Durable Goods Orders Plunge 7%, Flee While You Can

If you recall this correlation, I would run for the hills if you are invested in the S&P.

It will surely come down with the 7% plunge in durable goods orders.

Allana Potash Nearing Construction Financing

Following the news on July 30, 2013, that Russia’s OAO Uralkali was abandoning Belarusian Potash Co., a joint venture with rival Belaruskali of Belarus, the whole potash industry's stock market fell around 20%. Two cartels, Canpotex (PotashCorp, Mosaic and Intrepid) and BPC (Uralkali and Belaruskali), which control 40% and 30% of the potash market, would split up into three cartels: Canpotex, Uralkali and Belaruskali.

Uralkali said it would be focusing on production volume, which means they would sell more potash following the breakup of the cartel. As a result the capacity will grow on this news. The question is, how should investors play this news? Should they buy the dip in potash stocks or sell out?

Today, a month after this news, we already see that potash prices have fallen 5% just recently. Prices for spot shipments of the crop nutrient from Port Metro Vancouver recently slipped $20 (U.S.) to less than $400 a tonne, while there are preliminary signs of market softness elsewhere, including slightly discounted potash prices on rail shipments to China. So, it looks like potash prices are indeed softening.

We know that demand is still growing as potash deliveries are dependent on population growth in the Asian world and that number is still growing at a rate of around 5% per annum. If we bring this number down to world population growth, we have a growth rate of 1.1% per annum. Demand for potash is pretty inelastic, so it could be that some years demand will be higher due to lower potash prices, while other years will have less demand due to high potash prices. Overall, the demand side looks positive. According to Green Markets, a fertilizer industry information provider, demand will increase 26% to 66 million tons. Now let's look at the supply side.

Chart 1: Potash Delivery Vs. Population Growth

The potash industry is having a pretty high capacity utilization rate of around 80% (not as high as compared to a typical 90% capacity utilization rate in the mining industry), but let's say there is overcapacity at the moment. As capacity is set to grow due to the breakup of the cartel, we could see falling potash prices. At this moment, the marginal cost of potash production is around $280/tonne. So we could see potash prices fall another 30% to this level due to an increase in supply. It is estimated that supply will go to 96.5 million metric tonnes by 2017, according to Green Markets.

A good metric to predict potash prices is to look at the capacity utilization trends. The capacity utilization rate is a leading indicator for future inflation. When capacity utilization goes up, we can expect a similer increase in price in about a year from now. We can use this theory to predict potash prices.

Chart 2 gives the potash capacity utilization projection. As you can see, the capacity utilization plunged from 90% in 2007 to 50% in 2009. This corresponded with a drop in potash price from $870/tonne in 2009 to $312/tonne in 2010, exactly a one year lag as predicted by this correlation between capacity utilization and prices.

If we then look at what is happening in 2013, we see that the capacity utilization rate is pretty flat, so I don't expect any huge movements in price in the coming years, but prices could certainly soften to around marginal cost of production. If we look at the Green Market numbers, we would get 66 million tonnes and 96.5 million tonnes by 2017. That's a capacity utilization of around 70%. This really isn't all too bad, considering the plunge to 50% in 2009. Also consider that many of the mines won't come into production at the current price of $400/tonne.

Chart 2: Potash Capacity Utilization

Chart 3: Potash Price (KCL)

The conclusion is that this breakup in the BPC cartel can definitely lower potash prices to around $300/tonne. If you know this will happen, you should invest only in those projects that are low cost. Many development projects need at least a $400/tonne potash price to be economically viable, according to Patricia Mohr, vice-president and commodity market specialist at Bank of Nova Scotia. Knowing that potash prices could go lower than this level, I would be very wary about development companies. Investors should look at low cost producers that are fully funded.

One of my favourite plays was Allana Potash (ALLRF.PK) and it is still my favourite. I have written about this company a year ago. Even though Allana Potash has declined since then (together with the whole commodity market and mining industry), the news gets better and better. Allana Potash's valuations have only improved and the company has all the ingredients to make it into a producing mine.

Read about Allana Potash here.

First Majestic Silver premium on sale today

If you are planning to buy some silver, First Majestic Silver is on sale now. Only a 2% premium over spot!

Gold Supply and Demand Trends

The World Gold Council sent out another report for Q2 2013 here.

As expected, we saw large ETF outflows both from GLD and other ETF's, which led to a decrease in investment demand (Chart 9). But the decrease in investment demand was countered by an increase in jewelry demand, especially from India and China. We now see that the ETF's have finally stopped selling their gold into the market, so I expect that Q3 2013 will be more positive on the demand side.

On Chart 2 you can see that ETF's have large outflows, but this is countered by growing physical demand.

On the supply side we see that mining supply has increased, but recycling of gold has decreased, due to the fact that people won't sell their gold at these low prices. I expect mining supply to come down significantly in the next quarter due to the fact that mines have been shut down, workers have been laid off, funding was subdued...

So the overall picture is that the gold price is especially dependent on the demand side, as the supply side is pretty flat. Watch out for the ETF's and the physical demand for bars and coins. Once the ETF's are done selling, we will see higher gold prices.

GLD trust gold inflow?

Looks like the media is telling us that the GLD trust physical gold holdings are rising and giving a boost to the precious metals prices.

I don't believe it until I see it.

When I make the chart, I see that we are bottoming out (red chart), but by no means we are really seeing a pick up in GLD trust physical gold holdings yet. We will have to wait for a longer time frame to confirm this uptrend.

I need to admit that the red chart is bottoming out though. Maybe the selling of the GLD trust units has exhausted itself.

Chart 1: GLD Trust

As for silver, we really start to see an uptrend here:

Chart 2: SLV Trust

Conclusion:
Silver is the most undervalued of the two precious metals.

Peter Schiff: Stand-Up Comedian

As I always said, Peter would be a perfect Stand-Up Comedian. And here we have it...

Gold Lease Rate Higher, Registered COMEX Gold Lower

Just another update.

Gold Lease Rates are at an all time high again:

Chart 1: Gold Lease Rate

COMEX registered gold has once declined to even lower levels. J.P. Morgan unloaded its registered gold. Total registered gold at COMEX now stands at: 875713 troy ounces. We are nearing the bottom.

Chart 2: COMEX gold

The Declining Trade Deficit: Not As Rosy As You Would Think

The trade deficit numbers are out for June 2013 and have been very positive. Due to an oil boom, the trade deficit shrank 22% from around $44 billion in January 2013 to $34 billion in June 2013.

As you can see on Chart 1, the decrease in deficit was due to an increase in exports (red chart) and a decrease in imports (blue chart). This looks very promising, but I want to show that not all is well if you look into the details.

Chart 1: Import Vs. Export

Let's look deeper into these import and export numbers. Chart 2 gives the breakdown of the export numbers. The largest segments are "machinery and transport equipment", "chemicals and related products" "mineral fuels and lubricants" and "re-exports".

Chart 2: Exports January 2013

Chart 3 gives the breakdown of the import numbers. The largest segments are 'machinery and transport equipment", "mineral fuels and lubricants", "miscellaneous manufactured articles".

Chart 3: Imports January 2013

From these numbers we can deduct that the oil industry is indeed a very important segment that will influence the import and export numbers.

If we then further look at how these numbers evolve in time from January 2013 till June 2013 we have charts 4 and 5.

Chart 4: Exports (billion USD)

Chart 5: Imports (billion USD)

When analyzing the trends on charts 4 and 5, there is one segment that is worth noting. We see that exports of petroleum products (which are incorporated in the segment "mineral fuels and lubricants") have been going up, while imports of the same have been going down. The reason for this can be found in the divergence of West Texas Intermediate (WTI) crude oil and Brent crude oil.

To continue reading this analysis: go here.

China Gold Imports from Hong Kong: Steady in June 2013

In June 2013, the gold imports from Hong Kong to China were essentially flat.
The summer isn't a good period for gold either, so this is pretty normal. But anyway, gross and net imports are still at an all time high, compared to history (see chart 2).

And what's also interesting is that the ratio between net imports and gross imports are at an all time high too: 89%. China wants to keep all its gold.

Tax Receipts Vs. Savings Rate

Whenever the government raises taxes or when corporate profits rise, tax revenue will rise with it (blue chart).

But this has implications, if tax revenues rise, this will deplete the personal savings of the people. The red chart shows the personal savings rate (%). There is a negative correlation to be found here.

It shows us that higher tax revenues always lead to lower personal savings rates and vice versa. From this correlation we can deduct one thing. There is a limit to raising tax revenues. If the personal savings rate gets to 0%, there is no more margin to increase taxes.

At this moment the personal savings rate is 4.4% and is almost at a historic low. Contrast this to the savings rate of China, which is 50%. Also note that tax revenues have been declining as a percentage of GDP. This means that corporate earnings growth isn't keeping up with GDP growth at a constant rate of taxation.

To read more about this correlation go to this article.

Gold Backwardation Explained By James Turk

If you want to know what gold backwardation means, read this article of James Turk. Very interesting.

Let's say we have two currencies A (euro) and B (USD). Then the following is true:

- A's interest rate < B's interest rate
- A is in contango against B
- A's value rises going into the future
- Higher interest rates means a higher risk of debasement of the currency.


Now let's look at two other currencies A (USD) and B (gold):

- USD's interest rate < gold's interest rate (lease rate)
- USD is in contango against gold (or gold is in backwardation)
- USD's value rises going into the future (or gold's value declines going into the future = negative GOFO)
- Higher interest rates means a higher risk of debasement of the currency.

Now gold's interest rate is higher than the USD's interest rate. Which means gold has a higher risk of debasement than the USD. This is virtually impossible because gold cannot be debased.

Which means something has to give. This is a rare event and will mark a bottom in the gold price.