Monday, April 6, 2009

Latest On Precious Metals and Commodities

The news over the weekend was that IMF is going to sell 403.3 metric tons of gold. Wow! 400 tons of gold!

Except that it is old news. IMF has been making a lot of noise of selling 403.3 metric tons of gold for nearly a year now (some say for over a decade!). So what exactly is new? They never sold an ounce of gold. I will believe the IMF gold sell when it happens.

But such an expired old joke was enough to knock gold price down $25 on Monday, or -2.8%. Silver was down even more, -5.0%. Was IMF going to sell silver as well, or what?

There must be too many speculators and not enough serious investors in gold and silver. If you are serious about buying gold and silver as safe haven assets, then you should buy the physical metal, take delivery and hold for long term as an insurance for your financial security. Monday's gold/silver plummet proves that speculators still dominate the gold market; sentiments, rather than fundamentals, are still the driving force behind gold price. Even James Sinclair, the most outspoken gold bug, got so frustrated that he almost gave up attempts to persuade people to demand gold delivery from the COMEX.

Mean while, London based ETF Securities had just made US filings for platinum and palladium trust. Read the SEC filings for platinum and palladium. This is the first step in introducing the ETFs for physical platinum and palladium into the US market. This is extremely important and very bullish for the platinum and palladium metal, as demand from US investors could absorb a considerable amount of available PGM metals, and could trigger panic hoardings by industry users as they fear a looming shortage due to booming investment demand.

Jim Rogers summed up successful investments in three words: Skeptics, Curiosity and Persistence. My favorite precious metal is palladium as my study convinced me this metal has the most bullish supply/demand fundamentals among all precious metals. Norilsk Nickel (NILSY.PK) in Russia supplies 45% of the world's palladium. So every day I watch closely any news coming from Norilsk Nickel in Russia.

As I watched, the news from Russia keeps getting better for the palladium bull story:

  • Russia could suspend platinum/palladium export due to bureaucratic confusions. The confusion was due to conflicting laws and presidential decrees. The unspoken truth is if the Russians have a high incentive to export, the bureaucracy can be sorted out quickly. But as current prices of palladium and platinum are so low, there is absolutely no incentive for the Russians to speed up the exportation of the precious metals. Logically, they would rather drag their feet on the issue, and watch the metal prices skyrocket in an ensuring shortage. Then they can resume the exportation at much higher prices.

In a previous article I discussed why fundamentals of palladium are getting better. The recent science break through in Low Energy Nuclear Reaction (LENR) could attract more investment interest in palladium as it will become a critical strategic metal for the future energy needs.

Besides buying physical palladium metal, you can buy shares of two mining stocks: Stillwater Mining (SWC) and North American Palladium (PAL). People have complained about the difficulty in buying and selling physical palladium, as the premium is too high and the buy/sell spread is too wide. Complain no more, folks! You will soon be able to directly buy and sell shares in a palladium ETF, just like GLD for gold and SLV for silver.

Talking about ETFs, I am not a big fan of any ETF. Why invest in physical precious metals, if the metals are not in your direct control, and free of counter-party risks? Many people questioned whether SLV really holds the silver. But to their credit, SLV has been tracking silver spot price rather precisely so far. So long as SLV continue to track silver spot price, you may feel safe to hold SLV positions. But just don't hold it for too long. Holding physical metals is still the safest investment, when there is so much mistrust in the system.

On other commodities, crude oil price has already bottomed as OPEC's production cut is beginning to take effect. You may buy some US Oil Fund, USO on dips. Mean while, I believe it is time to massively load up US Natural Gas Fund, UNG, as there is very little further down side. Natural gas producers are cutting production aggressively at current price level. From an energy point of view, current natural gas price is equivalent to roughly $23 per barrel oil. That's rather cheap compare with crude oil price. Unfortunately, for oil and gas, you have to buy the ETFs as it is impossible to take physical delivery of these two things.

Full Disclosure: The author is heavily invested in SWC and PAL, and hold positions in silver stocks SSRI and PAAS. I also hold positions in AAUK, USO and UNG. I am also heavily invested in shipping stocks EXM, EGLE, DRYS, TBSI, GNK.


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