Will Iran Kill the Petrodollar?

By Marin Katusa, Casey Research

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran's oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn't make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods.

Click to read more ...

Hyperion Power Generation Inc. welcomes the release of the Department of Energy's Draft Funding Opportunity Announcement for Small Modular Reactors.

Administration effort will advance the next generation of clean technologies

DENVER, CO January 23, 2012 - Hyperion Power Generation Inc. (HPG) announced today that it will respond to the Department of Energy's request for comments on the recently released draft Funding Opportunity Announcement (FOA) for Small Modular Reactors.

HPG's CEO, Bob Prince, stated, "We are very encouraged by the Congress and Administration action to provide funding to support first-of-a-kind engineering, design certification and licensing of next generation reactors through a cost-shared partnership. We were very pleased that the opportunity is open not only to current LWR based reactor designs, but also to next generation reactors such as the Hyperion Power Module."

Click to read more ...

What Does A Flattening Yield Curve Mean For Gold?

In this article, we look to analyse the relationship between gold and the U.S. bond yield curve. The yield curve is an immensely useful economic indicator and hence can be used as one of the determinants of the gold price.

We have previously covered yield curve dynamics, for a refresher the following excerpt should aid in comprehension of this article.

“For those readers who may be unfamiliar with how the yield curve works, we will provide a brief explanation. Bonds of different maturities have different yields. By plotting these yields against their maturities we can build a yield curve. The yield curve becomes steeper if longer term interest rates increase relative to shorter term interest rates. The yield curve becomes flatter if longer term interest rates decrease relative to shorter term interest rates. One way to measure the steepness of the yield curve is to look at the difference between the yields at two different points on the curve. For example one may look at the difference between the yields on 2 year Treasuries compared to the yield on 5 year Treasuries. Such a comparison will often be referred to as “2s5s” and is measured in basis points (bps) by subtracting the shorter term yield from the longer term yield. So if one says “2s5s are trading at +225” this means that the yield on 5 year bonds is 2.25% higher than the yield on 2 year bonds. If 2s5s go from +225 to +275 then the yield curve has steepened between those two maturities. If 2s5s go from +225 to +175 then the yield curve has flattened between those two maturities.”

Intuitively, one would expect a flattening yield curve to be bullish for gold. Flatter yield curve = economic weakness = safe haven assets (gold) becoming more valuable, especially if such weakening in the economy is followed by monetary easing, or increased expectations of monetary easing. As with any hypothesis, this one is useless without being tested.

Click to read more ...

Don't Frack Me Up

By Marin Katusa, Casey Research

To many walking the planet, fracking has a seriously bad reputation. Thanks to hyperbole and misinformation, fracking opponents have convinced a lot of people that the operators who drill and then hydraulically fracture underground rock layers thumb their noses at and even hate the environment.

Anti-fracking claims may be twists on reality – for example, that a legislative loophole makes fracking exempt from the America's Safe Drinking Water Act, when really this federal legislation never regulated fracking because it is a state concern. Then there's the completely absurd, such as the idea that frac operators are allowed to and regularly do inject frac fluids directly into underground water supplies.

We decided to set the record straight by using facts,

Click to read more ...

Revisiting Our Proposal for an Overnight Gold Fund

In August 2010 we wrote an article entitled “Proposing An Overnight Gold Fund” in which we explored the potential for launching a fund that held long positions in gold overnight and was short gold during the day. We pointed out that “a hedge fund starting in 2001 with $100m, with the strategy of being long gold from the PM to AM fix, and short gold from the AM to PM fix...would be worth $2.16billion today, before any fees and expenses.” We have been monitoring this trading strategy since then and therefore would like to take this opportunity to update readers on its astonishing progress.

Firstly we will introduce the thinking that led us to investigate this trading strategy. There is much debate within the precious metals industry regarding the alleged suppression, or at least manipulation to an extent, by either central banks or the proprietary trading divisions of large banks, or a combination of the two.

Click to read more ...

SK Options Trading 2011 Report

Now that 2011 has drawn to a close we will take a moment to review our trades for the year. This report aims to summarise our trading strategies throughout the year, with full details given of all trades closed in 2011.

Skot 2011 Report

Subscribe for 6 months - $199

Subscribe for 12 months - $349

India: Land of Energy Opportunity

By Marin Katusa, Casey Research

Quick, what country is the economic engine that will power world growth? If you answered "China," you're far from alone. But there's another country that deserves as much attention and better yet, is much friendlier to investment: India, home to 1.2 billion people. To electrify all those houses, power the industries that keep all those people employed, and fuel the vehicles that more and more Indians own, India's energy needs are shooting skyward.

First question to consider: what kind of energy does India need? Just about every kind, really. India encompasses significant reserves of coal, oil, and gas, but each year it has to import more and more to meet its rapidly rising demand. Domestic production increases have been hampered by land disputes, interminably slow permitting, and government-regulated pricing mechanisms that discourage development.

Click to read more ...

Two Long/Short Pair Trades For 2012: DGP/GDX and GLD/TIP

By Sam Kirtley

SK Options Trading

Pair trading is a trading strategy based on the concepts of statistical arbitrage and convergence. Typically it involves being long one security and short another. For example one may believe that Apple would outperform Microsoft, so one buys Apple and shorts Microsoft. A pair trade may also involve two trading two markets that usually move close together but have drifted apart, for example the US and UK stock markets. If the FTSE has rallied strongly when the S&P has not, the trader may decide to short the FTSE and buy the S&P, taking the view than the US stock market will catch up to the performance of the UK stock market. Whilst our primary focus is on trading options, we have identified what we believe are two attractive pair trades for 2012.

Long GLD/Short TIP

The first of these pair trades is one based on convergence. Historically US real interest rates have an inverse relationship with gold prices, a relationship which we have written about frequently. The basic premise is that when monetary policy becomes more accommodative, US real interest rates decline and gold prices rise due to the ease in monetary policy. However over recent weeks gold prices have fallen but US real interest rates have remained low and this pair trade is speculating that the two will converge again.

To execute the trade we would use the gold exchange trade fund GLD and the iShares Barclays TIPS Bond Fund, although futures can be used as well. GLD tracks the price of gold and TIP tracks the price of Treasury Inflation Protected Securities. Since gold prices move inversely with real interest rates, it moves with the price of inflation protected bonds, since yield and price move in opposite directions in the bond market. This relationship is demonstrated in the chart below.

 

Click to read more ...

Changes to our Calculations of PnL on Short Spread Trades

We are going to alter the way in which we calculate the percentage return on our spread trades, where the spread involved being short one option and long another. The aim of this change is to give a fairer representation of returns.

The type of trade this affects the most is vertical spreads, where we received a net credit for placing the trade.

We will use the first trade of this type to demonstrate the differences in the methodology.

In this trade we sold a vertical put spread on GLD.

Click to read more ...

Using Options To Hedge Against a GLD Collapse

At SK Options Trading, we primarily use the SPDR gold trust (Symbol: GLD) for exposure to the gold price. GLD is an exchange traded fund, designed to track the price of one tenth of an ounce of gold. GLD currently holds around 1280 tonnes of physical bullion, the sixth largest holding in the world, preceded only by the U.S. Germany, the IMF, Italy and France. The major benefit of using an ETF such as GLD is that one can gain exposure to the gold price as easily as buying a stock and one can effectively trade gold options as easily as trading stock options.

However, some are concerned over the stability of GLD in the event of a run on the fund. This concern is mainly based on the following risks:

Click to read more ...