Palladium price has more than doubled since the early 2016 making the white metal more valuable than gold for the first time since 2002. Its impressive performance attracted much attention from the financial press, which published numerous articles and analyses about the palladium market. If you diligently read the analyses, you may learn that automotive industry accounts for some 75% of demand for palladium, that its global production is as little as about 200 metric tons per year (vs. about 3,000 tons for gold), that only two countries (Russia and South Africa) produce more than three quarters of its global supply, and that the demand for palladium is expected to continue to grow. Presumably that implies that palladium price should remain high and possibly continue to rise. Continue reading
- In financial and commodity markets, large-scale price events are not predictable. Even so, most market professionals rely on forecasts most heavily in making forward-looking decisions.
- At times, this has disastrous consequences (see below)
- Large-scale price events are far and away the greatest source of external risk for commodity-related businesses. Their severity and frequency has been on the increase in recent years.
- An alternative approach to mastering uncertainty is to explore systematic trend-following strategies which, if used appropriately can turn price risk into a source of profit and hard to match competitive advantage
According to the latest Reuters survey, over one thousand energy market professionals expect the oil price to average between $65 and $70 a barrel in the years 2019 through 2023. Only 3% of respondents thought that Brent Crude Oil might increase above $90/bbl next year. So, market experts do not expect any surprises and largely agree that oil price will remain where it is. This groupthink reminds me of a similar situation some 15 years ago. Continue reading
Extreme price events are far and away the greatest source of external risk facing oil and gas producers and other energy-dependent companies. Frequency and severity of such events has been increasing dramatically since about 2005/2006 causing ocasionally severe pain for many industry participants.
Case in point was the 70% oil price collapse through 2014 and 2015, from over $100 to below $30 per barrel. In the aftermath of this decline, U.S. mining industry – which includes oil and gas producers – reported losses of $227 billion, wiping out eight previous years’ worth of profits as the following chart shows: Continue reading
The price of Copper has been trending significantly higher since the start of 2016. However, this trend has not been easy to trade using traditional trend following strategies.
This last event (D) was quite painful for most – if not all – trend followers, as the following chart illustrates: Continue reading
Investors exert a great deal of intellectual effort to determine the correct valuation of securities. Economic value is central to our decision making and it plays a major role in our intuitive psyche. In daily life, when we buy a loaf of bread or a tank of gasoline, we tend to have a good idea about what we think is cheap and what’s expensive. We like bargains, don’t enjoy being ripped off, and in the same way we’re inclined to shop for value as consumers, we find value investing intuitively appealing. But here’s the critical difference between buying goods and investing: shopping for investments is speculative while buying stuff isn’t, and speculation activates the part of our mental circuitry that can heat up to a boiling point and overwhelm any rational consideration of value. Continue reading
In my book, “Mastering Uncertainty in Commodities Trading” I argued that security prices “are driven by human psychology and its self-stoking collective action that can sustain major trends spanning many years.” That’s because in speculative decision making, our views about the actions of others can entirely override our rational appraisal of the underlying asset value.
The most recent example of this is the price of Bitcoin that has surged from below $400 in January last year to $4,300 this week. When we set up the Altana Digital Currency Fund several years ago, many people thought that digital currencies were just a strange fad and investors continued to show little interest in them – until very recently. Continue reading
Nature has … some sort of arithmetical-geometrical coordinate system, because nature has all kinds of models. What we experience of nature is in models, and all of nature’s models are so beautiful. – R. Buckminster Fuller
Nature’s survival strategies that bear the most similarities to activities of market speculators are those of predators. To live, predators must hunt and this activity includes elements of speculation. Like trading, predation requires knowledge, skills, judgment and decision-making. It also entails risk and uncertainty. A predator can’t be sure where her next meal is coming from. Each hunt is an investment of resources; it involves the risk of injury and loss of energy expended in failed hunts, which tend to be more frequent than successful ones. To survive and procreate, predators must consistently generate a positive return on this investment. Too much of a losing streak could turn out to be fatal. In his book, “The Serengeti Lion: A Study of Predator-Prey Relations” George B. Schaller painstakingly documented the details of hundreds of hunts by large cats in the Serengeti National Park in Tanzania. We have all seen wildlife television programs showing lions and cheetahs hunting, but Schaller’s work offers a much richer account of the life of predatory cats including their hunting behavior.
The anatomy of a hunt Continue reading