Month: June 2020

Gold miners hedging Vs. Gold lease rates

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Gold miners hedge their gold production in case the gold price drops. This increases demand for borrowing gold. Gold lease rates rise.

In the year 2000, everyone was hedging gold, because the gold price kept falling. Gold lease rates peaked in 2000.

After 2000, the gold price went up and hedging decreased. When the price of gold rises, gold miners typically decrease their gold hedging, because they want to profit from the rise in gold. The decrease in hedging led to a decrease in lease rates.

Backwardation in Gold: GOFO = LIBOR – GLR

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Gold Forward Rate GOFO = LIBOR – Gold Lease Rate GLR.

This is stated as a percentage, and is almost always positive, meaning the gold price for future delivery of gold is higher than the current spot price. If the GOFO is negative, this means that it is cheaper to borrow against gold than dollars, and is very unusual. Generally speaking, it should be cheaper to borrow dollars for just dollars, without involving another commodity, however the GOFO has turned negative on several occasions in the past due to periods of high physical demand.

So what is the status today?

Gold Lease Rates are negative -2% and we even had spikes to -4%.

LIBOR rates are close to zero. 3 month LIBOR is at 0.3%.

That makes GOFO = 0.3% – (-2%) = 2.3%

GOFO is now almost in backwardation and that should tell us that there is a looming physical shortage.

China Power Consumption Confirms V-Shaped Recovery

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China is back in business. This means that we should be buying commodities like copper, oil, gold. Another way to play the Chinese market is to buy Chinese internet companies like KWEB.

 
China is urbanizing with 1.5 billion people, who all want to be connected to the internet.

China is pretty undervalued at a P/E of 13.7 compared to the U.S. stock market at a P/E of 24.

Another way to play China is to buy Fufeng group which is specialized in MSG and trades at P/E of 5 and has a 6% dividend.

The MSG price has gone down due to production increases, but people will still have demand for it.

Fufeng Group: A Leader In An Oligopolistic Market | Nasdaq

The MSG market can still grow outside China.

 

The market is growing at 4% per annum.

The average sale price of MSG for Fufeng group is currently around 5500 RMB per tonne.
Fufeng Group: A Leader In An Oligopolistic Market (OTCMKTS:FFNGY ...

Fufeng also produces xanthan gum, which is in an up cycle.

Import Air Freight Prices Are Soaring

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Import air freight prices have doubled over 2 months.

Import air freight prices only doubled for products coming from Asia. The reason for this is because of a scarcity of flights from Asia to the world, pushing up air freight prices.

What this means is that producers outside of Asia will need to pay a lot more for their imports to produce things. This will increase their cost of production. As a result, the Producer Price Index will go higher and the producers will need to push these costs to the consumer, which will increase the Consumer Price Index for many consumer goods.

This will also have a large effect on the trade deficit as imports rise while exports decline. I expect trade deficits to balloon in May 2020.