New investment post

16 Jul 2015 by Jim Fickett.

There is a new investment post up, about Brazilian equities.

Platinum, the bear story

18 May 2015 by Jim Fickett.

There is always a simplified bull story and a simplified bear story circulating for any given asset. I've told platinum's bull story before and will tell it again soon, with updated numbers. But for now the bears are having it their way – platinum is down from a high of $1901 in 2011 to $1166 currently.

The first part of the bear story is that the market for diesel-powered vehicles may be shrinking. For gasoline engines, palladium, which is cheaper, is the primary catalyst; for diesel, only platinum will do. Automobile catalysts for cars and trucks with diesel engines is a major fraction of total platinum demand. Europe, which is the largest market for diesels, has been making noises about discouraging diesel-powered autos and encouraging gasoline power instead. This is, indeed, bad news for platinum demand. However it has been blown out of proportion.

According to the World Platinum Investment Council total European autocatalyst demand was, in 2014, about 18% of total platinum demand. 18% is substantial, and there is some real risk. If sentiment against diesel were to gather momentum, and all of Europe were to ban new diesel engines, this would hit the mining industry hard. If, in addition, it were to happen quickly, the blow would be doubled by recycling – old autocatalysts would continue to be scrapped and recycled at the same time that new ones would no longer be in demand (at least for Europe).

However there is no evidence at present that things are anywhere near that bad. It is not all of Europe that is currently beginning to discourage diesel, but rather one country, France, and one additional city, London:

  • From Reuters: “Late last year, Paris announced plans to ban diesel cars from the French capital by 2020 to cut air pollution, while London mayor Boris Johnson plans to double charges for diesel cars in congested areas.”
  • And from the Financial Times: “Last year Manuel Valls, the French prime minister, said the promotion of diesel cars had been a “mistake” and Anne Hidalgo, Paris mayor, said she would phase out diesel vehicles from the city by 2020. London has also discussed anti-diesel measures.”

For the near future the effect appears to be quite small. The highly respected commodity analyst team at Macquarie Bank tones down the fears:

The death of diesel engines in European cars has been exaggerated, Macquarie said …

Macquarie said that 53.1 percent of total EU sales were made up of diesel engines in 2013, a figure it expects to fall in 2014 at 52.8 percent.

“For platinum demand this is bearish, but should be kept in context – a 2-percent point decline in diesel share only reduces platinum demand by about 50,000 ounces, and will be offset if overall car sales in Europe rise by more than four percent, which we expect. More profound changes could happen in future,” it added in a report.

… we think [diesel's] market share decline will accelerate in 2015, though by no more than 2.0 percent points,” Macquarie said.

So diesel market share surely bears watching in coming years but, for now at least, no significant decline can be predicted with any certainty.

The second part of the bear story is that recycling has increased steadily, with the total percentage of platinum demand met from recycling more than doubling in the last 20 years. Here is a graph from the South Africa Chamber of Mines, based on data from Johnson Matthey:

Jewellery recycling comes and goes, depending on the economic cycle and platinum prices. What is really driving this trend of steadily increasing recycling is autocatalysts. As the general infrastructure for recycling continues to be strengthened, there is no reason why the trend of increasing recycling should not continue.

Again, however, one needs to put things in perspective. One often reads commentary suggesting that, since hulks of discarded automobiles contain a higher percentage of platinum than South African ore bodies, recycling is trivial and will become ubiquitous. However discarded cars and car parts are widely distributed and it is the infrastructure of getting all the used catalysts to a refiner that is the challenge, not the refining itself.

The USGS wrote in 2004:

The relatively low value of the metal content (about $19.00 in each converter), the low concentration of PGM's (less than 0.1 weight percent) and the difficult logistics of returning the material to a central recycling location are reasons why recycling of PGM catalysts in not yet economically viable in the United States.

Things have improved since then, but Johnson Matthey reported only 3 years ago that recycling of catalysts was still only at about 50%.

In fact, although the percentage of newly mined platinum in autocatalysts has steadily decreased, the absolute amount of newly mined platinum in autocatalysts has, economic cycles aside, been quite constant for many years. See the green line in the following graph – the gross demand for platinum in new autocatalysts less the amount recovered from recycling old autocatalysts, in millions of ounces:

I have also plotted the total amount of platinum produced from mines, in the blue line at the top of the graph. I'm inclined to think the significant dip in the last couple years is temporary. Production dropped strongly in 2014 due to mine strikes and, in the 2015 estimate, the drop is mainly due to decreased demand from investors, the lowest in eight years, unsurprising since very few investors actually buy things when the price is low.

It is nevertheless possible that the number of ounces of platinum produced annually by mines might have peaked.

What if the absolute amount of platinum needed from mines is now in a downtrend? Compare the blue line at the top of the graph and the red line, recycling, at the bottom. Even in the most pessimistic (for mining) scenarios, it will be a long time before they meet, cross, and mine supply needed goes to zero. So most of the world's platinum need will be filled by newly mined material for a long time yet, and the increase in recycling does not in any way weaken the main bull argument for platinum, which is simply this: mines must turn a profit, and cannot do so at current prices.

Shorting treasuries looks attractive

8 May 2015 by Jim Fickett.

As you have most likely heard, Buffett recently said in a CNBC interview.

If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I’d do it. But that’s not my game, and it can’t be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I’ll put it that way.

So one must ask (yet once more), is there evidence that we might be near the bottom in long-term bond yields? The answer is yes. Here is the history of the 10-year treasury rate and core inflation for the last 60 years:

Note first that yields are, in absolute terms, at a 60-year low.

Second, note that 10-year treasury yields rarely fall below the core inflation rate. But recently they have done so.

And third, note that US inflation is unusually low. The average inflation rate over the last 102 years is 3.0%. Currently the core rate is below 2%.

So inflation is likely to rise, and yields are likely to rise above inflation.

If one could just buy and hold yield, rather than shorting treasuries, there would be no question. Yield is too low, and treasuries too expensive. But of course real-life shorting requires good timing.

You might get the idea from Buffett's statement that he is making a statement about timing, saying that whereas before it was too early to short treasuries, now is the time. In fact, if you listen to the quote in context, it is clear that he is making no such statement. He is very clear about the timing risk, saying in particular that Europe may need to hold rates low for longer and, if they do so, it will be difficult for the Fed to raise US rates very much.

On the whole I think a short position in the fairly near future might make good sense. Yes, it is true, European policy might delay Fed action. On the other hand, the Fed's own economic criteria for action (e.g. the unemployment rate) will push for some action before much longer; various Fed members in various fora have more or less admitted bubbles are a present danger; and the general sentiment in the bond market is clearly more negative than it was.

For a previous attempt to quantify the risk of using ETF shorting funds in this context, see Short on Treasuries and Inverse ETFs and Treasury yields.

Officially sanctioned bubble culture

5 May 2015 by Jim Fickett.

The Joint Committee of European Supervisory Authorities recently acknowledged that extraordinarily low interest rates, now policy in the EU as well as the US, are likely to channel money away from truly productive investment and into unproductive and dangerous asset price bubbles:

As market expectations indicate that future real yields are likely to stay below GDP growth, they … suggest that bubbles are in future more likely than in recent past. Available historical data confirm indeed that asset prices, in particular also for real estate (relative to rents), tend to be elevated when the interest rate is low (relative to output growth)… Given the low relative performance of growth rates, savers turn to bubbles to reach their return targets. Over time, productive investments are crowded out, as real resources are misdirected.

We could jump up and down and shout about this, or indulge in schadenfreude, but it is more useful to ask, what does this suggest for one's investment strategy? On the one hand, the success of Warren Buffet, for one, shows that straightforward value investing still pays. On the other hand, with not only human nature but now also central bank policy in all the largest economies standing unified to create bubbles, I suspect Jeremy Grantham is right to suggest that studying bubbles objectively, and learning to make money from them, should be part of every investor's thinking.

Silver is reasonably priced

3 May 2015 by Jim Fickett.

The current spot price of silver is 1% above its long-term average (see the Reference page Historical prices of precious metals for details). Given the natural volatility of the precious metals markets, this means that if you buy at current prices, you are very likely to be able to sell at a profit at some point in the future.

I am not attempting to predict the time frame or magnitude of any gains, and am not saying that silver is a particularly good investment. What I am saying is that if you are attracted to silver, as many people are, then now is a reasonable time to buy (in contrast to 2011, when the price was at twice today's level, and I pointed to a Silver bubble).

Additional evidence that silver is reasonably priced, possibly even a bargain, comes from analysis of mining costs. Silver, unlike gold, gets used up in industrial applications and supply must constantly be replenished by mining. So the price cannot stay for too long below the cost of mining. Mining cost is complex to analyze, because one must take into account capital investments necessary to maintain future production, as well as cash costs involved in mining, and also some share of general company expenses. It gets even more complex in the case of silver because silver is usually mined together with other metals and it is sometimes difficult to properly allocate company costs for each metal. Nevertheless, one can make a reasonable estimate. BMO Research, in a report Silver Industry Costs, analyzed the all-in sustaining costs, including taxes and interest expense, but only capital necessary to maintain production, not expand it, for each of a large number of silver mining companies. They found that only 25% of silver companies had estimated 2013 costs below the then-current spot price of $22.44/ounce. The price is now considerably lower, at $16.10/ounce. Thus, if this analysis is be be believed, it is very likely that the price will have to rise long-term.

All in all, I think silver, at current prices, is at least a good store of value, especially in a tax-deferred account.

Update on precious metal prices

4 Dec 2014 by Jim Fickett.

The gold price is driven entirely by investor sentiment, and the prices of silver, palladium and platinum are heavily influenced by investor sentiment. In such cases it is very useful to compare current prices to inflation-adjusted historical averages. This technique has served me very well. I sold both silver and gold fairly near their recent peaks (Rebalancing gold, Sold some old silver coins) and also more than doubled my money on palladium by buying when the price was historically low and selling when it was high (Sold palladium, Sold palladium, +172%, Sold last of palladium; +189%).

Here, then, is an update on precious metals prices in an historical context.

Silver is only 4% above its long-term historical average price. Leaving all supply and demand issues out of the picture, and just looking at price, this suggests that silver bought today can probably be sold at some future date at a higher price.

Gold is 59% above its historical average. So even though it has come down quite a lot lately, there is no margin of safety in the current price.

Palladium is more than double its long-term average price. This might or might not be justified by supply factors, which are complex.

Platinum is 25% above its long-term average price. In my view this premium is justified by increasing cost of production, and I think platinum is a bargain (Platinum: The short-term price drop is an opportunity). Nevertheless, the long-term average price analysis alone does nothing to add to the case.

(For data, graphs, previous commentary, and sources, see the Reference page Historical prices of precious metals.)

New investment post on global stocks

28 Nov 2014 by Jim Fickett.

Buying Tweedy Browne Global Value Fund

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