TIB: Today I Bought (and Sold) - An Investors Journal #56 - Rubies, Emeralds, Milk, Gold

Some days I just get excited and do some original research. Rubies did it. Markets are re-balancing the US Dollar and interest rates. Time to do a little hedging perhaps.

Bought

Mustang Resources (MUS.AX): Mozambique Rubies. Mustang released an announcement about growth in ruby inventory.

There was a net increase of 26,698 carats of rubies in the space of 3 weeks. This increase was consistent with the last increase - so it is beginning to look like a monthly run rate is being established. I did some calculations based on data from the leading miner in the region - Gemfields plc. They achieve an average sale price of $317 per carat. Bear with me as I crank the numbers step by step to reach a valuation. For Mustang, this equates to a monthly run rate of $8,463,266 (26,698 carats times $317) or $101,559,192 annually (assuming this is an achievable run rate). Using Gemfields price to sales ratio of 1.65 this equates to a market capitalisation of $167 million. Current market capitalisation of Mustang is $42.6 million. This suggests to me that the stock could increase by 4 times all other things being equal.

I am quite comfortable that all things could be equal because Mustang and Gemfields are on adjacent locations - so the cost structures and gem quality profiles will be remarkably similar. Gemfields does operate Emerald and Amethyst businesses too (in other countries) which means that the price to sales ratio might be different. Given that rubies are the second most valuable gemstone after diamonds I am thinking that Mustang will not be lower. If anything it will be higher. Gemfields has also found and sold some big rubies. This could make a difference. Mustang has found some big stones but sale results are not yet known - I am going to assume there is no difference. Now Mustang also has a graphite resource nearby - at these valuations the graphite resource is free.

Other news is Mustang is now listed in Germany under the ticker GGY.F trading at €0.05

Gemfields plc (GEM.L): Rubies and Emeralds. While doing the research on Mustang, I noted that Gemfields price is 23% off its highs (as is Mustang). I had some Pounds in one portfolio and bought a small parcel. With growing economies, gemstone demand should grow. Let's look at the charts

The blue box shows the price differentail from recent highs - 23.7% lower over the last 112 days. Price is also 55% below the 2015 highs. Note that there is a currency effect hidden in this chart. GEM.L is listed in the UK and its numbers are denominated in British Pounds. The low of the chart is Brexit and the rise from there is partly explained by the depreciation in the Pound (say 20%). The rest of the increase (30%) must come from business operations and gem price expectations.

EVolution Mining (EVN.AX): Australian Gold Producer. Signal came in from my research house to buy this gold producer. This is something of a US Dollar hedge trade. What struck me about the chart is the last high ($2.47) for Evolution was achieved at a lower gold price ($1,234) than the current gold price ($1,254).

Markets normally work this out and price should move past or at least to that last high. What I liked too was price just made a reversal and formed a ring low at a higher low level.

Deutsche Bank: (DBK.DE). German Bank. Bought December 2021 strike 16.07 call options. Current share price is €15.05. Adding to the holdings bought last week (Note: with the rights issues these options have been repriced from 18 to 16.07 strike). My entry price was 20% lower than last week. See TIB52 for the rationale for buying December 2021 options.

Sold

Deutsche Bank Rights: (DBK.DE): Deutsche Bank is in the process of completing a large capital raising through a renounceable rights issue. [Means: Existing shareholders are given the right to buy more shares. The offer is renounceable which means shareholders can sell those rights to somebody else]. As I already have a standard position size in Deutsche Bank, I did not want to buy more shares. I sold the rights and used the proceeds to buy more December 2021 options

iShares S&P Global 100 (IOO.AX): I have been progressively reducing my holdings in cross-sector ETF's. This one covers the top 100 Global companies and I bought it at the time as Australian markets were expected to decline after the end of the mining boom. The 45% profit since July 2013 was 29% better than the ASX200 achieved - so I got that one right.

The chart shows IOO.AX (black bars) compared to ASX 200 index (orange line) since I made the switch away from Australian stocks to Global stocks in July 2013.

A2 Milk Company (A2M.AX): I ignored the research house signal to sell this a few days ago. I did bring the target price a little bit tighter than they had initially suggested. That target was hit for a 6% profit in 6 days. The fundamentals for milk products sales (especially into China) remain solid. The recent visit to Australia by the Chinese premier supports that view. I continue to be invested in milk through Bega Cheese (BGA.AX)

Cryptocurency

Bitcoin: The cavalier trader in me was not patient enough to wait for a reversal on the 4 hour chart for re-entry.

I really do believe the Bitcoin community will solve their technical issues as there is a massive vested interest to make it work (and a good case study in Ethereum to see what not to do). I bought in and have been able to move stop loss past breakeven in early trade today. Each time the price does one of these big corrections, more weak hands will be shaken out. Bring it on.

Currency Trades

USDCHF Long trade stopped out. There appears to be a major rebalancing of US Dollar expectations in the markets. The media are jumping on a "Trump Rally is over" bandwagon.

My experience in markets tells me there is always a lot more going on. I will proffer 3 factors, some of which the media are talking about and one not

1. A corner of the markets had been factoring in the possibility of 3 more Federal Reserve rate hikes in 2017 and they have pulled this back to 2 more.
2. Equity and bond markets had been factoring in US GDP growth closer to 4% predicated on regulatory reform and lower corporate taxes. This is being revised given the difficulty the new administration had getting agreement on repealing the Affordable Care Act.
3. There is an unwind going on of the big carry trades. Carry trades work where investors can borrow at low interest rates and invest for higher returns somewhere else. Carry trade investors are currently borrowing in Euros or Yen. Short term interest rates have been rising in Europe and to a lesser degree in Japan. This puts pressure on the need for returns. US market has pulled back almost to the level of giving away all the last month's gains - 3% down in March to date. This is exactly the amount the Dollar Index has dropped this month. Of note in the same timeframe Emerging Markets have risen by close to 10%

This last view is my observation - nobody is talking about it. This is a good article with some data that describes what is going on.

https://www.bloomberg.com/news/articles/2017-03-27/trump-trades-still-show-life-but-the-signs-are-fading-fast

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas. I do participate in an investing group - some of the ideas flow from there. Do not copy my Bitcoin trading style - it is cavalier.

Images: I own the rights to use and edit the Buy Sell image. The Trump rally headlines came from Google news search. The Mustang announcement can be found on the Mustang Resources website. All other images are created using my various trading and charting platforms. They are all my own work

Tickers: I monitor my portfolios using Yahoo Finance. The ticker symbols used are Yahoo Finance tickers

Charts: http://mymark.mx/TradingView - this is a free charting package. I have a Pro subscription to get access to real time forex prices

March 27, 2017