic engineering, but that's not in the cards for the immediate future. But more tax-incentivized ethanol production is.

More generally, about three quarters of the world economy has negative interest rates, that's a pretty big tailwind for commodities. I think it keeps going until the next global slowdown.

Anonymous said...

Explanation for the Silver rally may be due to limited deliveries @ COMEX.

Leftback said...

It ain't over 'til it's over, TMM...

Anonymous said...

The problem ,Bob, is all this stuff can actually keep going, but would you actually hold it though the kind of volatility it shows.Don't answer because the answer for virtually everybody is NO,it really was a rhetorical question.

Polemic said...

thanks anon 6.26.

Perhaps we should have read that before. But seems the author of that ( you?) is a week ahead of us in head scratching,

Bob, yes fully agree for the long term. Buy a farm in Northern Canada, but short term isn't the problem that names with 1 yr performance measures are trying to leverage a 10 year macro trade. All tend s to go tits up at least once in the interim.
( so yes sort of anon 8.22s point)

LB - never bloody is, is it.

Duffer said...

Perhaps it has been unleashed sue to the investigation into silver price manipulation by JP Morgan (and HSBC) due to the aforementioned's huge short position it inherited from Bear Stearns. They have been told to pack it in. Silver catching up to where it should be perhaps with obvious excess of the momentum players.

abee crombie said...

correct m e if I'm wrong but last summer all the talk in the agg world was of large stockpiles.. sugar had come off big time, wheat, soya and corn were all getting killed.

Then we had some bad weather and QW2

silver and agg too me are the same thing... Momentum... forget about fundamental/macro analysis.. if the trend is up you buy..and if the move is overextended, you buy more! (if only i could think like that!)