Investment system and views on cyclical gold and copper
Shared by: Run Ge, Dawan Exchange Rate Investment Club
1, Stock selection system
Let’s talk about the stock selection system again, first of all, Porter’s five forces analysis. Any industry must conduct an analysis of Porter's five forces. Porter's five forces were proposed by Michael Porter in the 1990s to effectively analyze the customer's competitive environment. These five forces are the bargaining power of suppliers and the bargaining power of buyers. , the ability of potential competitors to enter, the substitution ability of substitutes, and the existing competitiveness of industry competitors; although some companies’ financial statement data are very beautiful, through Porter’s five forces analysis, you will see their shortcomings, such as Speaking of Focus Media, if you do Porter's Five Forces, you will find that the entry ability of potential competitors and the substitution ability of substitutes are immeasurable. The same is true for high-tech companies. You can't predict how strong the substitution ability of its substitutes will be, so I think we need to do this analysis first.
The first thing to look at is the growth of profits. We need to look at historical ROE, the growth rate of insurance intrinsic value, the certainty of profit growth, and the sustainability of profit growth. Choose a company that does not change with the times, rather than a company that changes the times.
In addition, there is valuation analysis. Sun Tzu's Art of War said that those who are good at fighting will first become invincible. People who are good at stock trading must first avoid losses before they can maintain profits. Defeat before fighting, and defeat beautifully to ensure your invincibility. Therefore, when choosing a stock, you must first look at where the bottom of the stock is. The valuation must be low enough and the purchase price must be cheap to ensure that you do not lose money. However, different valuation methods in different industries must be treated differently. Just like when Sunac participated in the acquisition of LeTV for 516.8 billion, its market value was only 25 billion and sales were 150 billion. It was obviously underestimated.
2. Sharing of cyclical gold investments
The above investment strategies are not suitable for cyclical stocks such as mining stocks. Therefore, I will use Zijin Mining as a representative to talk about mining stock investments that few people know about. Mining is a cyclical industry. Zijin Mining 's main products are gold and copper, and its operating income is about 50% gold and 30% copper. Let me first talk about some reasons why I am optimistic about gold.
Zhou Jintao 's "Oscillation Cycle Theory" writes that gold prices can be seen as the opposite of economic growth. Gold assets starting from the economic recession period enter a long-term bull market and obtain excess returns within 5 to 10 years of the depression period. During periods of economic recovery and prosperity, gold's yields tend to decline. When the economic system is operating normally, gold pricing is relatively stable. However, when the global economic system reaches a specific stage and credit currency is greatly turbulent, the price of gold ushered in a super market under the credit currency hedging attribute. The price system Turbulence is an important source of economic recession and an important force stimulating gold prices.
Everyone knows that the U.S. dollar is the world’s currency, and an important part of supporting the U.S. dollar is the petrodollar. Since the 2020 epidemic, the Federal Reserve has begun printing unlimited amounts of money, and the low oil prices have all had an impact on the stability of the U.S. dollar system, which is inevitable It will bring about the depreciation of the US dollar and increase the instability of the US dollar.
US dollar index shows cyclical characteristics. The appreciation cycle is 5 to 10 years, and the depreciation cycle is 9 to 10 years. From 1971 to 1980, it is a depreciation cycle, from 1980 to 1985, it is an appreciation cycle, and from 1985 to 1995, it is a depreciation cycle. cycle. In the middle, the Plaza Accord between Japan and the United States occurred in 1985. From 1985 to 1990, the Japanese bubble economy expanded and burst. From 1995 to 2002, it was an appreciation cycle. In the middle, the Southeast Asian crisis ushered in. The period from 2002 to 2010 was a depreciation cycle. In between, there was the bull market of Hong Kong stocks from 2002 to 2007 and the bull market of A shares from 2006 to 2007.
htmlThe period from 2012 to 2020 was an appreciation cycle, during which we ushered in the currency crises of Argentina , South Africa, Turkey , including Russia. In 2020, it entered a depreciation cycle again. The year 2011 was the end of the US dollar depreciation cycle, and it was also a phased high in gold prices, reaching about 1,920 US dollars. It has not broken through so far.As shown below, the US dollar index has shown a long-term downward trend since 1973. The lowest US dollar index was 85 in 1980, and the highest was 167 in 1985. In 1995, the lowest US dollar index was 80, and the highest US dollar index was 121 in 2000.The lowest US dollar index in 2011 was 72.7. In 2020, the highest US dollar index was 102. The low of each US dollar depreciation cycle was lower than the previous low, and the high of each appreciation cycle was higher than the previous high. point, so it can be expected that the U.S. dollar low in this round of U.S. dollar depreciation cycle will be lower than the last low of 72.7.
According to the previous model, Wall Street needs to export US dollars to the world, allowing the world to bear the losses of the US economy, while forcing the currencies of emerging countries to appreciate, and then the US dollar index will decline. In 1986, it suppressed the appreciation of the Japanese yen and the German mark. From 2003 to 2007, it suppressed the appreciation of the BRIC countries. The Federal Reserve began unlimited money printing mode in 2020, oil prices began to fall, and everyone suspected that the global economy had entered a depression, and then central banks of various countries collectively began to In the money printing mode, I think the decline in the U.S. dollar index, which was initially expected, will definitely put pressure on the RMB, including the appreciation of other currencies.
In this depreciation cycle, the low of the US dollar will definitely be lower than 72.7. From 1971 to 1980, gold decoupled from the US dollar, and the base price rose from 35 to 850. From 2002 to 2011, the US dollar index went from 121 points to 72.7, and then the gold price rose from 121 to 72.7. 257 rose to 1923, Therefore, judging from historical experience, gold will have to rise another 450% to match the growth rate of the gold bull market from 2002 to 2011.
Let’s talk about the supply and demand of gold mines. Needless to say about demand, the internationalization of the RMB. China and many oil-producing countries use RMB to trade crude oil. Then these countries can buy gold at the Shanghai Gold Exchange with the RMB. This is the current situation. a need. The price response to supplying it is very slow. The cycle from mineral product development to gold mine production is very long. It takes decades from the beginning of exploration to production. On average, a mine requires 10 to 20 years of preparation time before it can produce gold for refining. ore.
among them Zijin Mining I remember that we started prospecting and excavation in Zijin Mountain in the 1960s, and it was not until 1987 that gold began to be produced, which took nearly 30 years.
According to S&P Global Intelligence statistics, the period from 2010 to 2019 was a period when relatively few gold mines were discovered because gold mines entered a period of low prices. The Global Discovery Report lists 278 deposits with gold reserves of more than 220 ounces discovered around the world since 1990. Among them, only 25 were discovered in the past ten years, with resources of only 150 million ounces, accounting for only 7 of the gold mines developed before 1990. %. That is Newly discovered gold deposits in the past ten years account for 7% of the reserves in the past 30 years. I am bullish on gold prices in 5 to 10 years.
would like to add that the US dollar depreciated from 1985 to 1995, but gold did not increase much. Because gold is not only related to the US dollar, but also to risk events and economic depression. There was a long-term economic depression from 1971 to 1980, and there was the Bin Laden incident from 2002 to 2011. From 1985 to 1995, the economy was good and there were no risk events, so the price of gold could not rise. Compared with historical periods, there have been both COVID-19 risk events and economic depression events in the past 20 years. There is reason for gold to rise.
Let’s talk about copper again. McKinsey Global Research reports that by 2035, the demand for copper is expected to increase to 31 million tons. The current basic consumption is 22 million tons, an increase of 43% from now, because he believes that copper will play an important role in the new green economy. play an irreversible transformation, such as the change from gasoline or diesel vehicles to electric vehicles and hybrid vehicles. The International Energy Agency predicts that electric vehicle sales will triple in the next decade, from 5.1 million units in 2018 to 23 million units in 2030. It is estimated that the mining industry will need to produce 5 million tons of copper per month by 2030 to meet the demand for electric vehicles. This is approximately 3.1 times the monthly production of global copper mines in 2019. However, I think this data is a bit exaggerated, but electric vehicles, including charging piles, and distributed new energy sources, require more copper than before.
The biggest problem in terms of supply is that existing copper mines cannot guarantee the supply of so many products. As we all know, from 2011 to the period of commodity recession, global exploration expenses have been greatly reduced, so in the past ten years, we have been resting on our laurels and consuming the past. The reserves of some large copper mines are decreasing, and some mining operations have to move from open pit mines to underground, and they have to reduce production.
Take the world's largest (supplier) country Chile as an example. Chile supplies 30% of the world's copper. Chile's copper grade has dropped by 25% in the past decade, resulting in a decrease in global ores. The world's largest copper mine BHP Billiton Escondida Copper mines have switched from open-pit mining to underground mining. Exports fell by 85% last year. This giant copper mine in Chile is not expected to resume full production until 2020.
Grasberg in Indonesia is the second largest copper mine in the world. All high-grade ores have been mined and now it has entered the underground mining stage. The cost of underground development has increased significantly, and the existing deposits are being exhausted. , the service life is about to end. The mining downturn from 2012 to 2016 resulted in very little funding for new exploration, including greenfield exploration of copper deposits, so when trade barriers are resolved and the epidemic is brought under control, copper deposits may see a rise.
I guess one month (later), that is, when the epidemic in the northern hemisphere is under control in the summer, and when winter begins in the southern hemisphere , because the main copper mines are produced in the southern hemisphere, when winter begins in the south, the epidemic is out of control in the southern hemisphere. will lead to insufficient production capacity in the southern hemisphere , and strong demand in the northern hemisphere will lead to rising copper mines, so we are optimistic about gold and copper . The fourth largest copper mine in the world is Kamoa in the Democratic Republic of the Congo, which is the only unmined mine in the world. High-grade copper mine, Zijin Mining accounts for half of his equity , which is why I am optimistic about Zijin Mining .
3. The impact of the U.S. dollar depreciation cycle
In the last U.S. dollar depreciation cycle, U.S. dollars flowed out of Wall Street and into global emerging markets. Wall Street turned from a sea of global funds to global financial support. The inflow of funds into emerging markets drove the prosperity of emerging markets. , which used to be the BRICS countries. According to past models, Wall Street needs to export dollars to the world. Let the world bear the economic losses of the United States, coupled with currency appreciation, the dollar index fell, 1986 was the Plaza Accord, and 2003 was the bull market of Hong Kong stocks from 03 to 2007.
A shares also had a bull market from 2005 to 2007. Foreign investors also made a lot of money by investing in the four major banks and other state-owned banks. At the same time, the problem of technical bankruptcy of state-owned banks was solved. From 2002 to 2007, the Hang Seng Index rose from 8331 to 31958. At this point, the transaction volume increased from 441 billion in 2002 to 21.39 trillion in 2007, a 48-fold increase in transaction volume, and the current transaction volume in 2019 is only 13% of that in 2007. During the U.S. dollar depreciation cycle, the RMB faces appreciation pressure, which brings opportunities for revaluation of RMB assets. Smell-sensitive funds should have already made arrangements to enter in advance.
People who are currently pouring into China may first choose stocks. Then the years of stock market downturn are expected to end, and then with the opportunity brought by the appreciation of the renminbi, it may bring about a bull market. Everyone should seize this opportunity. thank you all.
Q&A session:
Q1: Let me ask Brother Run a question. Can you please tell me about an investment case in which you applied your investment principles? For example, how do you do contrarian investing? How to be absolutely rational? What are the methods and techniques?
A1: The principles were revised bit by bit. There were not so many principles at the beginning. At the beginning, I pursued a low valuation and invested in Sunac when the market value of Sunac was more than 20 billion. Reverse investment was to buy China Taiping for HKD 14 in 2016 and sell it for HKD 30 in 2018.
I find it difficult to be absolutely rational. I am a person who is prone to depression and anxiety for a long time, and it is not easy to be absolutely rational. I can only say that I should let my emotions not interfere with my judgment, and not judge based on feelings. Make some judgments based on some data. The method is to go against everyone and use the public as a reference, because the public's choice is definitely wrong. Everyone says that this is not a good time to invest, but maybe this is a good time.
Q2: What factors determine the depreciation cycle of the US dollar?
Ａ2: The cycle is based on the law of history. I don’t know why there is such a cycle, and I don’t know why there is such a law. But this cycle does exist.In 2019, I felt that it was time for the U.S. dollar to depreciate. One issue that reminded me at that time was the inversion between the long-term U.S. Treasury bonds and the short-term Treasury bonds. At that time, the U.S. dollar was in an interest rate hike cycle, and only a rate cut could solve the inversion problem. So I thought that in the second half of 2019 or 2020, the U.S. dollar should enter a depreciation cycle.
Q3: I have a question, is there any situation where the US dollar and gold rise or fall at the same time? Thank you!
A3: Yes, from 2016 to 2019, the US dollar and gold rose at the same time.
Q4: The inversion of long-term and short-term government bond interest rates is an observation point. What other observation points do you have to observe this cycle?
Ａ４: To be honest, I didn’t pay much attention to cyclical stocks before 2019. It was only when the treasury bond interest rate inverted in 2019 that I realized this was a possibility.
should say that sometimes the U.S. dollar depreciation cycle feels like an event-driven one. For example, in 1971, the U.S. dollar was no longer linked to gold. This was an event-driven depreciation. The 9/11 incident happened in 2002. When 9/11 happened, the US dollar began to depreciate. After Bin Laden was killed, the depreciation cycle of the US dollar ended, and then it started to appreciate again. I think this is also very interesting.
html What happened in 2019 that triggered my observation? It seems that the struggle between the Democratic Party and the Republican Party in the United States seems to have crossed the bottom line, which makes me feel that there is something. Unexpectedly, the real trigger was the COVID-19 incident.added:
Fengyun: Zhang Huaqiao’s explanation is also very good. See below.
Brother Run:
One type of control that the US military has over the global ocean is sea control. There are also the three major financial institutions led by the United States, the World Bank, the International Monetary Organization, and the Organization for International Settlements, which determine that the US dollar is the world currency, including the United States and oil. The US dollar is the settlement currency signed by the exporting country.
Let’s talk about U.S. dollar reserves, either U.S. dollar reserves or gold reserves. This is very important for the stability of the national currency system, such as the 1998 financial crisis, the Mexican financial crisis, including the Turkish currency crisis between 2013 and 2019, and the Russian currency crisis. In a currency crisis, if their foreign exchange reserves are insufficient, there will be a risk of their own currency being shorted by international speculators.
However, euros, yen, and pounds sterling are freely convertible, which makes the exchange rate unstable. The advantage is that they enjoy a higher degree of internationalization.
Q5: Brother Run, what do you think of the future investment opportunities in gold and base metals? Inflation is driving long-term strength in gold prices, and I'm a little less confident in the base metal.
Ａ5: Gold and basic metals should be viewed separately, because gold is a preparation for risks and a hedge against prosperity. The worse the economy, the more important gold will be. Most basic metals still have industrial uses, so the trends of basic metals and gold are still different. The reason why we are optimistic about copper is that copper will be needed in greater quantities in the new energy era.
Gold is equivalent to the hedge of credit currency. How can inflation not occur if everyone prints money? I think inflation will definitely come, and gold will also rise.
For basic metals, it still depends on the demand of the industry. The economic recovery of this industry will be how to praise this aspect.
Q6: Let me ask Brother Run, the most difficult thing in the cyclical industry is to judge the cycle. For example, in 2007, the Shanghai Composite Index reached 6,000 points, and CITIC Securities rose many times. Then the Shanghai Composite Index will definitely exceed 6,000 points in the future, so investing in securities companies means making a lot of money in the future. So many years have passed. Since 2008, investing in securities companies has not made any money, except for the increase in 2014-15. How to ensure the accuracy of judgment?
Ａ6: Looking for deterministic opportunities. For example, the U.S. dollar cycle is a relatively certain cycle.
Q7: Brother Run, what do you think of Silver?
Ａ7： I have never studied silver. Last year, based on the silver-gold ratio reaching a ten-year low, some people thought it was time to invest in silver, but they didn’t make any money later.
Base metals have industrial uses and benefit from currency depreciation and economic prosperity. Gold benefits from economic depression and currency devaluation.
additional explanation:
Qi Helong: Silver does not benefit much from monetary expansion. Among precious metals, only gold has a strong monetary effect.
Xiaokai2013: Silver and platinum have stronger industrial properties. Gold has monetary attributes
