A Tradable Low in Commodities
Investors love it when advisors make things complicated. We love experts. When they tell us gold is manipulated or that JPM intends to buy up all the silver in the world so they can dump it on the market all at once, we automatically turn off our brain as soon as they start feeding our fantasies.
We love to have our fantasies fulfilled. That’s why people were convinced that gold was being suppressed all the way from $252 in 1999 to $1923 in September of 2011. They didn’t even think of selling after a 12-year rally. After all, gold was supposed to go up every single day and if it doesn’t go up every single day, it’s proof it’s being manipulated. Sigh.
We want to believe there is some higher power controlling everything so off goes the brain switch.
Actually investing is not all that hard or complicated. When you want to buy or sell something; anything, ask yourself if it is cheap or expensive. If you only buy things when they are cheap and sell things when they are expensive, all you have to know is which they are, expensive or cheap. That’s the only way to make money. Buy cheap, sell expensive. Everything else is both voodoo and nonsense.
That can be difficult. At $50 an ounce the mob of advisors were calling silver cheap and that it was going to $300 an ounce. With gold at $1080 we have experts saying gold might go to $350 an ounce. Is $50 an ounce for silver cheap? Is $1080 an ounce for gold expensive?
No one knows. Certainly the mob was calling for higher prices for silver in 2011 and the mob is calling for lower prices for gold in 2015.
What we can know is prices in relative terms. In absolute terms, the lowest price for silver since 1975 was $3.53 in 1993. In relative terms, silver hit $4.01 in November of 2001 and that was the lowest relative price in 5000 years. So in late 2001, silver was cheap. And I said so. In April of 2011 I saw silver getting nutso again as it did in January of 1980 and I said so.
I was reading Steve Saville this weekend and he put in a really important chart. Steve is the publisher of The Speculative Investor and is brilliant. He is a must read. The chart was an inflation-adjusted graph of the Continuous Commodity Index. It used to be called the CRB. Going back to 1956, on an inflation basis, the CCI is the lowest it has ever been measured.
So we don’t know if commodities in general will go down tomorrow or be lower a week from now, they might. For 100% of the time from 1956 until today, commodities were higher. So they might get cheaper but they are lower than they have been in 60 years.
We are absolutely going to have a tradable low in gold, silver and the vast majority of other commodities. They could go lower but we have everything in place for a tradable low. My opinion and it’s only my opinion is that we are going to have a barnburner of a rally across the commodity spectrum.
My favorite commodity and the one I think is the lowest in relative price is not gold or silver, actually it’s phosphate.
My favorite phosphate company is Arianne Phosphate - DAN.V. For the next 20 years anything energy related is going to be high on investors' watch lists. The world’s population is growing and we either feed them or they riot. All fertilizers are going to be attractive. It’s the only way to make our limited arable land more productive.
Arianne has the world’s largest greenfield phosphate deposit and is located in one of the world’s safest jurisdictions, Canada. They released a feasibility study in October of 2013 that showed a NPV of $1.9 billion. Since that time they have both increased the resource and decreased the cost of production.
Since the BFS was released in 2013, DAN has reduced the cost of production by $14 a ton. That doesn’t sound like much until you factor in production of 3 million tons per year production. By sharpening their pencils and reworking their plans, they have put in savings of $42 million a year. And the BFS says they have a 26-year mine life, over 26 years that represents a $1 billion dollar saving .
And the company has been adding resources year after year. A back of the envelope calculation makes the mine life more like 50 years than the official 26 years.
Most phosphate produced today comes from the Middle East. It’s hardly news that the Middle East is in turmoil. As commodity prices go up from their historic lows, it would be natural to assume one of the big players will find it in his heart to put in a bid for Arianne. The company has an NPV of $21 a share today. Any bid would come in a lot higher.
Arianne Phosphate is an advertiser. I did participate in the last private placement at $1 a share. Please do your own due diligence.
Arianne Phosphate Inc