Fundamental Trade Notes: Short Silver

Morning,

Here are my notes for reasons why I am currently short silver:

1. China Growth Concern:

- Caused a drop across the commodity markets over the past month, of which a drop in silver has lagged behind the fall in the other major trading commodities.

- The drop and continued uncertainty in the Shanghai Composite Index is likely to continue to weigh down upon the Chinese economic outlook over the coming months.

2. Dollar Strength:

- Moves in the FOREX markets in combination with the poor Eurozone outlook and Asian quantitative easing program have created a dollar strong environment, which will help to pull all commodities downwards in price.

3. Gold Correlation:

- While silver does have more industrial uses than gold, it generally correlates with the gold price movement (as a fiat currency hedge - buying gold is going long market fear), which has been steeply downwards over the last couple of days. Silver needs to make a significant move downwards in order for this correlation to remain consistent.

Enjoy,

The Masked Stock Trader

Turmoil In The Oil Market.

I've never traded oil futures before, in part because the high inherent volatility of the commodity combined with a leveraged environment would throw me significantly out of my current comfort zone, but also because I would rather learn to trade on sector of the global markets really well rather than many to a mediocre level.


Nevertheless, falling oil prices have hit the AIM substantially knocking back the majority of junior oil explorers/producers, so I have to keep a vague eye on the market even if I don't directly trade it.


In my opinion the major falls we've seen in oil prices ca be split down into a few major points:


1. OPEC Vs Shale

- Personally, I feel that one of the major reasons why OPEC has decided to maintain its current supply levels is due to a desire to try and drown-out the US Shale Oil producers from the market and allow the status quo within the OPEC to continue undisturbed by foreign input and disruption.


- Moreover, intra-OPEC there seems to be certain parties who don't want their dominance with the OPEC to fall, with Saudi Arabia being possibly the best example of this. From the outside looking in, it would seem that they don't want to relinquish their supply into the hands of other members of the OPEC and will therefore hold at their current levels for the meantime.


2. Global Growth

- The next fundamental point is that global growth levels over the past quarter really haven't been anything to write home about, especially in the major growth markets, with China growing 7.3% in its third quarter - its slowest growth rate in five years. This coupled with China being potentially described as a "statistically generous" country with regards to its economic figures, means that the downwards pressure we've seen regarding oil prices was on a balance of probabilities going to be reasonably likely.


3. Reducing Sanctions on Oil Producing Nations

- Another key point that we shouldn't ignore for indication for the future direction of the oil price, is Iraq, Iran and Libya, all of whom have said they intend on increasing their production levels by 2015. This does in part depend on the sanctions currently in place on Iran over its nuclear program, but I certainly would not be surprised by more downwards momentum in the oil markets assuming a global state of ceteris paribus.


All the best,

The Masked Stock Trader

Understanding Gold As An Asset Class

I was asked this very question a couple of weeks ago by a friend of mine (not that I actually have gold currently in any of my portfolios, but that's part and parcel of being a more active trader).


Having a long position in physical gold possibly isn't necessary for those managing smaller portfolios, but for larger portfolios there is a really strong argument behind it. In the current climate, where major indices are reaching up towards the inflation adjusted levels we saw before the last crash, margin borrowing levels are back at pre-2008 crash levels and where political tensions are steadily increasing across the globe, having a strong hedge against global economic unrest is essential to preserving personal wealth.


One of the first problems that many westerners have with understanding gold, is that we have a tendency to believe that gold is a speculative asset driven by COMEX futures and ETFs and we ignore the fact that the biggest stock of gold held worldwide is in jewellery (mostly by Indian households who own around 18,000 metric tonnes of gold in total). The largest demand annually is still in jewellery and the largest annual geographic demand remains in India and China.

This is an important demand point to remember, because we can compare movements in physical premium prices in India and China against the leveraging levels in the COMEX futures and ETF redemptions to determine major changes in the gold price. For example, back in January 2014 when we saw these speculative gold indicators, we could have deduced that the gold price was unlikely to fall below $1200/oz as the gold premiums in China and India were still very high at that point. In effect we saw a transfer of western sellers to eastern buyers.

Excluding the jewellery markets, industrial demand is another important factor to remember as it amounts to a steady 10-12% of the world's gold demand, although when gold has been high in its price range there has been a change in many cases towards copper for the production of these semiconductors.


In terms of supply, the most important point for me is that when we analyse the gold price we need to remember that gold miners produce about 2,600 tonnes a year while gold recyclers recycle about 1,600 tonnes a year. This relatively low supply and low volatility in terms of supply is one of the reasons why gold has a generally low volatility.


A really big point we have to remember is that in terms of the global total assets under management, which is estimated as being anywhere from $120-150 trillion, gold still only amounts to between 0.5-1.0% of that total pot, so we can ignore arguments that gold is a done trade.


Other very strong factors behind gold are its uses as an inflation hedge (over the last 30-40 years it has out-performed US CPI inflation in periods of high inflation), a hedge against currency debasement and its potential use as a monetary quasi currency.



To sum up my like of gold, the number one reason to have gold in a long term portfolio is because it has very good characteristics to hedge against bad beta in high sigma events. The World Gold Council ran a study when they took a wide range of credit crunches and ran portfolios with and without gold and in only one crash did gold not benefit the portfolio. So, it effectively reduces current risk, but also hedges your tail-risk levels - it defends against unforeseen risk.


All the best,

The Masked AIM Trader