UBS' Hedge To The Next Leg Down In Commodities: Gold

Tyler Durden's picture


Anticipating another leg-down in commodities (and mining stocks) before sufficient stress emerges in markets to force a decisive policy response - which will create an attractive buying opportunity - UBS joins our ranks of the anti-reflexive NEW QE front-running 'small-crowd'. Laying out five clear signals that keep them cautious: Equity valuations remain well above the October 2011 lows; Positioning is short in base metals and less long in oil and gold – improving this contrarian signal; China’s policy stance is not sufficiently stimulative to trigger restocking, and we see structural declines in commodity intensity there; and, Europe and emerging markets are in the early stages of destocking, with no stocking due in the US; UBS believes that investors will buy gold and gold equities early this cycle - correctly suggesting that it is right to move just ahead of the broader investor community, and buy gold and gold equities now. Clearly, buying gold early into a downturn carries greater risks and will be volatile – consequently, they advise investors wishing to go long gold and gold equities to hold a short or underweight copper and copper equity position against it. Interestingly within industrial commodities, they also like being long oil and short copper on a 3-year view.

UBS Commodities: Signalling Caution

Our five signals (see chart above) for commodities and miners keep us cautious on the sector. We anticipate another leg-down in commodities and mining stocks before sufficient stress emerges in markets to force a decisive policy response and create an attractive buying opportunity. Our key points are set out below:

  • Valuation – Amber: We use the valuation range for BHP Plc to guide us as to when there is a compelling margin of safety to buy the sector as a whole, and for when the sector as a whole looks excessively rich. At present BHP Plc is trading around the middle of its trading range. We see a compelling margin of safety to buy the mining sector as a whole when BHP Plc is trading towards the bottom of its valuation range over the past three years, at a 40% discount to NPV. We see a 40% discount as an attractive buying opportunity for BHP and for the sector (£14.60 on the BHP plc line).
  • Positioning – Amber plus: Positioning has moved to net short of base metals, and less long oil and gold. Our proprietary flow data suggests flows out of miners over three months, implying that investors are small underweight.
  • China policy stance/inventory cycle – Amber: We have nuanced this signal. We are no longer looking at whether policy is stimulative (it is) but whether it is stimulative enough to trigger China restocking (it isn’t, in our view). China’s policy makers look set to respond to the current slow patch, and we now anticipate further boosts to infrastructure and local authority funding. But, for the first time in a decade, we see China’s policy makers pursuing only conservative stimulus, due to concerns about rebalancing, and we see the impact of stimulus as more muted than before, due to corporates’ need to destock over the coming months. Policy stimulus is not yet sufficient to trigger restocking, in our view.
  • Rest of world inventory cycle – Amber minus: The US restock is over, while the emerging markets and Europe have just started to destock. 
  • Capital flows – Red: The Fed is not printing, neither is the ECB; the US banks are just lending at home, while the European banks are deleveraging. In this environment, capital is set to continue to flow out of emerging markets. This signal remains the most important driver for the sector.

Our key call is to buy gold/sell copper on a 3-6 month view.

We believe that investors will buy gold and gold equities early this cycle. In our view it is right to move just ahead of the broader investor community, and buy gold and gold equities now. Clearly, buying gold early into a downturn carries greater risks and will be volatile – consequently, we advise investors wishing to go long gold and gold equities to hold a short or underweight copper and copper equity position against it. We anticipate positive absolute returns from both sides of the trade in the coming months, but we also expect the copper position to dampen the volatility, and raise the sharp ratio of the position.

Gold/Copper seems ready to break one way or another...

Within industrial commodities we buy oil/sell copper on 3-year view. Oil is already on its cost curve, and we anticipate supply discipline from OPEC. We expect copper to return to its cost curve, 20% lower, as the market moves into surplus in 2014. We are buyers of gold equities, which we would express through a basket of high quality names.


Source: UBS

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Wed, 07/11/2012 - 09:35 | 2605648 RobotTrader
RobotTrader's picture

S & P 500 priced in Euros is at a multi-year high.


Gold priced in Euros is near a multi-year low.

As the Euro drops, gold drops 2x faster.

Wed, 07/11/2012 - 09:38 | 2605654 Pladizow
Pladizow's picture


Simply admit you have missed a 12 year bull market!

Wed, 07/11/2012 - 10:34 | 2605908 johnQpublic
johnQpublic's picture

anyone know why i cant use my EBT card to buy gold?

Wed, 07/11/2012 - 10:58 | 2606037 moonstears
moonstears's picture


Wed, 07/11/2012 - 12:30 | 2606450 SILVERGEDDON

Robot Trader and Million Dollar Bonus are contrarian traders - probably working for a big pension fund, where pissing away people's hard earned money is easy to hide. They are the best investment advisors I have ever seen in the known universe. Just make your plays - the opposite of everything they have ever said or stand for, and you will be wildly successful !!! God bless them for every stupid bit of investment advice they have ever posted to Zero Hedge !!!

Wed, 07/11/2012 - 09:56 | 2605706 Sudden Debt
Sudden Debt's picture

Sure it is... paying 1400 euro's for a ounce isn't a "multi year low".

Look at the 5 year euro gold chart and shut up you fool!!!


Wed, 07/11/2012 - 09:51 | 2605721 OmNamah
OmNamah's picture

Indian markets broke out of its long term downward are silver and gold showing sign of bottomming out...Treasuries are showing signs of topping.....can this be possible that we have new bull market beginning now and here....i don know how...i don know why....prices are telling.... c for yourself the charts

Wed, 07/11/2012 - 10:00 | 2605751 DeadFred
DeadFred's picture

Since you aren't an idiot I assume you aren't proposing that we momo into the multiyear high and sell the multiyear low.

How good is a UBS recommendation as compared to a Goldman recommendation? Do they eat Muppets for breakfast too?

Wed, 07/11/2012 - 10:37 | 2605929 Jack Sheet
Jack Sheet's picture

Fuck off. We have had enough of this bullshit.

Sat, 07/14/2012 - 16:15 | 2616293 MeelionDollerBogus
MeelionDollerBogus's picture

robottrader wrong again ... as usual.

Dow priced in gold: still dropping

Dow priced in gold is at a multi-DECADE low.

Wed, 07/11/2012 - 09:39 | 2605660 fuu
fuu's picture

Just out of curiosity why is "copper" in the article tags but "gold" is not?

Wed, 07/11/2012 - 09:55 | 2605737 Max_Power
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While we're nit-picking, the correct possessive form of UBS is UBS's, not UBS'.

Wed, 07/11/2012 - 11:20 | 2606135 Thisson
Thisson's picture

That depends - different style guides suggest different uses.

Wed, 07/11/2012 - 09:42 | 2605675 kito
kito's picture

L ron hubbard has more credibility than ubs or any if these other know nothing bank analysts

Wed, 07/11/2012 - 09:53 | 2605729 Stoploss
Stoploss's picture

Only an "analyst" can come up with a strategy for a fiat failure.

Everything is for sale, some times one at a time, some times all at once.

Wed, 07/11/2012 - 09:42 | 2605680 lsbumblebee
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Unfortunately, regarding gold equities, Dennis Gartman agrees. But I'm still going to ignore him.

Wed, 07/11/2012 - 09:43 | 2605683 battle axe
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Gold, Guns, Ammo..........

Wed, 07/11/2012 - 09:47 | 2605702 Tao 4 the Show
Tao 4 the Show's picture

Let's see, gold probably arificially low due to manipulation and copper likely high due to economy on steroids and stockpiling by China. That would mean the triangle should have broken upwards already. With ctrl-P as a likely necessity, both may rise simply due to money dilution, but more so gold if inflation fears and solvency worries escalate. My guess: ratio will stay flat or head upwards. Problem is timing how long the can kicking will continue before reality re-asserts itself.

Wed, 07/11/2012 - 10:06 | 2605775 DeadFred
DeadFred's picture

weeks to short months. Maybe August, maybe October, maybe maybe as late as November/December. Coming soon to a market near you.

Wed, 07/11/2012 - 09:50 | 2605717 Quinvarius
Quinvarius's picture

All I can say about gold being in that wedge is..."Nobody puts baby in a corner!"

Wed, 07/11/2012 - 09:55 | 2605722 midgetrannyporn
midgetrannyporn's picture

You guys cite UBS as evidence it is time to buy gold? omg lol omg ;lol

Wed, 07/11/2012 - 10:01 | 2605753 LULZBank
LULZBank's picture

They are the largest PM dealers in Switzerland and were saved by the State in 2009 from going kaput.

Wed, 07/11/2012 - 09:56 | 2605742 disabledvet
disabledvet's picture

If I was to hazard a guess...and I do emphasize the word hazard here...I would argue we are all on the "bleeding edge" of a wave of nationalizations. Happy trading!

Wed, 07/11/2012 - 11:49 | 2606243 BigInJapan
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Yup. Especially all the Chinese mines in Canada and Australia.

Thanks for digging the holes, Fu!

Wed, 07/11/2012 - 09:59 | 2605749 AgShaman
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UBS:  "But....if you wanna buy any precious metals....we'd be happy to provide some storage solutions for you."

Wed, 07/11/2012 - 10:01 | 2605756 fonzannoon
fonzannoon's picture

Anyone notice that as corn production gets cut and their is less corn coming out of the ground prices move higher for the commodity itself and corn producers? Yet as Goldcorp cuts production estimates gold stays down and the producers get taken to the woodshed?

Wed, 07/11/2012 - 10:11 | 2605794 kito
kito's picture

gold miners ripe for nationalization.......buying the miners is fools corn producer nations, farrrrrr ahead of all other countries, are usa, which has no nationalization concerns (as far as the investing herd thinks anyway) and china, which is already nationalized.................

Wed, 07/11/2012 - 10:15 | 2605807 DeadFred
DeadFred's picture

Have you ever tried to teach a kid about some hard to explain concepts like 'infinity' or 'fair'? You don't have to because they're born understanding those ideas. It's strange because no one has ever seen either of them. Fair doesn't exist for commodities even if we somehow know it should.

Wed, 07/11/2012 - 10:07 | 2605778 orangegeek
orangegeek's picture

The elliott wave argument for Gold is bearish.


The next area of support should be around USD1350.

Wed, 07/11/2012 - 10:20 | 2605838 kito
kito's picture

l ron hubbard agrees.......................

Wed, 07/11/2012 - 17:35 | 2607848 GOLDTEETHSILVER...


Wed, 07/11/2012 - 10:19 | 2605831 MillionDollarBoner_
MillionDollarBoner_'s picture

If the US authorities want to suppress the price of gold all they have to do is create USD (via the usual Treasury & FED mechanisms) and then short gold through an ETF. This will work so long as USD are accepted as money. The same goes for any other country/currency where a central bank exists to facilitate the currency creation. It also explains why the ETF Gold balance is significantly lower versus last year when demand for physical gold is higher - there is still demand for long ETF gold but an increasingly large short ETF gold position. One might hazard a guess at who is building theis short ETF Gold...anyone want to take a shot?  

So, until USD and other fiats are no longer accepted as money, gold cannot take off. Understand this and you understand why gold is as "cheap" as it is in spite of the continuing decline of USD and other fiats. Also why some prominent analysts and commentators hold that gold can only be a good investment "in extremis" - at which point it will probably be declared illegal for private holders/trading.

Having said all this I do hold a percentage of my investable funds in PMs and I do own a small sailing boat.

Wed, 07/11/2012 - 10:37 | 2605900 TrillionDollarBoner
TrillionDollarBoner's picture

My boner is bigger than yours...

Wed, 07/11/2012 - 11:19 | 2606133 s2man
s2man's picture

In other words, BTFD.  Thanks UBS.

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