Most commodities have surged over the past few months. Nickel, copper, gold and zinc have outperformed.
Last week, nickel touched its highest level in two years. Copper climbed to levels not seen since 2014. Zinc surged to its highest price in almost a decade. And gold pushed towards one-year highs.
The weaker US dollar, supply outages, and global tensions boosted prices. The potential demand from the electric vehicle market also drove prices higher.
London Metal Exchange-traded metals have jumped for eight weeks. That’s shy of the nine-week record posted in 2006. In fact, we haven’t seen a better rally since the China-led mining boom peaked.
Resource Speculator readers have seen their stocks surge. For example, a copper-stock tipped at 0.9 cents has tripled since 29 August. One of their nickel stocks, which offers blue-sky potential, has doubled since 27 July. Mind you, that’s just the start. I believe the stock is about to make readers a lot more gains.
Unfortunately, the ‘experts’ aren’t doing as well…
The trend is your friend
Bloomberg reported on 7 September:
‘Commodities revenue at major banks took a further knock in the first half, sinking to an 11-year low amid poor performances in energy.
‘Combined income at 12 top banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. slid 41 percent to $1.3 billion in the first six months of the year, analytics firm Coalition Development Ltd. said in a report Thursday.
‘Coalition monitors commodities activities related to power, gas, oil, metals, coal and agriculture. Other banks tracked by the firm include Morgan Stanley, Societe Generale SA, UBS Group AG and HSBC Bank Plc. The analysis doesn’t include Australian, Canadian or emerging-market banks that have a large presence in commodities.
‘“The general environment continues to be negatively correlated toward the commodities business,” George Kuznetsov, head of research at Coalition, said by phone. “Given the lack of volatility, it becomes more difficult for banks to generate money on the trading side.”’
Goldman’s earned about US$95 million from commodities in the first quarter. The number was barely positive last quarter. The investment bank blames the lack of volatility for its poor performance. But is that an excuse, especially when volatility has been falling for years? Take a look at the volatility (VIX) index:
Source: Yahoo Finance
[Click to enlarge]
The VIX is trading around all-time lows at US$10.73. Investment banks have struggled. Unlike you and me, their traders need volatility to drive liquidity. Liquidity is needed to build and exit large positions. Remember, when prices are volatile, there’s more uncertainty involved. That’s why you pay more for volatility. It demands a premium in markets.
Big commodities traders want higher volatility. But markets have become more illiquid since 2008. Lots of reasons are to blame. For example, the emergence of exchange traded funds (ETFs). ETFs were born out of the last financial crisis. We won’t explain how they affect volatility today. But know that some punters are betting volatility won’t return to the ‘good old’ days.
Take Seth M Golden, for example. The former Target logistics manager made US$12 million shorting the VIX over five years. A short seller borrows the asset, sells it on the market, and tries to buy it back at cheaper prices.
Unfortunately, while Seth M Golden’s strategy sounds good in theory, it may not work forever. Mauldin Economics’ Jared Dillian explained on 6 September:
‘A curious aspect of all the VIX sellers smashing [volatility] is the fact that they are doing so while staring down the biggest-ever potential black swan — nuclear war. If we attack North Korea, and it goes sideways, the VIX isn’t going to 20. It’s going to 100.
‘People know that deep down, but they think they will be able to “get out in time.”
‘That is the liquidity fallacy — whenever you put on a trade, you must accept that the liquidity that was present on the way in might not be present on the way out. You could be “stuck” short [volatility] at 10 and watch helplessly as it reprices to 100. That’s a bankruptcy trade.
‘So, experienced traders know that this will come to a very ignominious end. But in the meantime, party on?
‘“Something bad is going to happen sometime” is not an investment thesis, but it’s true. Something bad will happen sometime. Could be really bad.’
Making a Fortune Backing Resource Stocks
Don’t expect low volatility forever. Geopolitical risk is building, and there’s a good chance that a mistake could be made. Kim Jong-un has proven himself extremely reckless. If the North Korean dictator fires another nuclear missile, tensions should rise again. That could easily happen.
Donald Trump offered to sell more military equipment to Japan and South Korea last week. He also vowed to respond with ‘fire and fury’ to North Korean threats a month ago. The US president called for fresh sanctions on the country over the weekend. Previously, Trump wanted a full ban on exports of oil to North Korea and an asset freeze on Kim Jong-un. However, China and Russia didn’t agree.
China worries that an oil cut-off would lead to North Korea’s collapse.
The United Nations — including China and Russia — voted for ‘watered down’ sanctions overnight. The new sanctions didn’t include an oil ban or asset freeze. That said, they did include an oil ‘cap’ for North Korean oil imports.
It remains to be seen how Kim Jong-un will react today. According to CNN, North Korea’s Foreign Ministry said yesterday:
‘The United States will pay a “due price” if harsh sanctions against the country are agreed at a United Nations Security Council meeting on Monday.
‘“The DPRK is ready and willing to use any form of ultimate means,” the statement said, referring to the country by its acronym.
‘“The forthcoming measures to be taken by the DPRK will cause the US the greatest pain and suffering it had ever gone through in its entire history.”’
Given the lighter sanctions, volatility is likely to remain low and commodities prices could jump following a negative statement from Kim Jong-un. In other words, while the investment banks may not profit from the next commodities surge, you can.
To find out how, go here.
Editor, Resource Speculator