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Nickel Trading: 3 Reasons To Invest In The Precious Metal (But Beware The Risks)
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Last Updated on August 16, 2020
Why is Nickel Valuable?
Nickel is a solid, lustrous, silvery-white metallic element that is strong, ductile, magnetic and resistant to corrosion. It also has a high melting point and catalytic properties.
These favorable traits make nickel one of the most widely used industrial metals on earth.
The earliest references to nickel date back to Chinese writings in 1500 BC. However, it wasn’t until 1751 that Swedish chemist Baron Axel Fredrik Cronstedt formally isolated and named the element.
Electron Shell of Nickel via Wikimedia
By the late 1800s, iron and steel manufacturers discovered they could strengthen traditional steel by creating alloys with nickel.
Discovery of new ore deposits in the early 20th century combined with strong demand for steel during World War I and World War II ushered in the modern nickel production industry.
Today mines worldwide extract more than 2.25 million tons of nickel annually.
In addition, recycling efforts account for additional supplies of the metal.
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Over 300,000 products in the consumer, industrial, military, transport, aerospace, marine and architectural sectors use nickel. As a result, nickel has become an essential commodity in world markets.
How Is Nickel Produced?
The supply of nickel derives from two sources: primary production (mining) and secondary production (recycling).
Nickel Rim South Mine via Wikimedia
Mining provides most of the supply, although the United States Geological Survey (USGS) estimates the quantity recovered from recycling in the United States represented 43% of total consumption.
Nickel derives primarily from two types of ores, sulfidic and lateritic. Each type has specific characteristics related to how it is mined:
Sulfidc and Lateritic Ore
|Ore Bodies||Pentlandite, pyrrhotite, and millerite||Limonite and garnierite|
|Characteristics||Usually found with copper-bearing ores||Ores contain iron|
|Nickel Content||About 1%||About 4%|
|Geographical Location||Mostly in the Canadian Shield and Siberia||Tropical regions such as New Caledonia|
|Deposit Location||Deposits are generally found deep underground.||Deposits are generally found in varying depths just below the surface.|
|Mining Method||Miners sink vertical shafts into the ground and drive horizontal tunnels into the ore.||Large equipment excavates the earth and removes the ore bodies.|
|Cost of Mining||Labor-intensive and expensive to extract||Less expensive since mining occurs at the surface.|
Processing the ores and separating nickel from them also varies depending on the ore type.
Although sulfidic ores are more expensive to mine, separating the nickel from these ores is cheaper than extracting nickel from lateritic deposits. Additionally, sulfidic ores generally contain other valuable minerals that can be extracted during nickel production.
Nickel Extraction Diagram via Wikimedia
Sulfidic Ore Processing
Separating nickel from sulfidic ores takes place using froth flotation tanks and magnetic processes. These produce two products – nickel matte and nickel oxide. These intermediate products contain between 40 and 70% nickel, but each requires further refining.
Further processing of nickel matte occurs using the Sherritt-Gordon process. With this technique, hydrogen sulfide is added to the molten material to remove copper. This leaves a concentrate of only cobalt and nickel. Solvent are then used to extract cobalt. This leaves a final product with a nickel concentration of more than 99%.
Further processing of nickel oxide occurs using the Mond process. With this technique, nickel reacts with carbon monoxide at temperatures of between 100 and 175 degrees Fahrenheit to produce nickel carbonyl.
At this point, chemists obtain purer nickel from the nickel carbonyl through one of two processes:
- Nickel carbonyl passes through high-temperature chambers that decompose it into pure nickel.
- Nickel carbonyl passes through smaller chambers that circulate the material at temperatures of about 450 degrees Fahrenheit. This creates a fine, pure nickel powder.
Lateritic Ore Processing
The high iron content of lateritic ores makes smelting the preferred method of nickel extraction. Lateritic ores have high moisture content that requires drying the ores in kiln furnaces.
These kiln furnaces produce nickel oxide from the lateritic ores. At this stage, electric furnaces heat the nickel oxide at temperatures between 2,480 and 2,930 degrees Fahrenheit and produce Class 1 nickel metal and nickel sulfate.
Flash Smelting Nickel Furnace Illustration via Wikipedia
The natural iron content of lateritic ores usually creates a final product after smelting that is ferro-nickel (a combination of iron and nickel). Steel producers can remove impurities such as silicon, carbon and phosphorous from this combination and produce strong steel alloys.
Very little nickel is recycled to its original elemental state. Instead, scrap products are often recycled into economically valuable materials containing nickel.
For example, it is generally not economically feasible to extract the nickel from scrap stainless steel products. However, recycling these products allows manufacturers to create new stainless steel products that contain nickel.
The Philippines is the largest nickel mining country in the world. However, no single country dominates in production of the metal. Mining takes place in a variety of geographies and countries:
How Falling Stock Prices Can Make You Rich
When buying stocks, falling market prices are your friend
Falling stock prices cause panic in some investors, but fluctuations in the market represent business as usual. Investors who are comfortable with this reality know how to respond to falling prices and how to recognize assets that are good buys when stock prices are dropping.
Ignoring Your Instincts
Human nature is to follow the crowd, and investors in the stock market are no different. If prices are going up, the kneejerk reaction might be to hurry up and buy before prices get too high. However, this often means that you’re rushing to buy a stock for, say, $50 today that you could have purchased for $45 yesterday. When thinking about it that way, the purchase seems less attractive.
The opposite also is true. If prices are falling, people often rush to get out before prices fall too far. Again, this might mean that you’re selling a stock for $45 that was valued at $50 yesterday. That’s no way to make money, either.
While specific events or circumstances can cause stocks to spike or plummet and force investors to take quick action, the more common reality is that day-to-day fluctuations—even the ones that seem extreme—are just part of longer trends.
If you’re in the market primarily to build your nest egg, the best course of action almost always is to do nothing and let the long-term growth take place. If you’re trying to quickly build the value of your business or your portfolio, though, seeing other people in a rush to sell a falling stock might be your cue to jump in against the current and buy. Consider how that can work for you.
3 Ways to Make a Profit From Investing
When you buy a stock, you are purchasing a small portion of a company. Profit from such a purchase comes from three different sources:
- Cash dividends and share repurchases. These represent a portion of the underlying profit that management has decided to return to the owners.
- Growth in the underlying business operations, often facilitated by reinvesting earnings into capital expenditures or infusing debt or equity capital.
- Revaluation resulting in a change in the multiple Wall Street is willing to pay for every $1 in earnings.
Imagine that you are the CEO and controlling shareholder of a community bank called Phantom Financial Group (PFG). You generate profits of $5 million per year, and the business is divided into 1.25 million shares of stock outstanding, entitling each of those shares to $4 of that profit ($5 million divided by 1.25 million shares is $4 earnings per share).
If the stock price for PFG is $60 per share, that results in a price-to-earnings ratio of 15. That is, for every $1 in profit, investors seem to be willing to pay $15 ($60 divided by $4 gives us a p/e ratio of 15). The inverse, known as the earnings yield, is 6.67% (take $1 and divide it by the p/e ratio of 15 to give us 6.67). In practical terms, you would earn 6.67% on your money before paying taxes on any dividends that you’d receive even if the business never grew.
Whether that return is attractive depends on the interest rate of a U.S. Treasury bond, which is considered the “risk-free” rate. If the 30-year Treasury yields 6%, you’d be earning only 0.67% more income for a stock that has lots of risks versus a bond with virtually none.
However, PFG management is probably going to wake up every day and show up to the office to figure out how to grow profits. That $5 million in net income that your company generates each year might be used to expand operations by building new branches, purchasing rival banks, hiring more tellers to improve customer service, or running advertising on television.
If $2 million is reinvested in the business, that could raise profits by $400,000 so that next year, they would come in at $5.4 million—a growth rate of 8% for the company as a whole.
Another $1.5 million paid out as cash dividends would amount to $1.50 per share. So, if you owned 100 shares, for instance, you would receive $150 in the mail.
The remaining $1.5 million could be used to repurchase stock. Remember that there are 1.25 million shares of stock outstanding. If management goes to a specialty brokerage firm, buys back 25,000 shares of their own stock at $60 per share, and destroys it, the result is that now there are only 1.225 million shares of common stock outstanding. In other words, each remaining share now represents roughly 2% more ownership in the business than it did previously. So, next year, when profits are $5.4 million, they will only be divided up among 1.225 million shares making each one entitled to $4.41 in profit, a per-share increase of 10.25%. In other words, the actual profit for the owners on a per-share basis grew faster than the company’s profits as a whole because they are being split up among fewer investors.
If you had used your $1.50 per share in cash dividends to buy more stock, you could have theoretically increased your total share ownership position by around 2% if you did it through a low-cost dividend reinvestment program or a broker that didn’t charge for the service. That, combined with the 10.25% increase in earnings per share, would result in 12.25% growth annually on that underlying investment. When viewed next to a 6% Treasury yield, it’s a fantastic bargain.
Some Good News When the Stock Falls
However, what if the price of the stock falls from $60 to $40? Although you are sitting on a substantial loss of more than 33% of the value of your holdings, you’ll be better off in the long run for two reasons:
- The reinvested dividends will buy more stock, increasing the percentage of the company you own. Also, the money for share repurchases will buy more stock, resulting in fewer shares outstanding. In other words, the further the stock price falls, the more ownership you can acquire through reinvested dividends and share repurchases.
- You can use additional funds from the business, job, salary, wages, or other cash generators to buy more stock at a cheaper price. If you truly are focused on the long-term outlook, the short-term losses are less significant.
A Few Persistent Risks
While most long-term stockholders don’t need to fear sudden dips, there are a few risks that can cause serious issues.
It’s possible that if the company gets too undervalued, a buyer might make a bid for the company and attempt to take it over, sometimes at a price lower than your original purchase price per share. This is essentially the same thinking that you may apply when you buy more shares during a dip, but since they’re doing it on a larger scale, they could push you out of the picture altogether.
If your personal balance sheet isn’t secure, you might suddenly find yourself needing cash. If you don’t have it on hand, you could be forced to sell shares at massive losses. You can avoid this scenario by not investing any money that could be needed in the next few years.
People overestimate their skills, talent, and temperament. You might not pick a great company because you don’t have the necessary accounting skills or knowledge of an industry to know which firms are attractive relative to their discounted future cash flows. If that’s the case, the stock may not recover from a sudden drop.
Short Selling Forex: How to Short a Currency
Did you know that you can trade both bull and bear markets?
We all know how the story goes when prices rise:
You buy and hold an investment until it reaches a higher price and make a profit on the difference between the buying and selling price.
However, many traders don’t understand how bear markets, i.e. falling prices can be used to profitably trade.
What Does Short-Selling Mean?
The usual way of making a profit in financial markets has long been this: you buy a stock, wait for its price to rise and sell it later at a higher price. Your profit would be the difference between your buying and selling price. This is what most stock traders do, they’re looking for stocks that are undervalued, buy them and hope that the price will rise in the future.
Short-selling allows you exactly that.
Short-selling refers to the practice of borrowing financial instruments from your broker and selling them at the current market price, with the anticipation of lower prices in the future. Once the prices fall, a trader would buy the same instruments on the market and return the borrowed instruments to the lender (typically the trader’s broker.)
The trader would make a profit equal to the difference of the selling price (when prices are higher) and the buying price (when prices are lower.)
Here’s a graphic that explains how short-selling work.
Step 1: Naked short seller (“naked” because he doesn’t own the shorted instrument) sells the borrowed instrument to the market (the “buyer”) at the current market price.
Step 2: The short seller buys from the market (in this case, the “seller”) at a lower market price and closes his short-position, making a profit on the difference between the selling and buying price.
Unlike beginners, professional traders don’t hesitate to short-sell a financial instrument. If the analysis is correct, a trader can make money both in bull markets and bear markets, which is the main advantage of short-selling.
However, bear in mind that short-selling doesn’t come without risks. When buying a financial instrument, there’s theoretically a limited risk associated with the trade. The price of an instrument can only fall to zero, but the upside potential is basically unlimited.
Short-selling is different. Since a trader is profiting from falling prices, there’s a limited profit potential as prices can only fall as low as zero. On the other hand, risks are theoretically unlimited as the price can skyrocket. This is the main reason why beginner traders hesitate to short in the financial markets.
What would you do?
Having strict risk management rules in place is a must when short-selling the market.
With the rising popularity of derivative trading and CFDs, a trader can nowadays short-sell on almost all financial markets. While we’ve focused on stocks in this introduction to explain the concept of short-selling, the same practice works on any other financial market.
Whether you’re trading stocks, currencies, commodities or stock indices, you can profit from falling prices on the markets.
How Do Forex Pairs Work?
There are eight major currencies on the Forex market which are heavily traded on a daily basis. Those are the US dollar, Canadian dollar, British pound, Swiss franc, euro, Japanese yen, Australian dollar and the New Zealand dollar.
However, to trade on the Forex market, traders are dealing with currency pairs and not with individual currencies, because the price of each currency is quoted in terms of a counter-currency.
The first currency in a currency pair is called the base currency and the second currency is called the counter-currency. A rising exchange rate signals any of the following scenarios:
- The base currency is appreciating or the counter-currency is depreciating in value
- Both the base currency is appreciating and the counter-currency depreciating in value
- Both currencies are appreciating, with the extent of appreciation being higher for the base currency
- Both currencies are depreciating, with the extent of depreciation being higher for the counter-currency
Read those four points as many times as needed until you fully understand this concept. You need to know what is going on with the base and counter-currencies of a pair when short-selling on the Forex market.
Currency indices can do a great job in determining what currency is appreciating and what is depreciating. For example, take a look at the Dollar index (DXY), which shows the value of the US dollar relative to a basket of six major currencies which have the largest share in the US trade balance.
The following chart shows the US dollar index on the daily timeframe. A bullish candle shows that the US dollar was outperforming most other major currencies that day, while a bearish candle shows a relatively weak greenback.
Finally, currency pairs are usually traded in lots. One lot represents 100,000 units of the base currency. For example, if you short one lot of EUR/USD, you’re basically borrowing €100,000 and selling them at the current market price by funding the position in the counter-value of US dollars.
Can You Short on Forex?
Shorting on Forex is perfectly possible and many traders do it on a regular basis. Unlike on the stock market, risks associated with shorting on Forex are relatively limited because of the inter-relation of currencies in a currency pair.
For an exchange rate to go through the roof, there needs to be dramatic changes in the current market environment.
Similarly, the downside potential of an exchange rate is also limited. It’s an interplay of the value of both currencies that determines the current exchange rate.
Ugly ducklings can throw spanners in the works
However, Black Swan events (unexpected events with severe and long-lasting impact) do happen from time to time on the Forex market and are a nightmare for traders.
Think about the unexpected removal of the EUR/CHF peg by the Swiss National Bank in 2020. The value of the Swiss franc soared by 30% in a matter of minutes. This led to dramatic losses to many market participants who were short on the franc.
Another good example is the Brexit vote in 2020. Investors who were short on the EUR/GBP pair either finished the day with high losses or blew their account completely.
Rollovers and financing
When shorting on the Forex market, you also need to be aware of the rollover and financing costs which can decrease your potential profits.
Since you’re shorting the one currency and funding the position with the other currency of a currency pair, you’ll have to pay interest payments on the shorted currency. That said, you will earn interest payments on the funding currency.
If the interest rate of the shorted currency is higher than that of the funding currency, you’ll incur interest costs equal to the difference in interest rates. And if the interest rate of the shorted currency is lower than that of the funding currency, you’ll earn the difference in interest rates.
In addition, if you’re shorting on leverage, your broker will charge you financing costs depending on the amount you’ve borrowed. Financing costs usually depend on the current interbank rates plus your broker’s markup.
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Best Currencies to Short
How to determine which currencies to short and which not to?
It depends on the analysis you’re using to find trades on the market.
As you already know, the best currencies to short are those which have the highest chance of losing value in the coming period.
Currency pairs that have formed reversal chart patterns on the daily chart during uptrends could be good candidates to short. Popular reversal chart patterns include:
- Head and shoulders pattern
- Double tops
- Triple tops
- Rising wedges (during uptrends)
- Triangle breakouts
You can also short currency pairs that have formed continuation chart patterns during downtrends, such as bearish wedges and triangle and rectangle breakouts to the downside.
Fibonacci levels also offer an excellent opportunity to enter into a short position if the price rejects an important Fib level, signalling that a downtrend is about to continue. Rejections of the 61.8% and 38.2% Fib levels are often used to enter into a short position during a downtrend.
Some traders like to use fundamental analysis to find good candidates for shorting.
Currencies that have a high chance of a rate cut (for example, because of weak economic growth, rising unemployment levels or weak inflation) are good to short-sell. Capital flows to currencies which have the highest interest rates, causing low-yielding currencies to depreciate and high-yielding currencies to appreciate.
Finally, political and economic turmoil, especially in emerging market countries, often cause a depreciation of the domestic currency.
Best and Worst Time to Short the Market
Despite being the largest, most liquid and most traded market in the world, there are times at which you should stand on the sidelines.
To explain the best and worst times to short the market, let’s quickly go through the main Forex trading sessions and their liquidity.
The Forex market is an over-the-counter market that trades during trading sessions, which are basically large financial centres where the majority of the daily Forex transactions take place. It’s no wonder that the largest world economies also have the largest share in the daily trading turnover.
The main four Forex trading sessions are:
Recently, Singapore and Hong Kong have also become big players in the currency market.
The New York session, also called the US session, is a heavily traded session during which major US economic reports are published. After the London session, the New York session is the most liquid of all Forex trading sessions with a high number of buyers and sellers available for all major currencies.
When the New York session is at its peak, it’s safe to short-sell a currency pair.
The London session is the largest European session and the most liquid trading session of all. The geographic location of London, being in between east and west, allows traders from both the US and Asia to trade during the London open market hours. The few hours during which the New York and the London sessions overlap represent the most-liquid and most-traded hours of all.
During these hours, it’s safe to scalp and short-sell at the same time.
Sydney and Tokyo
Finally, the Sydney and Tokyo sessions are major Asian sessions that trade when London and New York close. Asian currencies, such as the Japanese yen, Australian dollar, and New Zealand dollar are heavily traded during those sessions.
This makes it relatively safe to short those currencies against other majors.
Liquidity is your friend
As you’ve noticed, we mentioned the term “liquidity” several times. If you’re a day trader or scalper, you should only trade and short-sell during periods of high liquidity. Avoid short-selling during these times:
- Low liquidity – Liquidity refers to the number of market participants who are ready to buy or sell a financial instrument. If there is a high number of buyers and sellers, the liquidity is high. Similarly, a small number of active market participants are a characteristic of low liquidity. Liquidity is important because it allows you to immediately open and close a position with a market participant who has the opposite market order. When you buy, someone else has to sell, and vice-versa. In times of low liquidity, spreads can widen significantly and slippage can eat up a hefty portion of your profits.
- Major economic announcements – Markets can become quite volatile during times of major economic announcements. If you’re a scalper or day trader, avoid short-selling during these times.
- Ahead of important political and economic events – Think about Brexit, the presidential elections and the European sovereign debt crisis. All these events and the associated headlines can send shockwaves through the markets.
How to Close a Short Position?
After you’ve opened a short position, you’ll eventually want to close it to lock in profits or limit losses.
Remember what we’ve said in the introduction about short-selling. A short-seller borrows a currency, sells it at the current market price, waits for the price to fall and buys the currency later at a lower price in order to return the loan.
So, after you sell a currency, you’ll have to buy it to close a short position. This can be done either to lock in profits or to cut losses if the trade starts to go against you. If the currency starts to rise, you’ll still have to buy it in order to return the loan, only that in this case you’ll pay more than what you sold the currency for and incur a loss.
If your trade is in profit, the best time to close a short position is in times of high liquidity. This will ensure a tight spread and allow you to find a buyer close to the current market price.
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