vrijdag 30 januari 2015

Negative Mortgage Rates in Denmark

I would be wary about negative interest rates on mortgages. Denmark might be giving you money at this stage when you borrow for a mortgage (see blue chart below of Danish mortgage rates). But there is a catch.

It seems too good to be true to borrow money and get paid for it by the bank, but consider this.

The thing is, when you borrow money and buy a house with it, the house price can collapse and the krone can strengthen through deflation. You might not need to repay the same amount back to your bank, but the money you repay is much more valuable later on in a deflationary environment. You could buy two houses with the same money when we enter a deflationary housing bust.

Housing in Denmark hasn't been doing so well lately.

Or the krone could strengthen against the euro and you (as a Danish person) will have to repay the loan in expensive krone.

I think that negative mortgage rates are a very strong indicator that we are going to see a major housing bubble pop soon. Once interest rates move up, everything collapses. And you will be sitting there repaying your debt.

10 tonnes of gold disappear from FRBNY in December 2014

With repatriation of gold in the picture, especially when China is gobbling up all the physical gold, we need to keep an eye on the gold deposits at the Federal Reserve Bank of New York.

Each month they issue this report of gold deposits at the FRBNY.

The value of the gold deposit is calculated at value $42.22/troy ounce.

Take an example December 2014: 8170 million USD of earmarked gold.

So you first divide 8170 million USD by $42.22/troy ounce and then you convert it to tonnes. You get 6018 tonnes.

Now we chart it out over two years and we see that people are not deposition gold in the U.S. Instead they are pulling out their gold from the U.S. FRBNY at a very fast pace. I expect this to accelerate till there is no gold left in the U.S. or something breaks in the rehypothecation scheme.

In December 2014, we saw 10 tonnes disappear from the vaults. Which mysteriously coincides with the 10 tonnes that the Netherlands supposedly added in December 2014.

This is what it looked like in the past. If you take a good look, you will notice that gold repatriation typically occurs when there is a recession.

Business Inventory to Sales Ratio Vs. GDP

Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth.

It is worthy to plot the business inventory to sales ratio against GDP growth.

Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).

Since 2012, the inventories have continued to build up against lower sales, so I expect GDP growth to slow down.

Copper plunge not done yet, oil bottoming out, gold in high demand

Well, copper has gone down, but it doesn't seem like it's done yet, still in backwardation.

Oil is still in contango, so bottoming out, buy within three months.

Gold has seen high demand, another 5 tonnes added in GLD and the Chinese have bought again 70 tonnes this week (same as last week), the highest ever.

donderdag 29 januari 2015

Oil Versus Gold

What everybody has been ignoring these days is that gold has gone up and oil has gone down.

Let's look at the impact. More info here.

For 1 ounce, miners use 26 gallons of diesel or about 100 liters. We know that diesel costs around 3 dollars a gallon. So we have 3 dollars/gallon x 26 gallons = 78 dollars. 1 ounce = 1300 dollars. This means that energy is 6% of the cost to produce gold.
Top 5 Gold Miners Gold Production & Diesel Consumption

But, the costs are actually higher. The chart below says that one ounce costs 100 dollars on energy. So it's more like 8% of the total cost of gold production is energy. Oil dropped 60%, which means the costs of gold mining just dropped: "cost"*8%*0.6. Let's say we have an AISC of $1200/ounce. That would now be $1140/ounce. I think that is a very significant drop in cost.

Top 5 Diesel Consumption & Cost Per Ounce 

Of course materials and workforce also rely on energy and we didn't take that into account... So mining companies are benefitting greatly from the drop in oil price. The funny thing is that gold miners haven't seen the gains yet, which means I'm buying the mining industry hand over fist now.

woensdag 28 januari 2015

Significant reversal in GLD

Another 10 tonnes of GLD stock added in one day. I think I can confidently say that we've bottomed out at the hedge fund level. See how smooth the chart is historically and how suddenly we spike up since the SNB announcement?

zondag 25 januari 2015

Copper Contango Update

As you know, copper prices plunged last week and we see now a surge in copper stock confirming the glut of copper in the markets. Copper is now going back from backwardation to contango, but we're still in backwardation territory, so expect copper to be weak going forward.

Oil on the other hand is still in contango and will be bottoming out in the next few months.

Managed Money Short Update Gold/Silver

This week, the short covering continued. In fact we are at the same level of shorts as in June 2014. So you would expect that the gold and silver price is at the same level as well. This is true for gold. We are again at $1300/ounce.

But this is not true for silver. We were at $21/ounce in June 2014, today we are only at $17.7/ounce. Silver has underperformed gold tremendously and I attribute that to the lower oil price. Because lower oil typically means lower silver.

Now that the cat is out of the bag on the ECB QE, I expect people to sell on the news. Especially when managed money shorts are all covered. The shorts could now come back in and drive the price down temporarily. Of course in the long run, it won't matter.

Premiums have come down again and are now almost back at June 2014 levels.

woensdag 21 januari 2015

ECB $1.3 Trillion Money Printing Visualized

The ECB announced QE of 50 billion euro/month, probably for 2 years. That amounts to 1.1 trillion euros or $1.3 trillion dollars.

It looks something like this. The Fed, the ECB and the BOJ will all happily intersect with each other in 2017.

If everything goes as planned, this is very bullish for the U.S. dollar. Considering the fact that global money printing has just increased through the ECB, gold will benefit greatly.

As always, European bonds will not be a good investment when the ECB prints money, because the currency of those bonds gets devalued, so I would definitively avoid that.

For all those Europeans who bought gold in advance, congratulations!

We'll see what happens tomorrow...