Investment Thesis: Long Platinum

November 14, 2020

by Rob Zdravevski

Investment Thesis: Long Platinum 

A bet that the Internal Combustion Engine still has 30 years of life

The Discount:

Colloquially, Platinum is considered more precious than Gold.

When it comes to pricing, Platinum has traded at either par or $200-$300 an ounce higher than the price of Gold.

In early 2015, Platinum started to consistently trade at a discount to the price of Gold.

Today, Platinum is trading at $1,000 below the price of Gold.

We haven’t seen such a percentage discount spread in 35 years.

Subjectively, there is a euphoria behind Gold’s prospects while Platinum is seemingly unloved which seems to have widened the discount.

Platinum (in orange) compared to Gold (blue line)

Production & Supply:

At least 70% of the world’s Platinum production is sourced from South Africa’s Bushveld region.

This allows us to easily monitor supply disruptions, labour disputes and political machinations.

COVID-19 has also seen the South African Government restrict mine production to a capacity of 50% and in turn, mining companies have elected to place various mines in ‘care and maintenance’. 

Coupled with a latency in re-starting production, there is a distortion in price and supply upon us.

Industrial Use & a substitute for Palladium:

On the demand front, Platinum is used in ……..

jewellery, dental fillings, medical/laboratory instruments, turbine blades, computer hard disks, in the chemical industry (nitric acid, benzene, silicone), as compounds in chemotherapy drugs, as a catalyst making fuel cells more efficient and in motor vehicle engine catalytic converters. 

Catalytic converters (in cars, trucks and buses) account for 50% of its utility.

On the topic of automobile catalytic converters, Palladium has been the preferred metal amongst manufacturers and rightfully so due to its lower price.

On an industrial basis, being Long Platinum is to take a view that the proliferation of vehicle electrification will take longer than suggested. 

This is certainly a contrarian view.

Although, it has been noted that whenever Palladium trades at twice the price of Platinum, manufacturers opt for the cheaper Platinum substitute. 

Today, Palladium is trading at $2,457 is trading nearly 3 times Platinum’s current price of $887. 

The price of Platinum appears in orange, while Palladium is in blue.

Mean Reversion

Gold is currently trading at 64% above its 200 day moving average (on a monthly basis) while Platinum is 27% below its monthly 200 DMA. It is plausible to expect a convergence and mean reversion in both assets.

See this link.

https://robzdravevski.com/2020/08/20/gold-and-percentage-extremes-above-its-200-day-moving-average/

When pondering how this gap will narrow, a rising Platinum price seems more probable than a collapse in the Gold price in the current asset and ‘expected’ price inflation environment.

Correlation to CME Futures Contract Margins:

The case for an interim peak (for Gold) also lies in my historical analysis of futures contract margin requirements tend to coincide with an extreme in the price of Gold.

See this link.   

https://robzdravevski.com/2020/09/06/margins-on-gold-futures-have-tripled/

Platinum’s futures margin requirements are not reaching any historical peaks. In fact, I think there is growing probability that Platinum margins are decreased soon.

The Internal Combustion Engine (ICE)

It’s unlikely that automobile manufacturers will walk away from the capital expenditure spent on engine development and assembly, while synthetic fuels are making ICE’s even more cleaner.

Commensurate to introducing electric vehicles into their stable, auto companies have also made statements that they still expect the ICE to be part of their business for the next 30 years.

Incumbent industry and job protectionism is another topic that won’t dissipate anytime soon.

Electric Vehicles (EV)

While their purchase is subsidised in many jurisdictions, EV’s remain expensive and have yet to reach a pricing equilibrium making them affordable and a mass viable financial alternative to owning an ICE vehicle.

The EV charging network isn’t widespread and will require notable investment while facing a formidable fuel retailing industry. Range anxiety and the speed of re-charging also remains a challenge.  

Hence, EV’s account for 2.5% of global car sales and 1% of the global car ‘population’.

Bloomberg New Energy Finance predicts that electric vehicles (EVs) will hit 10% of global passenger vehicle sales in 2025, with that number rising to 28% in 2030 and 58% in 2040.

I’m not hanging onto the past and while EV market penetration should grow; we are still making cars, trucks and buses with ICE’s.

Government & Tax

Government love things which they know how to tax; items such as tobacco, alcohol and fuel.

The fuel excise tax is a hefty component of many government revenues and the funds raised assist with maintaining not only roads & bridges, but also hospitals and schools.

source: https://afdc.energy.gov/

EV’s are currently not providing a comparable revenue replacement for potential lost petroleum taxes.

Another challenge for governments is figuring out how to tax the electricity trickle from your residential power outlet, the solar panels located on your roof or from a public charging station.

We are now seeing governments announces “road usage taxes” for EV’s.

Please see my disclaimer.

Are they “natural buyers” ?

Gold ETFs now make up 35 per cent of global gold demand compared with just 8 per cent a decade ago.

October 8, 2020
By Rob Zdravevski
rob@karriasset.com.au

A gold take-under

Today, Northern Star Resources (NST.ASX) announced its wish to takeover Saracen Minerals (SAR.ASX).

Why don’t they call it a takeover rather than a merger?

Well, mainly because its “friendly”, hence using a “scheme of arrangement” encourages civil co-operation and it increases the likelihood of the deal completing but it does remove any possible price tension.

Anyway, putting spin to one side,

No premium was paid over the previous day’s closing price and Saracen’s board is recommending the acceptance of “nil premium bid”.

Yesterday, NST closed at $13.82. It is paying 0.3763 of its shares for 1 SAR share. This equals $5.20 per SAR share. Saracen’s closing price yesterday was $5.22.

This resembles past comments I have made suggesting that we can expect more ‘take-unders’ in terms of M&A prices paid.

Although this friendly and perhaps submissive path makes me wonder if Saracen think the business was/is fully valued?

Today’s price action in the rest of the sector is flat. In other words, ASX listed gold stocks are not being dragged higher with any M&A exuberance.

Perhaps last weeks note (link below) may add a little more ‘colour’ to the ASX gold market.

https://robzdravevski.com/2020/09/28/you-wont-lose-your-job-hedging-at-these-levels/

October 6, 2020
by Rob Zdravevski
rob@karriasset.com.au

You won’t lose your job hedging at these levels

When the price of Gold in Australian Dollars trades at 50% above its weekly 200 moving average……it may be time for Aussie gold producers to hedge.

Similar to my previous work on the USD price,
https://lnkd.in/gK9hj-P

…..the chart below shows the various percentages that the XAUAUD price is relative to its 200 dma.

If you combine the recent surge in the gold price with the historic peaks of the CME gold futures margin requirements, a long term overbought reading in the AUDUSD and my other extremes seen in Gold……

you’re unlikely to lose your job, hedging your gold resource and reserves at these prices.

Incidentally, when the CME hiked margins requirements on August 11th, 2020, the AUD gold price fell and closed at A$2,676.

Today, it’s trading at A$2,636. Much of a muchness, although mean reversion and probability can be unpleasant.

September 28, 2020
by Rob Zdravevski
rob@karriasset.com.au

We’re only renting Gold

But to be clear about today’s gold post, it is only a “trade”, that’s why I placed that reference, “it’s something to rent rather than own”.

I still think Gold still remains a marginal trade in the larger context as mentioned in these two previous posts.

Mean reversion and extremes above 200 day moving averages warrant attention.

https://lnkd.in/gK9hj-P

https://lnkd.in/gj3fJF8

September 25, 2020
by Rob Zdravevski
rob@karriasset.com.au

The current Gold trade

Gold needs to hold US$1,843….
if it doesn’t, US$1,795 is the next stop.

For now, probability of Gold staying above US$1,850 is increasing;
the AUDUSD is holding 0.7000,
and AUDJPY and Silver registered oversold readings overnight,
while Bitcoin is holding $10,100

On a daily basis, Gold and Silver moved 3 standard deviations below their mean, which coincides with the aforementioned oversold readings.

So, “long” Gold (or a proxy Gold equity) at the current US$1,863 (cash market) is to be treated as a “trade” pending supports being broken.

In other words, it’s something to rent rather than own.

n.b. if Gold trades to $1,795 the AUDUSD should then be around 0.6835.

September 25, 2020
by Rob Zdravevski
rob@karriasset.com.au

Market Quips & Synopsis – Sept 18, 2020

Market Quips & Synopsis Some brief points about selected markets or assets and look for the links within for added musings.

About current markets, I’ll open up by saying..

I notice there is dangerous trading going on, market capitalisations in some companies are extraordinary.
For example, how does $1 billion market cap on revenues of $20,000 sound?

ASX scuttlebutt says, “shorts” are trying to pressure companies into raising capital, some are seeing increased stock “promotion” activity and there are many people in the market “that don’t know what they’re doing or shouldn’t be there”.

I see the AUD and XAU (Gold) in a holding pattern, (see the AUD chart below);
they need to hold 0.7240 and $1,902 respectively,
breaks above 0.7355 & $1,978 should see a new lurch higher

Also watching AUDJPY closely, need to hold 76.00 to confirm “more risk-off”,
A move above 0.7730 suggests “risk-on” and higher equity indices

Another indictor to assess the steam in a S&P 500 decline is whether Japanese 10 Year Bonds (JGB”s) trade below 0.00%.

The S&P 500 is down 6% from recent highs,
Indicators are not clear in calling a new downward trend, however I think 3,272 is the target (a further 2.5% lower).

The Nasdaq 100 has now fallen 11% since its September 2nd high.
Looking for it to ease a further 2.4% to 10,814 before determining the strength of the decline.
The decline wasn’t a surprise, as written by me on August 29 and September 3rd  

Global portfolios have a 3% short position in either (or both) the Nasdaq 100 or the SOX index

My ASX 200 target is 5,803, which is 1.2% below the price as I write.

I’m pleased with calling Oil down from $44 to $39.30. Brent held $39.30 for the past week, 
has since rallied 10% in past 4 days….quick rallies are not always a preferred scenario

VIX remains relatively high at a reading of 26, the call option phenomenon has influenced this increase

The De-Equitisation story combined with rising money supply & low interest rates leads to my thesis that higher equities is the dominant and over-arching long term theme.

While we accept near-term rates will stay Lower for a while,
I think the long end of interest rate curve will rise.

AAII Survey exhibiting narrowest bull/bear spread since June 11, which is when S&P 500 had a 8.2% decline.
Since March 5th, more retail investors have remained bearish (than bullish). This survey remains a reasonable contrarian indicator as markets bottommed on March 26th and never looked back.

Oil Rig count showing no meaningful change of increase, see attached, number of rigs in operation has halved

I remain long term bullish on the Oil price and continue to accumulate positions (proxies) to benefit from this opinion.
Incidentally, I have a view there is a coming crisis in energy prices which will stoke inflation (albeit it may be 18 months away) 

In another edition, I’ll expand on various investing themes and I hope to soon publish my bullish thinking about Platinum on my Linkedin page.

That’s all for now…

warm regards,
Rob

Margins on Gold futures have tripled

Here is an 11 year overview of the margin (maintenance) requirements to trade Gold futures contracts on the CME.

Follow along and your pattern recognition will develop.

I hope you didn’t think that the price of Gold moved based on demand from Indian jewellery merchants ?

While there are arguments abound whether it’s a measure of inflation, a store of value or even considered currency.

The chart below and my notes within suggest that more than anything else, Gold is a “financial instrument derivative”.

Gold prices seem to be influenced by the futures margins which are set by the CME, which in turn fuels or repels the speculators.

Where the price of Gold typically falters (or is stifled) is when the percentage of the required margin creeps above 4% of the notional contract value.

The eliptical area in the chart is a period when the margins were closer to the 5% of the notional contract value, which is similar to today.

Over the past 2 years, the margins required to trade a Gold futures contract have tripled while Gold has risen 67%

What if the CME increases margins by another 25% or 50%?

by Rob Zdravevski
September 5, 2020
rob@karriasset.com.au

Gold stocks have fallen 20% from recent highs

My cautious views about chasing the gold price had merit and today (albeit my timing was off by a month) are justified as the reward didn’t out-stack the risk being taken of being long Gold and gold stocks following what I viewed as the “fat part of the trade” was already had and the tail was wagging during a euphoric move driven my media and the herd.

In other words, my work suggested that initiating a long position in May, June or July was a marginal proposition.

Now, ASX listed gold stocks are 20% below their recent highs, but more interestingly some are trading at the same price seen in January, February or March of 2020.

If you are a “trader” and you managed to “pick the eyes” out of the peaks and trough, I’m certainly pleased for you but as an investor, that’s not my bag.

As prices in gold securities continue to make weekly lower highs and lower lows, over the weekend, clients will be receiving my entry price suggestions for selected stocks at the lower end of this mean reversion and trend correction.

I’ll continue to post notes on various assets and securities when I see extremes (at either end) of price action or sentiment.

August 28, 2020

by Rob Zdravevski

rob@karriasset.com.au

 

Gold Price Action Update – August 27, 2020

Short term, gold is in an early downtrend,

trend is not strong,

thus we rely on whether immediate support levels will hold,

if they don’t and they are broken, then we look at velocity of the move to determine if this embryonic down trend has strength (and perhaps more longevity)

In this interim or this current short term view,

My email to clients on Monday August 24th, suggested support levels for USD Gold where $1,907 – $1,882,

Yesterday Gold traded to $1,902 on that support line and has bounced $40,

see two charts below (one is the “bigger timeframe, the other is a close up on yesterdays low kissing the support line)

I expect Gold to test that support line again in the next day or so and watch if it holds before making the next call.

August 27, 2020

by Rob Zdravevski

rob@karriasset.com.au

 

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