World Of Wallstreet

Shape Of Things To Come, 3/28/2008

Here's my look at the futures curve as it stands today:

Here's my animated look at how it has morphed over time. Here's how I look at this:

1. Wait until there are no dotted lines. This is the baseline case.
2. Pick a commodity (color), e.g. pick crude oil (CL, black).
3. Watch as the black line (Crude oil futures curve) moves over time.
4. Repeat for whatever other commodities are of interest.

Here's my observations:

• Gold - has continued its rise, despite the correction that started a couple of weeks ago. I'm still long and strong with almost all my portfolio in Jr gold and silver mining stocks. 
• Copper - has moved up nicely. I'm bullish on copper based on inventory levels and some news about the fundamentals (see the base metals inventory post from earlier today).
• Crude - crude oil has continued its dramatic rise, particularly further out the curve. Woulda, coulda, shoulda bought some future contracts when oil went down into the 80s a few weeks ago.
• Nickel - has advanced nicely over the last month.
• Zinc - has continued to languish at a low level.
• Lead (Pb) - is more volatile than most of the others and goes up and down.

Shape Of Things To Come, 1/18/2008

Here's my look at the futures curve as it stands today:

Here's my animated look at how it has morphed over time. Here's how I look at this:

1. Wait until there are no dotted lines. This is the baseline case.
2. Pick a commodity (color), e.g. pick crude oil (CL, black).
3. Watch as the black line (Crude oil futures curve) moves over time.
4. Repeat for whatever other commodities are of interest.

Here's my observations:

• Gold - since the baseline gold has been rising rapidly, however in the last month the 27 months out point did not rise and is now backwardated. I consider this to be an overbought indication.
• Zinc and Lead - popped up immediately after the baseline and has been falling since.
• Copper and Nickel - popped up immediately after the baseline, fell back down but has, particularly for the out months, be flat since.
• Crude Oil - the 27 month crude oil price is way lower than the earlier points along the curve. Crude oil futures look like a buy to the extent that you trust that "Peak Oil" will keep prices high or rising.

Shape Of Things To Come

Here's a new version of the shape of things to come, an animated version. With this you can watch the future price curve of a given commodity shift over time. Let me know what you think. The observations that I have are as follows:

• Gold has been consistently rising since mid October. Gold is the only of these commodities whose future price is significantly higher than the current price.
• Crude oil jumped and has fallen a little since mid October, but the further out contract has been rising.
• Copper and zinc jumped up some from Sep to Oct, but have fallen back and remained basically unchanged the last two months. Their curves are very flat going to into the future.
• Copper's furthest out futures price is higher than it was in September.
• Lead (Pb) has been falling.
• Nickle popped up in October but has been falling since and is now a little lower than September. Its curve is flat going out into the future.

Animated Future Curves

Latest Unanimated Future Curves

The Shape Of Things To Come, 11/21/2007 Update

Here's another look at the metal future curves. This month I've added Gold (Au) and Crude Oil (CL). The future prices from the original "Shape Of Things To Come" are compared to current prices in the graph below.

Here's the observations I draw from this graph:

1. Crude Oil has risen almost 20% across the futures curve in just two months. Again, we see that futures curves do not accurately predict future prices. CONCLUSION: Someone with true insight has an opportunity to make big profits. The only folks I've seen that have had true insight are the Peak Oil enthusiasts. One other exception is Ninestreams from the Investor Village boards. He seems to have a deeper insight into supply and demand (especially for energy) that any other expert opinion I've seen. I'm waiting for a correction to enter the oil energy market. I may end up waiting forever.
2. Zinc and Copper are the big losers since September. Ni prices have advanced around 10% while Pb prices are pretty much unchanged. Its interesting that back in September the experts were bullish on copper and bearish on zinc. They were right about copper and wrong about zinc.  CONCLUSION: The experts (well those who you can find in web site news articles) can't really predict decently even two months into the future. 
3. Gold is the only commodity that the futures clearly expect to increase over time. CONCLUSION: If you believe that gold prices correlate closely with oil prices you could dare to go long oil and short gold and expect to make money on the spread. ADJUSTMENT: Silver100 from InvestorsHub points out that the gold:oil ratio is historically redicuously low. This favors gold outperforming oil heading forward so you might want to reverse those trades, but I personally think it would be insane to short either one. I'm currently long gold mining stocks and would like to get long oil stocks because I think that oil prices will go up over the next two year, not decline. I'm looking for the right entry point.
4. The base metal futures (except for Pb) are basically flat from here out for the next two years. This is a change from September when they were declining further out. This is an indication that supplies are not as tight as they were but the fundamentals have not changed long-term. Zinc is the only metal whose long-term future price has declined in the last two months.

This doesn't change my basic stance that, for me at this point, the best predictor of base metal prices I know is watching the inventory levels. Watching inventories kept me from disaster in Ni earlier this year and helped me to avoid much of the recent carnage in zinc and copper. I wish I had taken my lumps and completely exited zinc when the inventories turned.

At this point, I'm bearish copper, nickel and lead (Pb) and am turning bullish on zinc as zinc inventories are again declining.

Click here and here to see the two previous Shape Of Things To Come posts.

The Shape Of Things To Come... Which Metal Is "Safest"?

Here's something that is contrary to intuition. Which of the base metals seems mostly likely to hold its value going forward? A good way to determine this is, "The Wisdom Of The Crowds" as embodied in the future prices. The futures prices, in some sense, embody the thinking of the smartest, best informed  experts on which way prices are expected to go. Thus, a metal with the strongest futures prices, relative to the current spot price is, in some sense, safest relative to its current price.

The graph below shows the LME futures prices as a function of the current spot price for the base metals. Surprisingly, the metal that has fallen the most off its highs, Nickel, is the metal that the futures say is most likely to maintain its current value. In fact, the three and twelve month prices are higher than the current prices. On the converse, the metals that are closest to recent highs (Pb and Cu) are expected by the futures to fall the most.

Of course, none of this futures pricing reflects a "collapse" such as what it would take to move the kind of Junior Canadian mining stocks I've been looking at into unprofitability. One can gain assurance from the futures prices that these mining stocks are undervalued in that the stock prices seem to have overly discounted the risk of falling metals prices.

It will be interesting to track these curves over time and to compare them to what actually takes place in the market.

Full Disclosure: I'm holding copper, zinc and moly mining stocks right now, but do not have any Nickel mining stocks. I will probably revisit this next week.