Valuation of gold stocks

In today’s post I want to look at valuation of gold stocks.

The last few days I’ve been trying to wrap my head around how to value gold stocks.

It’s not as easy as just valuing a normal manufacturing company with Debt to equity, Price to earnings or by Price to book value because of the resources in the ground.

This makes it inevitable to normalize all the values according to either production or reserves.

The first thing that we will look at is how to calculate the cash cost per ounce produced.

Calculating the cash cost per ounce.

The cash cost is calculated by subtracting Operational cash flow from Total revenue:

Cash cost = Total revenue – Operational cash flow

To get to grips with what this means we can visualize the subtraction like this:

Total cash cost is calculated by deducting Operational cash flow from Total revenue.

Figure 1.Total cash cost is calculated by deducting Operational cash flow from Total revenue.

Which is equivalent to this:

Net cash is calculated by deducting Cost of sales from Total revenue.

Figure 2.Net cash is calculated by deducting Cost of sales from Total revenue.

Then to calculate the Cash cost per ounce we divide with the total production for the year:

Total cash cost per ounce = Total cash cost / Total production

 

Estimated operational cash flow

The next thing that we will look at is an estimate of how much money can come into the company through sales of the metal.

If we estimate that the company produces X ounces of metal in the year, the average cost of production is Y $ per ounce and that the average price of the metal is Z $ per ounce then the estimated operational cash flow of the company is:

Formula for calculating Estimated Operational Cash Flow (EOCF) in $. FMP is the Forecast Metal Price in $ per ounce, CPO is Cost Per Ounce Produced and EOP is the Estimated Ounces Produced in # of ounces.

Figure 3. Formula for calculating Estimated Operational Cash Flow (EOCF) in $. FMP is the Forecast Metal Price in $ per ounce, CPO is Cost Per Ounce Produced and EOP is the Estimated Ounces Produced in # of ounces.

Estimated operational cash flow (OCF) = X (ounces produced) –  Y ($ per ounce) * Z ($ per ounce)

 

 

Conclusion:

In today’s post we have been looking at the valuation of gold stocks as a function of their production and reserves in the ground.

 

 

 

Technical analysis

Today I want to look at technical analysis of precious metals and other commodities.

Orange picture of graph with text about technical analysis

Technical analysis of Agnico-Eagle Mines, April 30, 2017

This is a weekly chart of Agnico-Eagle:

Weekly chart of Agnico-Eagle Mines (AEM) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 1. Weekly chart of Agnico-Eagle Mines (AEM) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The chart sits just at the descending trend line/50-week moving average.

The bullish case

First of all I will argue for the bullish case.

In this scenario prices continue up through the 50-week and the descending trend line.

Because the 50-week moving average is ascending I would give such a scenario a probability of 60 percent.

The bearish case

In this scenario prices are pushed down by the flattening 50-week moving average.

They then also go through the 100-week moving average.

I would give such a scenario a probability of 40 percent.

 

 

Technical analysis of Kinross Gold Corp., April 29, 2017

This is a weekly chart of Kinross:

 Weekly chart of Kinross Gold Corp. (KGC) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 2. Weekly chart of Kinross Gold Corp. (KGC) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

What is happening in the chart is that it is getting squeezed between trend lines that are working in opposite direction.

We are very soon going to see a resolution as to where the trend is going, but we don’t know yet.

Because technical analysis is all about interpreting the charts, and no additional knowledge can be drawn from politics, I prefer to stick to what the charts are telling me.

The way to go forward is to distinguish between two possible scenarios: the bullish and the bearish.

The bullish case

In the bullish scenario prices are lifted by the 100-week moving average and continue through the 50-week.

Because of the looks of the chart I would only give such a scenario a probability of 20 percent.

The bearish case

In the bearish case prices are going through the ascending trend line as well as the 100-week moving average.

Looking at the chart the feeling that I get is that this is the more probable scenario.

I would therefore give it a probability of 80 percent.

 

 

Technical analysis of crude oil, April 28, 2017

This is what a weekly chart of crude oil looks like:

Weekly chart of the crude oil index (XOIL.X). 50-week moving average is in blue and 100-week is in turquoise. Ascending and descending straight trend line are in white.

Figure 3. Weekly chart of the crude oil index (XOIL.X). 50-week moving average is in blue and 100-week is in turquoise. Ascending and descending straight trend line are in white. Chart: FreeStockCharts.com

My bearish scenario

Because the chart look extremely heavy at the moment (prices sit just at the ascending trend line) I put almost all my money on this.

I would give such a scenario a probability of 95 percent.

My bullish scenario

There’s also a minute possibility that prices will go up from here.

I give such a scenario a probability of 5 percent.

 

Technical analysis of the gold bugs index (HUI), April 27, 2017

This is what a weekly chart of the HUI looks like:

Weekly chart of the Gold Bugs Index (HUI) from the end of 2015 until now. The dotted blue line represents the 50-week moving average and the dotted turquoise the 100-week. Straight ascending and descending trend lines are in white

Figure 4. Weekly chart of the Gold Bugs Index (HUI) from the end of 2015 until now. The dotted blue line represents the 50-week moving average and the dotted turquoise the 100-week. Straight ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

What is clear from the chart is that prices are stuck between the 50- and the 100-week moving averages.

Because they have hit the ascending trend line it may be that they will now continue up until the descending trend line.

I would give such a scenario a probability of 60 percent.

The bearish scenario

In the bearish scenario prices are plunging through the ascending trend line/100-week moving average.

I give such a scenario a probability of 40 percent.

The reason why I give it such a high probability is because of the lower high in February compared to last autumn.

 

 

Technical analysis of gold, April 24, 2017

This is what a weekly gold chart looks like:

Weekly chart of the World Gold Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white

Figure 5. Weekly chart of the World Gold Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white. Chart: FreeStockCharts.com

What is clear from the chart is that prices are struggling to penetrate the descending trend line.

They also seem to be squeezed between the rising 50-week moving average and the trend line.

Once this situation resolves itself we will know a bit more about the direction of the chart.

The bullish scenario

In this scenario prices go through the 50-week and then continue up.

I would give such a scenario a probability of 50 percent.

The bearish scenario

In this scenario prices are pressed down by the descending trend line.

I would also give such a scenario a 50 percent probability.

 

 

Technical analysis of Randgold Corp., April 23, 2017

This is what a weekly chart looks like:

Weekly chart of Randgold Corp. (GOLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 6. Weekly chart of Randgold Corp. (GOLD) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

What we see in the chart is that prices are slowly being squeezed and pushed down by the 50-week moving average.

My bearish scenario

In the bearish scenario prices not only go down below the 100-week moving average but also plunge through the rising trend line.

While this scenario is obviously possible I would only give such a scenario a probability of 10 percent.

The reason for this is that support from the rising moving average/trend line is likely to be significant.

My bearish/bullish scenario

The bearish/bullish scenario is very similar to the bearish scenario above.

The difference is that prices bounce off the ascending trend line.

I would the scenario a probability of 40 percent.

My bullish scenario

In this scenario prices penetrate through the 50-week moving average and continue up from there.

I give such a scenario a probability of 50 percent.

 

Technical analysis of Silver Wheaton, April 22, 2017

Today I will look at Silver Wheaton. This is what a weekly chart looks like:

Weekly chart of Silver Wheaton (SLW) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 6. Weekly chart of Silver Wheaton (SLW) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

What is obvious in the chart is that we have two opposing trend lines: One ascending and the other descending.

One of them will win but at this point it is not entirely clear which scenario will do it.

My bearish scenario

In this scenario prices continue down from here and also plunge through the 100-week moving average.

Because of the rising trend line below I would give such a scenario a low probability of 10 percent.

My bearish/bullish scenario

This scenario is very similar to the one above but when prices come down to the rising trend line they bounce up.

I would give such a scenario a probability of 40 percent.

My bullish scenario

We can also argue for the bullish case. In this scenario prices go up from here and go through the descending trend line and 50-week moving average.

I would give such a scenario a probability of 20 percent.

My bullish/bearish scenario

This scenario is very similar to the bullish scenario above with the difference that prices are pushed down by the descending trend line.

I would give it a probability of 30 percent.

Conclusion:

That something will happen soon is clear from the chart, but the direction of this move is still uncertain.

 

 

 

Technical analysis of crude oil, April 21, 2017

This is what a weekly chart of crude oil looks like:

Weekly chart of the crude oil index (XOIL.X) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white

Figure 4. Weekly chart of the crude oil index (XOIL.X) from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

My bearish scenario

In this scenario prices are being pressed down by the descending trend line and go through the moving averages in Figure 1.

At this point I would give such a scenario a probability of 70 percent.

My bearish/bullish scenario

This scenario is very similar to the one above. Here prices continue down, but then change direction at the 50-week moving average.

I would give such a scenario probability of 20 percent.

My bullish scenario

Of course I can also argue for a bullish case. Here prices shoot straight up without being hindered by the descending trend line.

I would only give such a scenario a probability of 10 percent.

Technical analysis of the Gold Bugs Index, April 20, 2017

A weekly chart of the HUI Index looks like this:

Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 5. Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bearish scenario

In the bearish scenario prices are pushed down by the 50-week moving average and they then plunge through the 100-week.

At this juncture that is a plausible scenario that I would give a probability of 30 percent.

The bullish scenario

In the bullish scenario prices first go through the 50-week moving average and then the descending trend line.

The lower high in February makes this slightly less probable than the scenario above.

I would give such a scenario a probability of 20 percent.

The bearish/bullish scenario

This scenario is very similar to the bearish scenario above, but with the difference that prices bounce of the ascending trend line below.

I would give such a scenario a probability of 50 percent.

Technical analysis of platinum, April 19, 2017

Weekly chart of the World Platinum Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing ascending and descending trend lines are in white.

Figure 6. Weekly chart of the World Platinum Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing ascending and descending trend lines are in white. Chart: FreeStockCharts.com

My bearish scenario

In this scenario prices are pressed down by the 100-week moving average and they also plunge through the ascending trend line.

Given how much the platinum prices have struggled recently, I would give such a scenario a fairly high probability of 40 percent.

My bullish scenario

In the bullish scenario go up through the moving averages in Figure 1 and continue through the descending trend line.

Given the shape of the graph I would give such s scenario a probability of 10 percent.

My bearish/bullish scenario

In the bearish/bullish scenario prices first go down as in the bearish scenario above, but then bounce up.

I would give such a scenario a probability of 50 percent.

 

Technical analysis of silver, April 18, 2017

As usual I look at weekly charts to draw my conclusions:

Weekly chart of the World Silver Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white.

Figure 7. Weekly chart of the World Silver Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

The bullish scenario is based around the idea that there is no descending trend line in the chart.

In this scenario prices can move straight through without experiencing “gravity”.

In essence prices are lifted by the 50-week moving average.

I would give such a scenario a low probability because of the lower high in February and now.

The descending trend line simply makes the situation difficult for higher prices.

My probability ends at 20 percent.

The bearish scenario

The bearish scenario is based around the idea that there is no ascending trend line in the chart.

In this scenario prices will fall through the moving averages as well as the ascending trend line.

I would give such a scenario a probability of 20 percent.

The bearish/bullish scenario

Here prices fall down until they reach the ascending trend line below.

This is the most likely scenario for the time being.

I would give it a probability of 60 percent.

Technical analysis of gold, April 17, 2017

This is what a weekly gold chart looks like:

Weekly chart of the World Gold Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white.

Figure 8. Weekly chart of the World Gold Index from the end of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

We are now at an interesting juncture just at the descending trend line.

It is possible that prices will continue up, but because of the descending trend line I give such a scenario a low probability: 25 percent.

The bearish scenario

On the other hand there is a distinct possibility that prices will go down from here and through both the 50-week and the 100-week moving averages as well as the ascending trend line.

I would give such a scenario a probability of 25 percent.

The bearish/bullish scenario

In this scenario prices go down just like above, but then bounce up at the ascending trend line.

I would give such a scenario a probability of 50 percent.

 

 

Technical analysis of IAMGOLD Corp., April 16, 2017

A weekly chart of IAMGOLD looks like this:

Weekly chart of IAMGOLD. The 50-week moving average is represented in blue and the 100-week in turquoise. Descending and ascending straight trend lines are also in white

Figure 6. Weekly chart of IAMGOLD. The 50-week moving average is represented in blue and the 100-week in turquoise. Descending and ascending straight trend lines are also in white. Chart: FreeStockCharts

My bullish scenario

The bullish scenario revolves around prices being lifted by the rising 50-week moving average and going through the descending trend line.

This is a plausible scenario, but I don’t give it too high a probability because the high in January is lower than the high in August.

I would give it a probability of 20 percent.

My bearish scenario

In the bearish scenario prices are falling down below both the ascending trend line and the 100-week moving average.

Of course this can happen but it is not very likely. I give it a probability of 5 percent.

My bullish/bearish scenario

In this scenario prices are going up until they hit the descending trend line where they struggle and eventually turn south.

I would give such a scenario a probability of 65 percent.

My bearish/bullish scenario

In the bearish/bullish scenario prices are first falling down, but are then caught by either the ascending trend line or the 100-week moving average.

I would give such a scenario a probability of 10 percent.

Technical analysis of Yamana Gold Inc., April 15, 2017

As usual I look at weekly charts:

Weekly chart of Yamana Gold. The 50-week moving average is represented in blue and the 100-week in white. Descending and ascending straight trend lines are also in white.

Figure 7. Weekly chart of Yamana Gold. The 50-week moving average is represented in blue and the 100-week in white. Descending and ascending straight trend lines are also in white. Chart: FreeStockCharts

The bullish case

In the bullish case prices go through the combined 100-week moving average/the descending trend line and then also through the declining 50-week moving average.

Because of the lower low earlier this year I give such a scenario a low probability: 20 percent.

The bearish case

In the bearish case prices are pushed down by the 100-week moving average and then through the support zone that is drawn in the figure.

I would give such scenario a probability of 60 percent.

The bearish/bullish case

In the bearish/bullish case prices are going down just like in the bearish case but then when they reach the support zone in Figure 1 the are reversed.

I would give such a scenario a probability of 20 percent.

 

Technical analysis of Tesla Inc., April 14, 2017

This is a weekly chart of Tesla Inc.:

Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal trend lines are in white.

Figure 8. Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Horizontal trend lines are in white. Chart: FreeStockCharts.com

What is clear from the chart is that we have been trading in a channel for more than two years.

Now it seems as though we have been breaking out from that channel and are off to greener pastures.

I would like to caution you, however, that prices can fall down from here.

In order to look at exactly when to get in I will now turn to a daily chart:

 Daily chart of the HUI Index from the summer of 2016 until now. 50-day moving average in blue and 100-day moving average in turquoise. Horizontal trend lines are in white.

Figure 9. Daily chart of Tesla Inc. from the summer of 2016 until now. 50-day moving average in blue and 100-day moving average in turquoise. Horizontal trend lines are in white. Chart: FreeStockCharts.com

What we see in the chart is that prices are clearly above the 50-day moving average.

In my experience, that is not the time to get in. It is better to wait until prices have come down and kissed to 50-day.

Conclusion:

The chart pattern of Tesla is bullish, but because prices are so far above the 50-day moving average I would wait until they come in.

 

Technical analysis of the Gold Bugs Index, April 13, 2017

As usual on Thursdays today I will look at the Gold Bugs Index. This is what a weekly chart looks like:

Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white.

Figure 9. Weekly chart of the HUI Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending trend lines are in white. Chart: FreeStockCharts.com

The bullish scenario

In the bullish scenario prices go up and penetrate both the 50-week moving average and the descending trend line.

Because prices in February were lower than prices were in August (lower high) I would give such a scenario a low probability: 10 percent.

The bullish/bearish scenario

In the bullish/bearish scenario prices first go up but then stop at 50-week moving average or the descending trend line.

Once they’ve reached either of these they will then head south.

I would give such a scenario a higher probability of 60 percent.

The bearish/bullish scenario

In this scenario prices are first going down until they reach the ascending trend line.

Once prices have reached the ascending trend line they bounce and continue up.

I would give such a scenario a probability of 20 percent.

The bearish scenario

In this scenario prices go down and fall straight through both the 100-week moving average and the ascending trend line.

I would give such a scenario a probability of 10 percent.

Technical analysis of platinum, April 12, 2017

Today I would like to look at a weekly chart of platinum:

Weekly chart of the World Platinum Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing a potential head and shoulders-pattern are in white.

Figure 10. Weekly chart of the World Platinum Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing a potential head and shoulders-pattern are in white. Chart: FreeStockCharts.com

My bearish scenario

In the bearish scenario prices are pushed down by the 100-week moving average where they continue through the ascending trend line.

I would give such a scenario a probability of 40 percent.

My bearish/bullish scenario

In the bearish/bullish scenario prices go down to the ascending trend line as above, but then they bounce up.

I would give such a scenario a probability of 40 percent.

My bullish scenario

In the bullish scenario prices penetrate through the 100-week moving average as well as the 50-week. Prices then continue up and through the descending trend line.

I would give such a scenario a probability of 20 percent.

 

Technical analysis of silver, April 11, 2017

Today I will try a different explanation for what is happening in the precious metals. This is what a weekly silver chart looks like:

Weekly chart of the World Silver Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing a potential head and shoulders-pattern are in white.

Figure 9. Weekly chart of the World Silver Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Straight trend lines showing a potential head and shoulders-pattern are in white. Chart: FreeStockCharts.com

My bearish scenario:

I’m now trying an alternative explanation for the silver (and gold) chart.

In this scenario there is a left shoulder, there is a head and there is a right shoulder.

If this is to play out we will soon see prices go from $18 down to $16.

I would give such a scenario a probability of 40 percent.

My bullish scenario

In the bullish scenario prices are lifted by the 50-week moving average that will act as support.

I would give such a scenario a probability of 20 percent.

My bearish/bullish scenario

In this scenario prices are first falling down to the 100-week moving average.

Here they bounce up again, lifted by the 100-week.

I would give such a scenario a probability of 20 percent.

Technical analysis of gold, April 10, 2017

This is what a weekly chart of gold looks like:

Weekly chart of Goldcorp from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white.

Figure 10. Weekly chart of the World Gold Index from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white. Chart: FreeStockCharts.com

My bearish/bullish scenario

In this senario prices are facing resistance at the 50-week moving average and they are subsequently heading down.

What happens when prices meet the ascending trend line is anybody’s guess but in this scenario they head up again.

I would give such a scenario a probability of 50 percent.

My bearish scenario

In this scenario prices don’t find support down at the ascending trend line, but rather continue down.

I would give such a scenario a probability of 40 percent.

My bullish scenario

This is where prices go up from here.

I would give such a scenario a probability of 10 percent.

 

Technical analysis of Goldcorp, April 9, 2017

As always I prefer to look at weekly charts and this is what such a chart looks like for Goldcorp:

Weekly chart of Goldcorp from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white.

Figure 9. Weekly chart of Goldcorp from the beginning of 2015 until now. 50-week moving average in blue and 100-week moving average in turquoise. Ascending and descending straight trend lines are in white. Chart: FreeStockCharts.com

The bearish/bullish scenario

What we see in the chart is that prices are getting squeezed between the ascending and descending trend lines.

Now they are getting pushed down by the moving averages.

That can be seen two weeks ago when prices tried and failed to go through the 50-week moving average.

Chances are that prices will go down even further, but then bounce up again down at the ascending trend line.

I would give such a scenario a probability of 60 percent.

The bullish scenario

Of course I can also argue for the bullish case, and in this scenario prices go up from here as they are being lifted by the 100-week moving average.

I would give such scenario a probability of 10 percent.

The bearish/bearish scenario

The bearish/bearish scenario is indistinguishable from the bearish/bullish scenario until prices reach the lower, ascending, trend line.

Here they go straight through.

I would give such a scenario a 20 percent probability.

 

Technical analysis of Newmont Mining, April 8, 2017

This is a weekly chart of Newmont Mining:

Weekly chart of Agnico-Eagle Mines since 2013 until present. The 50-week moving average is represented in blue and the 100-week in turquoise. Straight ascending trend lines are in white.

Figure 5. Weekly chart of Agnico-Eagle Mines since 2013 until present. The 50-week moving average is represented in blue and the 100-week in turquoise. Straight ascending trend lines are in white. Chart: FreeStockCharts

The bullish scenario

From the chart it is obvious that a new fault line has opened up at the lower trend line.

The bulls are pulling prices higher with rising moving averages and trend line.

The probability of prices going higher from here is therefore 30 percent.

The bullish/bearish scenario

In the bullish/bearish scenario prices continue up as in the upper scenario, but then they halt at the descending trend line.

In favor of this is the fact that prices are lower now than they were in September.

I would give such a scenario a probability of 60 percent.

The bearish scenario

In the bearish scenario prices are falling down from here.

They go through both the trend line and the rising 100-week moving average.

I would give such a scenario a probability of 10 percent.

 

Technical analysis of crude oil, April 7, 2017

This is what a weekly chart looks like:

Weekly chart of the Light Sweet Crude Oil Index from mid-2013 until present. The 50-week moving average is represented in blue and 100-week in turquoise. Straight ascending and descending trend lines are also in white.

Figure 6. Weekly chart of the Light Sweet Crude Oil Index from mid-2013 until present. The 50-week moving average is represented in blue and 100-week in turquoise. Straight ascending and descending trend lines are also in white. Chart: FreeStockCharts

My bullish/bearish scenario

In the bullish/bearish scenario prices go up the descending trend line where they stall and head south.

The reason that I believe in this is that prices have tried to break through the trend line before without succeeding.

I would give such a scenario a probability of 70 percent.

My bullish scenario

In the bullish scenario prices not only go up, but also pass the descending trend line.

In analogy to the scenario above, I would give such a scenario a probability of 10 percent.

My bearish scenario

In the bearish scenario prices lose steam and fall down from here.

I don’t really believe that this will happen but I give such a scenario a probability of 20 percent.

 

Technical analysis of The Gold Bugs Index, April 6, 2017

This is what a weekly chart of the Gold Bugs Index looks like:

Weekly chart of the Gold Bugs Index from 2014 until now. 50-week moving average is in blue and 100-week in turquoise. Straight ascending and descending trend lines are in white.

Figure 7. Weekly chart of the Gold Bugs Index from 2014 until now. 50-week moving average is in blue and 100-week in turquoise. Straight ascending and descending trend lines are in white. Chart: FreeStockCharts

The bullish/bearish scenario

In this scenario prices are first going up until they reach the 50-week moving average.

Because prices fail to move through the 50-week moving average they are instead pressed down.

The reason why I believe in this is that the high made in February is lower than the high in September. This kind of chart pattern usually is bearish.

I would give such a scenario a probability of 70 percent.

The bearish/bullish scenario

In the bearish/bullish scenario prices are moving down to the 100-week moving average and the ascending trend line when they are lifted.

Prices would then move through the 50-week moving average as well as through descending trend line.

In analogy to the scenario above I would give this a lower probability of 10 percent.

The bearish/bullish/bearish scenario

In this scenario instead going through the 50-week moving average and the trend line prices are changing direction on one of those.

This, in my opinion, seems slightly more likely than the scenario above.

I would therefore give such a scenario a probability of 20 percent.

 

Technical analysis of platinum, April 5, 2017

If you are a regular reader of this blog you know that I prefer to look at weekly charts:

Chart of the World Platinum Index from mid-2014 until now. The time frame is weekly. The 50-week moving average is in blue and the 100-week moving average is in turquoise. Ascending and descending trend lines are drawn in white.

Figure 8. Chart of the World Platinum Index from mid-2014 until now. The time frame is weekly. The 50-week moving average is in blue and the 100-week moving average is in turquoise. Ascending and descending trend lines are drawn in white. Chart: FreeStockCharts

My bearish scenario

In the bearish scenario prices are pushed down by the declining 100-week moving average.

In favor of this argument is the fact the high in February was lower than September last year.

Another negative thing for the chart is that prices now are below the moving averages and are not likely to rise in the near future.

This is my preferred scenario looking at the chart and I would give it a probability of 80 percent.

My bullish scenario

In the bullish scenario prices are pushed up by the rising trend line in the chart.

In favor of this is the fact that the trend line is indeed rising and that they will follow along.

The probability for happening is low at 20 percent.

 

Technical analysis of silver, Tuesday, April 4, 2017

This is what a weekly silver chart looks like:

Weekly chart of the World Silver Index from 2013 until present. 50-week moving average is represented in blue and 100-week moving average is in turquoise. Arbitrary ascending and descending trend lines are in white

Figure 9. Weekly chart of the World Silver Index from 2013 until present. 50-week moving average is represented in blue and 100-week moving average is in turquoise. Arbitrary ascending and descending trend lines are in white. Chart: FreeStockCharts

My bullish scenario

In the bullish scenario prices are lifted by the combined forces of the moving averages and the rising trend line.

I would give such a scenario a 80 percent probability.

My bearish scenario

In  the bearish scenario prices fall down from here.

There is one little thing in the graph that is in favor of this scenario and that is that the high made in February of this year was lower than the high last autumn.

It doesn’t guarantee a bearish outcome of the chart.

I would give such a scenario a probability of 20 percent.

 

Technical analysis of gold, Monday, April 3, 2017

As always I will look at a weekly gold chart to figure out what is going to happen.

This is what it looks like:

My bearish scenario

What happened last week was that prices stalled at the 50-week moving average.

Because the moving average is acting as resistance for prices my main scenario will be bearish.

Such a scenario would get a probability of 60 percent.

My bullish scenario

Of course it is also possible that prices continue up through the 50-week moving average and the descending trend line.

I would give such a scenario a probability of 30 percent.

My neither bullish nor bearish scenario

There is also a possibility – however low – that prices will continue straight along the 50-week moving average.

I would give such a scenario a probability of 10 percent.

 

Technical analysis of Agnico-Eagle, April 2, 2017

This is what a weekly chart of Agnico-Eagle looks like:

The bullish scenario

What happened last week was that prices changed direction again. This time they went from going up to going down.

In the bullish scenario prices will continue up from here and pass through the 50-week moving average and the descending trend line.

I would give such a scenario a probability of 20 percent.

The bullish/bearish scenario

In this scenario prices go up to either the descending trend line or the 50-week moving average and then they turn down.

The probability of this scenario is 30 percent.

The bearish scenario

In the bearish scenario prices continue down from here and go straight through the ascending trend line and the 100-week moving average.

I would give such a scenario a probability of 20 percent.

The bearish/bullish scenario

In this scenario prices continue down to either the ascending trend line or the rising 100-week moving average and then follow these up.

This scenario gets a probability of 30 percent.

Kinross Gold Corp., April 1, 2017

Today I would like to revisit Kinross Gold Corp. that we looked at about a month ago.

This is what a weekly chart looks like:

My bullish scenario

It looks as though prices are being lifted by the combined forces of the 100-week moving average and the rising trend line.

In the bullish scenario prices continue up through the declining trend line and they will not run into resistance at the 50-week moving average either.

I would give such a scenario a probability of 35 percent

My bearish scenario

In the bearish scenario prices break down from here and pass through both the 100-week moving average and the ascending trend line.

While this is not impossible by any means I do think there is enough strength in the support to keep prices up at least for the time being.

I would therefore give such a scenario a probability of 15 percent

My bullish/bearish scenario

The bullish/bearish scenario is where prices go up slowly until they encounter the resistance zone at the declining trend line.

It may even be that prices go through the descending trend line, but then there is resistance also at the 50-week moving average.

Therefore prices are likely to halt at either of these.

I would give such a scenario a probability of 50 percent.

 

Technical analysis of crude oil, March 31, 2017

This is what a weekly chart of The Light Sweet Crude Index looks like:

My bullish/bearish scenario

This week we have seen a big reversal in the chart.

A few weeks ago I thought that the chart would break down, but it has not happened.

Instead prices were caught by the 100-week moving average and is now moving up again.

Therefore, I would give this scenario a probability of 70 percent.

My bullish scenario

In my bullish scenario the upper trend line is not in play so prices continue through it without any problems.

This seems unlikely because prices have tried and failed to this for about three months before.

Therefore I would give such a scenario a probability of 5 percent.

My bearish scenario

Of course prices can also break down from here.

Even if it seems improbable at this point I would still give such a scenario a probability of 20 percent.

Technical analysis of The Gold Bugs Index, March 30, 2017

A weekly chart of the gold bugs index – the HUI – looks like this:

What is clear from the chart is that is that prices changed direction three weeks ago, but are now running out of steam.

They are stuck between the 100-week moving average and the 50-week. They need to decide if they are going to go up or if they are going to go down.

My bullish/bearish scenario

In this scenario prices to go up to the 50-week moving, but after that they go down.

They will then move down through the ascending trend line and go further down from there.

I would give such a scenario a probability of 30 percent.

The reason why it is not getting higher odds is because the high in February was lower than the high in August.

My bullish scenario

Here prices go up through the 50-week moving average and continue up to the declining trend line.

What it will do up there is unclear at the moment, but my guess is that prices will stall and turn negative.

I would give such a scenario a 20 percent probability.

My bearish scenario

In this scenario prices fall down from here.

The chart in my eyes looks heavy and the reason for this is probably because of the lower high mentioned above.

The probability for this happening ends up at 50 percent.

 

Technical analysis of platinum, March 29, 2017

As always I prefer weekly charts and this is what the weekly platinum chart looks like:

My bearish scenario

From the chart it is clear that the 100-week moving is acting as resistance to the price that has been trying to push through.

Because the moving average is declining I don’t expect prices to go through the moving average.

The probability for prices going down to the ascending trend line is therefore high. It comes in at 70 percent.

My bullish/bearish scenario

The bullish/bearish scenario is that prices continue through both the 100-week and the 50-week moving average above.

If prices then finally encounter the descending trend line they will be pushed down by this.

I don’t find it very likely, because prices are clearly being pushed down by the declining 100-week moving average.

The probability for this happening end up somewhere around 15 percent.

My bullish scenario

In the bullish scenario prices go through the moving averages in figure 1 and then also continue through the descending white trend line.

As above, this is not a very likely, but I would still give it a probability of 15 percent.

 

Technical analysis of gold, March 27, 2017

If you are a regular reader of this blog you know that I prefer to look at weekly charts in order to draw my conclusions.

This is what a weekly chart looks like:

My bullish/bearish scenario:

Last week was another positive week for gold. It now seems that we are stuck between the 50-week moving average and the 100-week moving average.

What I believe will happen is that prices will press through the 50-week moving average this week and then press up against the descending trend line.

In the bullish/bearish scenario prices go down when they encounter the descending trend line.

I would give this scenario a 70 percent probability.

My bullish scenario

In the bullish scenario the descending trend line is not in play and the prices continue up.

I don’t give that scenario as high a probability as the bullish/bearish scenario because the high in February was lower than the high in August.

I still give it a 29 percent probability.

My bearish scenario

In the bearish scenario prices fall down from here without anything stopping it.

Of course it can happen, but it seems unlikely.

I would give such a scenario a 1 percent probability.

Randgold Resources, March 25, 2017

Today I want to look at Randgold Resources.

It is a South African mining company with an interesting long-time-chart:

My bullish scenario

What is clear in the graph is that prices had a huge run-up until the high set in 2012.

However, they did not manage to break through and fell sharply thereafter.

We can easily identify an ascending trend line beginning in 2015 with another bottom in 2016, but prices are now stuck between the 100-week moving average and the 50-week MA.

What I believe will happen is that prices will continue up on its current trend line.

I would put the probability of this happening at 80 percent.

My bearish scenario

The bearish scenario would play out if neither the ascending trend line nor the 100-week moving average would act as support for prices.

I would give such a scenario a 19 percent probability.

 

Technical analysis of crude oil, March 24, 2017

A weekly chart of the World Crude Index looks like this:

My bearish scenario

My bearish scenario plays out if prices are pushed down from here through the combined ascending trend line and the 100-week moving average.

Because prices have tried – and failed – to push through the resistance zone represented by the descending trend line, I believe that this scenario is likely to play out.

I would give it a probability of 70 percent.

My bullish scenario

The bullish scenario will play out if prices move up from here.

In favor of this scenario is that prices are now just sitting at the rising trend line.

Another positive thing for this scenario is prices have been rising since 2016.

But the fact that they have tried and failed to break through gives this a low probability.

I would give it a probability of 29 percent.

 

Technical analysis of the gold bugs index, March 23, 2017

This is what a weekly chart of the HUI looks like:

My bullish/bearish scenario

What is clear from the chart is that prices changed direction last week.

It does seem like the thrust upwards is losing a little bit of its energy, but I do believe that prices will continue up to the 50-week moving average from here.

Then I believe that prices will fail and turn down again.

The probability for this scenario is 60 percent.

My bullish scenario

The positive scenario would be if none of resistance in the graph was in play. Then prices would continue up to the sky without anything stopping them.

I would only put a 9 percent probability on this scenario.

My bearish scenario

The negative scenario would be for prices simply to fall down from here.

An argument against this is that the ascending trend line is likely to lift the prices when they encounter it.

I would still give this scenario a 30 percent probability.

 

Technical analysis of platinum, March 22, 2017

This is what a weekly chart of platinum looks like:

My negative scenario

At this point my preferred scenario is the negative one.

In this scenario the descending 100-week moving average is going to catch the price movement and push it down.

I would put a 60 percent probability on this happening.

My positive/negative scenario

In this scenario the declining 100-week moving average is not in play, and prices continue up to the descending white trend line in Figure 1.

My guess is that the trend line is then acting as resistance for the chart and that it will force prices down towards the rising trend line below.

I would put a 30 percent probability on this happening.

My positive scenario

The positive scenario would be if none of the things indicating resistance in the graph was in play.

Then prices would shoot straight up without any hindrance.

The reason why I don’t believe in this is because the high reached three weeks ago is lower than the high in August.

The probability for this happening I would put at 9 percent.

 

Technical analysis of silver, March 21, 2017

This is what a weekly chart of silver looks like:

The positive/negative scenario

What is clear from the graph is that prices have been moving in zigzag for the past year or so.

If we are not that accurate we can say that prices changed direction again last week at the 100-week moving average.

In a few weeks, I believe that the 50-week moving average and the descending trend line will prove too tough on prices.

The reason for me saying so is that the high we had a few weeks ago was lower than the high we set in August of last year.

After that my prediction is that prices will go down.

That is why I put a probability of 70 percent on this scenario.

The positive scenario

This scenario is based on the idea that the descending trend line and the 50-week moving average will not be in play.

I would give such an event a 20 percent probability.

The negative scenario

Of course it is also possible that prices fall from here and that they will not be caught by any price support.

However, I do consider this as an unlikely scenario and I would give it a probability of 9 percent.

Conclusion:

Today I’ve been doing technical analysis of silver again.

Because prices have changed direction once again I believe that they will continue up and kiss the declining trend line.

What happens after that is unclear in my opinion. We will have to wait and see.

 

Technical analysis of gold, March 20, 2017

I prefer to look at a weekly chart to draw my conclusions. This is what it looks like:

The negative/positive scenario

What is clear from the chart is that prices changed direction again last week.

What I believe will happen is that prices will continue up but that they will stop at the descending trend line and turn down again.

I would put the probability for this happening at 70 percent.

The positive scenario

Of course it’s possible that prices will not face resistance at the declining trend line.

But that fails to include that we have a lower high this year than the one achieved last year.

That is why I put the probability for this scenario at 20 percent.

The negative scenario

Another possibility is that prices tumble from here.

Of course that can happen, but I don’t consider it very likely.

I would put a 9 percent probability on this scenario.

 

IAMGOLD Corp., March 19, 2017

A weekly chart of IAMGOLD looks like this:

The positive/negative scenario

What is clear from the chart is that it looks very much the same as the other gold mining charts.

Prices were dropping until the beginning of 2016 only to change direction completly and rose almost vertically.

Then they dropped again until they kissed the 50-week moving average.

After another rise prices last week came down and touched the 100-week moving average.

Because the moving average is rising I believe that prices will continue up until they kiss the descending trend line that is drawn in the figure.

Thereafter I believe prices will go down again.

The probability for this happening would be 70 percent.

The positive scenario

Of course there’s also a positive scenario where the descending trend line is not in play. I don’t really believe in this, but I would still give it a 20 percent probability.

The negative scenario

The negative scenario would be that prices fell down from here and that they did not get caught by the ascending trend line. I regard this as unlikely and give it a probability of 9 percent.

Yamana Gold, March 18, 2017

Today I would like to look at Yamana Gold.

As always I prefer to look at a weekly chart to draw my conclusions:

My negative scenario

What is clear from the chart is that the prices are below both the 50-week and the 100-week moving average.

What is also obvious is that the high that came in earlier this year is lower than the high last year.

This is a bearish sign.

Furthermore, there is a declining trend line that’s in play too.

So even if go up to the declining trend line/100-week moving average I don’t see it go through.

My main scenario is therefore that will go up a little bit for the next two weeks, but that they then will fail and go below the lower, ascending, trend line.

The probability for this playing out I would put at 80 percent.

My positive scenario

Of course it’s always possible that prices will continue up through the declining trend line, but to me the chart looks “heavy” and I put this probability at 19 percent.

 

Technical analysis of crude oil, March 17, 2017

As usual I prefer to look at weekly chart to draw my conclusions. This is what such a chart looks like:

What we can see in the chart is that the prices headed south last week, but that they were caught this week and are slightly up.

Remember last week I was talking about prices falling, and if you look at the trend line that I had drawn, that would likely be the case.

What I didn’t consider was a different trend line that took into account the 50-week moving average.

I still believe that prices will fall because prices are pressing against the moving average, but technically I cannot tell in which direction will go.

All I can say is that the move will be violent.

If we look at the inventories it is clear that they are at the highest that they have been for a long time.

That is why my main scenario is that prices will fall.

My positive scenario

Of course it is possible for prices to continue up from here, but I don’t consider that eventuality to be very likely.

 

Technical analysis of the Gold Bugs Index, Thursday, March 16, 2017

As always I prefer to look at weekly charts to draw conclusions. This is what it looks like:

Positive scenario

What we see in the chart is that prices changed direction this week.

The most probable outcome is then for prices to continue up instead of falling down.

One thing that is in favor of this argument is that both the 100-week moving average and the rising trend line are ascending.

The probability for this happening I would put at 80 percent.

Negative scenario

Of course I can also make an argument for lower prices where they would fall below the ascending trend line.

The probability for this happening remains low however.

If I were to put odds on this scenario I would say that the probability for this happening is 19 percent.

Conclusion:

Today I’ve been doing technical analysis of the gold bugs index (HUI).

Because prices changed direction this week, and because the 100-week moving average is ascending, the likely outcome is higher prices.

 

Technical analysis of Silver, Tuesday, March 14, 2017

This is what a weekly chart looks like:

What we can see in the chart is that last week we had a big down week and that the 50-week moving average was not able to support the prices.

What we also can see in the chart is that in December of last year prices went through the 100-week moving average.

They subsequently stopped at the rising trend line that is drawn in the chart.

This is why I don’t think that the chart will stop at the 100-week moving average but rather continue down and touch the rising trend line.

Then I believe that prices will bounce up, but I’m not sure.

My negative scenario

This scenario is my main prediction and I would put the probability of this happening at 80 percent.

My positive scenario

Of course I can also argue for rising prices at this point.

If we turn the 100-week moving average into a 70-week moving average we get this pattern:

Here we see that the prices sit just at the 70-week moving average and that this may act as support.

I do not think that this is a probable scenario so I would put the odds for this at 19 percent.

Conclusion:

Today I been doing technical analysis of silver once again.

Last week was a big negative week which turned the chart from being positive looking to be negative looking.

 

Monday, March 13, 2013

As always I prefer the weekly charts to draw my conclusions and this is what it looks like:

My negative scenario

What we see in the chart is that prices went down until the beginning of 2016 when they changed course.

We then were in an uptrend the first half of 2016, but then the trend changed direction again.

Now we are in between the 50-week moving average and the 100-week, but because the moves during the past two weeks were so dramatic I don’t believe prices will bounce up from the 100-week moving average.

Rather I consider it more probable to decline further, down to the ascending bottom trend line that is drawn in the figure.

If I were to put a probability on this happening, I would give something like 80 percent.

The positive scenario

Because this is technical analysis nothing is impossible and there is a real chance that prices will bounce up from here.

The probability for this happening remains low, however.

I would put it at 19 percent.

 

Technical analysis of Goldcorp Inc., Sunday, March 12, 2017

This is what a weekly chart looks like for Goldcorp Inc:

My negative scenario

Until two weeks ago the main scenario for Goldcorp was bullish as prices seemed to get squeezed between the rising 50-week moving average and the descending trend line.

But then something happened that eliminated all those bullish signs: prices cut through both the 50-week and 100 the 100-week moving averages.

Now there does not seem to be much stopping the chart before we approach the ascending trend line at the bottom of the chart.

If I were to put odds on this I would say that there is 80 percent probability for this happening.

My positive scenario

It is difficult to make a case for higher prices at this point.

But one thing that we haven’t discussed is how the underlying commodity – gold – is behaving.

It is stuck at exactly $1300 and because gold has strong support at each hundred dollars it may very well be that gold bounces up from here.

That move may then bring Goldcorp with it.

However, when I look in the Goldcorp chart I don’t see too many signs for that happening.

If I were to put odds at this scenario I would put them at 19 percent.

Technical analysis of Newmont Mining, Inc., March 11, 2017

This time I will look at Newmont Mining. This is what at weekly chart looks like:

My negative scenario

What we see in the chart is that the prices went through the 50-week moving average last week and that it moved down quite substantially.

As you can see in the chart, we can draw a trend line from the low in 2016 to the low now, but because there does not appear to be any clear evidence of a supportzone anywhere in the chart, I’m not sure that a big role.

Instead I believe that the prices will come down and touch the 100-week moving average. If you look carefully in the chart, that was exactly what happened when prices came down and kissed the 50-week moving average.

However, it could not be supported by the 50-week, but rather fell through the moving average last week.

As always I will put a probability on this scenario and I would give it 80 percent chance.

My positive scenario

My positive scenario would be that the prices bounce up from here.

Because this is technical analysis nothing is impossible, but I would put the odds for this happening as low as 20 percent.

Technical analysis of crude oil, Friday, March 10, 2017

Today I will do something different and look at a daily chart of WTI oil. This is what the chart looks like:

What I see in the chart is that prices had been trying to break through resistance ever since December of last year without succeeding.

Instead prices fell precipitously on Wednesday and that the fall continued yesterday and they now sit just at the precipice of falling down.

Of course prices can pick up from here but the strength of the fall on Wednesday make me doubt it. Instead I see it as likely that the prices will continue down.

If I were to put a probability on my negative scenario I would give it 75 percent with a 24 percent chance of prices bouncing up again.

Even if it seems unlikely I would still give the event of just continuing sideways a 1 percent probability.

 

Thursday, March 9, 2017

I prefer to draw my conclusions from weekly charts:

My bullish scenario

First of all I would like to write about my bullish scenario – the one that I consider the most probable.

Prices didn’t penetrate the 50-week moving average about a month ago and are now moving very close to the ascending trend line.

What I believe will happen is for prices to bounce off of the trend line.

That would be my primary and most probable scenario.

The odds for this happening are about 70 percent.

My bearish scenario

There’s of course also a bearish case to be made.

Last week was a week with huge price declines and what I find disquieting is that the high about a month ago was lower than the one set in August of last year.

Therefore, the declines we are seeing in the chart now may just be the beginning of a bigger decline for the goldmines.

I would put the odds for this happening at about 25 percent.

My “sideways” scenario

Finally I will talk about the possibility that nothing at all happens to the gold chart.

Because there is always a possibility for the unexpected when doing technical analysis, I would put the odds at about 5 percent.

 

 

Technical analysis of platinum, March 8, 2017

If you are a regular to this site you know that I prefer to draw my conclusions from medium-term charts. This is what a weekly chart look

What I see in the chart is that prices have failed to penetrate the 50-week moving average and that they are now heading for the ascending trend line below.

I see it as probable that prices will continue up after having hit the ascending trend line.

So what could be wrong with my analysis?

Well, first of all it is not given that prices will continue up when they touch the ascending trend line.

I would put the odds for this happening at 65% compared to 25% for them continuing down.

The odds for the chart continuing straight I would put at 10%.

 

Tuesday, March 7, 2017

If you are one of my regular readers you know that I prefer to draw conclusions from weekly charts. This is what it looks like:

What we can see in the chart is that prices declined last week and that they now sit right at the 50-week moving average.

Because the average is rising, my odds favor that the prices will continue up.

They may go down a little bit more in the near term, but not more than they did at the end of last year.

The ascending moving average is acting as support for the falling prices.

If I were to put a number on my odds then I would say that there is a 75 percent probability of the prices going up in the medium term, 20 percent of them going down and 5 percent of them continuing straight.

Is there anything that can go wrong with my predictions?

Absolutely. The prices can fall precipitously without anything stopping them. The probability for that happening remains low however.

 

 

Technical analysis of Gold, March 6, 2017

I usually prefer to look at a weekly chart to draw my conclusions and this is what the weekly looks like:

Last week the gold price was significantly down which has been worrying me a little bit.

The prices are stuck between the two moving averages, but I have a hard time seeing them crashing down through the 100-week the same way as it did with the 50-week.

Therefore I still believe that the prices will continue up, but the odds for this happening has changed.

The odds are now 60 percent that the prices will continue up to the descending trend line and 40 percent that they will fall.

We will have to wait for the resolution.

 

Technical analysis of Agnico-Eagle Mines, March 5, 2017

My preferred time horizon is weekly so this is what a weekly chart looks like:

What I see in the chart is that prices were moving sideways for the two years 2014 and 2015 and that they then exploded to the upside.

They have since come down slightly but are still about the double of what they were before the move started.

My odds favor higher prices so I believe that the ascending trend line will act as support when prices come down.

However, it is not given because we also have a lower high which can be interpreted to be bearish.

If I were to put a number on the odds I would say that ther is a 65 to 70 percent chance that the prices will bounce off of the trend line and that there is a 35 percent chance that they will continue down.

We will have to wait and see how it goes.

 

Technical analysis of Kinross, Saturday, March 4, 2017

Today I want to look at a another chart, this time of Kinross Gold Corp.

As always I prefer to look at weekly charts:

What we see in the chart is that prices were descending for the most part of 2014 and 2015, but that they then staged a comeback.

The first six months of 2016 prices were rising dramatically. At the bottom, Kinross stock sold for $1.50 and at the high it sold for 5.82. That equates to a gain of 444% if you caught it all.

Obviously, we could of course draw a similar pennant as we did in the gold and mining charts, but the information that we would get would be limited since the moves are so strong.

My odds favor a contact with the rising trend line and that we will then bounce off of that.

On the other hand there is nothing that guarantees higher prices. It is fully possible that we will break down from here.

If I were to put a percentage on my odds, I would say that there is a 65 percent chance of prices going higher and 35 percent chance of them going lower.

We will have to wait and see.

Technical analysis of crude oil, Friday, March 3, 2017

As always my preferred time horizon is weekly. This is what a chart of WTI crude looks like:

What is clear from the chart is that prices were declining since the end of 2014, but that they changed direction and began to trend upwards at the beginning of 2016.

What we have is really two opposite trends – one descending and the other ascending – and they will soon collide.

When the pattern looks like this there is a lot of tension that is building up in the chart and when this tension is finally released the moves that follow usually are violent.

As it looks now prices have tried to break through the resistance that exist around $55, but to no avail.

My odds therefore favor that the penetration through the resistance will fail and that we will soon see a lot cheaper crude oil.

 

Technical analysis of the HUI, March 2, 2017

A common way of leveraging the price of gold is to invest in gold mines.

The way that I look at the gold is that it’s very much the same as buying a currency.

To invest in gold mines is fundamentally different from buying gold because you are actually buying equity.

Sometimes these stocks pay out a dividend which means that you can take advantage of compound interest the same way as with any other stock.

The Gold Bugs Index

As always I look at a weekly chart when I do my analysis:

What we can see in the chart is that the trend changed direction and headed downwards in 2011 and that the trend was down all the way to 2016.

Then in 2016 the trend changed and increased almost 300% in just a few short months.

The trend then changed again mid-2016.

But one thing that did not change was the direction of the 50-week moving average. It is still trending upwards.

The chart is now between the rising 50-week moving average and the rising trend line that can be drawn between the bottoms of 2016 and 2017.

I personally don’t think that prices will go down very much in the medium term because of the rising moving averages and trend lines.

Therefore there could not be a better moment to enter the market than this.

 

Technical analysis of platinum, March 1, 2017

As always I prefer to look at a weekly chart:

What we see in the chart is that prices of platinum headed south mid-2014.

They then were in a downtrend for something like 18 months when they had a come back.

The first half of 2016 the overall trend of platinum was up, but that changed around the US elections when prices headed down again.

What happens when prices are moving up and down like this is that neither the bulls nor the bears have the upper hand.

Rather the battle lines are only getting closer.

What that means is that a lot of tension is building up in the chart and when that tension is finally relieved the move will become spectacular.

The trouble is that I don’t know in which direction it will move. My personal hunch is that it will move higher, but that is not a completely unbiased opinion,

My personal odds are that prices will continue up after the chart has broken the descending trend line.

If you believe in higher prices it’s a very good time to enter.

 

Tuesday, February 28, 2017

As always I use a weekly chart to draw my conclusions:

There are a few things going on in the chart.

What we see is that prices were heading down for the better part of 2013, 2014 and 2015.

But then they changed direction in the beginning of 2016 and have been moving up ever since.

Furthermore, we don’t have the same clear bottom as we have in the gold chart, but rather a more extended support zone (see figure).

Obviously, we can draw ascending and descending trend lines, but I’m not sure if they are really in play in the market.

We blew right through the descending trendline a couple of weeks ago without any struggle. That indicates that it is not really in play.

Then the 50-week moving average is ascending as well as the 100-week which to my eyes looks healthy.

In short it seems to be a good moment to enter the silver market.

 

Technical analysis of gold – February 27, 2017

As always I look at a weekly chart to draw my conclusions:

What we see in the chart is that prices went down for the better part of 2013, 2014 and 2015.

Then in 2016 the direction of the trend changed to move upwards where it moved during the first half of 2016.

But then after the American elections prices trended downwards. They did so for a couple of months until they changed direction again.

As can be seen in the chart, the prices are now up against the 50-week moving average, but because the moving average is not down trending I don’t believe that it will cause too much resistance.

That means that I believe that the prices will continue to the descending trend line above.

What happens then is anybody’s guess. It may be that the uptrend is so strong that it will cut through the descending trend line without problems.

Or it may be that the prices change direction once again and build up more tension than what is already present in the chart.

We will have to wait and see.

If you want to learn the basics of technical analysis you can do that here.

How to use Microsoft Excel in finance – Part 3

This time we will look a bit more in depth on how to use Microsoft Excel for financial calculations.

Green Excel icon with text about using Microsoft Excel in finance

What we will look at today is Financial statements and how to use them in order to understand the financial health of a company.

In particular we will look at:

  • Financial statements
    • Balance sheet
    • Income statement
  • The basic difference between accounting (or book) value and market value.
  • The difference between accounting income and cash flow.
  • How to determine a firm’s cash flow from its financial statements.
    • Calculate cash flow.
  • The difference between average and marginal tax rates.
    • Calculate taxes

Finance not accounting

The first thing to grasp is that we will look at the numbers and look at them through the eyes of people in finance.

They use the numbers differently than the people in accounting and we will show you how.

Balance sheet

In the last article we talked about this formula:

Assets = Liabilities + Equity

Everyone in finance is using this equation and not just in finance but also in accounting.

What the Balance sheet does is that it reflects the equation.

The Balance sheet is a snapshot of the Firm’s account balances at the last day of the reporting period.

Hypothetical Balance Sheet of ABC Corporation (Current assets, Non-current assets and Total assets).

Figure 1. Hypothetical Balance Sheet of ABC Corporation (Current assets, Non-current assets and Total assets).

Assets

The assets are divided into Current assets and Non-current assets where the Current portion is assets that can be turned into cash within 12 months.

Then per definition Cash is a Current asset. Then we Accounts receivable which is accounts that will be cash soon. Inventory is another Current asset. The whole point of inventory is so that you can sell it and get cash.

The Current assets are important not only in finance, but also in accounting, auditing and banking. It’s very important to see a business’ Current assets, because if they don’t have very many current assets perhaps they cannot pay their bills.

The Non-current portion are fixed assets that cannot be easily transformed into cash. These are your buildings, your trucks or patents or the long-term assets that actually define your business.

This is what you’ve invested in because you think you can make a profit from this.

In a financial statement you will see different periods. That is because you want to compare one year’s numbers to another.

 

Liabilities

We will also talk about the other side of the equation, which are the liabilities. These are the funds that the company have at its disposal.

The company either goes out and get debt (current), it borrows money long-term (bonds) or it issues equity to get its funds which means the cash it is going to use to buy its assets.

Current liabilities are liabilities that need to be reimbursed within a year – much like the current assets which are assets that can be converted into cash within a year.

Current liabilities are the bills the company need to pay within one year.

As you can see, within the current liabilities there are two items Accounts payable and Notes payable.

Accounts payable is when the company goes out and buys products that it has to pay for. Notes payable is when the company borrows money that it has to reimburse within a year.

The combined current liabilities and non-current liabilities represent debt on the balance sheet.

Hypothetical Balance Sheet of ABC Corporation (Current liabilities, Non-current liabilities, Total liabilities and Shareholders' equity).

Figure 2. Hypothetical Balance Sheet of ABC Corporation (Current liabilities, Non-current liabilities, Total liabilities and Shareholders’ equity).

Shareholders’ equity

In cell A19 you can see that we’ve written Common stock and paid-in surplus. What that means is that if the company issues common stock and they are being priced at $22 but were supposed only to be worth $20, the paid-in surplus is the $2 that the stockholders pay in order to own the company.

Retained earnings belong to the shareholders and they are to be paid back to the shareholders in the form of dividends, but sometimes they are not.

If they are not paid out to the shareholders they can be used within the company in the form of investment.

The way to account for such a situation is to label the item Retained earnings.

Adding it all up

Finally we add it all up. First we calculate total liabilities which is the sum between current and non-current liabilities.

Then we calculate total liabilities plus shareholders’ equity which is just what it sounds like.

Why is it called the Balance sheet?

That’s because there’s an equal sign in the formula Asset = Liabilities + Equity which means that the two sides have to balance each other.

So what I do in cell B24 (Figure 2) is that I add the total assets from Figure 1 in cell B18 and in cell C24 (Figure 2) I add the Total liabilities and Shareholders’ equity from cell B22:

Comparison between Total assets for 2016 (B24) and Total liabilities and Shareholders' equity for 2016 (C24).

Figure 3. Comparison between Total assets for 2016 (B24) and Total liabilities and Shareholders’ equity for 2016 (C24).

The result that we get in D24 is then TRUE.

 

Working capital

Remember that Current assets are assets that the firm easily can convert into cash and that the Current liabilities are the bills that the company needs to pay within 12 months.

If your current liabilities are greater than your current assets it means you’re in trouble and you need to find cash somehow.

The Net working capital is the term that is used and it is defined as Current assets – Current liabilities.

The Net working capital is defined as the difference between the Current assets and the Current liabilities.

Figure 4. The Net working capital is defined as the difference between the Current assets and the Current liabilities.

The Net working capital is the short-term capital that the firm has to work with.

We will use the Net working capital when we do our cash flow calculations and we will also use it in the next chapter when we do analysis of financial statements.

In accounting you will see that the term Net working capital is used but in finance the term Capital is used more broadly for all assets.

If we now have our Current assets and Current liabilities on different sheets like this:

Screenshot of Microsoft Excel showing Assets, Liabilities and Working capital on different sheets.

Figure 5. Screenshot of Microsoft Excel showing Assets, Liabilities and Working capital on different sheets.

If we now want to calculate the Net working capital we do it like this:

In the sheet Working capital we type an equal sign in cell D16.

Screenshot of Microsoft Excel showing how to calculate a Net working capital: Step 1.

Figure 6.Screenshot of Microsoft Excel showing how to calculate a Net working capital: Step 1.

We then click on the sheet Assets in Figure 5. and we click on Current assets (cell B13):

Screenshot of Excel showing how to activate cell B13 in the sheet called Assets.

Figure 7. Screenshot of Excel showing how to calculate a Net working capital: Step 2.

If we look in the formula bar in Figure 7 we see that we have now activated cell B13 in the sheet called Assets. The exclamation sign means that we are using a different sheet for our data.

We then type a “-“-sign (1) and click on the “liabilities”-sheet (2) in Figure 5:

Then we click in cell B16 and hit Enter and we are immediately brought back to the Working capital sheet.

Screenshot of Microsoft Excel showing how to calculate the Net working capital from different working sheets in the same Excel document.

Figure 8. Screenshot of Microsoft Excel showing how to calculate the Net working capital from different working sheets in the same Excel document.

What’s important to remember here is not to click on Working capital sheet but rather hit Enter (if you don’t hit Enter your formula will be ruined).

If we then go back to the Working capital sheet and hit the F2 key, this will appear:

Screenshot of Microsoft Excel showing how to calculate the Net working capital in cell D16.

Figure 9. Screenshot of Microsoft Excel showing how to calculate the Net working capital in cell D16.

Of course, different businesses have different values for their Net working capital, but in general, the number should be positive.

Liquidity

We will then turn our attention to Liquidity:

Different concepts of liquidity and how it can be used.

Figure 10. Different concepts of liquidity and how it can be used.

Liquidity is important because if you run out of it you’re in trouble.

If your working capital is getting too small then maybe you have to sell assets to get cash for the company.

Liquidity is defined as:

How quickly an asset can be converted into cash.

Furthermore, liquidity has two dimensions:

  1. Ease of conversion into cash.
  2. Loss of value because you have to sell your asset quickly.

There are highly liquid assets which can be sold quickly without loss of value. (This can be inventory or a short-term investment).

How liquid is cash? That is the most liquid.

How liquid is accounts receivable? You can quite easily convert accounts receivable into cash. In fact you can sell those assets to bank and get cash in return.

The we have illiquid assets which are assets that cannot be sold quickly without significant price reduction. Examples of this are machinery and buildings.

You can almost sell anything if you reduce the price enough.

On the Balance sheet the items are usually listed in decreasing liquidity so that the most liquid assets come first.

Another aspect of liquidity is that businesses that have it can go out and get a loan easily.

 

 

 

 

 

 

This article is part of a series. You can read Part 1 here and Part 2 here. This article is highly influenced by the excellent work of Michael Girvin (Excelisfun) on Youtube.

Fundamental analysis of small-cap stocks

These are my fundamental analysis posts.

Friday, April 28, 2017

Light blue picture of cluster of grapes with text about Dillard's

Dillard’s is traded on the New York Stock Exchange under the ticker symbol DDS.

Valuation:

Dillard’s is a well ran business with solid earnings, solid cash flow and overall performance.

The trailing P/E ratio 11.2 and the P/E over the average three years is 8.4.

Free cash flow and dividend:

Free cash flow is healthy at $412,000,000 which corresponds to $12 per share.

The dividend is also at a paltry 26 cents per share which is too low considering the Free cash flow.

Balance sheet:

But DDS’ overall financials look more than reasonable.

For instance, the ratio between Current assets and Current liabilities is 1.9, but the Debt to equity ratio is a little bit high at 1.3.

Return on equity is 10%.

Negatives are that the company is involved in buying its own stock which only favor the ones who are selling the stock.

Summary:

Dillard’s seem reasonably priced with a good Free cash flow, but with a high Debt to equity ratio.

I would consider the stock as a BUY at these prices.

 

 

Monday, April 24, 2017

Today I will look at one of the best value Faroese companies around: P/F Bakkafrost A/S.

Orange figure of fish with text about Bakkafrost

The company is traded on the Norwegian Stock Exchange under the ticker BAKKA but they report their financials in Danish kroner.

Valuation:

Bakkafrost looks cheap at a P/E ratio of 7.9, but when looking at the average of the past three years’ earnings it comes in at 10.8 which does not look that impressive.

The Price to book ratio is 3.0 which is not cheap.

Balance sheet:

The Balance sheet on the other hand looks more than OK. The company has a Debt to equity ratio of 0.5 and a Working capital to debt ratio of 1.6.

Current assets to current liabilities is very good at 7.2.

Free cash flow and dividend:

The company has a Free cash flow of 163 Million DKK which equates 3.34 DKK a share.

This does not pay for the dividend at 8.70 DKK per share, but the dividend has been steady and increasing for the past 5 years.

Summary:

Even if the stock is not really cheap at 206 DKK, I would still consider it a BUY today.

 

 

 

Thursday, April 20, 2017

Today I will take a look at one of the best run French companies: Inter Parfums SA (ticker (Paris): ITP)

Blue figure of perfume bottle with text about Inter Parfums

Description:

Inter Parfums is a cosmetics and perfume company based in Paris.

The company is very well run with solid earnings and cash flow.

Valuation:

However, for the stability you will have to pay. The trailing P/E ratio is 30.0 and the P/E ratio over the past trailing years’ is 32.6.

The Price to book value is a hefty 4.1.

Balance sheet:

The balance sheet looks very good: The company has a Working capital of €280 million and a Debt to equity ratio of 0.4 which is considered to be low risk.

The ratio between Current assets and Current liabilities is also good at 3.5.

Cash flow and dividend:

The company has a Free cash flow of €42 million which equates to €1.28 per share.

Of this they pay out a dividend of €0.50 which amounts to a yield of 1.7% – a reflection of the high price.

Summary:

In summary I would not buy new stock at these prices. However, if you already own it I would hold on to the stock and keeping on reinvesting the dividend.

 

Monday, March 20, 2017

Today I would like to look at fundamental analysis of The Cato Corporation (ticker: CATO).

a32e38

Valuation

The company is an extremely well run apparel business based in North Carolina.

The trailing P/E value is 9.0 and if you look at the preceding three years’ earnings the P/E comes in at 10.1.

The Price to Book is a healthy 1.5.

Balance sheet

The company has a healthy looking Balance sheet with a Working capital of $280 million and Net working capital of $242 million.

The Debt to Equity ratio is 0.56 which is considered as low risk.

Cash flow and dividend

The Free cash flow is $67 million and the company pays out a dividend of $1.20 per share.

The company only has three years’ history of paying out uninterrupted and increasing dividends, but this is misleading because the dividends have been paid for more than 15 years.

The current dividend yield is 5.5% which is good.

My recommendation:

At these prices The Cato Corporation is a BUY.

 

 

Monday, March 13, 2017

Today I would like to look at fundamental analysis of one the best ran British small-cap stocks, Treatt Plc.

Blue picture of perfume icon with text about Treatt Plc.

Valuation

As always I prefer first to look at the valuation numbers and here it becomes clear that the stock is expensive.

You have to pay a hefty 28.8 times the trailing earnings for the stock.

When you look at the average three preceding years, the stock is even more expensive at 32.7 times trailing earnings.

Already here I would hesitate, but it gets worse. At these market prices, you are paying 5.2 times Book Value which obviously is not cheap.

Balance Sheet

The Balance Sheet looks far better. The Debt to Equity ratio is 0.9 and the Working Capital to Debt is 1.1.

The ratio between Current Assets and Current Liabilities is 3.3 which is very good.

Treatt Plc. has a Net Working Capital of £21,000,000 which equates to about 40p per share.

Dividends

The dividend history looks good with more than 15 years of non-interrupted and increasing dividends.

The current dividend yield is only 1.3 percent which obviously is a reflection of the high price.

Conclusion:

If you already own Treatt Plc. by all means keep the stock, but if you do not I wouldn’t buy it at these prices.

The Balance Sheet looks very good, but I would not buy the assets at this price.

The company has a good dividend history, but the feeble yield is a reflection of the price.

 

Thursday, February 23, 2017

Blue picture with brown car icon with text about Tesla Motors.

The reason for this is that I’ve recently been watching a Youtube channel called Now You Know that show a lot of news about Tesla Motors.

So I thought that I should look into the hype and see for myself if there was anything to it.

What I did was that I went to Tesla’s website and I downloaded their financial reports.

The numbers are shocking.

Tesla has been in business for almost ten years and in none of those they have made any money.

Granted, the loss last year was less than the year before, but still the second largest loss out of these ten years.

Looking at the balance sheet it’s very much the same story.

Its total debt is a staggering 16.8 billion dollars and the free cash flow is a negative 1.4 billion.

No wonder that the stock is losing more than 5 percent as I write this.

Who in their right mind would want to invest in something like that?

It’s clear that if you buy Tesla stock you hope that the earnings will materialize in the future.

At $259 those hopes are very expensive.

Elon Musk may be an excellent visionary, but his abilities as a CEO of Tesla Motors are not as good.

If you would like to learn more about fundamental analysis you can do that here.

Why is the Shiller P/E flawed?

Today I would like to take a stab at the question “why is the Shiller P/E flawed?”

red recycling arrows with blue background and the text: why is the Shiller P/E flawed?

What is Cape and why is the Shiller P/E flawed?

The cyclical P/E-ratio is calculated by taking the average over the past ten years’ inflation adjusted earnings.

This may sound as a good way of looking at the value of a company, but it is not and I will explain why in this post.

First of all when you are calculating the Shiller P/E you are averaging over the previous ten years.

What that means is that one years’ calculation contains almost the same information as next year.

So, in effect, you only have data points each tenth year and not each year as it is presented.

Looking backwards

The Shiller P/E is only a way of looking in the rear view mirror and not ahead.

As we all know a trailing P/E does not give you any information about coming earnings.

It does, however, give you an idea of past earnings.

If you want to make real money in the market you will have to guess future earnings which a Shiller P/E does not do.

Then ten years is a long time. We all know that.

During this time small-cap companies often change and sometimes even dramatically.

Their business model may change so to calculate an average over ten years makes no sense.

Moreover, the accounting methodology over the past ten years has changed which makes the Shiller P/E even more flawed.

What do you suggest instead?

Instead I propose to look at the inflation adjusted earnings of the past three years and using that as a guess for next year.

I believe this is a better metric because it gives the investor a clearer idea of what to expect for next year’s earnings.

 

How to use Microsoft Excel as a finance tool – part 2

This time I will look a bit more in depth on how to use Microsoft Excel for financial calculations.

Picture of Excel icon with text about how to use Microsoft Excel in finance

How can I use Excel to get the best out of my data?

Chances are that you are going to have to look into the data that you have entered again in a year or two years.

So how do I organize a spreadsheet so that I can see what I’ve done when I come back?

Excel is a very powerful tool once you know how to use it.

The secret is called labeling and with that I mean to properly label all the cells in order to easily be able to go back and change.

But to start off this chapter I will discuss  some financial metrics and why they are important.

So why is it an exciting time to study finance?

The reason is that we had a financial crisis in 2009 and still to this day we are seeing the repercussions of that meltdown.

We all got into a lot of trouble and the financial institutions that we depend on for our daily lives lost a lot of money.

Some of the questions that people are asking themselves in the aftermath of the financial crisis are:

  1. Can markets really allocate resources efficiently?
  2. Are markets efficient?
  3. Are people always acting rationallly?

These are questions that people in finance and economics assumed they had the answer to for years, but now they are getting more cautious.

What I will be talking about in this chapter is:

  1. The reason why the corporation is an efficient business form.
  2. The structure of a corporation.
  3. The fundamental accounting equation: Assets = Liabilities + Equity.
  4. Define what finance is.
  5. The goal of financial management.
  6. Why we are studying finance.
  7. What the key questions in finance are.
  8. Define financial markets (primary and sceondary) and why they are important.
  9. What is the importance of cash flow.

Forms of business

There are many forms of business, but the most common is Sole Proprietorship where just one person owns the company.

This particular form is easy to start and the least regulated kind of business there is.

Another advantage is that there is single taxation. You only get taxed on whatever your income is.

On the downside, it is quite difficult to raise funding.

Another thing is that you as a private person have unlimited liability. This means that if you get sued you can not only all the assets in the company, but also your personal belongings.

Finally, it is pretty difficult to sell your ownership compared to if you, for example, own a corporation. If you have shares in a corporation, you can just sell them on the market.

When many own the company it is called a Partnership or a Corporation.

A General Partnership means that you invest and work for the company whereas a limited Partnership means that you just invest.

A Partnership is easy to start and it is more regulated than a Sole Proprietorship.

If you have a Partnership it is somewhat difficult to raise money.

There is also the same problem as with a Sole Proprietorship – there is unlimited liability. So if you get sued, the court can take all your Partnership and personal assets.

It’s difficult to sell ownership if you want to.

But on the positive side: In a Partnership there is Single Taxation just as in Sole Proprietorship.

A Corporation is when instead of having a person owning the business there is a separate legal “person” who owns it.

On the negative side with this form of ownership:

  • There is a lot of paperwork that you need to file which means that it is somewhat hard to start a Corporation.
  • It is often more regulated than a Partnership or a Sole Proprietorship.
  • You have to pay taxes on both income and dividends. This is called Double Taxation. A dividend is when a company pays out cash to the stockholder.

On the positive side with a Corporation:

  • It is reasonably easy to raise funds.
  • There is Limited Liability which means that if someone sues the Corporation the court can come after the Corporation’s assets but it can not come after your personal assets.
  • It’s reasonably easy to sell shares of a Corporation in the market.

Regarding the last point, there are two kinds of financial markets:

  • Primary markets, and
  • Secondary markets

If you buy shares in the Primary market, the shares are issued by the corporation and sold to you.

This means that the shares (or securities) are issued by the Corporation.

Now, if you own the shares, you can go and sells them to whoever you want and you do that in the secondary market.

This means that after the sale in the Primary market, you can buy or sell shares, debt or equity to your liking in the secondary market.

Why is a Corporation a better form a better form of ownership than a Sole Proprietorship or a Partnership?

It’s because of the limited liability of a Corporation. If you get sued, the courts will only take assets belonging to the Corporation and not your car.

The main reason why a Corporation is the better alternative, however, is that it allows you to finance your idea far easier.

In other words it is pretty easy to get funds (equity or debt).

So if I were to summarize why a Corporation is the better alternative:

  1. It’s easy to raise cash.
  2. There is  a limited liability for debt.
  3. It is easy to transfer ownership.
  4. A Corporation has unlimited life which means that if the owner dies the business still lives on.

Structure of Corporation

Because this article is about corporate finance, I will now get into the structure of a corporation (Figure 1.)

Schematic representation of the structure of a corporation

Figure 1.The structure of a corporation. On top there are the shareholders, below there are the Board Of Directors that in turn hire the management who then hire the employees.

At the top of the Corporation there are the Shareholders. When you own a stock of Corporation, you are the owner of that Corporation and owners vote and bring in a Board of Directors.

The Board of Directors then hire the managers. The managers are then working inside the company and running the company.

Finally, it is the managers who employ the employees who work in the company.

The role of the Financial Director

Because this is a finance class we will of course discuss the role of finance inside a corporation (Figure 2.)

Schematic representation of the role of a CFO within a corporation.

Figure 2. The role of the financial manager inside a corporation. Below the horizontal line is inside.

Above the horizontal line in Figure 2. is the Board Of Directors. Below the line is inside the corporation.

The role of the Chief Financial Officer is then to supervise the corporation’s financial activities.

To his/her help, he/she has these people to help:

The role and structure of finance inside a corporation. On top there is the CFO or Chief Financial Officer. Below there is the Treasurer and the Controller and below them there are different people like Cash and Tax Manager.

Figure 3. The role and structure of finance inside a corporation.

On top there is the CFO or Chief Financial Officer.

Below there is the Treasurer and below him/her there are different people like Cash Manager who supervise the cash flows of the company.

The Credit Manager who look into questions like if the company is going to extend credit to certain customers.

Capital Expenditures is about what kind of projects or machinery the business might engage in. They do that by using cash flow analysis.

Financial Planning is about figuring out the company ‘s needs for issuing debt or stock to raise cash.

Then there is the Controller under whom there’s the accounting part of the Corporation.

The Fundamental Accounting Equation

The equation goes like this:

Asset = Liability + Equity

The equation is the fundamental part of Accounting and as such it has been around for more than 600 years.

What does it mean?

The Fundamental Accounting Equation: Asset = Liability + Equity

Figure 4. The Fundamental Accounting Equation: Asset = Liability + Equity

Assets

1./ If you have an asset – in the example I use a house – worth $200,000 and your loan on the house is $150,000 (liability), then you have $50,000 left in equity.

Imagine that a company buys trucks for its operations, buying other businesses, real estate or even inventory: Those are all assets.

What this means is that if you have a good new idea you can either pay for it yourself, you can borrow the money or use some combination of the two.

2./ The idea behind buying an asset is that you will make money in the end.

If for instance we use the example of a company buying delivery trucks – then the company needs to pay for it in order to get cash back in return.

The GAP definition of an asset is that it will provide a probable future economic benefit to the owner.

Liabilities

A liability is a promise to pay back the loan plus interest on that loan.

If the Company defaults on its loan, the house will go to the bank. That is a contractual obligation.

If you default on the loan, the bank gets paid first. That is also true in business. The person or the entity that has loaned the money gets paid first.

Equity

In the example above, there is $50,000 in equity.

If the bank is only able to get $100,000 for the house – that doesn’t cover the debt, but it’s all they get – you will get nothing.

If anything is left over, you will get it.

The way to think about it is whatever is left over after you pay all the Bankers.

Finance

The definition of finance is as follows:

Text about allocating scarce resources across assets over time in order to earn interest.

What this means is:

  • What should we invest in?
  • Should we use cash (equity) or should we incur debt?
  • The future is unknown which makes finance difficult.

The third point comes from the fact that finance is all about the future and since the future is unknown finance is difficult.

What we do in finance is that we are looking into the future and doing lots of estimates to decide what to do.

Goal of Corporate Financial Manager

The goal of financial management is to maximize the current value per share of existing stock (market value of equity).

Theoretically this is a good goal because the owners own the company and the financial manager works for the owners.

However, there are a few problems and let’s look at a few of them:

1./ The Agency Problem with Corporations

This is what the Agency Problem means:

The shareholders own the company and are what is called “principal”.

The managers run the business and are what is called “agents”.

According to the definition an “agent” is working for somebody and in this case for the shareholders or the “principal”.

The agent is supposed to act in the best interest of the principal.

But because the agent is inside the company the agent has custody of the assets.

Managers do not always act ethically or legally.

Question: If the principal is not watching the agent 100% of the time how can the principal make sure that the agent is always acting in their best interest?

Answer:

  1. Pay managers based on stock value of the company.
  2. External auditors of the financial situation of the company to the Board of Directors. The role of the auditors is to control the financial information of the company so that it comes out to its owners, regulators and potential investors. If the auditors have no direct interest in the company, it makes the situation slightly better.
  3. Control over assets and accounting. This means that before the management even gets hold of any books they are supposed to be managed properly by somebody associated with principal.
  4. Make management personally responsible for the financial statements.
  5. Regulation as for an insurance. If you come in a buy a car insurance, the insurance is obliged by law to hold money aside if there’s an accident.

2./ Financial-, Accounting- and Management-Gurus invent ways to circumvent laws that protect the owners.

There are many examples in financial history of companies having gone out and borrowed money in the market.

This money has then been accounted for as debt on the balance sheet just as it should be (a liability).

But then they bought the debt back and recorded the debt as an asset on the balance sheet instead.

This is fraud and illegal.

Another example is insurance companies that invented policies that circumvented the regulations and the law.

This was also illegal.

3./ Financial markets are efficient.

The definition of finance depends on financial markets being efficient.

What that means is that the assets are accurately priced in the market.

Obviously, we all know that this is not always true, but as a general rule it should hold.

However, there have been two major bubbles over the past 20 years:

  1. The dot com-bubble of the late nineties.
  2. The housing bubble between 2003 and 2007.

When you have a bubble, the market is telling you that the companies, or more broadly, the assets involved are worth a lot of money, but they are not.

What can happen then is that the bubble pops and loses all its inflated value at once.

This way a lot of people can lose a lot of money quickly.

If there is a manager inside a company and he/she is trying to maximize the value of the company, but the market value is not fair, the goal itself cannot be achieved.

That means that everyone is left guessing what the market value of the company is.

Here’s an example of a house in 2003 to 2007:

Red picture of the housing bubble of the 2000's with ever bigger houses and dollars.

Figure 5. The housing bubble of the 2000’s explained with ever increasing house values.

The market was telling the participants that houses worth more and more during the bubble years, but they were not as we could see when the bubble popped in 2007.

The process can be summarized like so:

  1. The markets said that house prices were worth a lot. This was a price signal to buy houses as an investment.
  2. The banks, who make loans for a living, the individual, who buy houses, and the contractor, who build the houses, all reacted to that price signal.
  3. Market was incorrectly giving people the signal to buy.

Why should we study finance?

There are of course several reasons why you would want to study finance.

First of all we have the Personal side:

  • Student loans
  • Credit cards
  • Investments
  • Retirement savings
  • Banking

What are the careers that you can have in finance?

  • Marketing (budgets, analyze market plan)
  • Accounting and finance (have a lot in common)
  • Management (investing, what projects are best given current circumstances, job performance)
  • Personal finance

Other areas of finance

In this class we are going to study corporate finance, but there are other areas of finance as well:

a. Investing

  • Stockbroker (where you buy and sell stock for customers)
  • Portfolio manager (where you buy and sell stock for a mutual or index fund)
  • Security analyst (where you do all the research and pick the individual stocks)
  • Bond trader (where you buy and sell bonds for customers)

b. Financial institutions

  • Banks
  • Insurance

c. International finance

What questions to ask?

  1. Capital budgeting: What long-term investments or assets do we buy? This includes equipment, buildings and investments.
  2. Capital structure: Are you going finance your investments with debt, equity or profits? What mixture of those are you going to use?
  3. Working capital: This is the nuts and bolts of running the company. The Working capital is defined as Current assets – Current liabilities and by definition this is short-term. How do we collect money from our customers to pay our bills? Concerned with short-term assets and liabilities.

Cash flow

In finance cash flow is everything.

This is an example of how cash can flow through a corporation:

Chart showing the flow of cash in a corporation.

Figure 6. Chart showing the flow of cash in a corporation.

In the figure it says A. The Firm issues securities. That can be the company having an initial public offering or an IPO.

Then people in financial markets decide to buy some stock so the cash goes from right to left and into the business.

Then we have B. Firm invest in assets which can be that the company buys for example machines or buildings.

Why is the company buying the assets? They of course do it to get a return on their investment.

Then we have C. Cash flow from Firm’s assets. This means that the company has earned a return on its investments and now the cash is flowing in three different directions:

  1. Back to the financial markets
  2. D. It can go to the government or other stakeholders in the form of taxes.
  3. E. The cash can be reinvested in the company.

The take home message here is that in finance what matters is Cash flow and not accounting numbers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The first part in using Microsoft Excel as a finance tool can be found here and part 3 can be found here.

This article is based on the excellent work of the man behind the Youtube-channel Excelisfun.

 

 

What is it about Warren Buffett that makes him such a fantastic investor?

How come Warren Buffett is such a fantastic investor?

Blue picture with text about the fantastic investor Warren Buffett

The early years

To answer that question we first need to look into what Warren Buffett has actually done.

He studied at Columbia University under the legendary Benjamin Graham where he learned the fundamentals of value investing.

What a value investor does is that he or she is looking for securities which prices are below its intrinsic worth.

What matters is the price. Buffett knows that if he can buy a well-run company for pennies on the dollar, sooner or later the market will appreciate its error and see the price of the security rise.

That is value investing and that was exactly what he did in the early days of his investing career.

For instance he bought a 5% stake in in American Express in the mid-1960’s for $13 million dollars.

What metrics are Warren Buffett looking at?

There are of course a few metrics that he looks at when investing in a company:

  1. Free cash flow is the cash that the company is able to generate after paying off its bills for its assets. This is for example the cash that can be used for dividends.
  2. Return on equity is another important Buffett-metric. A high Return on equity often goes along with a high annual growth rate in earnings per share.
  3. Debt to equity is where you take the Total liabilities of the company and divide with Shareholders’ equity. This metric informs you if the company has high debt levels or if they are low risk and manageable.
  4. Net earnings to sales is where you calculate the profit figure per dollar of sales. For a manufacturing company this number is usually an indication of relative weakness and strength.

Good luck with your investments. If you want to look at value metrics of small-cap stocks you can look here.

 

 

 

The 1,2,3-method of trading

Today I want to explain in more detail what I mean by my 1,2,3-method when it comes to trading.

Blue picture of stock chart and text about the 1,2,3-method of stock trading

How come some people always seem to be able to put a cooler on their nerves and consistently make money trading?

Is it because they have special abilities that you don’t have and never will have? Or is it because they are unbelievably lucky when it comes to trading and always bet on the right horse?

No. It’s because behind successful trading there are rules that they strictly adhere to.

These rules don’t come out of the blue, and have in fact often been learned the hard way by people in the business.

It may seem easy to stick to a number of rules, but I can tell you from my own experience that it is not.

This is why I’m writing this article. So that you don’t have to make the same mistakes as I have throughout the years and can start right away being what you really want to become – a successful trader.

I call my method the 1,2,3-method.

By adhering to my rules you can completely remove the emotions that inevitably surround the business of trading and focus on identifying the right moments to enter and get out of a trade instead.

The method is modified from Quint Tatro’s trading method which he has shown to be very successful in his career.

In this post I will lay out the fundamentals of a successful trading strategy and show you how you can consistently make money in the market.

What do you need?

As a minimum you need an internet connection, a trading account and some money on that account.

The trading account does not need to be advanced. The only thing required is an account that automatically buys and sells your stock at a given price level.

How much money you have is up to you, but I would advice against trading with less than $200,000.

If you have less than that you can still trade, but it’s difficult to use the economies of scale that present themselves when you have those $200,000 in your account.

In other words, you can trade for fun with less than $200,000, but not for a living.

You then need to use software that represent the different charts that you will use as a basis for your trading.

The best free software that I have found is called FreeStockCharts.com and that allows you to customize the charts in a way that best suits you.

They also have a paid version which obviously is better, but if you are just starting out you don’t need anything else than the free version.

So what is the method really?

In essence it’s about quantifying your risk.

Let’s say that I’m prepared to lose $500 on each trade.

Then I look at the chart and identify the price level where I want to get in as well as the point where I deem my trade to be a failure.

That is where I put my stop.

I then buy exactly so many stocks that my final loss will be $500 if things go bad.

That way I know before hand how much money I will lose if things don’t turn out the way that I want.

That means that I have mentally prepared myself for a loss of $500.

It’s the equivalent of betting on the race track, because if the horse that I have bet on will not win, my money is lost.

That is one of the advantages betting on the race track has over trading the market.

1, 2, and 3

If the stock goes the other way (which it should given the odds), I take a third off the table when prices have advanced 1 x the risk.

For example, if I get in at $10.00 and my stop is at $9.00, then 1 x is at $11.00.

The second third, I take off the table at $12.00 and the final third at $13.00.

By knowing beforehand when and where I will leave the trading, I don’t have to play with my own emotions.

Trading is difficult enough as it is. Don’t let yourself be your worst enemy.

That’s it. Enjoy your trading.

This post is a follow up on my guide on how to use technical analysis in trading.

Conclusion:

Today I’ve tried to explain how I personally approach trading and I do it with a method that I call the 1,2,3-method of trading.

It’s about recognizing that you are your own biggest enemy and that you have to manage your own risk.

You do that by taking the emotion out of your trades.

First I identify where my trade is no longer regarded a success. That is where i exit.

 

 

 

 

 

 

 

 

 

 

What are the most useful money investment and saving tricks?

Today I want to answer a question about useful money investment and saving tricks.

Text about saving money against a green background

There are a couple of things that you need to think about when it comes to your personal finances:

  1. Always try to save some of your income. I know that this is not always feasible, but for an average month, you should be able to put 10 percent or more away. Try to use the Warren Buffet method of saving where he deducts the savings from the income and gets his expenses instead of deducting expenses from the income to end up with his savings. This is a better way to think about it.
  2. There are fundamental reasons why you want to invest a part of your income and try to think about those at all times. The two main reasons are that you want to earn a decent amount on your investment while keeping the principal safe.

With that out of the way we can now begin to look at the specifics.

What are some good ways to save money?

a. Don’t keep a credit card. It may be convenient to be able to buy what you want at all times, but in the end it’s not worth it because you are paying a huge premium for that luxury.

b. Instead try to attach your salary to a debit card in a savings bank. That way, each dollar, euro or rupee you spend will come directly from your savings account. This not only saves the extra fees you pay for with a credit card but also allows you to directly control your spending.

c. Increase your salary. If you feel that your earnings are too small compared to your expenses, you need to find extra income. There is no way around it. The good news is that you can do this quite easily. If, for instance, you live in a house, I can guarantee you that there’s loads of stuff just lying around. You can sell it at Ebay.

How do I best invest my money?

As I’ve mentioned here before, the best way to invest your if you are not interested in the ups and downs of the stock market is to buy an Index Fund. An Index Fund is cheap – you will only pay between 0.1 percent and 0.2 percent a year in fees – and you will always stay exposed to the market. Over time the price difference will pay off and you will become rich.

You also need to protect a portion – I would say about 10 percent – from inflation. Now the classical method of doing this is by investing in physical gold, but nowadays there are Exchange Traded Funds (ETFs) that you can buy.

However, you don’t have to buy gold, but can buy Treasury Inflation Protected Securities (TIPS) instead. The return of those are indexed to inflation so that will receive a higher return with higher inflation.

Conclusion:

Today I’ve been talking about different saving tricks by not paying for a credit card and by attaching your salary to a debit card instead. That way you will more control on your personal finances.

 

 

 

 

I have a $5M stock portfolio that generates $130k a year in dividends. How should I invest my excess?

You are young and you are already wealthy with your dividends. Congratulations.

Picture with money icon with text about 5 million dollars

It seems as though you are getting a return of 2.6 percent from the dividends which seems reasonable.

What you haven’t told us is how you got the money. Did you invest it yourself or did you inherit it?

If you invested it, then, as other people here have said, just continue what you did to get to this point.

If you inherited, you need to educate yourself a little bit.

Ways to invest

There are two major ways that you can invest your money:

  1. Stocks, where you buy a share in the profits of a company. Stock picking, the process of identifying good stocks to buy for your portfolio is both time consuming and difficult. This is not for everybody. On the other hand, if you are not interested in picking stocks yourself there is always the possibility to buy an Index Fund. Index Funds are cheap and over time this premium will pay off.
  2. Bonds, are perceived to be safer than stocks because you are certain to get a specified return from it. However that is not the whole story. If you buy bonds dear, as they are at this particular time, and you sell when rates are higher you will lose money. That is why I don’t recommend buying bonds at this time.

Index Funds

As I mentioned above, the trouble with stock picking is that it is tedious and time consuming.

Even if buy companies that seem to offer good value you will never be sure that they will advance.

That is why my advice is an Index Fund – one that buys all the stocks in the Index.

Because they are so cheap – you will only pay between 0.1 and 0.2 percent in charges a year – over time your money will grow nicely.

If you add in extra money each month and keep it for more than 20 years, you will not only get rich but also outperform most money managers.

The only downside that I can see with an Index Fund is that it is boring – you will always follow the index.

You will never be able to brag to your colleagues or neighbors about how much your portfolio has appreciated.

But that may not be so bad in the end.

TIPS

When I say that you should not buy bonds at this time there is one exception: TIPS.

TIPS are bonds that indexed to the inflation.

That way you can hedge against the possibility that money will inflate away and you will lose all your money.

My advice

My advice would then be to buy 75 percent of an Index Fund and 25 percent TIPS.

That way you will be guaranteed a certain income while at the same time being well exposed to the stock market.

Don’t worry if the market begins to go down.

It only means that your underlying stocks have become cheaper and that you can buy more for the same amount of money.

Good luck!