Great Platinum Debate: Can R12 500 per month be justified?

 South Africa is the world’s largest producer of platinum and up until some years ago was the world’s largest gold producer. Both these precious metals have staked their claim as strategic resources in generating foreign revenues to aid an ailing current account deficit.

However on the 23^rd January 2014, members of the union AMCU (Association of Mineworkers & Construction Workers Union) downed tools and went on strike demanding a basic minimum wage of R12 500 per month. Since then no resolution has been made leaving many, in what’s dubbed the platinum belt of South Africa, in dire straits.

As traders our job is to seek out opportunities where they are present and an event such as this strike some would hope it would provide impetus to the platinum price breaking higher. However many traders have been left red faced with the lack of any direction taking shape in the past 4 months.

On the chart below we can see that the price has been oscillating between the levels of $1490 and $1400. One would think given the fact that the 3 largest platinum producers have been severely affected in this strike it would create a shortage and thus drive the price higher. This is not the case.

The price of platinum has in fact been directionless since October last year. Platinum, which is used in cars catalytic convertors to prevent harmful emissions entering the atmosphere, is very reliant on the production on motor vehicle manufacturing.   

Although much has been said about the recovery of the United States economy a lot is left to be desired. Not much is expected to come from Europe as their growth is slowly grinding forward and who can forget the “sleeping giant” China who is currently facing a risk of a much deeper slow down than had been previously thought.  

The chart above illustrates the price of platinum over the last year on a daily basis. I have used 3 different coloured lines to highlight specific periods which I thought could provide useful in unpacking the price action and maybe suggest the direction we could see. I’ll explain each one further.

The black line highlights a longer term range which has been in place since October 2013. Through November and December 2013 the price laid outside which we can conclude was a false break as the price crept back into the range in the beginning of 2014. 

The resistance comes in at $1490 and support at $1380, a break in either direction would lead to a price higher or lower but as we can see towards the end of last year the price did sit outside the range only to creep back in.  These are the foundations of the range.

The red line represents the beginning of 2014 and all the price action to the right of the line would represent the days which have pasted so far. This I believed to be important because the price has bounced back and forth between the mentioned support and resistance without breaking as happened to the left of the red line.

The lime green line is a shorter term range which would correctly represent the period from where the strike has been in place.  The range is slightly smaller than the longer term range but the resistance still bumps up against $1490.

This analysis points to one fact, the price of platinum seems to be tracking sideways which would suggest the strike has had no sympathy for the strikers and more relief for the producers. If the world economy was growing at a pace we had seen pre-financial crisis, maybe we would have seen a spike in price but we haven’t, this would suggest that the recovery we are experiencing is much worse than politicians are proclaiming.

It would also suggest that although the 3 largest producers are affected other companies in the sector are still producing enough quantity to be able to hold the price back from any move higher. We could deduce that the platinum industry could be in much more trouble than a wage increase.

With this being said in my opinion it would be a bad move for AMCU to carry on with this strike. The timing of its strike couldn’t have been worse and right now they could be in a very compromising position where they are going to let down a lot of hopeful people who have support this campaign for 4 months with no pay.   They seriously are running the risk of becoming the big bad wolf.

The platinum producers are aware of these risks to the industry but will continue to prolong this strike. They would rather be in a position where they consume no expense, exhaust their stockpiles and pay no workers to artificially inflate the price of platinum.  

Government intervention has been as efficient as loosening a nut with a screw driver.  One possible reason could be the ANC‘s alliance with Cosatu, the monopoly union before AMCU came on to the scene. The government would want to ensure that the power of Cosatu is returned to where it once was and by ignoring the interruption and dire situation they are able to portray AMCU in an unfavourable light.

The government is risking the well-being of the South African economy at the expense of all its citizens for their own political gain. Only recently Stats SA announced a contraction in the economy quarter on quarter.

One only has to look back a few years ago where the gold mining industry was subjected to the similar demands by workers and subsequently led South Africa to slipping in its place as the top producer.

Gold was once an important resource to leverage the country forward and we see that platinum has taken its place. What’s most concerning is that the same is now happening in the platinum sector and if all parties cannot come to the negotiating table and iron out the problems we could be seeing an end of an era in the mining industry where it’s prominence holds no importance.

 An industry in which a large number of people are employed, an industry where pockets of value lie untapped and an industry which keeps an economy alive.

  If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Following Proper Risk Management Techniques Ensures Long Term Profitability

Risk Disclaimers; the irritating fine print we suppose to read to understand the full extent of the risk we undertake but choose not to read because the words are too small and plus who reads that drivel anyway.

I consider myself quite lucky in that regard. Although I do read through all the fine print I must admit that electing to study a risk management module in varsity is definitely paying off. First question posed to me; what is a risk?

According to BusinessDictionary.com risk is defined as:

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through pre-emptive action.

Read more: http://www.businessdictionary.com/definition/risk.html#ixzz32Xf6sBJJ

The above definition is quite broad but the concept is the same when it comes to financial risk that something which may or may not be in our control can have a negative impact on the return we expect to obtain.  

When it comes to trading we know it’s a game of probabilities, if any trader tells you they have a 100% record of winning trades either his lying or his trying to sell you something. In trading there is always a chance that something might go wrong, however we can take pre-emptive action, it’s called a stop-loss, your insurance policy against rotten apples.

It’s one of those topics in trading which some are thankful that they had them in place and others regretting the larger losses they had to incur because they didn't place one.

I’ve found that one of the best ways to create consistency in your trading is to actively manage risk. There has to be a maximum threshold you are prepared to lose in any given trade. One of the well-known risk management techniques is the 2% rule. It states that the trader will not risk more than 2% of his capital in any one trade. That would suggest that you would have to lose 50 trades in a row in order to wipe out your entire capital which is close to impossible.  

This technique can be quite beneficial to the new trader as there are always going to be bumps along the way. I’ve said many times in my posts that trading is not simply funding an account and begin trading; it requires a great deal of skill and an understanding of what works. In order for a trader to do this he needs to have a set of beliefs to which he subscribes to.

 What were your first beliefs when you started trading? Most new traders are led to believe that trading is a great way to secure you a passive income without breaking a sweat. Wrong. Trading like anything else is a skill which is built throughout a process in which you have to participate in order to learn. How can you expect yourself to build a set of beliefs if you aren’t willing to invest time or money?

Beliefs are built over many trades and a lengthy period of time, which is why it is important to manage your risk effectively as possible. The above definition spoke about external and internal vulnerabilities.

Think about external forces you were unaware of when you first started trading like economic data or a war breaking out. What about internal forces like rookie mistakes, not obeying the rules or allowing your emotions to control your trades.

All these things add up and if you aren’t using the proper risk management tools then chances are you not reaching the desired goal you looking for.

Flip a coin and call head or tails. Chances are 50% of the time you’ll be right and 50% you’ll be wrong. So it’s the same in trading, two sides to a trade a buy or a sell. This would suggest that if you applied the same idea to a trade you would be able to get half your trades right.

But if you had half right and the other half wrong and gained and lost the same amount of money there would be no use to trading. However trading does allow us to gain more than what we lose if we have an edge. But how do we build an edge? By applying our beliefs to our trading process which allows us to either land more wins than losses or return a larger ratio on our winners than we have on our losers.

Going back to what I have said previously, in order for us to build our beliefs we need time and skill, these two factors allow us to build an edge over time which in the long term will make our trading a profitable entity.

I like to think of it like this; my initial capital invest is merely the school fees required to obtain my skills, the losses I incur can be put down to mistakes and my wins can be put down to doing something right. As time goes by losses begin to feel less of a mistake and more of a realism that the edge has moved out of my favour.

If I had to lose 10 trades and win 10 trades netting zero gains or losses I wouldn’t consider that a failure but merely an achievement to the amount of skill that I have built over time and as more time goes by my confidence increases to a level where I will start gaining and building my account.

Trading is about how long you can stay in the game, not how much money you can make in a single day.  Remaining prudent in my stop-losses will ensure that if I do make a mistake it won’t cost me much, my wins will cover most of my losses and at the same time open up the possibilities of beliefs that are needed to build a strong and sustainable trading plan.

In those early stages of your trading business don’t be too harsh on yourself if you haven’t gain much monetarily but rather assess your performance on how well you were able to execute your trades, obey your rules and find new beliefs that will lay the foundation to a profitable business.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Going the Extra Mile

Recently my sister completed the Loskop ultra-marathon after months of gruelling training and grit determination. I know for one the hours of dedication taken to reach such a tremendous feat. On occasion I would go for an early morning jog for moral support but quite surprisingly learnt more about the power of my mind than  I had expected.

As with anything in life, when we start something new we often head into it with much vigour. My first jog around the block was quite an eventful one. My sister kept teasing that I wouldn’t be able to clear 5km in 30 minutes. Determined to prove her wrong I set about my quest, only to be stopped by my pure exhaustion on the 3km mark.

Defeated and deflated I conceded that my fitness levels were not what they were once before, but I was dead set on figuring out the science of running and how a person were able to push their body through many kilometres of tarmac.

 If you’ve ever watched the Comrade’s Marathon you’ll know the admiration you have for the guy who crosses the line in under 6 hours. To put that into context that’s roughly 15km/h non-stop for 6 hours. I couldn’t clear 3km in 15 minutes let alone run 15km in one hour. But take note that we always benchmark ourselves against the best. We don’t really pay attention to the other thousands of runners who complete the same race just in a longer time.

When you run distance you not going start the race running at a pace of 100 metre sprinter, I guarantee you that you won’t have any energy left for the next 10km. Slow and steady wins the race.  

These were the first lessons my sister taught me on our first jogging expedition. We started small distances so I could gain my fitness then slowly started progressing 1km at a time. I reached 5km within a month and only managed 42 minutes, but it didn’t matter to me, I was proud of the fact that I was able to complete the distance without being exhausted.

After a few months of doing it over and over again I decide to get adventurous and try for distance longer than 5km. This is where you learn the most about running. We would run an 8km route but I quickly noticed that the route wasn’t so straight forward as the 5km one I had been training in. The elevation you run on begins to change at certain points and you would need to adjust for that.

You would have slightly inclined straights but you needed to preserve your energy because there were long uphills requiring you to use your thigh muscles more than your calves to power yourself forward.  You'd reach the end of the uphill and would need to slow yourself down so that you don’t overspend your energy and be able to reach the finish line.

I remember when my sister got her race map and she began planning for the race; she knew what she was going to be up against and planned accordingly.  In the weeks leading up to the race she focused on the areas of her running she felt would be needed.

 Let’s imagine for a minute our trading is like a marathon, the energy we spend is the capital we risk and the route we run is the market conditions we face. If we overdo too much we lose all our capital, if we don’t adjust our trading strategy to accommodate market conditions we face a serious problem of using the wrong methods in the wrong environment.

Take a good example of the public holidays we’ve just had over the last 3 weeks. The lack of volumes together with the stop and start motions made it extremely difficult to trade with not much direction. It gets to a point when you feel frustrated and eventually force the trade.

Now imagine that scenario in a 50 km race, you hit the 25 km mark and you just about feel fed up and decide the rest of the way you’ll just run your heart and soul out and it’ll get you to the end. Unfortunately it will be short lived. If you fail to plan, you are planning to fail.

Most of us start trading with the idea of finishing the comrade’s marathon in gold medal positions. I’m sure most of you will agree that would be a great achievement but in reality it’s not attainable. The game of trading is not about how rich you get quickly but more so accumulating over a longer period of time.

The truth is most traders never make it to the finish line, they’ve either spent all their energy or they just couldn’t master the realities of a changing market. If you want to make it to be a consistent trader, you have to plan your race, know every bend and uphill you going to face and lastly having the control to keep your mind in check because without it that finish line just gets further and further away.

One last thing, when you imagine yourself as a trader, instead of thinking of yourself as Usain Bolt dashing to the 100 metre finish line, rather think of yourself as the great Comrade’s Marathon runner Alan Robb who recently finished his 40^th Comrade’s.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR