August 2018 - Bubbles and Bottoms for Commodities -

I decided to add a commodity section to this newsletter, since there has been a lot of movement in this industry. As shown in the previous newsletter, Commodity indexes versus US stock indexes are at an all-time low, and as a contrarian, this means that it`s a great time to buy! However, the final phase of a bull or a bear market are always the most irrational, and massive swings can take place. Remember, commodities are often very scarce, and it takes effort (capital) to extract it from the earth. With an ever-growing world population (more demand), a growing world economy, and stable inflation rates, one would think that commodities are destined to go up. However, the opposite is true.

A possible explanation might be that commodities are often seen as a “safe haven asset”, because there is a limited supply, and can`t be theoretically printed to infinity like US dollars or Euro`s.  The following chart shows that capital flows towards safe haven assets have definitely reached a bottom and are now at all-time lows. It shows a combination of three safe haven assets: Gold, treasuries and the “volatility index”.

The following charts will show a few individual commodities, and the price slaughtering that has been going on over the past months. Will all of these commodities eventually find their bottom, and continue their way up? Without a doubt.

Gold miners have reached a point of capitulation, and operating costs do not justify the current gold pricing. What happens to the price of gold if gold mines start shutting down and output declines? Yup, the prices go up and the whole cycle begins all over again.

Coffee with sugar anyone? Prices have collapsed by 50% in the span of a year. Sustainable? You ask me. Are price declines being reflected in retail coffee and sugar prices? Nope, go check out your local Starbucks and tell me if prices have declined.

There are lots of conspiracies going around when it comes to precious metals, where people claim that big banks have a continuous massive paper short position on metals like gold and silver, which depresses the price. In the meantime, JP Morgan has accumulated a higher amount of physical silver over the past 7 years than the Hunt brothers did back in the day! (they tried to “corner” the silver market in 1979-1980 by buying up one third of the entire world supply of silver and creating an artificially high demand and thus higher silver prices). 

It seems like the perfect strategy: depress silver prices by going massively short on the paper market, and then buying the physical silver at a discount. Mind you, there is a big discrepancy between the amount of “paper silver” and physical silver that is being traded every year. Are you ready to get your mind blown?

in 2016, at an average price of $ 17 per ounce, 2275 Billion dollars’ worth of paper silver was traded on exchanges. Only 4.4 Billion dollars were invested in physical silver that year. This means that the paper silver market is 517 times larger than the physical silver market! Looking at these ratios, it becomes easier to see how the physical silver market can easily be manipulated, and how banks can purchase physical silver at a massive discount. The good news is, you can purchase physical silver at a massive discount too!

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.