Sterling, Silver

On Monday CU offered us a contrarian punt on Sterling, so here's a different view.  I don't much like the look of any of the major currencies right now, what with talk of competitive devaluation and every currency-bloc having its own compelling tale of woe. I took to billing in EUR again 6 months ago, which has served me well, but now I find myself unable to judge.  Is it all hopelessly relativistic ?  I am no macro-economist.

But there is always bullion to consider as a possible reference-point for paper money.  Readers will know I am a long-term holder of gold (strictly physical) which has been a one-way bet for several years now.  There have been some lurid commentaries on the precioussss just recently but I am unmoved: and quite by chance (Moody's having inexplicably failed to tip me off) I decided at the end of last week that we had reached a bottom.  So I went long silver, which I haven't held for ages now, and is by far the more volatile of the two traditional PMs: but I expect to be at my desk for a bit now, and able to watch the screen.

So if the post-Moody pound is to weaken against the dollar, I shall be even more glad of the decision.  Then again, CU may be right and Sterling may bounce, which would take some of the shine off it.  

As always, just MHO, DYODD etc etc.

ND

Update: and now there's this - 

"Sterling is winning the currency wars, having overtaken the yen as the world's worst-performing major currency this year, although economists suggested the pound's biggest falls could be behind it"

Oil: Flirting With Double Figures

In October oil stooped briefly to touch $100.  But it rebounded strongly, maintaining a flat-ish $125 through March (which I misread).  The earlier assessment was the correct one: the distinct prospect of GlobalRecession2 has put a dent in commodities, even as producing nations are opening the taps;  the Baltic Dry Index, that traditional coalmine canary, is in decline once more; and oil dipped back into double figures again this week. Since GR2 isn't remotely played out, we may expect more flirtation with $99.

Stock markets have found reasons for optimism just now, but overall it looks like another crisis brewing: number 94 in a long and tiresome series. And right on cue, for whatever you think it's worth, gold and silver have broken out of their 3-month-long down-trend.  I'd assess that particular uptick as more meaningful than the stock markets' own burst of green.

ND  

JP Morgan: Rum

You don't need us to give you links to the current slew of lurid JP Morgan / London Whale stories: you can hardly move for them.  And what about that Ina Drew, eh?  (Must be OK with a name like that.)  Her with the "enviable reputation as one of its best managers of balance sheet risk" - and the $32m pay-off.  Nice work !

But if this seems to have come from out of a clear blue sky, here are a couple of suggestions for google searches in a quiet moment.  Try JP Morgan / silver:  the word 'manipulation' pops up before you've barely entered s-i-l-v, and you'll need a whole afternoon to sift what you find.  Or you could try prospecting for JP Morgan / gold -  blow me, it's 'manipulation' again, and away you go for another afternoon at the races.  (That Blythe Masters ... what a gal!  Imagine her pay-off when she retires.)

Then type in JP Morgan / coal: the word 'loss' will beat you to the punch, and you're off on another fascinating thread.

Seems these chaps have, errr, form: it's beginning to look distinctly careless.  Either that or Astonishing Bad Luck.  And some rather unenviable public relations episodes, too.  What are we to think ?

ND

Oil and More Rumours of Wars

Just as the Baltic Dry falls through the floor (a reliable indicator of global slowdown), our good friends Gazprom cut their prices again, and commodities soften generally, oil is once again in the spotlight. And not in a good way.

Yes, at home and abroad the prospect of trouble at t'pump looks to be on the cards. Starting with Petroplus*/ Coryton: this may provide an excuse for a price-hike in the South East, but in reality its effect will be limited. When the owners of a conversion-process asset like a refinery go under, the creditors step in smartly to ensure it keeps running, just to generate whatever basic turn is there to be had: no-one wants to see the cashflow dry up. We've seen it a dozen times with power plants (in the dire period 2002-04, for those with short memories). What tends to happen is that the asset, which should be run on a highly-optimised basis when in the hands of a proper owner, slips into a dumb but still effective mode of operation, with reduced but still positive margins.

If it turns out this isn't possible, i.e. only a hyper-optimised refinery is profitable, it will mean there is a surplus of finished products (petrol etc) anyway. So no big worries just yet.

The main story, though, is in the Middle East where Syria is in turmoil, Iraq is nudging towards civil war, the Iranian war-drums are beating, and the carrier groups are massing once again. A war-weary western public may be forgiven for groaning déjà vu and assuming it's just another galling waste of blood and treasure to satisfy the American electoral process.

But from the C@W standpoint, is there something really rather new and interesting afoot ? The possibility that oil might start being priced in gold is not hot news, but could be a serious development - and one that might make the US pause for careful thought. I have previously highlighted the forthcoming Chinese Pan-Asia Gold Exchange as a potential Chinese strategy to supplant the dollar: lots of countries are looking to a post-dollar world: the euro is hardly a candidate anymore and oil-for-gold would be a very logical step along the way.

The ramifications of this will be many. Here's one: if this catches on, a lot more countries and companies will potentially be in the market for gold hedges (just as they are for oil and dollar hedges, as a matter of day-to-day risk management). But the paper (forward) gold market is, allegedly, one of the most heavily manipulated in the world (along with silver and the Swissie and oil and ...) - hmm.

Any other suggestions as to how oil-for-gold would change the world ?

ND


* Petroplus was always a quirky operation. The cleverest thing they did in the last decade was develop an LNG import terminal in Pembrokeshire, and planned to do several more around the Atlantic basin - they are very easy to build, even for a company whose main business at the time was oil storage tanks. But they sold this nascent LNG business, '4Gas', to Carlyle in order to concentrate on becoming a 'specialist refiner' ... hah! Should have stuck to tankage.

Trading Update: the Precious Metals Strategy

Well since CU mentioned it, *ahem*, it is indeed a fact that the PM strategy has worked out OK.

As updated a while back, silver trading on a fairly active basis (by my sluggish standards) has yielded a tad over 40% - which is obviously sub-optimal but I failed to sell at the April peak. I've been flat since August, so there it stays. The issue with this book has been the grotesque VaR I was carrying whenever long. Boy, that's an ugly market: don't ever be away from your desk.

The gold is up just a tad over 30%, for zero activity and a very much lower (though by no means insignificant) VaR, depending on how you factor in the powerful multi-year (upward) drift. That's why the long stays on - and of course the valuation is MTM, with potential for an update by year-end.

Since all of this is considered (by me) a hedge against the other awful stuff away from the Drew trading-floor (e.g. the pension, for starters), I may end up needing every penny ... still, a few glasses to be raised when the C@W annual staff party convenes!

ND

MF Global: What Counts As Safe Anymore ?

A short while ago I wrote, can't recall where, that I'd assumed back in '08-09 the financial system itself might collapse - credit cards not accepted, wire-transfers not possible, funds frozen etc etc; but that apart from one Sunday evening when apparently the ATMs were nearly turned off, for most people this actually never really happened.

So - can we afford to be sanguine this time around ? Once again, I'm assuming not - and as Exhibit A we have the ghastly case of MF Global.

Hopefully not too many C@W readers have been personally affected by this; but some folks have been seriously harmed. Read this and gulp. When segregated client funds start going walkabout, the end is nigh. What - or who - is next ?

It's the reason (in my personal opinion) why sticking to physical is best if one wants PMs as a hedge against the worst. Even then, unless its under the mattress ...

ND

Trading Update: Tale of Two City's

Never let it be said that we push a consistent party line here. On the one hand, CU shares his up-beat fortunes (and occasional misfortunes) in the equities. I on the other offer doom, gloom and precious metals. In the middle, Mr Q keeps our spirits up with tales from the High Street and the doings of Brownadder.

Following CU's latest update, a quick word about the preciousss. Things were looking toppy at the start of the week, and so it proved. I have come to view silver as the vehicle for in-and-out moves, and for once I sold at the top (having missed that trick on 1 May): the Drew silver account is a bit more than 40% up on the year. As anyone can figure out, that is by no means optimal, proving I am no trader.

But I have left the longstanding gold position in place, and thus missed out on the 20:20-hindsight 10%-in-2-days on offer. Why ?

Because from where I am sitting, gold looks inexorable. Look at the chart (source: 'economicfreefall') - what is a 10% twitch against that trend ? Less than the previous 2 weeks gains, that's what. The bottom line approximates very closely to the 144-day moving average, the significance of which is that silver bottomed on the 144MA after the May massacre, and then resumed its bumpy ascent.

There was, in my view, no way that 2008-9 was just a nasty bout of recession. The only trick up the sleeves of Gordon 'PFI' Brown, or Ben 'helicopter' Bernanke or whomever, is that dealing properly with problems can generally be postponed. For a bit. Theories of what is happening abound: here's one you may care to read.

Sometimes, to quote Brute Anderson from the DTel yesterday, what's needed is "some old-fashioned Tory pessimism".

ND

Trading Update - Back Into Silver

Well, the bottom for silver was $33 as foreseen, but for various reasons I let it pass, and only got back in at the end of last week, at a little under $36. I'd be surprised if there isn't at least 10% to be had before the summer doldrums - purely MHO of course, and these are crazy 'conspiracy' markets.

Gold, needless to say, has soldiered on almost oblivious to the May massacre. Ditto oil: Brent has stayed resolutely in 3 figures throughout the carnage, and is now back on the steady rising trend that began at $70 less than a year ago (from under $40 at the end of 2008, lest it be forgot).

So - QE3 ? or even permanent rolling QE. It won't just be the FTSE that will see the 'benefit' ...

ND

Oil & That Commodities 'Correction'

So what was that all about last week then, eh? I'm not going to spend much time here on silver, entertaining though it may be, because it is a thin market and crazy things mean less there than elsewhere. Here's a link for those who are interested: I'd say the conspiracy theory must broadly be correct but I'm certainly not going to argue the toss.

Unless the silver thing does actually turn really nasty, oil matters a lot more. Really nasty ? Well, if it causes life-threatening problems for JPM or HSBC (the big short positions); and/or encourages the US authorities to indulge in one of their really brutish, statist interventions like Roosevelt's 1933 confiscation of gold. When you read what transpired over Lehmans, AIG et al in 2008, you needn't harbour any illusions about due process in the Land of the Free.

So what about oil ? This was my 2011 prediction:

"Oil to be in 3-digit territory by year-end and to stay there forever. It will cross the 100 line earlier than that, but there is scope for some dithering on either side initially. Cowardly caveat: a combination of second-leg global recession in 1H11 plus absence of strife in Caucasus / Middle East / Nigeria etc could delay the timing."

Not much in need of revising there (and no shortage of strife). Brent was at $93 at the time, WTI at $89: it didn't seem a particularly bold prediction, but I can point you to some 'professional' econometric forecasters who had it staying in 2 figures for the whole of 2011.

Last week's commodities action, with oil as the centrepiece, is interesting for a number of reasons. (1) Goldman Sachs seemed to know it was coming; (2) it followed Obama's little tantrum (and the UN's !); (3) it has suited those who are trying to levitate the USD right now. For now.

That's where it gets complicated, however, because of course most people would reckon that in the long-term the US is deliberately devaluing the $ via inflation. I'm not going to attempt to summarise here the full conspiracy theory which synthesizes all this stuff. There is a simpler point to make, however: the commodities avalanche was led by gold & silver. Now in a world of leveraged trading and ever-increasing margin calls, a sudden big movement can force big liquidations automatically. So any liquid assets stand to be hit in the storm, and commodities fit this bill pretty well. The rest is a self-feeding downward spiral - until some big cash buyers with a strategic outlook on life come to the party ...

Anyhow: the price of oil remains squarely in 3 figures even after last week's 'rout', and why shouldn't it stay there ? Only Global Recession 2 could undo this, and of course the two are teleologically intertwined. And I do mean global: continuing misery in US / EU / Japan alone won't do the trick, IMHO.

Views ?

ND

Trading Update: Silver: Wow !

That was the week, that was. Having misread the overnight Sunday downtick and added to my stash (and made a day-trader's turn of 4%), it soon became clear this was ugly. On Wednesday I bailed on the main stash (of silver: the gold is a long-term thing), realising a gain for 2011 of a tad under 30%. Of course, last Friday on an MTM basis it had reached 45% ...

All credit to Bullionvault whom I use for PMs: they made a very fair market continuously, throughout all the parabolic carnage. PS that is not a recommendation: but it is certainly a commendation of the highest order.

Debate now rages as to whether Friday marked the bottom. If & when a bottom forms I expect to be back in again, because I have come to like the dynamics of silver a lot.

Next week I will do a proper post on the mayhem in PMs, oil etc. For now, suffice to say, the whole commodities thing reeks of manipulation - details to follow. The Big Boys are lashing out; there may be worse still to follow in this regard; and it's a very dangerous arena for anyone trading on margin (which I never, ever do). When the elephants fight, the ants get crushed.

Unless they are very nippy !

ND

Silver Market Re-visited: Trading Update

Back at the trading pit ... precious metals, and more particularly silver, have surged. I was asked by commenter Sean last week for an update on the conspiracy theories surrounding silver, and at that time the rumour was of $36 being a price- level above which disproportionate losses would accrue to the deemed Big Short, viz JPM (allegedly).

Such dynamics can sometimes be in play: for example, Enron's descent into melt-down was pretty much assured when its share price fell below a very specific level, because various parent-company guarantees etc kicked in at that point. By way of 'evidence' to back the JPM/silver/36 story, $36 did indeed seem to be some sort of ultra-resistance level, and successive 'attempts' to break through had been unsuccessful (or 'repulsed' if you follow the theory).

Anyway, in the last couple of days silver has breezed through 36, hitting 38, at which point yours truly took profits on half of Jan's acquisitions, averaging (in £££) 753 for a 29% gain. This was a bit of a judgment on $/£ too, as the dollar has perked up a bit lately. For once, I picked a top & it fell back thereafter: but will need to be nimble if I decide to get back in again. Since the credit crisis, we're not obliged to mark-to-market any more, are we? - so I shall not disclose the value of the remainder...

As for the fate of JPM - who knows ?

ND

Silver & Oil: Commodities Update

A couple of days ago one of our esteemed anons asked about alternatives for trading the silver market in the current chaotic conditions. We need immediately to register a couple of important points:
(a) we give no advice here & everyone must figure things out for themselves; (b) 'chaotic' is often a good reason for steering clear of anything, n'est-ce pas ?

Anon was raising issues around the potential for physical default if what many judge to be a short squeeze on COMEX silver persists. Anon and others seem to think the situation may be containable in March but could go critical in May. I don't have an opinion on that. But the old question of how reliable is paper? is worth rehearsing again (click on the C@W 'Trading' bar & go back to Silver posts beginning January 11). And here I do have an opinion: if you are hedging against Bad News (my personal reason for being long bullion), and that includes long-heralded market breakdowns - why would you rely on a paper hedge ?

If the answer comes - because it is in backwardation (as it has been recently) - we must immediately retort: of course it is, there's a premium on the physical ! And that's because ... etc etc. Indeed, it is rumoured that some holders of futures are being paid a premium - or 'bribed', as we might say - to accept cash settlement at delivery instead of physical. Have a look at realized prices vs average 'market' prices (the amusingly-named London PM Fix !) for 4th Qtr 2010 as reported by Hecla Mining - hat-tip Anon.

In any case, the same investors were using paper when it was in contango, which is considered 'usual' for precious metals because they have a cost-of-carry but pay no dividend. I can only presume that people find it so much easier to trade & perhaps more significantly, get leverage, using forwards instead of physicals. Seems like a lousy trade-off to me.

Anon went on to say:

"My thoughts are Junior Miners for investment purposes, but worries about price discovery exist"

Which brings us to oil, and CU's post of last week. Oil goes up, and AIM-listed oil stocks go down! How can this be?? All I can say is that a couple of years ago I researched the correlation between gold mining stocks and gold itself, and it was very poor indeed.

So disconnected are the bullion markets from precious-metals mining companies, that the spread between the two is a recognised trade! One of the reasons may be that miners et al are often hedged, i.e. they are not actually exposed to the price of the underlying at all. Then again, just as Anon worries about price discovery, I worry that these bastards lie through their teeth when it comes to disclosing whether they are hedged or not. (This is certainly true of some energy companies, the sector I know best.)

To sum up: the poor correlation between commodities & commodity producers may be counter-intuitive, but when it comes to money, to hell with a priori reasoning - go with empiricism ! Sticking to facts is the capitalist way.

ND


PS if any of this is gobbledegook, give a shout in the comments & I may be able to clarify.

Silver & The Great Conspiracy

There's never a dull moment in the silver market. Recently we discussed the merits of investing in physical, rather than paper commodities, and my personal preference for physical is neatly underscored by the current rash of conspiracy theories concerning a perceived black hole in vaults where big deposits of the shiny stuff should be.

Google any combination of silver, conspiracy, backwardation and JP Morgan, and enjoy the show ! Strongly reminiscent of the more lurid aspects of Enron: larger-than-life businesswomen, rumours of huge out-of-the-money positions, anonymous sources detailing nefarious trading plots - it's all there.

My own recent position is in the money - just - but the bid-offer has widened as things start to go a bit haywire, which is no time to do anything except watch. If the more colourful reports are even part-way true, a battle royal is raging out there, with scope for all manner of mischief and mishap.

ND