Happy Days

fire in the middle of the city during night time

Our resolve can wear down a lot after a couple of months of being hammered in the market. Choppy action for months can be harder than a steady grind down. You get your hopes up that the sector is decoupling from the general market just to get the rug pulled out from under you. 

It is hard to see that equity prices go towards, or below, prices the equities were at a year ago. Getting closer, or below, your entry price is even worse. When you are up by a lot you are playing with the house money. It does not give that much consolation that commodity stocks are performing a lot better than the overvalued tech stocks or the other overvalued sectors. The only thing that matters is that we do not lose money. If you give it all back, you get angry at yourself that you did not take some of it off the table. 

Still, keeping things in perspective is very important. Yes, a recession, or a several year long depression is a possibility. In that case a lot of wealth will be wiped out in the world, but we will still need food and energy to survive. I do not believe that uranium and other essential commodities will fall as much as many of the speculative options out there. (We do however see the uranium sector has outsized beta to the up- and downside again and again). If they do, I believe they will bounce quicker. Why? Because they are essential for our way of living. Most of the speculative cryptocurrencies and tech companies (with unproven business models) can not proclaim the same place in the Maslow hierarchy. Well funded companies with great management in a sector essential for the world energy supply will survive. Compared to other investments many commodities have few to no substitutes, and many of them also have very inelastic price demand. Demand can go down a certain amount during a recession, but if the commodity already is in a major supply deficit, there is a bigger margin of safety  compared to other investments. You still have to pick the right companies. (Picking the wrong one, who has to do a capital raise at the worst possible time, can be the difference between bad and spectacular returns). 

With hindsight on the last couple of years, I would maybe have been a little less aggressive and been more patient with putting on my positions. Lobo Tiggre, the Independent Speculator, is someone I want to emulate more. The markets have time and again given us great buying opportunities. I am however not changing my overall strategy. As with diets or fitness programs, the best strategy is the one you are able to follow. What helps a lot for me is having a job with a cash flow coming in every month. I have diversified some of my new funds into the oil sector, but I am still buying uranium. If we continue lower, I will have some money ready to take advantage of it.

Getting on the offensive

MGM Studios, Inc.

One of my older posts “The Big Commodity Short” has been shared this week. I think that most of it is still on point. If I could have made one change for my own part, I might have invested more in the oil and gas sector that has been on a tear the last year. Still, I think that I also may have dodged a bullet. The cheapest and most undervalued oil and gas equities were in Russia. When I wrote this piece we knew that rising commodity prices would lead to higher prices on other products. That this again would put pressure on the central bank banks to curb runaway prices was a given.The question is still if the central banks will continue to increase rates and cause a major recession.

One should not be in the situation where you doubt the thesis every time the market is going down. The markets do not move up or down in a straight line. I see proof almost every week that the thesis is unfolding:

On Thursday June 16th Borja (@piterloskot82) reported that CGN (China General Nuclear) and CGNPC (China General Nuclear Power Corporation) have entered into a new sales framework agreement for three years between 2023 and 2025 for 3.12 million pounds per year. The interesting part was that 40% of the contract was fixed at $61.78/lb multiplied by an inflation multiplier, but the majority (60%) of the contract was linked to the spot price:

CGN

I have two takeaways from this contract: The first one is that the fixed part of the contract is way higher than the spot price at the moment ($61.78/lb versus $46.98/lb). The second part is that CGN has the majority of the contract linked to the spot price at the future delivery date. CGN would not have 60% linked to the spot price if they did not think it would be a lot higher than $61.78 during the contract period 2023-2025.

We also got the news that Global Atomic has received a Letter of Intent from a major North American utility to produce 2.1 million pounds of uranium from 2025 to 2030. Utilities are looking for pounds outside the major producers with developers to diversify supply. (Previously we have seen companies like Encore Energy contracting pounds for delivery in 2023). We did not see a lot of this before 2021. Focusing on just the general markets and the spot price of uranium going down (while SPUT is getting stink bids filled) becomes very myopic with this backdrop.

The challenge now is to get on the offensive. When looking back at the time we are now five years in the future, what do you think will be the best decision you can make today? Do you believe this is a buying opportunity or should we abandon ship and wait for better times? I am looking for more cash to deploy more steadily, but I will try to be a bit patient the next couple of months.

Why do I still own gold and silver?

white and gray bird on the bag of brown and black pig swimming on the beach during daytime

The majority of my articles are about uranium. My second biggest position is, even if I do not write a lot about it, in physical precious metals and the miners. Owning precious metals after August 2020 has been frustrating to say the least. Why do I still hold these positions when they are underperforming?

To defend an allocation to the physical gold and silver positions, we have to understand that all investments are not for maximizing the upside. Our allocation to physical should be considered more of an insurance. Something you only want for protection against a negative event like a currency devaluation. (The situation in Venezuela comes to mind). Investments in the miners are more for speculation and participating in the upside.

Inflation protection

Many people own precious metals as a hedge against inflation. In that environment, veteran investors will be quick to tell you that investments in energy and other commodities perform even better than precious metals. (A good reason to hold uranium, oil and other commodities).

The other benefit you get by owning precious metals is for diversification, and that it still performs in a deflationary environment. Let us compare the S&P 500 to the performance of gold during the financial crisis of 2008.

Gold during the 2008 Financial Crisis

During the 2008 financial crisis the stock market fell by more than 50% after the housing bubble popped.

From the top og $1549 in October 2007 it took about 16 months before the S&P 500 bottomed out at $735 in February 2009, down 52,5% from the 2007 top. From there, it would take another 49 months before the S&P 500 got back to break even in March 2013. In total, the S&P 500 spent more than 5 years underwater before it managed to get back above its 2007 highs.

The price of gold during the same time told a completely different story. From the S&P 500 top in October 2007, to the bottom in February 2007, gold went up 27%. By the time the S&P 500 was back at break even in March 2013, gold had gone up by more than 120%.

This is not an example to show how much you could have made if you rode the gold bull market perfectly. This is how part of your portfolio could have performed (not inflation adjusted) during the time of the financial crisis if you were diversified into physical gold. Owning an asset that protects you like this can make a big difference if you want to protect your wealth.

Caveat – Gold stocks are still stocks

It is important to emphasize that physical gold performed well as a hedge, not gold mining stocks. The gold stocks performed very similarly to the general stock market, they just fell even more. (On the positive side, they bottomed out and got back to break even earlier than the general market). Gold stocks were not a good hedge during the financial crisis.

What I am doing

Markets do not move when we want them to. I have a position in physical gold and silver for protection, and in the miners for upside. (I look to add to this, and to my cash position in 2022). Many talk about scaling out of some of their commodity positions, and into gold and silver miners later. I do not know if the market will be there for them when that time comes. I therefore have some exposure to gold and silver at all times. 

My portfolio is a mix of physical and Sprott’s gold or silver trusts. In addition I own some miners. For miners the big ETFs are where most of the funds have gone. I also have some select companies who have jockeys with a track record for making money for their shareholders. (Rick Rule has mentioned some of these jockeys in earlier interviews). Like everything else, you can get these companies at reasonable valuations if you buy them during weakness in the market.

Volatility

roller coaster ride

I have already compared the uranium sector to a roller coaster. Today I will expand on that a bit more. The peaks and valleys you will have to go through will only increase with the higher valuations. You therefore have to be prepared for it.

It is not easy to hold on to uranium positions in a bull market. (I have used a graph for Global Atomic for illustration, but the story is similar for most of the companies in the sector). Since mid June 2021 we’ve had a two months long correction that lasted till the end of August. Most of the companies went down 25% or more during this time. When we reached the second bottom in August, the sentiment was close to rock bottom. Most people knew that Sprott was coming during these months, but towards the end several were doubting that it would have an effect on the spot market. This however quickly turned with SPUT launching their ATM on 17. August. We saw the spot price going up from about $30 to $50 inside one month. Many of the companies doubled during this time. Suddenly investing in uranium was considered a sure bet. Just buy SPUT and count your gains. We went from one extreme to the next.


This did not last long. When sentiment did not seem it could get any more positive, we got the news from China that the real estate giant Evergrande may become the Lehman Brothers equivalent for the markets in 2021. Several uranium companies then corrected down by more than 25% within two to three trading days. These moves up and down within a month can make the most veteran of investors nauseous. 

A question for many is, how should you deal with this? Should you sell down and diversify your portfolio? I can share some thoughts I have made on my own portfolio allocation.

Value, volatility and allocation of positions

From 1. August 2020 the value of my portfolio has gone up almost 3X. (I picked August 2020 because the value of my uranium portfolio was still reasonably low then). The increase of almost 3x is partly from new money invested, but mainly from returns on the existing uranium positions.

At 1. August 2020 my allocation to uranium was just over 60% with gold, silver and other investments amounting to the last 40%.

As of september 2021, my allocation to uranium has gone up the most because it has had the best returns. Uranium is the most volatile of the sectors I am invested in. For my portfolio this means that for any given day, the volatility is now expected to be higher than it was in 2020. I have allocated funds to other positions, but my uranium positions have grown a lot more than my new ones. The volatility in my portfolio is therefore mainly uranium.

From the June top, my portfolio value was down about 27% of its June value when it had its first bottom in July. After a failed recovery, it dipped again in August. At the beginning of September we went vertical with SPUT purchases, and the portfolio recovered its losses and went up to about 30% above its June value in just a couple of weeks. (From the bottom in July the value was up almost 78%). After the latest week of fear in the market I am now down to 5 % above the June high, or about 18% down from September the top. The difference from the June top is the sums are a lot higher, and it feels worse to loose the higher amounts. Other, less volatile sectors can take a year to make any of these moves we have had the last couple of months.

You can compare holding your uranium positions through a bull market to raising a tiger. At the beginning it is not that big and scary, and it is still relatively easy to control. When it is fully grown, you risk losing your arm if you are not careful.

I will take my initial position off at some time to reduce the risk, but we are not there yet.

Uranium chugging along

train in railway

This week we have seen SPUT is continuing to drain the spot market. Kazatomprom is in talks to supply both SPUT outside the spot market, and Chinese stockpiles. Today I will have a shorter update, and my focus will mainly be on the action in the market on Friday. I also share some of my thoughts for new investments going forward.

Uranium

Friday was a very interesting day. I hope that everyone that has entered into the uranium sector has been aware that these daily moves are both possible and normal. Volatility is the name of the game, and it cuts both ways. There can be several reasons why the companies, on average, lost 10% on Friday:

  • The situation in China with Evergrande Group and their creditworthiness we are seeing going down. This is scaring the general market who is afraid of contagion. A lot of people remember the housing market in the US was the first domino to fall in the 2007-2008 financial crisis. If not a full blown crisis, people might just be afraid of a correction. That however usually means a run to the dollar. With the uranium sector having a high beta, the moves down in the general market is amplified among the uranium companies.
  • We can also have traders who look at $50 as a resistance level that could give a pullback and have traded this level. The market is made up of several different players who play a different game than you and me.
  • Friday was also the date for option expiry for a lot of the companies. Before Friday a lot of these options were in the money, but with a 10% correction a lot of these expired worthless. I have not seen any numbers to see how big of an impact this correction had, but I would not find it surprising to see these kinds of moves.
  • Some investors in the uranium sector can have $50 dollars as their first sell target for their first tranche of selling. If enough big players sold down a portion of their holdings, this could affect the market. (I think the marginal cost of producers is more around $60-70, and is where a functioning market could find its equilibrium).
  • We’ve had several tweets shared about utilities that have three years worth of uranium. This can make the utilities wait longer for contracts than we think, and ride this price spike out. I do not think that three years sounds that long. We have the ramp up times for existing (and new) mines that can take years, and the time for the fuel cycle is not that quick too. John Borshoff of Deep Yellow, says that there are many teams that lack the skills to start up and run a uranium mine. He thinks the ramp up speed is way too optimistic for most of the aspiring producers in the sector.
  • We have the existing producers (Kazatomprom and Cameco) who do not want a spike in price. This could lead to overproduction, followed by a sharp decline in price, with the price settling down in the 20-30s again. I believe we can have a spike and a drop, but going back to the 20s again would mean all the utilities have topped up inventories again as they had before Fukushima. They had been contracting over 100% of their yearly consumption for years by that time. I do not think that Kazatomprom and Cameco will be able to cap the price at around $60 now. In 2019, before the supply disruptions by Covid-19, and before SPUT was launched in 2021, I think they could have been successful. Now that the financial players on Wall Street are smelling blood, it’s a whole other game. Wall Street now has a vehicle where they can move the spot market.

When I take the numbers from UxC (that Kazatomprom has been using) for utility term volume (over a simplified assumption of 180 million pounds consumption/demand per year), I get a graph very close to the one Sachem Cove Partners have been using in their presentations. The years with 40% contracting led to several years with over 100% contracting. Several years of contracting at this higher level had to pass before the price could drop from oversupply of the market.

Barring a bigger correction or financial crisis, I do not see much stopping the Sprott Physical Uranium Trust from continuing to push the uranium spot price past $60 the next couple of weeks. The uranium equities can however correct 50% at any time, and still be in a bull market. This volatility is something you have to live with if you want to hold them.

Other commodities

I have to admit that I am looking a lot at other commodities than uranium at the moment. My allocation, and the appreciation, of the sector has made my uranium holdings very large. (The picture was totally different during the Summer of 2020. My uranium holdings were a fraction of what they are now, and their performance made me pinch my nose when I bought more). I do not have that feeling anymore and I am looking to precious metals that have had a horrible year. Copper and tin are also sectors I want to get a better exposure. 

Commodity companies are not buy and hold investments, and the different sectors will have different peaks. I know some think they can surf one wave perfectly and then hit the next one. I doubt that I will be able to do that. I therefore want to average into some other commodities going forward. I have to preface this with the fact that I have tried to do this before, and I have most of the time ended up just increasing my positions in uranium.

Conspiracy Theories

Flat Earth

Conspiracy theories have a long and exciting history. Throughout history we have seen conspiracies to take over land, acquire power, wealth and influence by many. We also have theories about whether many of the events back in time are in fact as history says. We often call this conspiracy theories. 

There is actually an anecdote about the term “conspiracy theory”. It is only in recent decades that the term has been given the somewhat derogatory term it has today. It is therefore only fitting that there is even a conspiracy theory about the origin of the term “conspiracy theory”. The conspiracy theory claims that the CIA invented this term in 1967. They did this to disqualify anyone who questioned the official version of the assassination of John F. Kennedy, and anyone who doubted that Lee Harvey Oswald had acted alone. The extreme version of the theory is that they invented the whole concept of “conspiracy theory”, while the more moderate version is that the CIA made propaganda that gave negative associations to the term. 

My favorite conspiracy theory is about director Stanley Kubrick and Moon Landing. The theory is that the film “The Shining” is the director’s admission that he actually directed the moon landing in 1969, and that the United States never went to the moon. (Or at least did not go to the moon in 1969). Since Kubrick had made “2001 a Space Odyssey” in 1968, he was the perfect candidate for the job. The United States could not see itself beaten by the Soviet Union in the space race under any circumstances. The Shining is therefore according to conspiracy theorists, full of hints that Kubrick was the director behind the moon landing. A documentary has even been made about this. «Room 237», which addresses this and several conspiracy theories about the film.

The crown proof most people use is that the character Danny is wearing a sweater with the motif “Apollo 11” on it.

If this conspiracy theory had been true, I would have found it very amusing. I am therefore sad to say that I have seen several documentaries, analyses, and behind-the-scenes footage that unfortunately disprove this theory. Kubrick always used strong symbolism in his films and they can be interpreted in several ways according to what you are looking for. In The Shining it was the costume designer for the film who found the sweater with Apollo 11 as the motif for the character Danny. The costume designer said that she chose the sweater because it looked like it was homemade, and that the family in the film did not have a lot of money. Kubrick had no influence on this other than approving the choice she made. 

There are also conspiracy theories that are supported by traditional media. Everything that had to do with suspecting the Wuhan lab was behind the virus was off limits for over a year. The media said it was a conspiracy theory. You would get suspended off Youtube if you got to close with your accusations. Now, the media have suddenly turned and say the lab could have been behind the leaked virus. The bat (and the other explanations) the media gave instead can be seen as a conspiracy theory from them. The media tried to lump everyone who saw the lab leak as a probable explanation together with the flat earthers. 

The reason I am giving all these examples is just to encourage you to be more open. Conspiracy theories do not have to be invented by people in their basement with a tin foil hat over their heads. As an investor you will have to look past the headlines, or go beyond what the crowd is doing if you want outsized returns. It is important to be critical of everything you see and read.

Precious Metals

All this preamble for saying that I am open to the possibility that the gold and silver paper markets are manipulated. (What I do not want to speculate on is how far up this conspiracy goes).

What I am comfortable in saying is that paper short sellers are able to manipulate the paper price. They usually sell down hard during the low activity hours of the day when there are few buyers are around. The amount of paper contracts they are selling are several times the real volume exchanged in a year of the physical metal. One would expect higher volumes in a futures market, but I wonder if this was the intention when they started selling the futures contracts.

We experienced a massive demand for silver this Winter/Spring with the Silversqueeze. We saw massive amounts of people who took physical delivery. There were shortages at dealers, premiums were high, but the paper price was “tamped down” because of massive paper selling.

It has been very interesting to observe this. I have never been exposed to a market where the product is sold out, and the price is going down. This is not what I have learned about supply and demand in Economics class. For me this smells like bad fish.

I am following a lot of people for more information on the subject:

Sprott Money with Eric Sprott and Craig @TFMetals Hemke

GoldSilver with Michael Maloney @mike_maloney and Jeff Clark @TheGoldAdvisor

Arcadia Economics and Chris Marcus @ArcadiaEconomic

David Morgan

Wall Street Silver

@natefishpa behind renaissancemen.org

These are just at the top of my head, and there are several others to check out. Most of these have been called tin foil hat conspiracy theorists. In this case, I think it is more a badge of honour than an insult. I can be wrong about this, but it does not hurt to seek out independent information. Both that support, and undermines your hypothesis.

Zero to one

faceless man with decorative shoe playing table game

I made my first substantial money investing in tech. Books like «Zero to One» is a book that was referenced a lot for investing in the tech sector and I really respect Peter Thiel as a thinker. I have found this book can also be applied to commodity investing. One can take knowledge from one place and try it in other sectors.

From my experience the biggest change in valuation a company can have is going from the impossible to the possible. A company that is able to get into production, come successfully out of a restructuring, or strikes gold are events I would put in this category. Things that are already seen as possible for a company will already have a lot of this priced in. Unanswered questions, or impossible situations are not priced in, and people do not know what it is worth.

In Zero to One there are three ways of approaching this:

1. Bet on a contrarian truth

What important truth do very few people agree with you on? Here you have to take a step outside the mainstream consensus. Some examples I have for this in the commodity sector are:

  • Renewables like solar and wind can’t save the environment alone. We need reliable baseload power. The solution for this is in many cases nuclear.
  • The electronics industry is experiencing a chip shortage because of increased electronics demand. The tin shortage is the bigger factor, and not production capabilities in the factories that the mainstream media portrays it as.

By betting contrarian here in smaller sectors, one avoids competing one will experience in bigger, more popular sectors.

An important factor to make sure you are correct here is: Is it the right time? If you have seen “2001 a Space Odyssey” they have a version of an iPad in the movie. The movie is from 1968, more than 40 years before the technology and the market was ready for such a thing. You would not want to wait that long for something to materialize.

2. Start by dominating a small market

The book here gives an example of Amazon that started in a small niche market, selling books. They used this as their launching pad for getting into other sectors later.

Also here you can apply this to the commodities market. You will have a better chance with over performing in a niche market like tin, tungsten or uranium than iron ore or coal. But as for every rule there are exceptions. For example, after the big fall in the oil price after 2014, a lot of the workforce had to leave the sector. After investment interest went down in the sector, competition among investors to find the best investments also went down.

3. Strive to be a monopoly

This point is about how you should not compete against other companies. You should be without competition as much as possible. By doing this you prevent the competition from eating away your profits. By doing this companies like Google can focus on improving, and creating new features which the customers will get advantage from.  

I do not apply this to the companies by themselves, but more the sector by itself when it comes to commodities investing. The sector has to be the only solution for their customers. There should not be an easy substitute for them.

The uranium sector is the only source of fuel for the nuclear plants. There is no substitute for uranium to keeping them running. That is why, when the circumstances are right, the price utilities have to pay does not matter.

If you want to solder circuit boards you need tin. Tin is the glue metal. Before you could use lead for soldering, but due to regulatory requirements, plus the health and environmental benefits, tin is the only real alternative now. 

Conclusion

This is something one must try to do with more than this example. From every aspect of your life you might have something you can transfer to another situation. From football you might have to learn to keep cool under pressure, from long distance running you might learn patience and perseverance. All things you can transfer to the rest of your life and maybe to investing. A lot of great things can happen if you go from zero to one.

Common myths about gold

gold bars

If you bring up gold in casual conversation with people you can get a lot of reactions. You have some who love it as jewelry and want more of it. You have people who give it away for special occasions like weddings. You have gold bugs that talk about a financial collapse, and you have most of academia and the world of finance that call it a pet rock.

Gold has many opponents in the world of finance and academia. I therefore want to present the most common arguments against gold mentioned by James Rickards in the book “The New Case for Gold” (2016). Dispelling the most common myths about gold is just a small part of the book. I have mentioned James Rickards in a lot of my posts lately and I think more people should read his works. I recommend you start with The New Case for Gold if you want to get into his writing. If you like what you are reading you can start on his quartet of books on money with “Currency Wars” (2011). It is well worth your time if you want to know what the possible strategy of the central banks might be. You might say that his predictions are very dramatic, but we have seen very many strange things come to pass over the last year.

I

John Maynard Keynes said that “Gold is a barbarous relic”

(Gold belongs to the past)

First of all, Maynard Keynes never said this about gold. Keynes said “the gold standard is a barbarous relic” (Monetary Reform, 1924). He referred to the gold standard in Britain between 1922 and 1939. Britain, like many other countries, had abandoned the gold standard in 1914 to pursue an expansionary monetary policy during the First World War. When Churchill was Minister of Finance after the war, he tried to take the country back to the gold standard they had before the war again in 1925. The mistake he made was that he did this at the same gold price as they had before the war, even though the country now had a higher money supply. This resulted in deflation and a prolonged depression in the country long before the crash of 1929 in the United States. Had Churchill instead gone in for a higher gold price, much of this could probably have been avoided. In any case, it is a big difference to criticize a gold standard and not gold directly.

II

There is not enough gold in the world to cover world trade

This is perhaps the most common myth about gold, but this myth is incorrect. It is correct that there is a limited amount of gold in the world. Considering the amount of money in the world, at today’s gold price, it is not enough to cover today’s needs. What most people ignore is that even though the amount of gold is almost fixed, the price of gold is not. If the price of gold is higher, gold will be able to cover the money supply, whether it is M0, M1 or M2.

You also do not need to have 100% coverage of the money supply with gold. In 2016, for example, the United States, the Eurozone and China could go for a gold standard with 40% coverage in gold at $10,000 per ounce with the M1 money supply. If gold were also to cover M2, the gold price would be $50,000 per ounce. None of these prices are impossible. (For anyone talking about Bitcoin taking over as a means of payment and going to $100,000 or $1,000,000, this does not sound like an extreme option).

Explanation of money supply:

  • M0: The basic amount of money. Money originating from the central bank. Banks’ deposits with the central bank and cash in circulation.
  • M1: the narrow concept of money supply. Money immediately available for use. Transaction accounts and cash in circulation.
  • M2: the broad concept of money supply or public liquidity. M1 + other bank deposits including bank certificates and money market funds.

III

Supplies of recovered gold are not growing fast enough to cover world growth

Then the question is first which target figure should we use to measure growth. Average GDP growth between 2009 and 2014 has been 2.9%, Population growth has been 1.2% in the same period. Gold has increased by 1.6%. The question may be whether GDP should be a good measure of growth or could population growth be a more correct measure. The money supply growth from the Fed during the period during the period has been 22.5%. Which of these four numbers stands out the most?

IV

Gold was the cause of the Great Depression of the 1930s

This is not true. It was monetary policy in the 1920s that made it possible for a bubble to develop as it did. Many say that the Great Depression in America in the 1930s lasted so long due to experimental policies by politicians that resulted in great insecurity among companies and wealthy individuals. Due to fears of changes in the tax system or regulations, a great deal of capital was put on the sidelines during this period. The amount of money was never limited by the supply of gold during this period in the United States. Many, on the other hand, hung on to the money supply in the United States since the depression in the United Kingdom (from point I) was precisely due to this.

It is true that Churchill, by trying to return to the gold standard, which Britain had abandoned during the war, started the depression on the British Isles (from point 1). However, this depression did not spread much outside the United Kingdom. It took several years before the crash in the US in 1929. Several countries had a boom until then. On the other hand, the Depression spread from the United States to the rest of the world when the bubble burst in 1929 and lasted until World War II.

V

Gold has no return

This argument is completely true, but it is not an argument against gold. That’s an argument in gold’s favor. Gold should not have an interest, gold has no risk whatsoever. Gold is money. Bank deposits and cash are in a currency. There is a form of “inflation risk” on this currency, so there is a reason why we want to receive interest on this money. In addition, there is a risk that the bank might go bankrupt and not repay the money. These are two of the reasons why you should demand interest for having money in the bank. (In addition, the bank lends the deposits for mortgages on which they make money).

Furthermore, there are currently countries that issue loans with negative interest rates. In addition, several private banks in the world have only negative interest rates for those who make deposits. This means that you pay in more than what you get taken out of the bank. In this case, I prefer gold, which is a safer alternative for me to retain purchasing power and which does not have a negative interest rate.

VI

Gold has no intrinsic value

This is a statement from David Ricardo. If you are behind it, you are following in the footsteps of Marxism. Karl Marx used this argument in both the “Communist Manifesto” and “Das Kapital”. Both believe that value arises from capital and labor. The more work, the more value. Not a correct theory. For example; I can spend a long time drawing a picture with the best tools around me. Still, I’m not a good artist and this would result in a picture no one wants to buy. Carl Menger from the Austrian School rather suggests a subjective value. Based on the individual’s wishes and needs, the individual will suggest a value they will provide for a product or service. What the person is willing to pay determines value. Independent of capital and labor. Gold value will vary according to the need for people to have real value. In good times, the need for gold is low and correspondingly the value is low. In bad times, the need is higher and correspondingly the price goes up.

The Inflation King

Preserving or increasing my purchasing power has been a big reason why I am investing in commodities. At the moment there is no agreement on what the massive amounts of money printing will lead to. Will we have massive inflation or deflation (or will we have stagflation)? For this week I have focused on the Inflation King.

I love reading about historical figures like the Robber Barons: I’ve read about the Vanderbilts, Rockefellers, Carnegies, Mellons and Morgans. The topic of today is Hugo Stinnes, more famously known as the Inflation King, or “Inflationskönig” in the original German. Most of the information on Hugo Stinnes has been in German, and I did not know that much about this Tycoon before I read the book ”The New Depression” by James Rickards.

If you have grown up in the West and paid attention at school, you know that Germany in the 1920s suffered hyperinflation. This led to a devastating loss of purchasing power for the general population in the country. People lost all their savings they had in the bank, and they had to pay for products with more and more of their currency. There are pictures of people carrying cash in wheelbarrows and kids playing with their useless currency.

The hyperinflation was caused by massive money printing for paying reparations for the First World War from the Treaty of Versailles. The result of this devastating loss of purchasing power for the population. The depression that followed sowed the seed for what came to pass in the 1930s and 1940s.

The reichsmark became worthless. The exchange rate between it and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion in late 1923.

Hugo Stinnes was born in 1870 and was from a prosperous German family who had interests in the coal mining industry. Later Hugo inherited the business, and expanded it by buying more mines and diversifying into shipping, buying cargo lines. He could then use his own vessels to transport the coal. (With John D. Rockefeller making a lot of money on transporting oil, it was probably not a bad idea to be in charge of your own transportation). He also expanded the shipping to include lumber and grains.

Hugo Stinnes

Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks to make more purchases in the different sectors. (I have not found out if he was just a very big gambler, or if he had read up on the works from the Austrian School or similar). When the hyperinflation hit, the value of coal, steel and the price for shipping retained their value, while the reichsmarks fell in value. (Hugo Stinnes also had investments outside Germany where the currencies had not lost their value on the same scale).

Stinnes was able to repay his debts in worthless reichsmarks from his profits from his investment in commodity production and shipping. The price of the commodity, and the shipping of the products, went up while the debts stayed the same. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.

The reason why I bring up the example of Hugo Stinnes is that we have heard mostly about the middle classes being destroyed. If you are prepared you can take advantage of this instead of becoming a victim. Hyperinflation has happened in several places. Three examples are in Hungary, Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.

My takeaway

Writing this I have not run to the bank and borrowed as much as possible to do the same. (However, I did increase my mortgage a bit. I had already paid down a lot on it, and the mortgage is less than two times my yearly salary). I am also using most of my monthly salary to add to my commodity investments. With countries printing trillions of fiat currency with no end in sight, the value of the currencies will go down. The deflationary pressure we have experienced since the 1980 with products imported from low cost countries will not be enough. The price of labor might still be low, but the price of the commodities that go into the products will go up. For commodities we have no new supply coming online at today’s prices.

As for currency default, my home currency is one of the few in the world that is not printing itself into oblivion. I am more worried about the USD than the Norwegian Krone. I have most of my investments outside my home currency in CAD, USD and AUD. I do not expect hyperinflation but a steady devaluation of most currencies and the commodities going up or keeping their value.

Printing new money (stimulus) is far easier for governments than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything drops in value and the purchasing power of the currency actually goes up, which encourages savings and hoarding cash. Why buy a car today (if you have the money), when you can buy the car next year for less currency. The thing with inflation is that it hurts people that have been good savers the most.

Inflation is already here. I go by the definition that inflation is an increase of money supply. “Inflation is always and everywhere a monetary phenomenon.” Increasing prices, which we often call inflation, is a result of the inflation. The question is if we will see increasing prices on goods and services. For anyone who has seen the price of copper or lumber, or anything that is not included in the reported  CPI, the answer is yes. We get a decline of purchasing power of a given currency over time.

I do not care if you are a Tin Baron or Uranium-, Silver-, or Gold bug. We will all be inflation kings.

The Big Commodity Short

large bison

This Sunday I will give my thoughts about the coming supercycle in commodities and why I am bullish on almost all of them going forward.

Most people are aware that I am a Uranium Bug and that I have a good allocation to precious metals. I have also just recently made my first allocation to the oil business, but I have to admit that I am optimistic about the whole commodity sector. I have tried to give an explanation for this enthusiasm in the following paragraphs. 

Backdrop

Commodities are currently 50% cheaper than their lowest point the last 50 years if you compare them to the S&P 500. There are several reasons for this. The cyclical nature of commodities is that we go through boom and bust cycles. We have seen many of these over the decades. Still, the latest downturn has been exaggerated by a number of contributing factors:

A big factor is there is so much passive money waiting to chase the next big thing. We are looking back at 10 years where everyone has been piling into tech companies, weed and cryptocurrencies. Some people are maybe a bit agitated that these sectors have taken away money from commodities, but there is also a silver lining. Instead of having a better funded market, that might be in a supply and demand equilibrium, we are seeing great potential for outside returns on our investments.

I listened to a great interview with Mark Thompson on the podcast “Mining Stock Daily” in their “Tin Special”. He put into words what has been in the back of my mind about the commodities sector for a long time:

The median fund in the world’s allocation to commodities is zero, and most funds do not touch it. In the 80s and 90s, the risky part of people’s portfolios were either allocated to biotech or to commodities exploration. That part is now consumed by tech companies or bitcoin (and other cryptocurrencies) instead. We therefore have not had the needed allocation to commodities that you need to find new deposits. This has in turn affected the supply side. This underinvestment makes commodities very attractive after 10 years of underinvestment.

In the meantime commodities, which are essential for maintaining our living standards, have underperformed. The cost of producing the commodities is in many cases higher than what the companies make selling them. This has led to production cuts and supply being removed from the market. Prices have to increase a lot to incentivize production. However, this supply can’t be turned back on with a flip of a switch. Ramping up production takes time. The companies have to hire and train workers, permits have to be granted and CAPEX investments have to be made. 

The easiest example I can choose from here is uranium. The world is totally dependent on uranium for the 10% of energy production coming from nuclear power. If we want a snowball’s chance in hell of making the climate goals, we can not depend on windmills and solar panels alone. At today’s prices the cost of producing uranium is higher than what they get paid by utilities. For incentivising new supply the price of uranium has to go up. If not quoting Rick Rule: the lights go out. 

We have the same scenario with battery metals like lithium nickel and copper needed for electrification of the world. There are many other commodities that I have not mentioned, but safe to say I am bullish on most of them.

In the coming commodity super cycle we will see massive amounts of passive funds crowding into the different commodity sectors. Passive investing has increased by a lot the last 10 years, and this will hit the very small markets like a ton of bricks. This will have a bigger impact than most people can imagine. When 50% of the market is passive, it will be very different from the bull run in the early 2000s. Passive flows say: let’s buy what is going up no matter the price. Because of this you get big moves. I believe we will see new all time highs in most of the commodity sectors. Many of the sectors today are trading for a total value under the value of companies like Apple or Amazon. When passive funds see the outperformance of the different commodity sectors sustained over time, we will see a rotation away from growth/tech stocks. It is just a question of time. 

We are seeing some evidence for this already. Again, I will give some examples from the uranium sector, because it is the one I am following the closest. In Australia Paladin will be included on ASX 200 and 300 later this year. This means that there will be passive flows coming into the company and give the valuation of the company a tailwind. In Canada we have the same situation with Nexgen and Denison Mines will be added to the S&P/TSX Composite Index.

The picture above is a comparison between QQQ (an ETF that includes 100 of the largest companies listed on the Nasdaq stock exchange) and URNM (the NORTH SHORE GLOBAL URANIUM MINING ETF). The last year URNM has a return of 222% compared to 63% for the QQQ.

I expect this to be a trend we will see continue over the next 5 years. After overperformance the funds will rotate out of their old favorite sectors and enter the commodities sector. A couple more quarters of outperformance and we should witness the metaphor about forcing the contents of Hoover Dam through a straw coming to fruition.