Sold my Gold. Stop Trading a while.

2 weeks after I build up my large 9% gold position, it hiccuped:

After that, I reduced the large position, losing ~USD 1K, and am now down to a manageable 3%.  Will probably sell it all.

The macro environment keeps changing too fast.  If I trade now I need to hold smaller positions for shorter times.  That doesn't suit me so I'll stop trading for now.  I trade best when I am willing to buy at times that no one else is - and thats not now.

The market is still reasonably priced, I'll just buy dividend stocks instead.

Bought Tencent and Gold

Took advantage of last weeks China stock turmoil to buy a 2% position in Tencent.  Bot 200 shares at HKD 460.20/share.

My reasons for buying:

• It owns the omnipresent WeChat platform.   The company is a monster with its tentacles stretching throughout China's technology ecosystem.
• Its reasonably cheap, at under 30X earnings with 15-20% growth and no net debt.

I am keeping the position to 2% because this stock can go to zero:

• The VIE structure
• Geopolitical risk.  How much are any China shares worth if missiles start flying over Taiwan or the South China Sea?

Also bought a big position in GLD, now 9% invested.  I consider gold to be a currency like USD or SGD, so can hold a lot of it.  Expect it to do well with rising inflation over the next few months/quarters.

I'm now almost 100% invested:

The holdings:

Why I want to buy Gold

 Gold may have stopped falling:

In the coming years, I expect periods of high inflation like in the 40's or 70's.  Gold serves as a decent inflation hedge, even if its not a great one:

Source: Bloomberg: More Previous than Gold.  Copper is the better inflation hedge.

In the coming quarters, I expect a lower q-on-q growth rate.  Gold does well when growth slows.  One caveat is that even through the growth rate should be slower, GDP growth itself should still be high (mid-to-hight single digits).

In the next few months I think there's a good chance of a market correction.  When market exuberance hits slowing growth.  Think it'll be a small correction like Dec 2018, not a crash like 2020.  Gold hedged against past market corrections well.  I put the chances of a correction this quarter around 50:50.

Gold is the best bet for me now.  Copper may be a better inflation hedge long term, but does badly with slowing growth.  Gold miners will go up more than gold over several quarters, but won't hedge against a correction.  So just hold the shiny yellow stuff paper.

I bought a small 2% position nought during last month's shakeout.  Right now its hard to buy more, its always overbought.  Got a feeling it won't be oversold for a while.

Lots of reasons to buy it.  No reasons not to.  This is my only high conviction trading/investment idea now.

Where are we in the Palm Oil price cycle?

There are a lot of listed CPO producers in Malaysia, Singapore and Indonesia.

The CPO price is really volatile:

Source: Trading Economics

The latest peak is probably caused covid-19 supply disruptions, and is probably temporary.

Where are we in the commodity price cycle?

Demand

I don't think we can predict demand in the next few years.  There's too many moving parts:

• Used for cooking and in around 1/2 of all supermarket products.  Can be substituted with other vegetable oils - the palm oil price usually tracks soybean oil at a discount.  The demand for use in branded products is inelastic: producers will not temporarily switch from Palm Oil just to save money.  Those using it for cooking may switch to soy or vegetable oils.
• Also some demand for bio-fuel.  Indonesia had mandated its use, but it may not be enforced.  The EU has tried to ban palm oil bio-fuel.
• China announced plans to stop using corn & soybean in animal feed, which probably reduces soybean oil crushing margins, and is good for CPO.
• Demand from India dropped due to covid 19.  (chart)  Palm oil there is used by wholesale buyers, stalls and the F&B industry.  Households prefer more expensive oils.

We are better off looking at supply.

Supply

Palm Oil can only be grown at plus or minus 10 degrees from the equator.  In 2018, Indonesia supplied 56%, by far the most.  Malaysia supplied 28% with the remaining 16% from other Asian, African or South American countries.

The long term factors affecting supply are the number of hectares planted and the age of the trees.  The trees start producing 30 months after being planted, and reach peak yield at 7-13 years.  Production slowly declines since then:

Source: Palm Oil World

This December 2020 CPOPC report explains supply well:

Other figures corroborate this: Malaysian Palm Oil production has been flat for the past 5 years, while Indonesia's has been rising:

Source: Indexmundi (Msia, Indon)

In summary:

• Malaysian CPO production has been flat, while Indonesia's growth has slowed (though is still currently growing enough to meet demand).  
• If both Malaysia and Indonesia catch-up in replanting new trees, it would temporarily remove around 2.6m tonnes (estimated 3.5% of world production).  I guess it would take 4-5 years for production to recover from this, after which it starts exceeding today's numbers.
• El-Nina has unpredictable short term effects on prices.  It may increase or decrease palm oil production, and affect soybean production (substitute for palm oil) in Latin America.

I would say that 2019/20 may have been the bottom of the cycle, but its not clear.  We did not see the type of demand destruction typically associated with the bottom of commodity markets.  But we did see some curtailing of growth.

If we do get a CPO boom, expect supply to catch up with demand in 3-6 years time.

Bought Uranium Stocks

Been looking for a chance to buy Uranium producers.  For the inevitable uranium bull market.  Was waiting for a market correction, but this news ("Chinese nuclear plant 'performance issue' reported by its French joint operator") hammered Uranium stocks last night.

Decided to take the plunge and buy a 3% position.  For something this risky, its gotta be a small enough position so that it doesn't hurt too much if it halves.   Otherwise I can't stick with it.  This is a "buy and forget" trade.  I want to wake up a few years from now and find we're in a Uranium bubble.

Theres only 2 publicly listed Uranium companies currently producing:

• Kazatomprom - the world's lowest cost producer in Kazakhstan (LSE:KAP).  Bought 364 GDRs @ USD 31 each. 
  
• Cameco - a Canadian mid-cost producer (TSE:CCO).  Bought 570 shares @ 23.83 each

Its risky.  Short term, the knife can keep falling, even if the fears turns out to be false.  After rising so far, these stocks may need a few more more days to shake out weak hands.  Long term, they can go up 3 or 4X if a real Uranium bull market occurs, like in 2007.  They can also drop by 2/3rd if the worst turns out to be true and we get another Fukushima.

(Edit July 2021): Realised Cameco is a mistake, sold it off at a small loss.  Its a barely profitable company, not one that I want to hold when I may have to wait years for a recovery. Sold it off at a tiny loss.

Does Paper Gold hedge against stock market corrections?

Gold is an unprintable zero-yield currency.  So it should do well when real interest rates fall, or when they are expected to fall.  Like in a stock market correction.  Lets check the behaviour of GLD in past corrections.

Since GLD's history only goes back to 2004, we start in 2008.  The chart below covers the the 17-month bear market from Oct 2008 to Mar 2009.  S&P 500 (the purple line) was down 55%, while GLD (the candlesticks) was up 40%.

It wasn't smooth. GLD had a vicious 7-month 1/3rd drawdown, followed by a swift 4-month 50% recovery, bringing it back to where it started the drawdown. 

Why did it fall?  Interest rates were falling throughout this period, but there was a pause from May to Sept 08, corresponding to GLD's fall:

Source: MacroTrends Federal Funds Rate - 62 year historical chart

Flat rates would have stopped gold rising, but why did it fall?  Probably due to the panic, with funds needing to liquidate anything they could.  No one knows, but the important thing is that it did.  How would you buy-and-hold or trade through this?

Next we have a series of smaller corrections.

• A brief two-month 16% S&P 500 correction from May-June in 2010, shown by the dotted rectangle below.  GLD up ~3%.  Its too short a time for the chart to mean anything.  And this was within a wider multi-year gold bull market.

• A more substantial 5-month 19% S&P 500 correction from May-Sept in 2011.  GLD was up 4%.  We can see GLD's big spike as the stock market corrects, but GLD's final red candle has it falling 9% in a week.  Excluding this fall, GLD was up 13%. 

• Again, we can see how hard it is to trade or buy-and-hold.
• After the above spike, gold entered a 7 year bear market.  We only get one stock market correction in this time, 3-month correction from Nov 2015 to Jan 2016.  GLD exploded when the market dived:

• The 3 month 2018 bear market from Sept to Dec 2018.  GLD was up 3-4%, and a lot less volatile than the S&P 500 which was down 20%:

• With hindsight, the above was the beginning of a new bull market in gold.  Which we may still be in now.

• GLD fell with everything else in the 2020 crash.  It was down 7% vs the S&P's 33%.   With a maximum drawdown of 8%, it held up ok.

Conclusion

On average, GLD has risen during small corrections.  But not during large bear markets or liquidity crises.

I'm expecting a short correction in the second half of this year.  Like 2018 or 2015-16.  I'm thinking of going long gold.  The odds are on your side if you buy gold before a (brief) downturn.  But the charts above give some idea of the risks involved.  2015-2016 in particular shows how dangerous it can be to be early.

Selling My Trading Account

I'm now selling my trading account which made up around 15% of my assets:

I'm selling now because:

• Hedgeye sees quad 4 next quarter.
• Money inflows from the Treasury General Account will stop.
• The market is too frothy.  Every man and his dog is in.  Shitcoins are flying as crypto will "change to world".  Headlines proclaim "Copper is the new oil"...where were all these guys in 2020?

Think I've got another month to sell.  Then I look to buy gold to benefit from falling growth.  Don't know how long that trade would last.

Longer term, I think the correction will be short, like Dec 2018.  I want to be in the market again.  Still in commodities for higher inflation.  I'm looking for new targets, plus sticking with the old ones:

• Copper again, for electrification.
• Aluminium, copper's only substitute.  It also increases energy efficiency (lightweight).
• Oil.  Rising energy prices are the definition of inflation.  
• Fertiliser, rising crop prices mean more planting for next year's harvest.
• Maybe palm oil, it takes 4 years for newly planted trees to bear fruit.
• Battery metals are tough, they are prone to substitution.
• Met Coal.  Probably US based, to support infrastructure spending and re-indistrialization there.  Australian listed coal producers have too much thermal exposure.
• Maybe evil thermal coal?  Would favour Indonesian producers, as they have a strong domestic market (unlike the US or Oz) and are best placed to export to Asia & India.
• Uranium is hard to place bets on.  The small caps are losing money, and Cameco is too tame.
• Crypto.  I like ETH, but they are losing market share from high fees and a clogged network.

Basically anything that can't be grown too fast or printed.