Monday, May 28, 2012

This Is How You Get Got

You're in the Bushveld digging up rocks
Got, this is how you get got
LSE listed and offshore borrowings too
Got, this is how you get got
Trying to hustle in Africa without breaching FCPA
Got, this is how you get got
Some guy called Paulson said "I like your stock a lot"
Got, this is how you get got

TMM can't help but think of the lyrics of Mos Def's "Got" warning of the dangers of flaunting wealth when thinking about precious metal miners. GDX, the largest ETF covering gold miners has flown high and far since the end of 2008 and it supercharged much of the more inflationista funds' returns. Palladium is the standout but all of them ripped and ripped hard through mid 2011. If you were buying gold and particularly gold equities till you were almost blacking out you could do no wrong.

Recently however, this has changed as can be seen below. The first chart is gold versus GDX.

The second is a bunch of platinum miners and platinum and palladium. As you can see, for both the equities are not just doing really badly, they are underperforming physical in a big way.

Not that physical is looking healthy in gold - TMM's brokers indicate that given the stuttering out and decline in ETF ounces for gold seen below in white is a big part of the drop in physical (orange). Were it not for central bank dip buying things would likely be much worse.

So, aside from TMM's view that you've heard before - you know - that this recovery in the US is sustainable enough to not justify merciless slotting of USD as an investment strategy anymore - TMM thought it would be good to give you a couple of choice quotes from Eastern Platinum, a South African Platinum miner that they released in May last year.

On Friday 6th May, mine vehicles were driven by employees through the security gate to the Zandfontein Mine causing damage to mine property.  Employees then embarked on unprotected industrial action. Mine services at both Zandfontein and Maroelabult underground mines were also damaged, and for safety reasons, the management at CRM instructed the mines to be vacated. Approximately 180 workers then proceeded to unlawfully occupy the mines. Mine management advised employees to cease this illegal action, and simultaneously, a court interdict against NUM and its members was granted that instructed NUM and the employees involved to cease the action and vacate the mine. The workers involved made several demands to management, as well as threats of damage to mine property and underground infrastructure if management did not comply with these demands. To safely resolve this situation, to prevent it from escalating, and to safeguard the overall integrity of mine installations, management had numerous meetings with NUM and instructed them to ensure that their members vacated the mine and ceased their unprotected strike action. An offer was made by mine management to resolve the situation but this was rejected by NUM and/or the employees involved who refused to vacate the mine and made yet further demands of management that were rejected. As these workers refused to vacate the mine, the offer made by management was then withdrawn.
Following the failure to resolve this illegal action by some of their members, NUM invited the Congress of South African Trade Union (“Cosatu”) to assist in negotiations with the instigators of the illegal industrial action. Certain statements were made by the Cosatu and NUM representatives to their members in order to encourage them to vacate the mine. There was no agreement in place between CRM and NUM/Cosatu at this time. The workers involved in the illegal action subsequently vacated the mine.
Stuff happens, but stuff happens more in emerging market countries that have bad institutions and whose labor unions are the political support base of the ruling party as the NUM is with the ANC. TMM would like to say that anyone who thought doing business in South Africa was going to be easy or allow one to earn the excess return of precious metals over the contents of South African CPI or any other wages proxy failed in a big way to understand this country. If you want to own a mine you don't just need high metals prices, you need them to rise faster than your costs. TMM think that mining in South Africa and having your profits increase very quickly is a bit like Mos Def's description of flashing all of your rocks in Brooklyn. Dangerous, and not a long run equilibrium.

TMM are still negative on South Africa where most of the gold and PGM output comes from, miners in bad jurisdictions and when we want to short USD we find something cheap, not something shiny. All great parties have to end and TMM thinks it time to call this one whatever the gold bugs say.


Anonymous said...

w.r.t. Gold, the Fed may have eased up on the printing press for a while but the ECB, PBOC BoJ have a fair amount of easing to do still

Anonymous said...

"flashing all your rocks in Brooklyn", an example can be given from each BRIC(S) country..Google threatned a country to PBR being used as a cash cow...

Anonymous said...


"Google threatned in a country".

Amplitudeinthehouse said...

The QE reflexivty trade from 2011 still seems to be permeating around a few marketplaces, notably the DR PHD.

Amplitudeinthehouse left the confines his residence for one of his random adventures over the weekend after a teeth pulling research session in which an analogous chart depicting the Gilts v JGB piqued his interest not so much in price but in time.A market in sudden distress can fall into an availability heuristic - BONDS.

Therefore after an indeterminable length of time due to opposing actors in the market, my guess is they fell into the trap of the 'Familiarity bias heuristic.Now Amps having been sheltered during his formative teenage years when living literally on a racetrack, didn't leave these years to siree.Perception is the key in finding that edge....where is it , where is it going?

Amps decided to venture out into the real world and put an experiment to test, to see if the familiarity bias has a certain time dependency threshold.As it is, Amps had been hearing rumors that where he had been seen regularly placing football bets , the staff were passing on details of his bets to out-side sources,ergo, out into the bigger world..

A fellow Warcraft-gamer pal of Amps and himself decided to put this rumor to the test, Amps picked out a certain game during the Saturday afternoon football schedule that he would throw down a chunk on with some confidence.

Warcraft-gamer and Amps were seen around the corner of the local betting shop last Saturday afternoon in what appeared to be a brief discussion on how things would play out...shortly after..Amps walks into the local betting shop some time after Warcraft, places a his bet and walks straight out without acknowledging anyone and heads to the pub around the corner in wait for Warcraft.Not long after Warcraft strolls in , sits down and produces a smile from ear to ear......"wow!,soon as you walked out, the attendant that served you walked to the back of the stall and pulled out their mobile phone and was on there for no longer than one minute"

Therefore this experiment proved to Amps that the Bond market may have fallen into a "familiarity bias" or about to.

Later that night Amps was walking down the street having had a couple ales with Warcraft in honor of the word "familiarity" , when a homeless man jumped out in front of him asking for some spare change,now Amps doesn't think he short of empathy, but he was still half-smarting to himself about what had happen later that afternoon, so with some hesitation he said to homeless man "tell you what old-timer....if can answer my question in eight words I'll give fifty dollars"


Amps..."Tell me, am I real or just a F---IN ILLUSION?!

The old-timer without any pause just return a knowing smile and reached into his pocket and pulled out a t-shirt...

Amps was last seen heading back to the pub $500 lighter and wearing a new shirt emblazon...


Dee Dee Humberside said...

Pardon the commodities newbie but wouldnt SA supply constraints be very bullish for the shiny things? Or are you just commenting on the doom cost structure implications for the miners stocks, rather than the physical stuff.

Tradebot said...

Uh huh, I am NOT so sure about calling the end of shiny stuff rally. History teaches us that when countries face enormous debts they tend to either inflate away or default - hardcore, structural changes to increase productivity and competitiveness are just too damn hard to implement in democracies where vested interests of state sector are so engrained [anywhere above 30% of GDP]. It is just far easier to kick the can down the road and let central bank rip. In addition , once you have opened the pandora's box of money printing , the pain barrier to doing further rounds just gets lower and lower.

In negative interest rate world where the central banks manipulate yield curve to the tune of discredited economic models, the negative carry stuff like commodities have no relative value disadvantage to holding bonds or even equities [provided we trade here or higher, not way lower]. I am happy to hold and add selectively when leveraged, weaker players liquidate [usually to compensate for losses somewhere else]. Shiny stuff and the Goo might not be a screaming buy anymore but I'm not throwing in the towel yet despite the long rally.

Tradebot said...

caveat : of course there is the tail risk of China blowing up - but that is no reason not to own shiny stuff, you just have to own additional tail risk insurance.

XPT looks like a falling knife I would like to catch... :)

Anonymous said...

C says'
The are many things that come to mind that I might be inclined to do in anticipation of political intervention. Catching any kind of "falling knife" with or without a "Kevlar vest" would not be one of them. The only "negative carry" I could envisage from that would be my subsequent stretcher journey to ICU.

One of the few things to come out of Angela Merkels mouth that resonates with me is "this will take years to resolve". To me that doesn't suggest any form of strategy that requires fast twitch muscles unless your favoured hero is Mr Whippy, or MR Average on down.

Regardless of recent moves in oil and comms etc my favoured pain trade for H2 2012 is a continued breakdown in the Pavlovian manouver for the above. Rover is distracted.

Anonymous said...

S&P 500 down 2.5% and Gold up 4% on the same day. Great call chaps! Keep it up.