The Best Safe Haven Investments
Make no mistake about it, we are in the midst of an unprecedent crisis. Every one is watching Fanni Mae (FNM) and Freddie Mac (FRE). Every one knows what a collapse of these two mortgage giants could mean, and what a high cost a government bail out would be. I encourage you to watch what Jim Rogers had to say about the crisis. I also encourage you to read Jim Sinclair's daily commentary to understand what's going on.
People, wake up! This is a worse crisis than even the Great Depression. I don't see any one in our government capable of handling it. The best you can do is try to protect yourself. You must put away a certain portion of your financial asset into something that is directly under your own control and protection. I mean physical assets that you hold to your hands!
Don't put your money in a bank. As what happened at IndyMac Bank (IMB) shows, banks are extremely vulnerable to bank runs. If you wait until a bank run occurs to withdraw your money, it is too late. FDIC does insure bank savings up to $100K. But FDIC does not have an unlimited amount of funds to insure every one against loss, nor do they insure against lost purchase power of your $100K. I do NOT intend to cause bank runs. I do NOT want to see a total collapse of our financial systems. But I think that if enough people have their money in their hands, instead of in the banks, then people will have much greater confidence in their financial security, and there will be much less panic. I don't want to see people panic. The way to prevent panic is to remove reasons for panic. If bank runs are inevitable, I would rather see a slow and gradual bank run, where people withdraw maybe a couple hundred dollar a day. It's a way much better than ten thousand people all rush to the same bank at once and grill under the sun for 6 hours in the queue.
So here is my second point, after you get your money out of a bank, do NOT put it under your pillow. Cash stashed away under a pillow is useless and doesn't protect you, because our dollar is losing purchase power at a rapid pace. So instead you should spend your cash to buy things. Your purchases will put the money right back into the circulation of the monetary system and hopefully provides some stimulation to the economy. Hopefully by spending your cash away, the vendor who receives your cash payment will deposit it into the same bank, who will then stash it into the same ATM machine, so you or some one else can withdraw another couple hundred dollars the next day. That improves the liquidity of the system, doesn't it?
So what do you buy with your money? You need to buy useful things that can preserve value both in good times and in bad times. Buy dry food items that can be preserved for long time. Buy toilet paper, a lot of them! You need toilet paper WSHTF. I am half joke and half serious with toilet paper here. You need to buy toilet paper as well as any daily use items, paper towels, detergents, whathaveyou, non-perishables that can last 5 years, 10 years or longer, because price of everything is going up fast. Why do you invest in something else that appreciate slower in dollar terms, and you have to pay capital gain tax, and then at the end of day you could only buy less of the things at much higher prices? You might as well just buy a whole closetful of those useful and non-perishable daily items, which probably appreciate in dollar terms faster than any other investments. And you don't need to pay any tax on the appreciation either. Hopefully through your big grocery purchases, you help to inject a little bit vitality into our economy by helping the workers who make the toilet paper or the detergents to keep their jobs.
You also need to buy things that takes up less space, is less useful to you, but preserve and increase value over time. Of course everyone will immediately think about precious metals and when it comes to precious metals, you immediately think about gold. Most people probably think gold is the best safe haven investment. But I actually believe gold is the worst of all inflation hedgies. In the past 8 years the performance of gold lacks behind many physical commodities. That's a fact. People who bought gold near the 1980 high still haven't recoped their losses. The most famous gold bug sold all his gold exactly one day after gold peaked in 1980. Don't bet on selling exactly at the peak unless you have that kind of timing capability. Most people really should bet on being a sucker who always get the timing wrong.
I am NOT a gold bear. I honestly believe that gold will reach the $1650 per ounce target Mr. Jim Sinclair predicted, and probably get there faster than his prediction. But that alone is not a good enough reason to invest in gold. Because you probably are losing instead of gaining in purchase power. A one ounce gold coin probably buys more rolls of toilet paper today, than it does in the future when it reaches $1650. What makes gold special than other metals just because it is labeled as monetary metal? Copper is monetary metal, too! So is silver! So is nickel! Do you know that the first batch of immigrants spent a whole summer searching for gold and the local Indians, who consider gold as decoration rather than money, figured that the white men must eat gold as food. Most of the first group of immigrants died when the winter came and their gold could not buy them food. An interesting historical lesson.
Natually, from a long term point of view, a commodity's value is often determined by the cost of producing it. If it is very profitable to produce, it encourages more mining and production, bringing supply up and price down, and if it is un-profitable to produce, the mines will shut down, reducing supply and bring price up again. There are only two exceptions. One exception is if the production of the commodity is inheritantly limited by the availability of natural resources. Production can not be boosted even at high prices, for example oil, or platinum group metals. Another exception is when there is already a huge stockpile above ground, enough to provide many years of supply, then annual production no longer matters. Examples of second exception include both gold and silver.
Gold is the most abundant of all commodities, in all of humanity's history. Abundant in terms relative to annual physical consumption. Gold has very little industry usage. Most of gold is used to make jewelries or gold coins. Old jewelries and coins are routinely recycled and refined into pure gold, feed back into the supply chain. If all of the world's gold mines are shut down for a few hundred years, I don't see a problem at all. The existing global gold stockpile can supply the world's need for a few hundred years before a shortage develops. Gold price may raise a bit but then wearing gold jewelry may go out of fashion which brings down demand.
The world has enough gold stockpile to last a few hundred years! Try to imagine a world that has enough copper stockpile to last a few hundred year, or a world that has enough corn stockpile to feed the population a few hundred years! What would that do to the commodity price? The bottom could fall off! But gold is an exception. The whole world's gold mines can all shut down for a few years, it will not boost gold price much. Likewise, if number of producing gold mines double, it will not dent the gold price much either. Gold's price level is largely affected by investment sentiments, not supply and demand. But investment sentiments can go either way. People never hesitate to sell their gold whenever they find something that's more attractive as investment than gold. Only when they can't find anything better to buy, will they return to the perceived safety of gold to try to preserve fortune. But do we really have nothing better to buy than gold today?
Of course there are better precious metals to buy. Namely the platinum group metals, platinum and palladium. They are way much better than gold. South African mines shut down for 5 days in January and it sent platinum price and palladium price spiraling up for a month before the correction. You can clearly identify when the shut down happened by looking at the price charts. The same event also shut down all the gold mines in South Africa but you won't be able to tell it from the gold price chart. What does it tell you? The PGM metal supply is so tight that a 5 days disruption is enough to cause panic. The same can not be said about gold.
Regardless of how you think about the PGM metals supply/demand fundamentals, there is a very solid bottom of PGM metal prices for which you have assured protection and assured hedge against inflation. The bottom is the price level at which the current PGM mining companies can ensure at least a moderate profit margin, even with increasing cost of energy and mining equipments. You can not say that for gold or silver mines.
The reason is very simple: if the PGM price falls below the profitable level, one or more of the major PGM metal producers will be forced to reduce production or even shut down, as you can not operate a non-profitable business for long. When that happen it will tilt the dedicated supply/demand into shortage and send the metal prices spiraling up, until the mines can profitably re-open again. I talked before about the price inelastic nature of PGM metals supply. But I think I must make a correction: It's a one way street, higher price is unlikely to boost production. But lower price would be rather quick in cutting down supply when PGM producers become un-profitable.
A few years ago, when palladium price was at the bottom, Stillwater Mining Company (SWC), one of my two favorite palladium mining company, was able to sign palladium price hedging contracts with major auto makers, and was promised palladium floor price much higher than the going market price at that time. Because the industry users could not afford to let SWC go out of business, and therefore depriving them an important supplier of the palladium metal! It was a shame that we allowed the Russians to grab a majority stake in this strategically important national treasure of ours, sold out at dirt cheap price.
Judging from recently quarterly reports of Stillwater Mining Company (SWC) and North American Palladium (PAL), both of which only recently turned modestly profitable in Q1, 2008, the current platinum and palladium prices are probably not very high from the solid profitability bottom. The industry can not afford to drive any of the world's PGM producers out of business because they can not afford to lose any portion of the tight global supply of the PGM metals. This ensures that the price of platinum and palladium WILL continue to grow, commensurate with the raise of energy, raw material and salary cost. You can't have a better inflation hedge than that!
I was once heavily invested in SLV, the iShares Silver Trust, although I could never get really interested in GLD, the SPDR Gold Shares. That was before I spend extensive amount of time really try to understand the market of palladium and platinum. On the internet there had been lots of speculation whether SLV was backed by by real physical silver, until eventually Barclays (BCS) released a long list of silver bar serial numbers, ending the speculation. I think in a stable market cndition, it would be OK to invest in either the GLD and SLV ETF funds. But at a time when you can't even feel safe leaving your money in a bank, why would you feel safe leaving your share of gold and silver to be watched by Barclays? You'd better take delivery of real physical gold and silver metals in your own hands. Not to meantion that palladium and platinum is way much better.
It is ridiculous that the share price of SWC and PAL have been supressed to such a rock bottom price. I do not know why. You have hundreds of gold mining companies to buy, hundreds of silver mining companies to buy. When it comes to PGMs, there are really not many choices. When it comes to primary palladium producers, there are only these two hidden gems. If I had enough money and was able to acquire a majority stake of both company, here is what I would do to realize the true value of these two gems. I think I will temporary shut the businesses down for 6 months, pay the workers regular salaries and extra bonuses to vacation around the world. Let the industry and investment community panic about the supply disruption and let the metal prices run up. Then people will realize the value of PGM metals, and then they will recognize the true value of SWC and PAL. I think that's how free economy works. You don't operate any business unless it is quite profitable, or will be quite profitable soon.
Finally I want to comment on a recent news piece by Nikkei. Clearly this news release by Nikkei has spreaded around the whole internet in just two days and it caused quite a bit of turbulance in the platinum price. The news said that Nisshinbo Industries Inc., a Japanese chemical product company, has developed a new fuel cell technology that is platinum-free. If that is truth, of course that will remove a big chunk of the expected future demand of PGM metals from the fuel cell sector. But how credible is that news story?
I frankly believe it is either a careless rumor, or a deliberate rumor, for several reasons. One is so far Nikkei seems to be the only source of this story. If this story was truth, this would be a very important technology breakthrough, a Nobel Prize worth of disruptive new technology. Hundreds of research institutes spend decades trying to find a non-PGM based fuel cell solution and the search has been fruitless, and this company no one heard about suddenly announce they did what no one has accomplished?
The Nisshinbo Industries Inc. company itself would have to issue a formal press release and call in a press conference to announce such a break through. There is no such mentioning on the company's web site. Even if the company did not choose to release a press release itself, but rather through third party media, logically it would choose to release the news through a technology, industry or academic publication. Why would it choose to leak the news to Nikkei, a financial news media. It would be totally unethical to skip normal publication channels for technology matters, and choose instead to utilize a financial news media to announce a technology breakthrough, because MBA folks in the financial sector would NOT have the expertise to be able to scrutinize matters related to the intimate details of technology.
Nisshinbo is a chemical comany involved in a broad spectrum of products. They do not specialize in fuel cell developments. They do not make whole fuel cells. They do make components for fuel cell batteries, a component called fuel cell separator plates, or bipolar plates. They do indeed have a carbon nano-technology in making those bipolar plates. But those bipolar plates are NOT where the PGM metal catalyst sits. Nor does Nisshinbo make the catalyst for fuel cell. I never heard anyone using carbon as a catalyst! I searched the whole Nisshinbo web site, and found dozens of mentioning of fuel cell, but not a single occurance of the word "platinum". I searched for any possible patent they could have filed, and could only find one patent related to the carbon based bipolar plates. So I really don't know there this "carbon based platinum-free fuel cell" thing come from. I am in the process of contacting Nisshinbo and seek a clarification. If any one reading this has contact with Nisshinbo, please forward my article to them and seek their comment and clarification.
Rumors spread fast. But truth spread slow. On a side note, I wrote in the past about tellurium and how First Solar (FSLR) critically depends on this rare element. My articles falled into deaf ears so far. One news piece yesterday really caught my attention because I think it is extremely interesting that a seemingly empty shell company would attempt to purchase a critical source of FSLR's tellurium! I don't want to spread rumors. I have my own speculation but I will not say it out here. Let people read the news themselves and speculate on their own. Suffice to say that I think I really need to short FSLR before its coming earnings release. I still have not heard any thing from FSLR. I hope they can give me a good reason not to short them.
P.S. The author is heavily invested in SWC and PAL, and hoard precious and rare metals. I currently do not have any short position in FSLR but is considering shorting it soon.