Commodities

Today gold hit $750, the highest its been in 28 years. It looks like we might break the previous intra-day high of $850 within the next few months.

There was a slew of bad news today related to the housing industry and inflation worries and both oil and gold reacted by going up. I bought into GDX today which is the gold mining index. I had bought it last year, but I sold it to buy actual gold coins.

 I’m still heavily bullish on gold and I think we’re still in the beginning stages of a rally.  Why do I think so? Because almost everyone I know ridicules my idea of gold being a good investment!!!!

Typically, the average person does his investing by looking through the rear-view miror. He invests in whatever was hot last year or the last few years. I fell prey to that investing mindset early on in my investing adventures. I saw that tech stocks had done phenomenally over the past few years and in late 1999 I dumped all my savings (and some money I borrowed off my credit cards) into the high-flyers and subsequently lost all my money. I later found out that successful investing entails “anticipating the anticipations of others”, to quote John Maynard Keynes.

Once the popular media starts hyping up gold, then the average person will want to get in on it.

In a few years, when my friends start asking me about gold and how to buy, I’ll know its time to get out!

Till, then I’m a gold bull. I’ll take a shiny piece of yellow metal over a green piece of paper with a promise on it anyday!

As previously mentioned, I entered a synthetic long stock position using options in Seabridge Gold.

As a recap, a synthetic long stock position is buying the calls and selling the puts to offset the cost the of calls. (If you don’t know what calls and puts are, I suggest you read up on option trading. Options Made Easy: Your Guide to Profitable Trading is a good book).

With $60 I was controlling $1650 worth of stocks, or about 100 shares. On Friday, or about a week later, the stock was up just over a dollar, so I sold 2/3s of the call contracts and all of the puts. On the call side, I netted a profit of $0.40 or $40/contract and on the put side I netted an additional $0.35 or $35/contract. I actually closed out all the puts and kept only 1/3rd of the calls.

If I had closed out the position entirely I would’ve made about $70/contract or about 116% in roughly 1 week. As it stands, since I’ve liquidataed most of the position, I’m now in each call contract at almost cost and I’ll recognize a total net profit when I exit the calls. Currently the calls are selling for $235.

Last friday was also Triple Witching Day, (the contracts for stock index futures, stock index options and stock options all expire on the same day) and historically the week after that in June has a tendency to ended lower. Thats why I decided to close out most of my position. If the stock market does move lower, I can re-enter the position at a cheaper price. If not, then I’ll still make money on my existing call options.

If the stock drops, so long as I sell the calls before they drop under $10-$15, I won’t lose any money. If the stock moves significantly to the upside, the Delta will move towards parity with the stock and I then get most of the upside.

Currently I’m in a good situation. Lots of upside potential with minimal downside risk!

On another note, BHP Billiton (BHP) and Anglo American (AAUK) are hitting new highs! I love my commodity stocks.

According to an article in the Wall Street Journal, the rush to produce ethanol has resulted in sharply higher prices for corn. Corn is used to feed cattle and pigs and as a result of the price increase, farmers are feeding their pigs trail mix, candy and Top Ramen noodles!

Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs. “It’s kind of like getting Cocoa Puffs,” says David Funderburke, a livestock nutritionist at Cape Fear Consulting in Warsaw, N.C., who helps Mr. Smith and other farmers formulate healthy diets for livestock.

California farmers are feeding farm animals grape-skins from vineyards and lemon-pulp from citrus groves. Cattle ranchers in spud-rich Idaho are buying truckloads of uncooked french fries, Tater Tots and hash browns.

In Pennsylvania, farmers are turning to candy bars and snack foods because of the many food manufacturers nearby. Hershey Co. sells farmers waste cocoa and the trimmings from wafers that go into its Kit Kat bars. At Nissin Foods, maker of Top Ramen and Cup Noodles, farmers drive to a Lancaster, Pa., factory and load up on scraps of the squiggly dried noodles, which pile up in bins beneath the assembly line. Hiroshi Kika, a senior manager at the company, says the farm business is “very minor” but helps the company’s effort to “do anything to recycle.”

Mr. Smith says he’s paying about $63 to feed a single pig for five or six months before it goes to market — up 13% from last year. His costs would be even higher if he didn’t augment his feed with trail mix, which he says helps him save on average about $8 a ton on feed. This year, Mr. Smith has bought enough trail mix to feed about 5,000 hogs, and that will save him about $40,000.

Its only a matter of time before corn prices become too expensive for human consumption in the US. Already its too expensive for people in Mexico and being a major ingredient in their diet, thats having an inflationary effect on their lifestyle.

Rather than using corn-based ethanol, I wish the government would look into using vegetable oil instead. There are several kits available for diesel cars that allow the owners to switch to “used” vegetable oil whenever its available. In Southern California, there are companies like Socal Greasers that will fit your diesel car with a converter kit for a reasonable price.

So next time you stop by a fast-food place for a meal you can ask the manager for some of their used cooking oil. They have to pay to dispose of it and are usually happy to give it to you for free. It burns much cleaner than gasoline and your exhaust has a nice french-fry smell too!

BHP bought 1.5 million shares today. They report this on their website. Pretty amazing how much stock they’ve bought back. The stock buy backs along with their regular dividends and diversified commodity base makes them one of my favorite stocks. Plus the fact that everyone I know isn’t harping on about them (like Qualcomm in 1999) makes it even more attractive.

Along with Anglo American (AAUK), these two are great commodity plays. Plus they’re both down over 5% this week makes it a good time to jump in. I plan on holding both for a long long time.

As usual, do your own Due Diligence. If you don’t know what that means or how to do it, put your money in ING Direct instead!

Today’s market rebound was disheartening. Even though my portfolio is down on the whole, my invesrse S&P500 fund was up 7% yesterday. Now I don’t know whether I should hold it or bail. On the other hand, if we saw another day like yesterday, I could exit and take my profits! But then gain, everyone else seems to be really happy with the rebound. I guess thats the closest we’ll ever get to world peace. I’ll take it 😉

I came across this article last night, 32 Reasons Why The Stock Market Will Jump This Year.

While its written as a serious prediction, I personally feel its more like a christmas wish list or a list of finalist answers at the Miss World Beauty Pagent!. Here are some of the gems

#1. Housing and Auto-manufacturing weakness will subside
Based on what? Major layoffs in both industries?

#5. Unemployment with stay at record lows.
Hmm…with the massive layoffs in Housing and Auto-manufacturing, you really think so?

#7. Inflation will continue to decelerate, with CPI averaging around 2.0%.
Hmm…ever since the minimum wage was jacked up, small business around where I live jacked up the price of everything along with it. That doesn’t sound like low inflation to me. Anyone who thinks that CPI is an accurate measure of inflation makes way too much money to begin with. Once you take out all the factors that cause inflation, of course you’ll be left with 2%. What a doofus.

#11. The US Dollar will firmer up and even maybe become stronger
With almost all the worlds major currencies strengthening against the USD how is this going to happen? Oh yeah, Bank of Japan is enforcing a weak Yen policy. And of course the USD will strengthen against the Iraqi Dinar! And with China owning a Trillion USD do you think a strong Dollar is actually in our interest????

#12. The U.S. budget deficit, which is currently 1.5% of GDP, well below the 40-year average of 2.3% of GDP, will continue to trend lower as healthy economic activity continues to boost tax receipts substantially more than estimates.
Uh…isn’t the US GDP is currently mainly comprised of government spending? Thats not really a show of healthy economic activity. Although it is true that the tax receipts are up more than estimated.

#15. The mania for commodities will completely end.
Yeah Right!!! All those millions of people in India and China who can now afford to buy a car and a decent place to live will choose to buy plastic go-karts and tents instead of regular cars and houses that use steel & copper. Is he completely blind to the global industrialization thats taking place? Every year China adds to its electricity generating capacity by the same amount as the entire UK. This electricity comes from coal and is used to make more cars and power more houses. The dude’s smoking crack now.

#16. Oil falls to $35 to $40 per barrel and eventually $20-$25.
#19. Gas prices will drop below $4/mcf.
#20. Gold will drop below $550 per ounce
This was written on the 1st of Feb 2007 when Oil was around $50/barrel. Its since gone up to nearly $60 and is probably on its way up. Corn has quadrupled to over $4/bushel making ethanol almost as expensive as gasoline now. Similarly Gold is also up to $665. I actually bought some GLD (the gold ETF) 2 days ago and I’m already up 7%. I predict its going to $800 in 2 years.

#17. Peace in the Middle East.
HAHAHA.

Some of the points are actually valid, but the ones I’ve mentioned are pretty stupid. Like I’ve said before, I’ve taken exactly opposite bets in my stock investing, so of course my views are out of line with the authors.

What do you think?

I own a few shares in a company called Freeport-McMoRan Copper & Gold Inc. (FCX). Monday they announced a bid to buy copper producer Phelps Dodge Corp. (PD) for $25.9 Billion. [yeah thats Billion]. Interestingly enough, as part of the bid FCX will pay $500 million if it backs out while PD will pay $750 million if it bails.

As if that wasn’t exciting enough, yesterday an analyst floated a rumor that BHP Billiton Ltd. (BHP) would shortly announce a bid for FCX!!! Apparently the market liked that idea because prices for FCX and BHP did well. I also own shares of BHP. BHP is involved with oil, gas, copper, silver, zinc, lead, uranium, and copper by-products, including gold, aluminum, coking coal, iron ore, manganese, diamonds and fertilizers.

If you’re wondering why I own stock in BHP & FCX its because I think we’re going to see high inflation in commodity prices and a devaluation of the dollar. [search this blog for “inflation”]. Also read this post on “Hot Commodities”.

Here’s a good post on what the PD acquisition means at The Strategic Investor.

On another note, my dozen shares of PetroChina (PTR) have been doing pretty well. They’re up 10% in the month that I’ve owned them.