Saturday, September 6, 2008

Market Manipulation and Extreme Volatility In Commodities

In recent weeks, we see the worst sell off of commodities in the history of commodity trading. The magnitude and viciousness of the sell offs made many traders wonder, when they look at the price charts, that now a slowing global economy could mean commodities are no longer bullish fundamentally. Not surprisingly, paid talking heads like Jon Nadler jump all over the places excited by US dollar rally and the plummet of gold and silver, spinning out articles faster than I can read them.

I can not write up stuff as fast as Jon Nadler does! When one has to think with a brain, it really slows you down! If you are a paid market commentator, stop using your brain, or you could be fired for being too slow. As they are using computer blackbox programs to automatically trade stocks and paint tapes, they might as well use a computer program to generate today's media junks quicker and cheaper: "Today platinum dropped because traders feel demand may be weaning"; "Today platinum rallied because traders feel it's over sold"; "Today platinum dropped because US dollar rallied so precious metals are no longer needed". Too easy! Except computers really do not have a single ounce of intelligence.

The commodities sell offs are precisely synchronized in timing, which subject them into suspicion of market manipulation and government intervention. Food grains, precious metals, base metals all move up together in one hour and then all fall off a cliff in the next hour. I guess the fundamentals of basic supply and demand of everything must now be fluctuating up and down in a time scale of hours, not years. How ridiculous! If you want to know the big picture, read Jim Sinclair daily, read GoldSeek daily, and listen to what Jim Rogers is saying.

As vicious and relentless as recent sell offs are, there has been absolutely no fundamental change in the multi-year commodities boom and dollar bearishness. It is all just inherit market volatility which naturally exists in any commodity in short supply. The volatility is due to sentimental fluctuation of too many market participants chasing too narrow a market. The narrower the market is, the tighter the supply, the more people are involved in a particular sector, the more extreme volatility we will see in the market place. Gold is less volatile than silver because the silver market is much narrower than gold. Palladium has been more volatile than platinum and silver because the palladium market is even narrower.

I first learned the concept that a tight market supply must be associated with extreme market volatility, when I first learned about Peak Oil. It is a known fact that when supplies are abundant, the price tend to be very stable over long period of time, and when supplies are tight, prices tend to shot up rapidly, then drop viciously only to bounce back and shot up even more. Rhodium and cobalt prices are very good recent examples. I recommended cobalt as a better silver and pitched OM Group (OMG) as cobalt play, remember?

Why tight supply must be associated with extreme volatility and abundant supply must lead to flat prices? That's because when the supply is abundant, there will be abundant inventory at every segment of the supply chain, buffering any price shock and smooth out any price fluctuation. Producers will be able to plan in advance and adjust production to meet the level of demand, based on the inventory level and price movement.

But in a tight supply situation, inventories are depleted, which could lead to panic buying and hoarding by end users and skyrocketing price. And then the buyers thought the price is too high and held off further purchases. Sellers suddenly find buyers are all gone and wonder what happens and have to slash price to attract buyers, which actually drives buyers further away to wait for even better deals. Speculator who were attracted by the tight supply in the first place further add fuel to the volatility by joining the bids on the rally and joining the panic selling on the way down. Eventually price falls to an extreme bottom and savvy investors have patiently purchased away all the selling near the bottom. Industrial users who now has depleted their hoarding figure the price is at the bottom now, and start to buy, and suddenly they find there is no more supply because some savvy investors have purchased away all the available supplies. And hence it starts the panic buying again and another round of strong rally and vicious sell off.

BHP Billiton (BHP)'s recent cobalt sales history is a textbook example, as buyers on August 22, 2008 suddenly all jumped in together after waiting on the sideline for months. I watched the $24/pound price tag that day and how I wished I had enough cash to buy. They told me minimum order was two metric tons.

I wonder that during recent platinum and palladium price free fall, there might be a few big savvy investors quietly loading up all the physical metal being sold off. I know Jim Rogers likes palladium. I know George Kaiser loves palladium as a long term investment and he owns almost a majority stake in North American Palladium (PAL) for years and recently increased his stakes. Metals analysts like Jefferey Christian of CPM Group are very bullish on PGM metals. I know Norilsk Nickel (NILSY.PK), world's dorminant palladium producer, pushed for direct negotiation between President Bush and President Putin to reach the deal to acquire a majority stake in Stillwater Mining (SWC) in 2003. Their strategic goal of global dorminance of palladium market is clear. They don't do it for global charity to supply cheap metal, but for their own best interest.

The case for a palladium super bull cycle is so indisputable, SWC's presentation at 1:30pm on Sep. 9 presents very concrete data and facts why the PGM market fundamentals remain bullish. Latest news of South Africa's -32.8% PGM production shortfall should make the bullish case even stronger. There must got to be some big players very interested in the metals and would love to buy at the lower prices. So I am not too worried about the recent price plummet. Some one some where must be planning to corner the palladium market to rip huge profits. The supply is so tight; the global palladium market is so narrow, any one with a decent high net worth could corner the market for profit as the reward/risk ratio is just so irresistable, some one MUST be doing it!

Talking about cornering markets, the most successful case is De Beers successfully cornered the global diamond market for over a century. About diamond I have a wonderful story to tell which will do wonderful things to the PGM metals. But first let me tell the story of De Beers cornering the global diamond market, because it has some implications on what to come in the looming global economic crisis.

For over a century, De Beers monopolize the global diamond market and created a gigantic consumer market for it. They purchased virtually all of the world's raw diamond production and put into an inventory, then release the supply to the market in carefully controled quantity, creating artificial shortage to raise prices. Mean while they launched a successful global marketing campaign to promote diamond as a symbol for love and commitment. It's very successful! Ladies and gentlemen all over the world, most recently in China, fall in love with this precious crystal with excellent physical characters.

A Diamond Is Forever!

That's the most successful advertising slogan in the 20th century. So it also seems De Beers is also forever as they continue to be the monopoly of the global diamond market. And people continue to love diamond, in good times and bad times. But De Beers is recently under threat as the word FOREVER begins to crack apart in the middle. It now reads "FOR EVER y one"!

A Diamond Is For every one!

Who said that? A top secret private company called Apollo Diamond. You must read this amazing story which entertains you like the best 007, KGB and CIA spy stories. Suffice to say that modern technology is now ripe to bring artificial grown diamond, bigger and with better quality than natural ones, massively to the global consuming population, at a price much more affordable, and an availability virtually unlimited. A diamond is truely for every one!

Not yet right now. Under a constant death threat, and not wanting to ruin the market price and their huge profit potential, Apollo Diamond has been very cautious and only releasing a limited amount of their lab grown diamonds to test water in the market, at a price not much cheaper than the natural ones. I know by now you must be dropping water from your mouth wanting to jump in to invest in Apollo Diamond immediately. Nada a zilch chance! They are privately held and they do not need new investment to share their potential profit at all.

But never mind. The Apollo Diamond technology, based on CVD, Chemical Vapor Deposition, is nothing new and nothing proprietary. Their only secret is the right recipe of gas compositions, temperature and pressure, which they discovered by trial and error. As they have already demonstrated that it can be done, any one with a decent amount of money can put together a team of CVD experts and figure out the correct recipe on their own, and break Apollo Diamond's short lived technology monopoly on growing jewelry grade clear colored diamonds. Huge profit potentials will bring in competitions, bring down the price and bring up the availability and make diamond truely for every one, rich or poor!!!

And that does wonder to platinum and palladium! You can not wear a loose diamond by itself. It has got to be set into something solid. You surely do not want to mount a diamond on a plastic ring or a copper ring. It's got to be something more precious and more long lasting. Gold's yellowish color is ugly for a crystal clear diamond. White gold? The Chinese hate any precious metal that is not pure, as do people of other cultures. The only fitting pure white precious metals that do not tarnish in air are platinum and palladium.

So "A Diamond Is For Every One" really means a lot of jewelry demand of platinum and palladium, more than current global supply can provide, as annual global platinum and palladium production is worth about 0.035 grams of each of the metals for each person on earth. One diamond ring probably will cost about 5 grams of the metals. Maybe rich people can have platinum diamond rings, middle class wear palladium diamond rings, poor ladies can have silver diamond rings. For rich or poor, for silver or platinum, a diamond is always a symbol for love and commitment for every one, and should really be the standard affair for every engagement proposals!

As the US dollar is being desperately pumped up and precious metals and all other commodities are on free fall, many wonder are we facing a deflational future or an inflational one. I think the diamond provides the correct answer as while the crooks knock down precious metal prices, they have forgotten to also knock down diamond prices. Read the Diamond Registry for the big picture. I recommend read this one: The "Diamond Lining" To All the Clouds.

This is the business that has survived numerous recessions because it is a
business based on love, and love endures, and even grows stronger, through hard
times. People will always fall in love, and get engaged and married — and when
they do they will do it, they will mark those events with diamonds.

No wonder China's diamond import tripled in a year and is still growing rapidly. No wonder global diamond price has increased 30% from a year ago and is still growing rapidly and there is no such thing as a price correction in diamond, as there is no paper diamond trading in COMEX, as diamond is purchased not by hedge funds but by the mass populance, who look for diamond not just as a symbol for love, but also as an investment and a preservation of wealth in this inflational environment. Tiffany & Co. (TIF)'s rapid sales growth reflects that reality, so as the report from Harry Winston Inc. (HWD).

Shame on the talking heads who spread the myth that higher platinum and palladium prices suppressed the jewelry demand. Have they looked at the booming diamond demand? A typical platinum diamond ring costs any where from $2000 to $5000 or higher a piece, with 90% of the cost in the diamond. The metal cost is a mere fraction, $200 a piece even at $1500 per ounce platinum. If it's palladium, the metal cost at $400/oz palladium is only $65 a piece, comparing with the $2000-$5000 price tag of the whole diamond ring. If the Chinese are buying three times more diamond at 30% higher diamond price, then people can afford 300% higher platinum price in buying a platinum diamond wedding ring for the commitment of a lifetime love.

So I believe platinum, particularly palladium, are the best physical assets to buy at current ridiculous low prices which are now below mining cost. Stocks of the only primary palladium producers in the world, SWC and PAL, are now the best stocks to buy.

Amid the looming IKE hurricane, I think now it's an excellent time to buy oil and natural gas players. I recommend buying USO, UNG. I also recommend buying NGAS, CHK. I personally bought them but as always I encourage people to do their own due diligence study. The natural gas price has fallen to below production cost of some of the producers, so it is a solid bottom. Any time a commodity falls through the production cost, it is pretty much a bottom.

Like wise, as silver and gold price now drops to below many producer's production cost, it is now near bottom to buy some of the worst punished gold and silver players. My favorites are PAAS, HL and SIL. Of course I bought them recently. There are many others. I also like CDE, SSRI, among other things. But I can not buy them all. Top of them all, people should buy SLV and GLD. You've got to like the physical metal ETFs before you can like the mining companies.

On the coal sector, ACI, PCX, BTU, JRCC all have seen even a worse bloodshed than precious metal mining companies. I called on JRCC at $4, and I called profit taking on JRCC one day before it peaked at $62.83 and I was right. I predicted low $20-ish JRCC and I now see further downside to go, as the coal sector really has not seen a serious correction yet, which it must. So wait till JRCC to fall through $20, before you consider whether JRCC can be a buy. Ultimately JRCC can reach $100 one day. But now, precious metals especially platinum and palladium is where you want to be, not coal.

P.S. The author is heavily invested in SWC and PAL but also hold long positions in a number of beaten down commodity stocks, including UNG, USO, NGAS, CHK, HL, PAAS, SIL.


MyAwesomeCard said...

FSLR chart looks like breaking down now, have you started shorting it yet?

Anonymous said...

Blaming market manipulation is a cop-out. I've been long SWC, too, since February (wish it was since Jan 25) but have been wrong.

SWC majority owner Norilsk Nickel is in an ownership/control battle now (see recent Financial Times articles), so maybe SWC stays independent awhile longer.

My biggest fear is that Norilsk is ticked off after top-ticking the stock with that convertible deal, and is driving it down so they can buy the whole thing on the cheap, which will keep my position in the red.

Do you have an opinion on ENER?

JJ2000426 said...


No I am not shorting FSLR right now. Too many good beaten down precious metal players to buy to waste on shorting FSLR. They will pump FSLR up once again so wait for the next round to short. So far the thesis on FSLR down is the same as on other solar players: oil down so there is less need of solar. This thesis is wrong as oil will recover.

The correct thesis for FSLR going down is tellurium shortage. So far this has not kicked in yet. When this kicks into people's mind that's where FSLR call really fall to low double digits. Time is not ripe for that yet.

The bullish fundamental of PGM metals have not changed. Auto demand shrink has been overblown and the South African production fall has not been fully appreciated. I expect SWC to make new highs way much higher than where it was at the beginning of March. I am not worried about the long term potential.

Norilsk won't be able to buy up the whole SWC company. The politics would not allow that to happen. They are currently neither adding nor reducing their stake.

John Smith said...

Are you long on AGPPY as well?

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