TBT - The Big Trade's Back On

T-Bonds going down again

Well, I thought I'd be back into this one, and I am - after yesterday's cross of the 3dma below the 13 (for TLT, the 20+ T-Bond ETF).

So, I've bought another chunk of TBT (the Ultrashort 20+ T-Bond ETF). My arguments are the same as before - that currency debasement must eventually raise yields.

Of course, it would have been better not to have been whipsawed out the other day. But, with leveraged ETF's, it is too risky to stay in a counter-trend play. You may prefer different methods to my moving-average based system, but you need some sort of objective system and you do need to stick to it.

So much for the big trade

I dumped my TBT holdings yesterday, at $41.24 (£29.61). This was simply because the 3dma of TLT (the underlying ETF which is long 20+ T-Bonds) had risen above the 13dma, and so was a short-term "close short" signal.

So much for "the big trade in 2009". I suspect it will come back, though.

Centamin Egypt (CEY.LSE) - A Junior Gold Share

The Egyptians have some experience of gold

I know I said I was reluctant to discuss my specific gold mining shares.

Nonetheless, I am now going to cover one of my favourite and longest-held juniors, Centamin Egypt, which trades in Australia (CNT), Toronto (CEE) and on AIM in London (CEY - where I bought mine). For the full picture, check out Centamin's website.

Now, in the interests of disclosure, I should point out that I bought my holding in these shares quite a few years ago, at a mere 13.88p. I've also since sold half of them, when I first got a double, a practice that I think works well with junior explorers (so insulating you against any possible downside). Nonetheless, I am now officially adding them to the CCI portfolio at 39p, as I think that the correction of the past few days is an excellent buying opportunity.

So, why do I think that Centamin is such a good buy? Well, as juniors go, Centamin is relatively ... emm ... senior. At 39p, the market cap is some £343M, or about $500M in US dollars. For that, you get an advanced stage project at Sukari in Egypt, which is scheduled to enter production in the second quarter of this year. The total resource estimate now stands at 9.01M ounces of gold Measured and Indicated, plus a further 3.3M ounces Inferred, or 12.31M ounces total (all figures from Centamin's September 2008 quarterly report, available on their website). That's around $40 per ounce, at current prices; the company is fully-funded through to production (and debt-free), and estimates cash operating costs of $365 per ounce once in production.

It doesn't take a financial genius, therefore, to work out that at an $800+ per ounce gold price, Centamin will be immensely profitable, and should be worth much more than $500M. A current mid-range producer, sunch as IAMGOLD (IAG.NYSE), for instance has a $1.68B market cap with a resource size of only around 8M ounces. And, of course, that's without factoring in a rising gold price, or an expanded resource (exploration is ongoing) or the likelihood that an existing producer is quite likely to buy Centamin out in the near future (12.31M ounce gold resources are rare, and are the kind of find the majors need to replenish their reserves).

Of course, there's lots that could go wrong. Centamin's management could be utter rogues, but that seems unlikely, given that the resource estimates have been prepared in accordance with the Australian JORC requirements, and the project is now so very advanced. More likely is some sort of Egyptian government land grab or nationalisation; while this sort of event is on the rise, it is not necessarily a show-stopper - see the recent purchase by Kinross of the junior Aurelian Resources, despite the Ecuadorean government's revised legislation.

It should also be noted that, while Centamin will be the first Egyptian gold mining operation since the Pharaohs, British energy major BG operates gas fields in Egypt very successfully.

The bottom line is that a junior gold share like Centamin is not something to be the farm on, or even to take the sort of position size you would on an ETF like GDX or EWS. On the upside, if everything works out positively, you could get an easy double in the next twelve months.

SRS - shorting US Real Estate yet again

Somewhat against my better judgement, I have heeded the 3/13dma cross on IYR, and bought the Proshares Ultrashort Dow Jones Real Estate ETF again, this time at $62.04 (£41.72).

What about the gold miners?

A mine is a hole in the ground with a liar at the top
Attributed to Mark Twain

Well, I've said several times how much I like gold bullion, but what about the mining companies? There's plenty of discussion about gold mining shares on the web, probably more than there is gold itself (there is, after all, more to write about with a company than a slab of metal), and the investment merits of the two do tend to get confused. I'll admit it now, I've been invested in numerous gold mining issues for many years, and still have a sizeable position.

So, why have I been reluctant to discuss gold mining shares on this blog? Well, in the first instance, because I think that investing in mining equities (and especially gold miners) is a highly specialised field, where you do need expert guidance. I'm no geologist; I seek (and pay for) expert guidance when it comes to my gold mining investments. And, therefore, there is only a limited amount I can reveal about exactly which shares I have invested in, without breaching confidentiality agreements.

However, I do think that my experience can be useful, in general terms, to anyone thinking about entering this field. With that thought in mind, here are a few things that I have learned.

Physical gold (and derivatives like GBS) and the miners are not the same thing
Which may be a statement of the bleedin' obvious, but has some important ramifications. Gold is just gold: a lump of metal which, by virtue of its rarity, physical beauty and historical connotations, is a universal store of value that serves, in reality, as a stateless currency (and one where the supply can be increased at only a very low rate). Gold mining shares, by contrast, are simply shares in companies whose business happens to be mining (or exploring for) gold; their value is ultimately determined by company profitability.

Now, obviously there is a connection between the price of gold bullion and that of gold mining equities; all other things being equal, a higher gold price will mean higher gold miner profits and will so boost mining equities. In theory, mining equities can act as a leveraged play on gold, viz.:

Mining costs $700 per oz; gold price $800 per oz.; profit $100 per oz.
Mining costs $700 per oz; gold price $900 per oz.; profit $200 per oz. (i.e., doubled)

Unfortunately, things are rarely equal, and one reason why gold mining shares have not performed as well as some pundits expected is simply because mining costs have increased at least as fast as the gold price. As I noted last September, before the Lehman Disaster, gold was a mediocre performer compared to other commodities; oil, for instance, increased more than ten times from its 1999 nadir to its 2008 peak, versus only a four-fold gold appreciation. And energy, of course, is one of the major costs of any mining operation.

What's interesting, of course, is that gold has significantly outperformed oil and other commodities since then. My GBS gold ETF was at $81.31 on September 18th, and is $84.26 today; the Brent Crude equivalent (OILB) was well over $60 and is $34.61 today. This supports my thesis that the true gold bull market only started after last September's implosion, with gold assuming the role of an alternative currency rather than another commodity. And, of course, the gold mining shares as leveraged plays thesis could now prove accurate.

Gold mining plays are speculative
No sh*t, Sherlock. Yes, you can get burned badly on gold miners, as that leverage works both ways. As I said, I've been into gold miners for a long time, and while I made excellent returns from 2001-2007, last year's crash hit them hard, with 90% falls in some of my most speculative plays. Fortunately, as I believe in diversification, my position sizes were small enough to avoid any real hurt.

Mining is a depleting business
Another statement of the bleedin' obvious, perhaps, but remember that a mining company's main asset are its mineral reserves. And, with every ounce they mine, that's an ounce less they have. Most of the majors will shortly and urgently need to find fresh reserves, or see their business fade away.

In practice, I find the best way to compare mining valuations is to divide the market cap by their total reserve figure, so giving a dollar-per-ounce value. While this is, of course, a crude metric (and you have to allow for producers versus explorers, proven versus probable reserves, location and grade, etc., etc.), it does give a basis for comparison. I must admit, I tend to find the $10 per ounce figure pretty irresistible.

Small-cap gold explorers are even more speculative
Yes, if actual profitable multi-million dollar cap producing gold miners are speculative, then the small-cap exploration companies, with no profits, no mine, and maybe just a bunch of theories and moose pasture ... well ... Yeeehaaa!! Welcome to the Wild West, baby! Before you even consider thinking about shares in one of these, heed the words of Mark Twain, read the story of Bre-X, and check whether any of their geologists have “fallen” out of a helicopter.

So, why do I think that the small cap explorers are actually the best investment opportunity? Well, it comes down to the bit about mines being depleting resources. Mining companies have to obtain fresh reserves if they are to stay in business, and few of the majors do much in the way of greenfield exploration these days – that's what the junior sector is for, so that the risky exploration business can be performed by entrepreneurial types, and get funded by the gamblers who like to speculate on the Toronto Venture Exchange and AIM. So, in practice, a small-cap explorer that makes a worthwhile discovery will, sooner or later, likely end up being bought out by a major (or, will end up becoming a producer itself).

And, the rewards from the juniors can be dramatic. For example, Almaden Minerals (AMM.TO), a Canadian junior explorer, traded for just C$0.17 in October 2001, and for over $3.40 in February 2006. Is a 1900% profit enough for you? Of course, it's been downhill all the way last year, with AMM back to C$0.44 last November (but a near double since to C$0.86 today).

For me, I suppose the bottom line is that all gold mining shares are speculative, so you might as well go for the most speculative, and try to hit the serious rewards.

So, how to invest?
As I've said, you really do need some specialised advice, especially if you are going for the juniors, to give you some chance of dodging the shysters who run half of these companies. The easiest way to take a position in the majors (i.e., actual gold miners) is to buy the Market Vectors Gold Miners ETF (GDX.NYSE), currently trading at $31.52 (£20.71).

Its top-ten holdings include the likes of Barrick, Gold Fields, Kinross, Newmont, Yamana, etc. I'm officially adding GDX to the CCI portfolio, as a representative of several big cap gold miners which I do personally hold.

As regards the juniors, I doubt that a collective approach would really work, as (frankly) most of them are garbage and any fund would contain too many dogs. What you need to do is to put the work in to discover the few worth buying.

TBT - The big trade in 2009?

I think the big trade in 2009 will be to go short treasuries massively.
Dr Marc Faber, quoted on Moneycontrol.com, 30/12/2008

Well, I've been here before, and my arguments remain the same: at some point, the Fed's attempts to refloat markets by debasing the dollar will succeed, and that long-term US interest rates will have to rise to compensate for resurgent inflation.

I'm very glad I exited this trade before, given the near parabolic rise in 20+ T-Bonds since late November. However, as of Friday, the 3dma of TLT (the iShares Lehman 20+ Year T-Bond ETF) has broken below the 13dma, so I'm going short of T-Bonds once more, through the purchase of the Proshares Ultrashort 20+ T-Bond ETF (TBT). I bought a stack of these today at $42.33 (about £28.42).

Note that this Ultrashort ETF is actually an inflation play, unlike the SDS or SRS which I have traded recently. I'm also being aggressive in ignoring my own rule about the 39dma, which still slopes upwards for TLT. Time will tell whether I am jumping the gun.

Credit Crunch 2008 Portfolio Review

Not the best of years for financial markets

Well, I'm glad that's over – for personal reasons, rather than financial ones. But, as is traditional for everyone else at this time of year, let's look at how 2008 has gone for this blog and its investments.

Of course, this blog has only been running since September, but did I ever time things right to see the fireworks! While the slide has clearly been going on since July 2007, only with the collapse of Lehman Brothers last September has the global economy actually imploded, and oft-overused references to 1929 have, for once, been appropriate. We now live in a very different world to that of only six months ago.

The stated intention of this blog can be summed up by my little Marxist misquote:

The philosophers have only interpreted the world, in various ways; the point is, however, to profit from it.

With that in mind, I have tried to invest in securities which offer the opportunity for capital protection and even growth during deflationary times, as well as those which will gain from the eventual reflation which world governments are desperate to ignite (an intention which I believe will ultimately be successful). However, as well as being deflation or inflation orientated, my investments can also be categorised as long or short term; ie, where the investment rationale is based either on fundamental considerations or on short-term trend-following. While my preference is for fundamentals-based investing (I am a very skeptical technical analyst) I recognise that for some investments, the trend simply has to be your friend. This applies particularly in the case of leveraged ETF's, which cannot be sensible LTB&H investments (see here for an explanation why).

So, for ease of discussion, I'm going to divide my 2008 portfolio review into fundamentally-based (mostly open) positions, and shorter-term speculations (all closed), viz.:

Long-term positions:

Powershares DB US Dollar Index Bullish Fund (UUP.AMEX)
Bought 05/09/08 at $24.34/£13.83; sold 30/10/08 at $25.94/£16.14; sterling gain 17%. Interestingly, it's now worth about $24.92/£17.13, so I was clearly a bit premature to sell. Nonetheless, with US interest rates now at zero, this is not a trade I am inclined to revisit – US dollar strength is a temporary phenomenon.

iShares Euro Government Bond 15-30 (IBGL.LSE)
Bought 13/09/08 and again 23/09/08 at average price £116.96; price now £153.25; sterling profit 31%, plus a fat cash coupon as well! Definitely a strong HOLD for me – I see long-dated euro government bonds as a winning proposition under almost any circumstances. To date, of course, most of that gain has been driven by the weakness of sterling versus the euro, a slide which has been exacerbated by the Bank of England's willingness to cut interest rates faster and harder than the ECB. Even if that situation reverses (as the BoE approaches zero and they find they have to do SOMETHING to stop the slide in the pound), then IBGL should still gain as it represents fixed-yield instruments, which should RISE in value as ECB short rates decline. I see this one as a keeper until the ECB gets all the way down to zero (monitor them here).

My only worry with IBGL is that it represents a mixed basket of long-dated euro government bonds, including those of the unfortunate PIGS (Portugal, Italy, Greece, Spain). It is likely (perhaps I'd go so far as to say “inevitable”) that, at some point in this crisis, one or more of these heavily indebted nations will withdraw from the euro, repudiate their euro debt, and announce that their bonds will in future be repaid (at a fixed conversion rate) in “new lira” or whatever their newly-minted toilet paper of a currency will be called. However, I'm inclined to think that the ECB will have gone for the zero option before then, which will be my cue to leave. Get the info on IBGL here.

Lyxor Gold Bullion Securities (GBS.LSE)
Bought 18/09/08 at $81.38/£44.35; price now $86.31/£59.32; sterling gain 34%. Unsurprisingly, a very similar gain to that of IBGL, and basically reflecting the same decline in sterling. Gold, however, is an investment much closer to my heart – the only asset which is not simultaneously someone else's liability. I think that gold has a great future ahead, as the world governments engage in a “race to the bottom” to debase their currencies, reinject liquidity into markets, and gain competitive export advantage. If you own nothing else, own gold. His heart is cold ... he loves only gold ...

Titanium Metals Corporation (TIE.NYSE)
Bought 23/09/08 at $12.35/£6.65; sold 03/10/08 at $9.26/£5.22; sterling loss 21.5%. This was, really, only a tiny little side-bet so I am not too worried about the loss. The investment rationale was based on the Contrarian Investing method, which I still think is valid, and may revisit sometime soon. However, with TIE still at $9.26 today, getting out in October was clearly the right choice.

iShares MSCI Singapore Index Fund (EWS.NYSE)
Bought at $7.66/£4.59 on 21/10/08; price now $7.25/£4.98; sterling profit 8.5%. Note that this profit is really only an expression of sterling weakness; EWS is down in USD terms. However, I still think that this is a great long-term holding; Singapore is one of the strongest economies in the world, with vast foreign exchange reserves and a very business-orientated government – pretty much the Asian Switzerland. And, you get an excellent dividend yield while you wait for the global economy to recover. Get the details here.

M&G International Sovereign Bond Fund
Bought on 24/10/08 at 60.61p; price today 78p; profit 29%. A familiar “anything-but-sterling” profit, but note that the M&G fund does not pay out as good a coupon as the IBGL ETF (1.86% versus 4.54%). I also expect IBGL to do better because of its focus on longer-dated bonds, but that's not really the point with the M&G fund – it's a means of intellectual diversification. By holding an actively managed fund, I am conciously allowing someone else (who, hopefully, knows what they are doing) to manage a portion of my portfolio, although within certain restrictions (ie, they can only invest in non-UK government debt). As long as deflationary forces continue to be strong, and U.K. economic management continues to be recklessly incompetent, I don't think I can really lose on this play.

CurrencyShares Swiss Franc Trust (FXF.NYSE)
Bought on 19/12/08 at $90.24/£60.53; price now $92.35/£63.47; sterling profit 5%. This is just a straight currency diversification play away from US dollars (where most of my spare cash was held) into a Swiss franc ETF (see here for details). This move was prompted by the Fed going to zero interest rates. So far, it appears to be doing well, in both dollar and sterling terms; apart from gold itself, the Swiss franc is probably the strongest currency there is.

Short-term speculations:

Ultrashort FTSE/Xinhua China 25 (FXP.AMEX)
Traded three times, for a sterling profit of 20% and then losses of 8% and 40%.

Ultrashort QQQ (QID.AMEX)
My Nasdaq 100 short, traded twice, losing 5% and 25% in the process.

Ultrashort MSCI Emerging Markets (EEV.AMEX)
Traded twice, losing 2% and 47% in the process.

Ultrashort DJ US Real Estate (SRS.AMEX)
Traded four times, for gains of 36% and 64%, then losses of 12% and 11.5%.

Ultrashort Lehman 20+ Year Treasury (TBT.AMEX)
Traded once for a sterling profit of 3%.

Ultra S&P500 (SSO.AMEX)
Traded once for a sterling loss of 3%.

Ultrashort S&P500 (SDS.AMEX)
Traded once for a sterling loss of 6%.

Analysis:

Overall, I'd have been better off forgetting my short term speculations and sticking to fundamental-based investments (average short-term loss 2.58%). However, the performance of my short ETF's was skewed by a particularly stupid decision to re-enter my positions on 24th October, when the effective stop-loss was much too high.

This is why these plays eventually lost me 40%, 25% and 47%, rather than 6-12% losses normal at other times. A key lesson of short-term trading is to ensure that your possible wins far outweigh your possible losses – thus, you need to set your stop-loss relatively tightly. In my case, that means avoiding trades where the 3/13 dma cross over point is already distant.

As I already knew this back in October, the real lesson is not to trade when you are tired and distracted.

Anyway, overall I am very pleased, with my long-term investments showing an average profit of over 14% (much more if you take relative position size into account). At worst, if you knock off my average failed speculation, you still end up with a 12% annual gain. Know many other portfolios which have managed a 12% gain in 2008?

Two more failed speculations - SDS & SRS

If you follow the technicals like I do, you will not be surprised that I dumped both my Ultrashort ETF's on Friday, after a (positive) 3/13 dma cross for for the S&P500 and the IYR US Real Estate index.

I sold SDS at $70.89 (£48.72), a 6% sterling loss, and SRS at $53.34 (£36.66), an 11.5% sterling loss. Such is the price of short-term failed speculations, and should be contrasted with the 64% profit I made on SRS in November.