In Gold We Trust Report 2021

In case you want to read the 350 pages of In Gold We Trust, here it is.

This is probably one of the most important charts: silver mine supply.

Gold production in China is down.

In fact, most gold miners have seen lower gold production.

Rare Earth Metals

Rare earth metal supply is growing at a rate of 5% per year.

Most of the supply/reserves come from China and U.S.A.

The most used rare earth is Neodymium, so we need to watch the price of that rare earth metal and we will know the rest of the market as well as they all move in sync.

Demand was projected to be 10% per year. This will increase as more clean energy demand will arrive.

Here are some good rare earth plays outside China.

Biden Budget

Biden released his budget forecasts.

What strikes me is that the 10 year yield will be lower than today, which benefits gold. Debt and deficits will continue to rise by $1.5 trillion per year. So you can forget that the U.S. will ever get into surplus. Which means the U.S. dollar can only go lower.

Why Chile Tax Doesn't Affect Capstone Mining

Capstone Mining has an exemption from Chilean tax hikes for 15 years after commercial production due to DL 600.

European Green Energy Stocks

If you want to invest in green energy, here are some candidates.

 

BHP Escondida Mine goes on strike

BHP's Escondida mine is going on strike. This will remove 1.3 million tonnes per annum from the copper supply.

To give you an idea how big this is: that's 13 times Capstone Mining's production. 

This will be bullish for copper.

Shanghai Composite Index Vs. Copper

The Shanghai Composite Index is correlated to copper price. This is because China heavily depends on commodities. We see a pennant formation shaping up and expect a breakout in 2021.

 

Sprott Holdings Update May 2021

Sprott has filed its new holdings in May 2021.

What's notable is:

They added Rio Tinto, which is a base metal iron producer.

They sold McEwen Mining, which was a very bad mine. They sold some copper mines like Teck Resources and Western Copper and Gold. Probably profit taking. They also sold Bank of Nova Scotia, which means they don't believe in the banking stocks anymore.

Sold holdings:

 

Overnight Reverse Repurchase Agreements Vs. Effective Fed Funds Rates

Whenever the effective Fed funds rate drops too much, the Federal Reserve will conduct overnight reverse repurchase agreements where it will sell treasury securities to the market in exchange for cash. This will push up the Fed funds rate temporarily.

A rise in overnight reverse repurchase agreements (RRP) indicates that there is too much liquidity and tells us that the U.S. dollar is about to get weaker on lower Fed funds rate pressure. When banks have too many reserves, this harms their capital ratios as reserves have a non-interest expense to it. 

For example, In May 2021, there was an excess amount of bank reserves parked at the Fed (and increased cost associated with it), pressuring the Fed funds rate lower and the IOER higher. The RRP purchases skyrocketed to keep a lid on excess reserves. There is a counterparty limit of $80 billion. 

Copper supply and demand

The copper price is dependant on supply and demand.

• The demand curve slopes down: if prices go down, people buy more copper.
• The supply curve slopes up: if prices go up, miners will produce more copper. 

The supply curve for copper is given below. As you can see, the copper price is today at $4.5/lb, which is way higher than the cost to produce copper. This means that we are at maximum mine production. Supply is inelastic. A small increase in demand will increase the price of copper exponentially. Copper recycling will probably add some supply as well, which is not taken into account in this chart.

Updated 2019

As a comparison, uranium is only at the middle of the cost curve ($30/lb). Which means uranium will not have an exponential rise, because a higher uranium price will add extra mine production to the supply.

Copper demand and supply point to a deficit.

Copper Deficit Until 2023

Copper is expected to stay in deficit until 2023. 

Basel III Gold

28 June 2021 will mark Basel III rule that banks will have to put up 85% of the value of the unallocated gold in their reserves. Before Basel III, the banks didn't have to put any value of the unallocated gold in their reserves. No shenanigans are allowed anymore and this will increase real physical demand for gold. For example, if the bank owns $1 billion in unallocated gold, the bank will need to increase reserves by $850 million, which is a big increase in costs. Banks will try to get rid of unallocated gold or they will buy physical gold.

Implementation of the NSFR will be done on July 1, 2021.

PGM Demand in the Next Decade

PGM's will still be in high demand for about 5 years.

But demand will drop off.

Supply is coming mainly from South Africa, which is superior to Russia. We are transitioning from palladium to platinum/rhodium and that's exactly what Russia doesn't have.

 

Baltic Dry Index Vs. Bulk Shipping Rates

The Baltic Dry Index is correlated to the bulk shipping rates.

The Capesize vessels 180000 dwt are mainly used for iron ore, while the Supramax (75000 dwt) and Handymax (58000 dwt) are used for copper. 

Federal Reserve Initiates Operation Twist 2.0

The Federal Reserve has started buying more treasuries on the long end of the yield curve while decreasing purchases on the short end.

The allocation across the 7- to 30-year nominal coupon maturity range will increase by 3 percentage points, in line with shifts in the distribution of Treasury securities outstanding. The allocation to the shortest nominal coupon sectors and Treasury inflation-protected securities (TIPS) will decrease modestly.

China Nuclear Demand

China is about to triple its nuclear energy demand. To bet on this, buy NXE, the lowest cost developer of uranium.

 

Confirmed by Katusa.

 

China nuclear demand is going higher.

Uranium supply is not going higher soon.

 

Brave-Butters-Kelly Leading Index

The Brave-Butters-Kelley Indexes (BBKI) are part of a research project from the Federal Reserve Bank of Chicago, and you can now find the monthly and quarterly BBKI in FRED.

The indexes are constructed from a large panel of monthly measures of real economic activity and quarterly real GDP growth. Monthly GDP growth is indexed to the quarterly estimates from the U.S. Bureau of Economic Analysis and consists of three components: cycle, trend, and irregular.

Kilian - Zhou Commodity Index

This Real Economic Activity Commodity Index of Kilian - Zhou tracks commodity prices via shipping activity.

FRED has this index from the Dallas Fed, developed by Lutz Kilian, that measures global real economic activity in industrial commodity markets. This index has some advantages, compared with standard measures of global real GDP or global industrial production. See Kilian and Zhou (2018) for all the details. For now, here are three:

1. This business-cycle index is expressed in percent deviations from trend.
2. It’s derived from a panel of dollar-denominated global bulk dry cargo shipping rates
3. It may be viewed as a proxy for the volume of shipping in global industrial commodity markets.

 

Chile Increases Tax Rate on Copper

Chile is about to apply a higher tax rate on incremental marginal copper production.

When applying these marginal tax rate, we are looking at a 50% tax on $8/lb copper.

This will be very bad for development projects in Chile. Nobody will want to start up a mine with these taxes. As these taxes are on the revenue side, this will outprice high cost producers from the low cost producers. High cost producers won't be able to survive, while low cost producers (like Capstone Mining) will thrive.

Bitcoin Checklist

To predict bitcoin price, follow this checklist:

1) Bitcoin Price Model

Make sure the bitcoin price is undervalued based on the bitcoin price model.

2) Mayer Multiple

The Mayer multiple is a good indicator for bitcoin valuation. Make sure to buy bitcoin below the average.

3) NVT Ratio

The Bitcoin NVT Ratio show you if bitcoin is undervalued or overvalued. Buy when undervalued.

Also buy when we are at the start of the halvening cycle indicated by the vertical red lines.

4) Bitcoin Transactions

Buy when bitcoin transactions rise. This is a sign of adoption.

5) Bitcoin Users

Make sure the unique addresses are moving up. If it starts falling, this means people are liquidating their portfolio.

6) ATM Growth

Make sure the bitcoin ATM's are growing. This is a sign of adoption.

7) Cost per Transaction

Make sure the cost per transaction is low, this signals a bottom. People are less likely to use bitcoin if the costs are too high.

8) Hash Rate

Hash rates need to move higher. The Bitcoin network’s hash rate is the speed at which miners are able to perform proof-of-work calculations per second. A rising hash rate indicates more adoption.

9) Relative Unrealized Profit

This chart shows if we are in a depressed or euphoria phase. Buy bitcoin when it is depressed.

10) Stock To Flow

Watch for a low stock to flow ratio.

11) Puell Multiple

Buy bitcoin when miners have low issuance.

12) Alt Season

Choose to buy bitcoin or altcoins based on seasonality.

13) GBTC premium

Buy bitcoin when GBTC premiums are low, this signals a bottom.

14) HODL Rate

Bitcoin peaks when the HODL rate declines.

15) USD Index

Bitcoin is negatively correlated to the USD. Buy when the USD crashes.