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.

Silver: Do we want to have a free market or do we want shortages?

close up photo of gorilla

I am back with my tinfoil hat to write a bit more on the silver market. Doombergs recent article on the copper and oil markets have put things into a bigger perspective for me. In addition I have relied on the work of Nate Fisher and Ronan Manly on the silver market.

Oil

I will start with referencing Doombergs 25. October 2021 article “Doctor Copper Is Sick“ where they started with explaining what happened in April 2020 when the oil price traded negative $37.63 a barrel:

 «The front-month May 2020 West Texas Intermediate (WTI) for delivery in Cushing, Oklahoma is the contract that traded negative and – critically – the Chicago Mercantile Exchange (CME) allowed it to happen.»  

«Whatever you might think about the CME’s decision, few doubt the sanctity of that market now. Participants understood the rules, the rules didn’t change, a clearing price was found, and life went on. Production of oil was curtailed, creative storage solutions were implemented, prices recovered, and excess inventory was worked off in an orderly fashion as the economy rebounded.»

Doomberg

In this case long traders were punished because they did not have a place to take delivery of the oil they had purchased. For anyone who believes in capitalism, this is how you do it. You do not interfere with the price or change the rules. Price is the market clearing mechanism. Everyone in the market knows the rules already, and you do not change them when some of the participants are in trouble. The market was allowed to find a market clearing price at negative $37.63 a barrel, and this was reached without outside interference. 

Copper

On the The London Metal Exchange (LME) however, the price was not allowed to find a clearing price in the copper market:

«somebody was caught naked short and could not make delivery. They collected money from another trader at some point in the past on the promise that they would have copper to give them, but when the time came, they couldn’t make good on their contractual obligations.»

Doomberg

Market participants have to know the rules in the market they operate in. If a naked short sees the price of copper goes up, they have to run around to sellers of physical copper to buy from them. If they can’t find anyone to sell them copper, they can’t deliver on their obligations. (To use GameStop as an example: the short sellers were forced to buy back the shares they were short at prices way above what they had already sold). Those are the rules, and they have not changed. This led the copper price at the short end of the curve to go vertical.

LME interfered and allowed participants with short positions to avoid delivery. The rules were changed. People who have followed the commodities markets have expected copper going up with increased demand, and have taken long positions in anticipation of this. (As we saw in the oil market, being long is not without its risks). Interference to protect short sellers does damage to the market. Inventories of copper were low because supply could not keep up with demand. Increased demand for a product is not manipulation.

«the LME damaged its credibility in the marketplace. It either facilitates price discovery and thereby serves a useful purpose, or it doesn’t. Apparently, it doesn’t.»

Doomberg

The positive take away from the oil and copper market is at least that it is communicated to the market. Many find it is a lot worse in the silver market.

Silver

Moving on to silver I will follow the example of Nate Fisher and make the disclaimer that everything I write about the silver market are allegations only. 

I am using the articles “The Great Silver Conspiracy – should we have hit $50 silver in February? Yup.” by Nate Fisher and “LBMA misleads Silver Market with False Claims about Record Silver Stocks” by Ronan Manly as my reference.

They are very thorough articles so I hope you will read them for reference. I am doing the cliff notes version here:

Starting at $24.85 on 28. January, the price of silver spiked up. Silver was going into the weekend 30. and 31. January at about $27.00. Over the weekend there were massive retail raids of physical silver all over the world, and several sellers sold out their inventory. This had the effect that retail sellers would have to source new inventory. Into Monday 1. February the price of silver went up even more, and hit $30 before ending the day at about $29. A massive move in a short amount of time. The next day on 2. February the paper price on silver was smashed down over $3.50. – This was at a time where there was massive physical interest with retail silver selling out, and money was pouring into vehicles like the SLV and PSLV.

The reason for people buying SLV and PSLV was simple: 

(this) “led many of us to buy SLV or SLV call options expecting the float in the LBMA warehouses to be exhausted and force SLV to go to the open spot market to buy silver at increasing prices. Potentially hundreds of millions of ounces would need to be sourced, and it led investors to believe that the price of SLV would thus go sky high.“

“Now, with SLV, investors at the time were led to believe that if they bought shares in SLV, that SLV would then add the appropriate ounces to the trust.“

Nate Fisher

Over a three trading days period between 29. February and 3. February SLV claimed to have sourced a massive 118 Moz, and barely moved the paper prize of silver in the process. (With a yearly consumption of 1,000 Moz, a three day shock of more than 10% of this is huge). People who did not believe this were asked to take off our tinfoil hats.

Silver investors

“However, it appears that somewhere around February 1st, SLV changed their prospectus to suggest that “not all of the silver is there.”

Nate Fisher

What a coincidence. A fund that at one time had in their prospectus that they had fully allocated to silver, suddenly changed to say it might not be all there.

Later, in April when they closed the books for March, someone found a 110 Moz accounting error in “one of the LBMA vaults”. (Tinfoil hat back on).

«In short, instead of silver holdings in LBMA vaults having risen by 3,863 tonnes (or 11%) in March, the new LBMA claim is that the silver inventories rose by 561 tonnes (or 1.6%). Which is 6.88 times less.

Instead of a 124.2 million oz increase, the increase was 18 million, a difference of a massive 106.1 million ozs. Instead of record silver holdings in London, there was no record. Therefore, the folks at the Guinness Book of Records are not needed. The record still belongs to March 2020, when 1.175 million ozs of silver was claimed by the LBMA to be stored in London.»

Ronan Manly

There are a lot more factors in play here, but I suggest you read the two articles I have linked on the subject. In short what happened was the following:

SLV misled investors to think they had added 118 Moz of silver, and they did not. (If they had gone out into the spot market to buy these 118 Moz, the silver price would have moved significantly, and sharply higher. In turn, this much higher price would have attracted even more buyers and speculators – driving the price even higher. Silver and many commodities act like a Giffen good: A good that people consume more of as the price rises). Furthermore, SLV changed their prospectus during this time, before they months later discovered the accounting error.

I can attest to, as a person who works in accounting, and has reporting every month, that in even smaller companies you will have some quality control over what you report. If there is a big change month over month in a reported number, it will always be investigated, verified and commented on. «I see we have a 10% increase in inventory this month. What is the reason for this?» Is something that will be asked in situations like this. Especially if holding bullion is your main business. The responsible for purchasing and logistics then have to confirm it. People make the entries, and we always have to double check for human error.

The only thing I am unsure of in this case is what price we could have seen in February. Could it have hit $50? One can never know how things would have played out without interference. I am sure that when price was not allowed to spike up, and find willing sellers, we have just kicked the can down the road. The market has not been given price signals to increase production, and companies like First Majestic are holding back part of their production. People around the world are seeing rising prices. Those who have read up on history are buying real assets, cryptocurrencies, commodities and precious metals. I am sure we will see situations later where we will have a similar run on silver, and there will not be enough to go around. The playing card with “accounting error” will not be possible to use again. Silver investors have also learned not to use vehicles like SLV, and will only buy physical or use PSLV that actually stack silver for their customers.

The inflation of silver

pexels-photo-3483098.jpeg

I have not written about silver (and gold) for a while, and there’s no secret why. Even with the #silversqueeze movement early 2021 the price has still not moved anywhere. However, the lack of interest in the sector only increases my conviction long term.

Gold and silver are my most frustrating investments, at least so far. The interest rates go up, precious metals go down. Interest rates get pushed down, no response from the precious metals. (Don’t get me started on the money supply). This is an exhausting situation, and I think many have given up on the sector. I am stubborn, and have been in a similar situation with uranium, so I still hold my position. (If I had started with investing in uranium earlier, maybe 2017, I would maybe be fed up by the start of 2020. Right at the beginning of the turn for the sector). A year of underperformance or flatlining can turn around very quickly.

Gold and silver trade very similarly, but with my risk tolerance, I follow silver more closely. Silver also has the more interesting demand structure with about 50% from retail and 50% from industrial.

Why are we here

As in many other commodities I think investors do not believe in it after several years. We are in a “The boy who cried wolf” situation. We even had the #silversqueeze this Winter and retail trying to drain the COMEX. (COMEX is the primary futures and options market for trading metals such as gold and silver. However, they mainly offer paper contracts, and do not want customers to stand for delivery. Their physical supply is more what you see at a car dealership showroom. They do not have that many cars parked outside). With the massive buying of physical silver, both from coin dealers and through the PSLV (Sprott Physical Silver Trust) we had a spike up in the paper contract price over $28, but it was soon pushed down again. Still, the movement continued to stack silver and buy PSLV for months afterwards. It is therefore frustrating for many to see the silver price is trading lower than it did a year ago.

silverprice.org

The big inflation of silver

The reason why the price of silver is trading lower is the inflation we have in silver supply. (In this case I am talking about “paper silver”). With so many paper contracts for silver, the amount of “silver” in the market gives the market an image of oversupply. If you have an oversupply of a product the price usually moves down. Very few of the paper contracts are expected to be held for delivery. Some people are talking about a 500:1 ratio for paper to physical silver. In the midst of February 2021, when the #silversqueeze frenzy was at its highest, you suddenly saw a tremendous supply of paper silver being sold in the market. The silver market seems to be trapped in a situation where the paper contracts decide the price, and not the supply demand of the physical silver.

The supply and demand we see for physical silver

Production of silver is falling, and according to First Majestic Silver, mines produce about 800 Moz a year. Annual consumption of silver is about 1.0 Boz. The 20% that is not covered by mining comes from recycling and above ground supplies. How big these above ground supplies are is difficult to estimate. No one really knows. (We have a similar situation with estimating above ground mobile inventories of uranium). 

57% of silver consumption is from industrial applications. We are talking electronics, medicine, solar, water purification, window manufacturing, etc. (Silver used to be in high demand due to its application in photography, before digital cameras became widely available. Industrial use of silver fell due to the transition to digital photography. This slack has now been picked up by demand from photovoltaics (solar panels) and EVs).

The remaining 43% demand comes from coins and bars who absorb 22%, jewelry with 17%, and silverwarewith 4%. With the #silversqueeze movement this year, the demand for coins and bars have been a lot higher than normal.

Why do you invest when the market is rigged?

The average silver investor

At the moment, financial players are able to control the market, but I do believe that one day we will see an end to this silver manipulation. If silver had 100% industrial demand there would be more held for delivery. (The retail demand for coins and bars we are seeing now, is trying to force the same effect). The more people try to force delivery of actual silver, the less paper silver will be able to dictate the price. 

In the Palladium sector they had a situation we hope will repeat with the silver sector. (The key commercial use for Palladium is as a critical component in catalytic converters – a part of a car’s exhaust system that controls emissions). Palladium had a futures market that broke down because strong physical demand broke the short interest players.

Sprottmoney had the following explanation for the price going vertical from $1,600 to $2,600 in just a few months in 2018: “After a rally from January 2016 to January 2018 of over 150%, or $682, Palladium fell just 28%, or $318. Then it took off again, and as we know now, after a vain attempt to cap the price they decided to give up this time and not risk being even more record short this time around. They realized that paper futures no longer had the same effect on the price of the underlying commodity anymore and did not want to risk being caught massively short as the price continued to soar higher.

The increasing demand for the physical product, together with a high short interest in the futures market, made the massive price increase possible. The longer the price is kept down, the more energy is stored. This is the reason why I am not letting my eyes off silver.  If $21 is the floor for silver, or we might have to go lower remains to be seen. I am keeping my silver position and hope to get rewarded in the long term.

An eventful week in uranium

space grey ipad air with graph on brown wooden table

I do not think I am alone in looking back at a great week of investing. From the activity on Twitter it seems many have had a hard time concentrating on their work with the spot moves we’ve had in uranium. I am happy that the Australian market is closed before I start work, and the US and Canadian market opens just as my workday ends. It looks like the games have begun.

The depth of the uranium spot market

We have seen much discussion back and forth the last year about the depth of the uranium spot market. In an interview with Smithweekly, Mike Alkin from Sachem Cove Partners said “With a couple of hundred million dollars they can create their own reality in this sector.” (In this setting he referred to the financial players). I have been in the camp believing Mike Alkin and Timothy Chilleri in this, but there have been people taking a different view. They have been saying we would have seen a move in the spot price already if that was the case. 

Some people reacted to the euphoric atmosphere on Twitter the last couple of days, saying that sentiment is too positive. First of all you have to consider we just went through a 30% drawdown in July and August. Secondly I would say that it was mainly a cry of relief that a key component of our investment hypothesis seems to be correct: The available supply in the spot is very low. There is above ground inventory but it is not readily for sale, or at least not at these price levels. As Brandon Munro also has commented: when sellers see that spot is increasing, it actually reduces available supply. This is because the sellers see they probably can get a higher price in the future. 

Tradingview

With the $39.00/lb spot price in uranium at Friday’s close, the entry of the Sprott Uranium Trust ATM funding has led to a $8.70 increase from $30.30 on 17. August. That is a 28.7% increase in the uranium price.

I think that we were really close at moving the spot price up to today’s levels during the Spring. This was when the developers were buying uranium. Many of them, however, bought pounds several months into the future and did not really challenge the near term spot supply. If we had seen more purchasing with 30 day delivery, I think we could have seen a similar situation to the one we are seeing now.

What I believe we have seen the last couple of weeks is that most of the readily available supply has been removed. Up until now, a couple of traders have (at least in theory) been able to keep the price at or under $30 by selling the same pounds back and forth among themselves. The buyers in the market want to get the best price. Utilities, and producers like Cameco, have been buying in volumes, and with delivery further into the future, so they do not move the price. When production at Cigar Lake halted in 2020 because of Covid-19, we saw the spot price increase by a lot during a short timespan. This was because Cameco had to secure pounds to deliver on their contracts. Securing supply for delivery was more important than waiting for better offers.  

As for some of the profit taking and selling on Friday. People sell out of their positions for many reasons. Many investors reached their objectives and have taken money off the table. (If you want to exit a position you would rather do it when there are many buyers and the interest is high). These sellers might enter later when the spot price goes over $40. In bull markets we have to climb a wall of worry. At every resistance level there are participants that expect the trend to turn downward and sell down their positions. I expect a lot of people, new and old, jumping in when we get above $40.

Can SPUT be stopped?

There are some people who are discussing if SPUT can be stopped legally, with them cornering the market for spot uranium as they are doing now. We have the example with the Hunt Brothers in the silver market who were forced to sell their silver position in 1980. At the time silver was going parabolic. (We have still not made a new all time high in silver since then). Concerns about government intervention is therefore something all of us should consider.

I love using anecdotes from when I was a child, I will therefore share one with you here: When I was about five years old my brother and sister entered into a drawing competition in the local newspaper. After a couple of weeks they both received a participation trophy in the form of a calendar. I became jealous and I cried to my dad and asked him to contact the organizers. He called them and asked them to find my picture, but they could find any. My dad then had to explain to me that they could not send a trophy when I had not participated. Nothing is stopping utilities or producers from entering the market and bidding for the pounds themselves.

Kevin Bambrough says that most people won’t even blink an eye under $150/lb and I agree with him there. It is never too early to consider it, but we should not sell or worry at all under $40/lb. We are still under the all in sustaining cost for most producers, very early in the game. John Quakes does not see why or how the US government could intervene to try to stop a Canadian based company issuing shares and raising cash in Canada to purchase a commodity in the market.

In closing I just have to say we are looking at exciting times ahead. I have no idea how far we will go. My positions in uranium are already doing better than any of my investments up until now.

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.

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.

Second-order thinking

rocket launch liftoff long exposure

Today I will have a very short post about second-order thinking. A term made famous by Howard Marks from Oaktree Capital. I have applied some of his principles to my investment philosophy.

To explain second-order thinking, it is always good to use an example: Imagine that you have a company that is doing well in terms of profitability and the share price returns. One who uses first-order thinking reasons that this is positive and wants to buy shares in the company. Second-order thinking, on the other hand, can come to a different conclusion. The company is competently run and does well, but all investors already think so. The company might be overvalued and the stock overpriced. The second order conclusion may therefore be that it is best to sell.

When I started investing in stocks, it was mostly first-order thinking. I never thought I would buy shares in industries where most producers were losing money. First-order thinking says a company that is losing money will probably give a negative return, and maybe risk bankruptcy. This is quite simple and straightforward. If a company spends more money on producing something than they get paid, they lose money.

For investing in most industries, this is a good practice. I used this first-order thinking in 2011 and 2012 for my investments in banks. Banks were demanded to build a capital buffer to improve their solvency to be better prepared for a downturn in the future. The newspapers were at the time saying that the banks’ interest margins were unreasonably high, and the banks took too much from customers. I thought that instead of fighting against the banks, it would be easier to become a part-owner of them. I started buying shares in the banks that had better than normal profitability. The next few years this was a great investment. Several banks saw returns of over 100%. I would consider this first-order thinking, but no one said it has to be unprofitable to do the obvious.

Second order thinking

What I try to do more of today is second-order thinking. The person most responsible for this is Rick Rule, legendary investor and CEO of Sprott U.S. Holdings. (Now retired, I am looking forward to him saying what he really thinks about companies. He has said he can talk more freely about them in retirement). He has an expression that says: “The cure for high prices is high prices”, and “the cure for low prices is low prices”. This term applies especially to the commodities sector.

If we are in an industry that experiences high prices, it will attract more players. Think of the shale oil industry in the United States when oil prices were above $100 a barrel. With several offering the same product, the supply eventually became so high that there was a surplus of the product. This in turn led to falling prices. See below for the number of operating rigs in the USA and correspondingly for the fuel oil price:

Number of operating rigs in the US Baker Hughes

In 2014 oil production became so high, together with expectations of rising production, that the oil price dropped 50 %. It did not bottom out before the fall 2016. Leading to a long bear market in the oil market.

Brent Crude Oil Prices Makrotrends

Similarly with low prices for a product, you will eventually lose so much supply from the market that the price of the product has to increase to attract production. If not, no one will produce the product again. There are several industries that are completely dependent on raw materials to be able to produce their end products. Electricity, cars, or pharmaceuticals, all of them are dependent on commodities.

“The cure for low prices is truly low prices.” Prices can however stay low for several years. Excess supply has to be worked off. In addition, in most cases there needs to be a triggering factor that causes prices to start moving upwards. Often there is a perceived, abrupt shortage of the product. For example, suppliers may have production stoppages due to natural disasters, wars or a pandemic. If the buyers expect that they still can get the item product, they will not bid up the price. What makes raw materials special is that when the price goes up, the demand often goes up as well. This is contrary to what economists think is rational for market participants. The damage of running out of critical raw materials in production is far higher than paying higher prices for them. (Very often the price of the raw material is immaterial for the end product. Silver is in a lot of products. Very often it is in quantities that amount to a couple of dollars. If the price goes from $25 to $50 it does not affect the end product that much). 

In 2020 we had a great example of fear of running out of a product. You want to find similar opportunities in the commodity market.