Thursday, June 27, 2013

All's not well with Gold?


By Smoking Gun


At the time of writing, gold is trading below 1200. Why the sudden exodus from the yellow metal? It seems that all seemingly good news for gold has been ignored while every little bits of adverse news for gold has been reason for bears to double down their short bets and shoot down gold to bits.

Even this obscure piece of research which first appeared a  year ago by an even more obscure business professor who argues that the fair price of gold should be trading closer to its "fair value" of USD800/oz has now caught on fire with the gold bears.

Below is a reproduction of the news article;

KITCO NEWS INTERVIEW: Gold Prices Could Tumble Further -- Duke Professor


(Kitco News) - Gold prices fell to roughly $1,220 an ounce Wednesday, nearly a three-year low, and further downside may be possible for the metal.
That downside could be a longer-term move for gold, too, as the metal may be moving back to its fair value, according to Campbell Harvey, professor at Duke University’s Fuqua School of Business, who has done academic research regarding the value of gold.
Harvey’s research puts the long-term fair value of gold at $800 an ounce, which is about $400 an ounce lower than current prices.
Fair value is “an average, so to get to the average, there are prices above and below it. We’ve been above it for a number of years,” Harvey told Kitco News.
That means there is “considerable downside here,” Harvey said, given that prices don’t necessarily go to fair value and sit there.
Gold has a tendency to be very volatile in the short-term, but is a good store of value in the long-term, he said, with “long-term” defined by centuries.
In a research paper he published along with Claude Erb, the two authors looked at the accuracy of some commonly held beliefs about gold. Using examples through history, Harvey and Erb showed that gold can be a good store of value in the extreme long term, but is too volatile to be a reliable inflation hedge for most people’s investing time frame. Those are two of the top reasons people hold gold in their portfolios.
In one example, the authors compared the salary of a Roman centurion to the annual salary of a U.S. Army captain, and found that the annual pay is almost similar. A U.S. Army captain makes about $46,000 a year, while a Roman centurion received the equivalent of 38.58 ounces of gold annually.  Using the current $1,220 an ounce as a price, 38.58 ounces comes out to be about $47,000.
The salary comparisons were the most interesting part of their research, Harvey said, and it shows that gold is a good store of value over thousands of years. The problem is, no one lives that long.
He was quick to point out, however, that he is not anti-real assets investing. Specifically, he said a diversified portfolio of real assets, which can include gold, helps to offset unexpected spikes in inflation. He said owning a commodity index will do a better job than holding just gold.
“I have absolutely no problem whatsoever in having a diversified portfolio that contains some gold. Yes, if you had a lot of time to figure out which commodity is above or below fair value, (it would be better) but most people don’t have that luxury,” he said.
His point was that owning a single commodity to hedge against inflation, in this case gold, is not unlike owning a single stock and calling it a diversified equities portfolio.
Their original research paper was published a year ago, but since gold’s price plunge the research paper picked up more interested readers, he said, and is the most downloaded paper of his 20-plus year career. He and Erb updated their paper in May to include new research, including a look at different examples of how gold reacts during many hyperinflation environments.
They studied 56 different countries that experienced hyperinflation in the 20th century to document gold’s effectiveness as a hedge during those times. They concluded it depended on how gold was trading globally at that time as to whether it was a good inflation hedge.
While many point to Germany’s Weimar Republic during 1922-23 as the ultimate example of rampant inflation, there are more recent examples to consider, he said. One case is Brazil from 1980-2000. During those 20 years, the average annual inflation rate was about 250%, Harvey and Erb’s research stated.
For investors who stashed cash under a mattress, those people lost 99.97% of the value of that currency because of multiple devaluations and changes in the currency. Brazilians who bought gold and held it for those 20 years saw the real price metal lose 70% of its value, according to the IMF’s measure of Brazilian inflation, Harvey said.

“Note, this is not a short horizon situation; this was 20 years…. You would have been far better off rolling over your money in interest-bearing deposits. You would have still lost, but you wouldn’t have lost 70%. Of course there would be some risk of default,” Harvey said.
Brazil’s situation shows that gold did not perform the way most people expect gold would have acted during hyperinflation, he said. The South American country’s hyperinflation coincided with gold’s global price decline, which he said underscores how volatile the gold price is, even over the span of 20 years. Had Brazil’s hyperinflation occurred at another time, the outcome would have been different.
“If the Brazilian hyperinflation would have been from 2000 to 2013, gold would have been fabulous, even with the current price break. It would have looked great,” Harvey said.
While the Brazilian example is one of gold not performing as expected during hyperinflation, some other countries that experienced hyperinflation when gold prices were rising made the metal look like a good hedge. Harvey said that inconsistency proves his point.
“How gold acts is highly dependent upon the actual hyperinflation period. Because gold is so volatile it would be an unreliable hedge for regular unexpected inflation and hyperinflation,” he said.
My take on this is that this article is blah as it fails to account for the costs of extracting the finite precious metal from the ground. All it does is to debunk the hypothesis that gold is a inflation hedge. Whatever has been said about gold, it is probably one of the most unreliable inflation hedges around.. If someone did a paper comparing the price of gold and the relationship with the costs of extracting gold over time, that may be more meaningful but I doubt that such datas would exist as the only meaningful data would be recent times, and especially when gold prices were kept artificially low when governments banned the individual ownership of gold in the not to distant times. While it is true that during times of irrationality and market panic, prices may go below the cost of production, as experienced by other asset classes such as soft commodities and even real estate (during property busts, property prices are often below replacement costs) but this values wont be permanent as there wont be any profit seeking enterprise willing to produce at below marginal costs levels.
A colleague sent me this chart below today which is self explanatory. Over the past 6 years, gold prices have always trended above their marginal cash costs. During the height of the global financial crisis, gold prices tumbled just above the marginal cash costs before rebounding and resuming its upward trend. 
Some may argue that gold does not have industry use value and basically its the most useless of all metals except as a store of value and inflation hedge. With the perceived opportunity costs of holding the metal rising, it makes the bears' case compelling. Yes, there is a case for further weakness in prices, but in my opinion, the price has been too severely battered to warrant for this swift and sudden fall from grace. Look, no one's going to produce any gold if the cash costs are higher than spot prices. You are probably looking at marginal players shutting up shop altogether and the majors hoarding gold. Take that physical supply out of the equation and you may see a lack of sellers at this levels. The investment demand for gold only represent probably around 20% of the total demand for gold. As it stands, most of those who wants out has already done so. The bottom should be not far away from here. The world economy is still not out of the woods yet, the US may look better, but the economy is not as robust as it looks, external black swans abound... Eurozone, China may pull it back down, so the easing conditions should remain for a bit longer. If the Feds wants to pull the plug on the QE, they will... but they just won't tell you exactly when.. the worst thing for them to do is to pussy foot ala Japan, which hasn't really wised up to its past follies... as demonstrated by Abe's super-push only to now hold its horses and resume its very Japan-like attitude of waiting and seeing and wait a bit ah..



A

Sunday, June 9, 2013

Interra Resources - Another Ramba in the making?

By Smoking Gun
Quote of the day
"An Idle Mind is the Devil's Playground" - Benjamin Franklin
Last Friday's release of the US jobs data was just what equity markets needed after a week of wild swings. What can be best described as Goldilocksian numbers that showed that a higher number of jobs than expected were added, coupled with an overall increase in unemployment rate. The numbers assuaged fears of a premature tapering of the QEs while also tempering fears of another dip in the economy all at once. This sets the stage for a good trading week for global markets and I will look into one stock in particular which I have been monitoring on my P8118.com system, Interra Resources.
Fresh off the frantic run-up and subsequent announcement of a buyout deal (albeit a huge anti-climax) concerning Edward Soeryadjaya controlled Ramba Energy, a similar build-up in interest is brewing at younger brother's Edwin's Interra Resources. It may be that the sudden interest in Interra Resources was a spillover from Ramba's trading halt which may have diverted trading interest in the former, as both companies similarly are in the Oil & Gas Mining and Exploration space even though the two companies have no links as the brothers are not known to be on the best of terms.
The Edge published an article on Ramba on Friday which would shed some light on the recent trading activity.
From the Edge 7/6/2013
INTERRA RESOURCES, which could trace its SGX listing through the reverse takeover of Van der Horst in 2003, was once a low-profile energy play. But with the current interest in companies with exposure to Myanmar, Interra Resources, which is thus far not formally covered by any analyst, is now drawing some serious investor attention. Last November, CIMB analyst William Tng put out a similar non-rated research report on the stock, suggesting that it is worth 44.1 cents.
Since the CIMB report, the company’s share price has increased by more than a third to close at 51.5 cents on June 7, extending a run since January 2012 when the stock was languishing at less than 8 cents. Interra Resources, profitable for five straight years, is totally different from the days when it was a struggling producer of oil in a pariah country.

If certain analysts are right, the company’s share price has more room to grow. On June 5, DBS Vickers put out a non-rated report by Ling Lee Keng and Suvro Sarkar that gives a potential target price of 57 cents. The company now has two producing fields in Myanmar, where it holds a 60% stake for both fields. It is also pumping in two other wholly-owned fields in Indonesia. It has a total of so-called “proven plus probable” reserves of 24.6 million barrels.

Last year, Interra Resource’s share of production from the fields was 369,908 barrels — up 23% compared to the previous year. Earnings for FY12 was US$3 million — up from just US$1 million the year earlier. Revenue, in the same period was US$30 million and US$25 million respectively. DBS Vickers’ Ling and Sarkar expect the company’s earnings this year and next year to hit US$4 million and US$5 million respectively, on a corresponding revenue of US$30 million and US$31 million.

The higher forecasts are backed by the company’s on-going expansion. From 33% last year, Interra Resources today has increased its share of onshore oil exploration in Myanmar to 40%, making it the market leader in the country in this segment.
The company is carrying various expansionary activities like drilling. From seven wells drilled in 2011, Interra Resources has been stepping up the pace, to nine wells last year and this year, it will further increase the number to 21 wells. The company, which has been doing business in Myanmar since 1996, is also seeking out more fields put out for bidding by the government. DBS Vickers analysts expect 18 fields to be put up for bidding around August this year, with the awarding of the licences by end of the year.

Besides Myanmar, Interra Resources has also been expanding. Last year, it bought a 49% interest in an onshore exploration block in central Kalimantan covering some 8,150 sq km. Under terms of the Kuala Pambuang production sharing contract, Interra Resources has up to 10 years to find new oil.

Ling and Sarkar note that a “wild card” might manifest in the form of growing gas production. Gas, commonly found tucked with underground crude, has been found in one of the wells in Myanmar. However, how strong this gas will flow has yet to be fully determined. “Gas is generally cheaper to produce but its selling price is also lower. The upfront investments for gas exploration are higher but once the flow of gas has been established, the incremental cost is less than for oil production,” they note. If gas production is to happen, the company can tap on existing lines to pipe gas from Myanmar to China.

Of course, there are risks. Firstly, there might be uncertainty over the company’s concession terms over the longer term. “There is no guarantee of contract renewal or extension upon expiry, failure of which may result in substantial losses and significant reduction in investment value,” state Ling and Sarkar. Next, the company’s revenue is reliant on global crude oil prices. Finally, the company needs substantial capital to fund future development activities. “Failure to obtain additional funding may cause the Group to forfeit its interests in certain concessions or to discontinue some of its exploration,” the analysts write.
On this post, I am looking at the stock purely from a trader's perspective as I had picked up some highly abnormal trading patterns in Interra Resources during the start of the week using the P8118.com system. The readings were still very positive at the close of Friday's trading session. I had spotted Ramba at the early 50c levels using the P8118.com system last week which turned out quite well,sprinting all the way up to 78c until the trading halt. The subsequent announcement turned out to be a big sell. (Looks like a rushed announcement by Ramba, probably cornered into submission by the SGX query on their recent run-up in share price)
At last Friday's close (7/6/13), the readings on the M Index were neutral at 64.67, down from the abnormal trading volumes registered on the 4th and 2nd day prior to Friday's trades (399.82 and 250.04 respectively). For those that are not familiar with the P8118.com system, the M Index measures the abnormality of trading interests in a stock i.e. 100 being the normal trading volume, and readings of 200, 300 and .....being 2X, 3X (and so forth) normal trading activity. It is normally the first indicator I look at, as this index will filter out those which are have higher than normal traded activity. It must also be up, meaning that the increased activity is bidding up prices, meaning that buying interests must know something the market doesn't, something akin to insiders mopping up shares in anticipation of a move. This was evident during 4 days ago, when the M Index spiked up to 399.82 from 16.43 the previous day.
Despite trading activity regressing back to its normal trading volumes, what I like about the stock that the Money Flow Index (MFI) is still on an increasing trend. This means that the smart money is still in the stock. One further plus point is that the stock is close to its 52 week high as displayed on the last column BrH%, which shows that the stock has backed off marginally from the previous days' highs but still remain at 91.96% of the 52 week high. We like to look at stocks which are trending clearly towards the 52 week high, in most cases stocks at 90% of the BrH% tend to try to break those highs and reach higher highs. 
If you are already in the stock, you will be comforted by the fact that the Money Flow Index is stable and on an increasing trend, no major problems there. BrH% also looks ok. You would only be worried if there is a drop of 3% of the MFI from current levels otherwise the stock is still ok. If you are not in it yet, you should look at signs of activity in the M Index to time your entry. Any readings of end of day M of 250 and above would be good indicator for entry (given that the M reading is accompanied by a price increase). Please note that M Index is a cumulative figure and starts from 0 at the start of the trading session and peaks at the close. So for trading purposes, one would have to estimate the M value based on the trades during any given point of the day, say if during the first hour of trade, the stock trade at M of 60, one can assume that if the trading were to reflect early trading interest, the M should be around the range of 150-200 by the end of day. 
For trading purposes, I do not like to look at target price levels as I think the exit levels should be based on the MFI levels. The basis for this is that the smart money knows when to go in, and they would probably know what levels to go out as well. So normally, I would look for weaknesses of 2-3% on the MFIs to get out as it would be a good sign that the smart money has exited. As long as the MFI is increasing or stable, one should let the profits ride.
Personally I find the P8118.com system suitable for fast paced trading as compared to charting per se as it would give me a quick filter on prospective trading opportunities which charting tools can't fish out immediately. The concepts are easy to grasp and the learning process is very short and simple as compared to other methods like technical analysis and value investing methods. Currently, its open for registration and they giving away free trial accounts. What is more beneficial is that they are also giving unlimited free classes to all paid and trial users to enable them to understand and use the system for their trades. For more about the P8118.com system, you can visit them at www.P8118.com.sg.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Thursday, June 6, 2013

Asset Class Returns As At 31 May 2013


By Guest Blogger, Salvador Dali of MalaysiaFinance.Blogspot.com

This is highly interesting. As a test, if you were looking at the table what could you say or what kind of observations could you make. Not trying to be an asshole or "guru" here, but if you are honest about your knowledge of markets, the ability to synthesize data and tell a story, you should do well in financial markets. If you can't, then you shouldn't be, or are just plodding along. To be in the markets you can study, but you have to have passion for it. Make your own observations before scrolling down.

060313Z.gif

- The one month data does not tell us much.

- YTD, the equity markets have been well led by the US, in fact emerging markets have been trailing ... suffice to say that most of the Asian markets which have been surging so far this year have been an anomaly, which further depresses the real performance of other emerging markets.

- We know the financial markets have been awashed in liquidity with QEs from various central banks, but where have they been headed. The YTD figures are again revealing, some have exited gold in a big way. Them taking money off gold may be just profit taking or likely to mean they are more comfortable that currencies won't be debased anymore, or that bailouts have finally went past a peak. The reduction of fear or volatility could be another reason.

- So where is the liquidity? They went largely into US stocks, US REITs and even foreign REITs. The REITs interest is but a reflection in a strong bottoming in property price correction and a resurrection of demand, and also a hint that people are more employable even now to take up new mortgages, and/or that a lot more PE/VC/vulture funds are taking advantage and making deals on distressed commercial properties.

- Look at crude oil, one month, YTD or 1 year even, that is a good reflection about the robustness (or lack of) of the global economic recovery. The recovery is benign and in patches still.

- Look at commodities, again the same conclusion as for crude oil, still working of excess inventory in the global system.

- Look at the emerging equity markets from 1 year ago, there has been a dramatic shift away from emerging markets back to US and possibly Japanese stocks. Again the robust performance of other Asian equity markets is very telling as it is viewed as largely unscathed and the equity markets there do attract sufficient interest compared to other emerging markets.

- The most important point one has to conclude is a drastic shift away from bonds of all kind. Bonds have been great on a 3 year basis but more funds are moving out. They move out because they either think there is a bubble there (too safe, and too many people willing to pay too high a price for low yields) and/or equity provides a better return even after accounting for risk.

From the above, I am quite confident that the current sell down in equities will be brief.

An Introduction to My Blog

By Smoking Gun

Dear readers

I made my first trade at the age of 16, using my mom's account to buy and sell shares (with her approval of course). By the time I turned 21, I had made a small fortune, even before graduation. I really had only one desire then, which was to finish my degree in double quick time, land a job with a stock broker, any one for that matter and indulge in my one true passion, dealing and trading stocks. As I was spoilt with trading success from an early age, coupled with good grades from school, I was lulled into a false sense of security, thinking that I knew quite a lot about the stock market. Boy, was I wrong... and had to work my ass off for a long time to get myself back in shape. That was 20 years ago, and I have been involved in equity markets since in many incarnations first as an analyst, a corporate dealer, a corporate financier and lastly as a fund manager, basically progressing from one end of the telephone to the other end. Funny how things turn out. From receiving orders to barking out the orders. Just how ironic can that be?   

In the past, I have had many an inclination to write about my experiences and my thoughts on the financial markets but I have always had the convenient reason to put off for some reason or another... baby coming along, new job, familial commitments, work commitments etc.

So here I am. Finally taking the first baby steps in blogging.

My posts would center around Singapore equities, and once in a while, I will also document my thoughts on global, regional or industry specific issues. As this is a financial blog, I would try to remain apolitical but those who know me knows that I am a Liberal at heart but political leanings aside, I will try to tell it as it is.

My trading methodology is based mainly on the trading system P8118.com, which I use in conjunction with my assessment on the general sentiment and overall direction of the stock markets. 

As my postings may be irregular due to family and work commitments, I will be inviting prominent guest bloggers such as Salvador Dali of malaysiafinance.blogspot.com to offer some insights into regional or global issues on this blog. Dali is one of the most followed financial bloggers in Malaysia who happens to be my very old friend, colleague and for many years, my mentor as well. I am sure you would find his insights enlightening, humorous and sarcastic/cynical, in most instances all at once. In fact, the name of my blog was totally inspired by his own blog, might as well, since we are talking about mostly the same stuff, just in different markets.

Finally, I hope that my blog can be a forum for like-minded investors and traders to share their thoughts and comments, and hopefully benefit from the interaction and the exchange of thoughts.

Thank you and remember to stay sharp and disciplined.