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Calm down guys. It’s not as bad as you think.
Wherever you looked last week, it was pretty hard to escape the talk about commodities. Oil was down, gold was down, and silver continued its slump. Even cocoa, sugar, wheat, and corn tumbled. The series of mini flash commodities crashes bring back memories of last year’s market meltdown.
But do you remember what happened last year after the flash crash?
What is going on here? Are hedge funds running for the exit signs? Were the jumps in job loss claims driving all of this?
To make a long story short, this is simply a continuation of liquidation which has been happening for the last few weeks and months. As we rose, shorts had to cover and as we went down, longs had to liquidate. Next week, we should see some back-to-basic stabilization.
If you read last week’s letter (see Age of America Over), you would’ve been prepared for the major selloff in commodities and the stock market that took place earlier in the week.
If you missed last week, I had taken some profits off the table in the prior week and said that:
“Commodities and resource prices are at near all time highs, yet many of the mining stocks are struggling to keep up. I’ve been speaking with some of the top brokers and money managers and many of them are looking for liquidity. That could mean a temporary drop in prices as the big money sells.”
And that is exactly what happened this week. Gold, silver, oil, and other commodities and related stocks took a major tumble, with silver leading the way with one of its biggest short term declines in the last 36 years.
Silver
Silver, what call the Devil’s metal (I call it the Human Metal), has turned millionaires into billionaires but has also left many traders and investors broke because of its major volatility.
The big selling started last Sunday night in the Asian markets when some hedge funds and other money managers decided that silver had gotten ahead of itself and liquidated huge amounts of silver. Of course, this led to the dumping by the retail investors, who often conform to the big names and try to follow everything they do.
Billionaire Carlos Slim has been selling silver futures for “weeks” in an effort to actively hedge the production of his silver mine. George Soros has been liquidating his precious metals position over the last month. Sprott Asset Management was also rumoured to have sold a large part of their silver ETF position, the Sprott Physical Silver Trust (PSLV). CEO Eric Sprott later clarified that while part of his fund did sell some PSLV, it was only an “incredibly small” sale relative to what they owned, and the proceeds were used to reinvest into other silver-related plays and physical silver that were underperforming the iShares Silver Trust (SLV). He also reinforced that their silver position in ounces is higher than it has ever been.
Profit taking was not the only catalyst for the selloff. An 84 percent rise in trading costs by the CME group forced many traders and funds to liquidate. And as the saying goes, we have the domino effect.
The CME, which typically raises margins when volatility in markets increases, announced successive margin hikes raising the margins from $8,700 per contract as of April 25, 2011 to $21,600 effective this coming Monday, May 9. Each contract holds 5,000 ounces of silver, or $178,000 in today’s prices.
While the short term squeeze forced a lot of money out of the silver markets, it’s only a short term blip in silver’s climb.
We are still in a secular bull market for precious metals and as I said last week, any selloffs would be temporary and we should, “use these pullbacks as buying opportunities.” Especially when you have a 30% correction in a secular bull market…
Silver didn’t get ahead of itself. It was manipulated. I think that a group of traders not only took profits from longs and shorts, but wanted to slam the price of silver so that they could pick it back up at cheaper prices. My theory will soon be put to the test if silver strengthens next week and we see an uptick in the prices of precious metals. If we don’t, take it as an added week of accumulation opportunity. While short term volatility remains as others sell, I wouldn’t be surprised to see silver back up to $45-$50 with ease in the near term.
Fundamentally, nothing has changed. This applies to both gold and silver. If gold or silver continues to dip, it will only be short term. As a matter of fact, the recent correction is healthy for both the stock market as a whole, and for commodities and resources.
Investors have been spoiled by quick returns over the last few years and the reality of the markets are giving us a swift kick in the butt. I am still looking to put up some stink bids in hopes they get filled, as the market quiets for the junior miners and explorers over the summer. This happened last year, and it will more than likely happen again this year.
Bernanke is still printing (although he claims otherwise), interest rates will remain low in the near term, and oil prices are hurting the consumer. According to the Wall Street Journal, the amount of people paying income taxes in the US are now a minority. A new congressional study concludes that the percentage of U.S. households owing no federal income tax climbed to 51% for 2009.
At the same time, there are millions of Americans, who pay practically no taxes at all.
About fifteen million American households, or 10 percent of all taxpayers, receive more cash from the IRS than they contribute in federal income taxes and payroll taxes, thanks to “refundable credits.”
With the dwindling participation of foreign investments into US debt and taxpayers who don’t pay taxes, it’s only natural that the purchasing power of the Greenback will fall against Gold and Silver. Rates around the world are remaining at all time lows and the European Union bailout deals clearly indicate continued troubles in those nations.
Take major pullbacks as an opportunity to pick up some cheap shares of silver or silver related stocks.
Uranium
I have now turned bullish on uranium.
While uranium has taken a major blow since Japan’s recent earthquake, it still remains a much needed resource. At current prices, I think those who wanted to sell have sold and shares of uranium miners are now in much stronger hands. Moving forward in the longer term, uranium shares look attractive, as do uranium prices.
I understand that the recent events in Japan are devastating. But we have to remember that it was caused by an earthquake, and not any major fault of the power plants themselves. There are still many power plants around the world and many of them do not lie on any earthquake fault lines.
Furthermore, nuclear power plants have a long standing history of safety. While the average person is quick to shy away from nuclear energy, I think they forget that more power plants exists in their own backyard than any other country. The US currently has 104 reactors in operation, 1 under construction, 9 more planned, and 23 proposed.
Even though the Chinese government reacted to the crisis in Japan by announcing a moratorium on nuclear project approvals, I doubt that will change their plans. Right now, the Chinese has 13 operating nuclear reactors, 27 under construction, 50 planned, and get this…110 more proposed. By 2020, the country’s nuclear capacity is expected to increase tenfold.
Worldwide uranium required in 2011 is estimated at 68,971 tonnes. Worldwide uranium production in 2010 was only 54,000 metric tons, which is still up over 6% from the previous year.
Of the 479 new nuclear reactors planned globally, a third are to be built in China. With barely enough uranium output to meet half its current needs, China is tapping global producers aggressively. Last year, its uranium imports more than tripled to 17,000 metric tons – about 37.5 million pounds.
While uranium isn’t especially scarce, it is difficult to extract profitably in large quantities. That means price will need to rise in order to meet demand.
I think the uranium sector has bottomed. It’s time to go long. There are many attractive stocks in this sector. Cameco, Denison Mines, First Uranium, Hathor Exploration, Uranium One, Uranium Participation, Paladin Energy, Ur-Energy, and Strathmore Minerals all look attractive.
I don’t own shares in any of the uranium names, but I will look to accumulate on dips.
Happy Mother’s day to all of the mothers out there! Happy Mother’s day mom! Thanks for…everything!
“God could not be everywhere and therefore he made mothers.“
Until next week,
Ivan Lo
Equedia Weekly
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