Peak Oil, Alternative Energy and Platinum Group Metals

The world's attention is increasingly turning towards alternative energy as the reality of Peak Oil is sinking in, even though the public discussion of Peak Oil is still only just wispering, with majority of investors unware of the looming global crisis.

Fossil fuels are cheap and convenient: they are easily produced, and the fuels themselves serve two purposes at the same time: They are both energy source, and energy storage. When you fill up your car with 15 gallons of gasoline, you acquires both the energy needed to drive your car a few hundred miles, as well as ways to store the energy: the energy is stored in the gasoline until it is burned in the internal combustion engine.

Any alternative energy development must address these two issues as well: energy source, and energy storage. Alternative energy sources we talk about, like solar, wind, ocean wave, nuclear, addresses only the problem of energy source, but not the energy storage.

While scientists are making some progress in developing high energy density batteries, the basic physics is that energy density in any battery could never come even close to the chemical energy density in either hydrogen, or carbohydrate fuels. The best energy storage solution we can find is to synthesize carbohydrate fuels using energy derived from solar, wind, nuclear or coal fired power plants. Such synthesized carbohydrate fuel can then be transported using the existing infrastructure before they can be utilized. Finally, fuel cell batteries can extract energy from the carbohydrates and turn it into electricity energy, at an efficiency much higher than simply burning them in a combustion engine.

So this is the alternative energy recipe scientists have given us:

1. First electricity is generated from alternative energy sources like solar, wind, ocean wave, nuclear, hydropower, etc.


2. Second electricity is used to synthesize carbohydrate fuels, allowing the stored energy to be easily transported and utilized.


3. Third fuel cells are used to generate electricity from carbohydrate fuels to provide end energy usage, like driving a vehicle or other electricity driven machines.

Do you realize that for steps 2 and 3 to be possible, a category of rare and expensive precious metals are need. You need the so called PGMs (Platinum Group Metals), namely platinum and palladium. These two metals serve as catalysts in synthesizing cabohydrate fuels. They also serve as catalysts in fuel cell batteries.

Among the two PGM metals, palladium is probably even more important. Palladium is very unique in its extreme affinity to hydrogen: one volume of palladium is capable of absorbing 900 times the volume of hydrogen. Such extreme affinity to hydrogen makes palladium an ideal catalyst in any chemical process that involves hydrogen, including, of course, the chemical process to synthesize carbohydrate fuels, or the chemical process to turn carbohydrate fuel into water, carbon dioxide and electricity, as it happens in fuel cells. There is no shortage of efforts by scientists to look for alternatives to the expensive platinum and palladium, in the last one hundred years. Unfortunately no practical substitute could be found so far.

No wonder when President Bush advocated hydrogen economy in a State of the Union address in 2003, some one reminded us that you can NOT have a hydrogen economy without palladium, and that the USA is lucky to have one of the world's only two primary palladium mines: the Stillwater Mine (SWC) in Montana. The other palladium mine is North American Palladium (PAL). Read "The Russians Are Coming" by Mother Jones.

Recently there is an investor mania in the sector of rare earth metals, just like the one in solar energy a few years ago, due to recent news that China is limiting production and export of rare earth metals. The rare earth metals mania is not without a good reason. The alternative energy development is a huge investment theme due to Peak Oil. In the alternative energy development, you need efficient electric motors to turn mechanical energy (like wind power or hydropower) into electricity and turn electricity into mechanical power (like in a hybrid car), and you need high energy density batteries to store the electricity energy. The high density batteries need rare earth metals. To make the strong magnets needed to build electric motors, you need rare earth metals. Not to mention the advanced electronics technology need rare earth metal as well. No wonder the whole world panicked when China begin to cut back rare earth metals expert quotas, and there is an investor mania to rush into potential rare earth mining plays like MCP, REE, AVARF.PK and UURAF.PK these days.

But let me be clear: rare earth metals are not rare at all. China could not cut the world off on rare earth metals even if she wants to. There are plenty of rare earth resources else where in the world that can be developed. They just won't be cheap.

But here are these two other metals that are truely rare, and that all alternative energy technology more critically depend on, and which China has zero domestic sources. China runs the danger of being cut off by the world on these two critical metals if there is a resource war.

Those two metals, as I just mentioned, are palladium and platinum. Supply of these two metals concentrate in just a few spots in the world: Russia's Norilsk Nickel (NILSY.PK) mine, South Africa PGM mines, and these two palladium mines in North America: SWC and PAL. Price of platinum but even more so that of palladium, have been surging up relentlessly due to strong supply/demand fundamentals. China, Japan and other nations without their domestic sources of these two metals, better begin to think about accumulate their strategic reserved of these two critical strategic industry and war time metals.

Likewise, investors would do much better hoarding physical palladium metal bullions, than hoarding a basket of 2 dozen different rare earth metals and not knowing which one will do best in the near future.

In the next two articles I will talking about how effects of resource peaking in two countries will impact global supply of platinum and palladium catastrophically, causing market panick in the near future, sending prices of these two metals surging to unimaginable high levels:

Peak Coal in South African and the Global PGM Supply

-How South Africa is running out of coal. How booming India coal demand will deplete South Africa's coal supply. And how these will impact South Africa's electricity supply and therefore constraint that country's platinum and palladium supply.

Peak Nickel in Russia and the Russian Checkmate on Palladium

-The Russian checkmate on global palladium supply are in two aspects: First the end of Russia strategic palladium stockpile sale, due to the stockpile depletion. Second, palladium production of Russia's Norilk Nickel (NILSY.PK) mine declines dramatically, as ore grade deteriorates. Third, More shockingly, Norilsk Nickel is now considering the more cost effective Activox Process technology, which it acquired by spending US$6.5B to acquire LionOres a few years ago. The Activox Process will dramatically cut sulphur dioxide pollution. But the new technology will only extract base metals nickel and copper, leaving platinum and palladium in the residue un-extracted, unless the price is high enough to provide the economic incentives to extract the precious metals using alternative approaches. This change would be a catastrophic loss of global palladium supply and will be sure to cause market panic.

Full Disclosure: The author has large long positions in palladium mining stocks SWC and PAL, in addition to silver mining stocks like SSRI, CDE, HL, and coal mining stocks PCX and ACI. The author has no position in rare earth metal plays REE and MCP.

The True Rationale of Commodities Supply and Demand

The price of rhodium staged an impressive rally in recent weeks. At the bottom of recent commodities sell off at the end of October, 08, rhodium dropped to $750 per ounce, from the high of $10,000 just a few months ago. Since the October bottom, rhodium price has raised to $1650 per ounce, a surge of up 120%, while gold is up only 25%, silver up 36%, platinum is up 58% and palladium is up 38%. Clearly rhodium has been the best performing precious metal.

But if you ask the metals analysts, they will tell a bearish story. Rhodium has no investment demand, as the metal is extremely hard to buy and sell, and there is no futures trading on rhodium. Rhodium's demand is purely industrial, with auto sector accounts for over 90% of the total. The auto sales are weak, so the rhodium demand should be weak and the price must drop.

Analysts get one thing wrong. For an easily hoarded metal like rhodium, the true industry demand does NOT equal to the immediate consumption need. The true demand is how much industry users are willing to buy, at current price, NOT how much their current needs are. Analysts have confused purchase demand, the force that drives price, with consumption demand, which doesn't affect price.

Like wise, the true supply of the metal is NOT how much the mining companies have produced, but rather, how much they are willing to sell, at current price. I suspect some South African PGM mines may hold back some of their rhodium to wait for a better price in the future.

As the metal is dirt cheap now, industry users will want to buy more, much more than they would need for the next 3 months, 6 months or even 10 years. The cost is minimal to store rhodium for long term. It makes perfect economic sense to buy extra at $1600/oz, so you can buy less when the price runs up to $10,000 again. It's common sense people should buy more when things are cheap, and buy less when they are expensive.

Such rationales, as well as the fact that PGM prices rallied strongly off their recent lows, are proofs that the bearish calls on the PGM metals, such as bearish calls made by the Fortis Group, do not reflect the reality and are completely unfounded. Investors would do better looking at the complete picture and do not let the analysts do the thinking for you.

The same rationale can be applied to other easily hoarded commodities, like industrial base metals: copper, zinc, nickel, cobalt, aluminum. That might be the reason why most commodities bottomed at roughly the same time, and then all rallied up since. People in the industry understand they can not expect prices to stay low forever. If prices are lower than marginal production cost, producers will have to cut back and prices must go up to reflect the real cost. So it is prudent for industry users to buy more, hoard more for their future needs, if they can, while the prices are low.

One exception is coal, as coal is cheap and bulky. It is costly to store large quantity of coal if it is not used soon. That's why coal price hasn't recovered yet like other commodities do. I would caution about buying coal stocks now, like BTU, ACI, CNX, MEE and JRCC.

The Chinese government understands the economic principles of commodities pricing. There are reports that China has been aggressively spending out its US dollar reserves to buy and stockpile all sorts of industrial materials. Some speculate that China's purchases could be the reason behind recent surge of copper price. Copper is unique as its price never significantly fall below production cost, and few producers actually cut copper production as they are still making profits. For example, Southern Copper Corp. (PCU) could still break even in Q4, 08. Read "copper standard" on recent China speculations in copper.

If China and other countries are stockpiling industry raw materials, then it's a good bet that dry bulk shipping stocks will continue to be bullish, as you need ships to transport bulk materials around the world. All shipping stocks are still dirt cheap to buy, like EXM, EGLE, DRYS, TBSI, GNK, NM, DSX, OCNF, SBLK. My favorite shippers are EXM, EGLE, TBSI, due to their high ratio of shipping capacity versus current market capital, and DRYS due to its asset of ultra deep water drilling rigs. Watch Transocean (RIG) to get an idea on deep water oil drilling.

The biggest metal story is about my favorite metal palladium. On sunday April 19, CBS 60 Minutes carried a special TV program about the science that will shape our energy future: Cold Fusion! You can watch it or read it. Read my previous comment on the breaking news.

The 60 Minutes program, titled "Cold Fusion is Hot Again", is a powerful endorsement on the science of LENR, Low Energy Nuclear Reactions, previously known as Cold Fusion, an important physics discovery previously discredited, but picked up research interests again as new evidences have convinced many former cold fusion skeptics.

It's an impressive CBS report to watch or read. CBS contacted American Physical Society, who sent Dr. Robert Duncan to help to make a determination. Dr. Duncan was a cold fusion skeptic. They flew him to the Israel lab to spend several days there. Let him scrutinize every detail and ask tough questions. At the end, Dr. Duncan was totally impressed and convinced by the compelling cold fusion experimental evidences. The fact that CBS brought alone a skeptical physicist to visit the cold fusion researchers and convinced him that the experiments were legitimate is pretty impressive. On the other side, Dr. Richard Garwin's claim in the TV program that the researchers measured the input energy wrong for 20 years (?!), was decidedly unimpressive. Watch the program and judge by yourself.

Cold fusion relies on the precious metal palladium. Successful commercialization of cold fusion will mean humanity will have a cheap and virtually inexhaustible new energy source, and hence we can put the threat of Peak Oil Crisis behind us. If you are concerned about our energy future, if you care about our children's future, you need to contact politicians and urge them for support of cold fusion research. This science was suppressed for 20 years. We can not allow it to be suppressed any more, for our children, as Peak Oil has already become the reality.

Cold fusion will take some time to be developed into a commercial reality. But when it does, palladium price could go up to unimaginably high level. Such a great investment is worth buying and holding patiently for long term. So now is time to buy any physical palladium you can lay your hands on. It is also a good time to buy stocks of Stillwater Mining (SWC) and North American Palladium (PAL). They are the only PGM producers in North America. As I explained, when things are priced ridiculously low, it is a good time to buy.

Full disclosure: The author is heavily invested in palladium mining stocks SWC and PAL and own AAUK. I also hold large stakes in shipping stocks EXM, EGLE, DRYS, TBSI, GNK, and ETF shares of USO, UNG and SLV.

Extreme Opportunities to Make or Lose Money

Today's market is full of opportunities to make money or rather to lose them. Just remember: The market always makes the biggest group of people lose the largest amount of money to allow a few to get obscenely rich at the same time.

For your own good, you should always avoid the biggest crowd, and go to quiet secret places few noticed, it's true for making money and for life in general. Imagine you are at a place with hundreds of thousands of people. There is imminent danger and there are only two bridges leading to safety. One is narrow and in terrible shape. Another is big and in solid shape. Which one would you rush to? I would rather foolishly run to the dangerous one, knowing that all the smart folks will rush to the safer bridge, and collapse the safer bridge due to the sheer weight of the big crowd. That's the philosophy of life.

Read my previous analogy using Noah's Ark. Safe havens, by definition, must be narrow and can not accommodate too many people. If a perceived safe place can accommodate every one, then it is a death trap! The biggest presumed safe haven today, and hence a death trap, is the US Treasury Bonds market. There is an imminent danger in the TB market. People invested in treasuries have already lost big time, without realizing it. The bridge is perfectly safe, until one last person step onto it, and then it collapses suddenly under the collective weight.

Like the bridge, the TB market could collapse merely because there are too many investors in TBs for the perceived safety. The problem is when these people want to unwind their positions, who is going to buy? Whoever want to buy TBs have already done so! In 10 years you will be paid back the principal amount, but maybe not the purchase power. I suspect that government of China or Japan may have utilized recent US Treasury Bonds frenzy to quietly unload their overly too large US Treasury Bonds holdings which are otherwise impossible to unload. It's purely just my speculation with no evidence that I know.

Always avoid the big crowds! Last year when I suspected the big crowd had arrived, I called for folks in coal stocks like JRCC, ACI, ANR, BTU, CNX, MEE, to take profit. The timing was perfect as JRCC peaked just one day later after my article was published on Seeking Alpha.

Recently I was alerted that the dry bulk shipping stock DRYS was too crowded with too high a daily volume. My initial entry into the shipping sector was perfectly timed near the bottom, and I picked the best one to buy at that time, DRYS. But when I became cautious as the sentiment in DRYS was too high. So I switched from DRYS to EXM, another dry bulk shipper, as I believe EXM presented a much better valuation now. Read also David White's take on EXM.

Then, on Jan. 22, 09, DRYS dropped $4.01 on some "bad" news, even as the BDI surged up 5% that day. The news was out before the market open, but it turned into a total panic only in the last hour of trading. I think DRYS was overly punished by the news which isn't so bad after all. DRYS is over sold here. But EXM is still a better buy, from the valuation point of view. Unfortunately Mr. George Economou, the CEO of DRYS, will continue to disturb investors' perception of the company, regardless whether any of his private dealings are appropriate or not. I would rather stick with a company clean of such doubts.

In a previous article, I recommended shorting three stocks which are related to discretional consumer spending, and hence vulnerable during hard times: Coca Cola (KO), Pepsi (PEP) and Colgate (CL). All three are down from when I recommended the shorts. These stocks are not very volatile, and do not have too much short interests. So they are nice long term shorts if you hate volatility.

Along the thinking of discretional spending, I would now recommend shorting Apple (AAPL), and a recent high flier PALM. The current valuation of AAPL is just ridiculous. It is based on the hope of continued fast growth of AAPL's earnings, which is unrealistic. How many more iPhones can AAPL sell, before the market is saturated? The recent hype of PALM is a joke. They have a nice product which may be better than iPhone, but so what? I would rather buy a proven and established product, than something un-proven and non-established. Google (GOOG) is probably a good short, too. GOOG's income mostly comes from web advertisements. When companies are struggling to cut cost, they do not have much appetite spending money on advertisements. These three might not be immediate shorts amid recent earnings announcements. But watch closely for good short entries.

Stillwater Mining (SWC) continues to be my most favorite stock to hold. I firmly believe there is an undisputable bullish case for the precious metal palladium, and hence for SWC. I have yet to analyze North American Palladium (PAL)'s recent announcement for a comment. But SWC is a better value with much higher ore grade and a much bigger mineral reserve. Read about the palladium bullish case.

In short term, the dry bulk shipping sector is the best to be in. The global trade has not and can not come to a complete halt. The shipping industry is capable of adjusting to lowered demand quickly. But think about it: Trillion dollars of government spending is going to be a much bigger demand on physical goods and commodities, than your $200 weekly grocery shopping. There is a chance shipping can even reach new highs.

The unique nature of shipping supply and demand is that when demand is high, it's hard for supply to catch up, because you can not build new ships fast enough, or make the ship sail fast enough to meet the demand. On the other hand, when the demand is weaker, the industry CAN respond promptly to reduce capacity to meet lower demand, by canceling new ship orders, speed up scrapping of old ships, lay up ships for longer period of maintenance, or simply sail slower to save fuel cost and make fewer port calls. All those adjustments are happening right now so in short term, dry bulk shipping is very bullish. All of these shipping stocks are good buys: EXM, DRYS, EGLE, NM, TBSI, GNK and OCNF.

Full Disclosure: The author is heavily invested in SWC and shipping stocks EXM, EGLE, TBSI, as well as hold PAL and cobalt stock OMG. I have no positions on other stocks mentioned in the article.

Opportunities in an Irrational Market Place

We saw another irrational knee-jerk market reaction on Jan. 7, 09. Oil price dropped more than 12% in a day in response to EIA's weekly inventory report, which shows an increase of 6.68M barrels. The un-warranted knee-jerk reaction shows the market interpreted the data completely wrong. If you scrutinize the data, oil price should jump up, not down.

Simply, if oil is being hoarded, of course the inventory will jump up. The data shows US oil imports of last week increased dramatically over the same week a year ago: 13.698M barrels a day versus 12.904M. So for the week an extra 5.558M barrels of oil was imported. If the USA is buying more crude oil, of course inventory will raise. When Americans are buying more, shouldn't the oil price be driven up in the international market? Inventory was up NOT because Americans are consuming less, but because we imported much more.

EIA report says oil products supplied was 20.1M barrels a day, down 2.9% from a year ago. Gasoline demand was down 2.2% from a year ago. Those are very small percentages. Early last year, due to high gasoline prices, many people switched to more fuel efficient vehicles. So it's not surprising that Americans may well be driving slightly more mileages but actually consume a bit less gasoline, simply because of better vehicle fuel efficiency.

I discussed in my last article that the fundamental demand on oil and automobiles have NOT weaken as mobility is a basic human needs, more important than even food. I cited the Great Depression story "The Grapes of Wrath" where a family lost everything but they kept the family truck as it was vital to the family's survival. The current weak auto car sales are merely postponement of demands, not disappearance of demands.

I did not sell my US Oil Fund ETF (USO) holdings during the panic on Wednesday. Shipping stocks like DRYS, EXM, EGLE, GNK, OCNF and NM all dropped heavily with oil, despite of the BDI index going up for the day. I used the opportunity to load up a lot more shipping stocks. My favorite now is EXM, because it is even more under-valued than DRYS. Hellenic Shipping News recently has a nice story about EXM. My initial entry into the shipping sector was on DRYS, but then I find that DRYS is a better known name in shipping. I would rather pick something a bit less popular. Why pay the extra premium just for a popular name?

How do you deal with an extremely irrational and volatile market, with stocks routinely move 10% up or down in a day? Just do NOT run with the mobs! Do things contrary to the group mentality. Buy on the dips, and NEVER set a stop loss sell order or panic sell. Why lose your positions to a computer, and then have to pay higher price to buy back the same shares? When people are selling in panic, it's good to buy. When people are complacent, then you should sell.

Not wanting to follow the majority is one reason why I was never interested in SPDR Gold Shares (GLD) and I recently get out of iShares Silver Trust (SLV) totally. I am always skeptical about the physical precious metal ETFs like GLD and SLV. The metals might actually be there as claimed. But they are not in your physical control. Someone else that you don't know, let alone trust, controls th0se metals. There is also counter party risks in these ETFs. I never understand why the banking Santa Clauses took all the trouble setting up precious metals ETFs and hire guards to watch the metals for you and help YOU make money without lifting a finger. Theoretically there can be one trillion shares of SLV held long and another trillion shares shorted. But the world does not have a trillion ounces of silver. You either buy and own physical precious metals and bury them in your backyard, or you merely own promises on paper.

Opportunities knock on the doors when you least expect it. Today I noticed something that shocked me. The trade volume of the E-TRACS UBS Long Platinum ETN (PTM) suddenly surged to more than 10 times the average daily volume, starting on Jan. 6, 2009, while platinum staged a remarkable multi-day rally. Some one must be buying the PGM metal massively.

I do not know what's behind the sudden surge of PTM trade volume. But I have done plenty of research in the PGM metals sector and I firmly believe the fundamentals of these metals are very bullish, despite of temporary set backs. I continue to hold a large position in Stillwater Mining (SWC), one of the world's only two mining companies who produce palladium as the main product. The other one is North American Palladium (PAL).

The sudden surge of PTM trade volume and recent strong rally of platinum and palladium prices are good news to shareholders of SWC and PAL. There have been some extreme daily movements of these two stocks lately, especially SWC's extreme price movement on Jan. 6, 09, which is also the first day PTM saw unusually high trade volume. I can only speculate that the price manipulation in SWC and the sudden surge of PTM trade volume could be connected.

I continue to monitor the coal sector even though I do not currently hold any coal mining stock. I believed that globally, the coal supply and demand was largely balanced, with a shortage of no more than 1% or 2%. The current economic downturn could well turn coal into a surplus, particular in the US coal market. I suggested that if you hold coal stocks like ACI, ANR, BTU, CNX, JRCC, etc., you should sell them in the next rally as the US coal market might be bearish in short term, although I believe coal has long term potential.

Surprisingly, international coal prices stabilized at not much below $100 per ton, and they are quietly trending up again, despite of oil price drop to recent lows. What gives? Maybe Europe figured that they need to rely more on coal as their oil and natural gas supplies become vulnerable. This is painfully clear after recent dispute between Russia and Ukraine shut down natural gas supply to a big part of Europe, causing panic. Predictably, Europe will need more coal and will need to import them from overseas. So the US coal market may not be bearish after all, if Europe starts to turn towards the USA to purchase coal.

But in such case, it's better to buy the shipping stocks at deep discount from their recent highs, rather than the coal mining stocks. The coal has to be transported by ships, right?

Full Disclosure: The author currently holds positions in SWC, EXM, EGLE, DRYS, PAL, OMG and USO. I do not own other stocks mentioned here.

The Real Supply and Demand of Oil and Other Commodities

The market irrationality has reached a new record. Spot price of the crude oil free falls to $31.41 a barrel (WTI Cushing Spot) two days after OPEC cut production by 2.2MB per day and made clear that they wanted to see $75 oil and will continue to cut if necessary. As OPEC vowed to keep cutting until they see $75 oil, oil should go up, but it actually went down. What gives?

In search for an answer, people blame it on "the oil demand has collapsed". Global oil demand did NOT suddenly collapse in the two days after the OPEC announcement. Look in a mirror for the answer. Yes that says you! Every one bet on raising oil after OPEC cut. The market ALWAYS fools most of the people most of the time, logical or not. Fundamentals work in long terms, not in short term moves. If you bet on short term moves, try to bet against most people, instead of bet on fundamentals.

Has the global oil demand collapsed? US oil import in October actually surged. Read the EIA provided weekly US oil import data. In the week ending Dec. 19, total US oil imports were 12.780M/day, versus 12.907M/day in the same week a year ago. That's only a 1.0% drop. Consider the surging oil demand in China, Russia, India, the global oil demand probably sees a slight increase or at least remain flat.

Do not forget Peak Oil. The world's top ten oil fields are all in steep production declines. Mexico's Cantarell Oil Field is declining more than 33% a year! According to Matt Simmons, Mexico, our 2nd largest oil supplier, will CEASE to export oil by the end of 2009.

The free fall of oil completely defied logic. I did purchase some USO a bit too early after the OPEC decision. Judging from what happened to other commodities, oil price may continue to drop to such low level that most oil producers can no longer make a profit. At that point people may finally be convinced that oil producers will cut production for real, instead of cheating on the OPEC production quota.

The fundamentals of commodities supply and demand can not change in just a few months. As I discussed before, the global credit crunch resulted in forced liquidation of global supply chains, as every one liquidate their inventory to raise cash in order to survive. The inventory sales flood the market to create a false over-supply situation while supply destruction is playing out at break-neck pace as unprofitable mines are shut down.

Due to the credit crisis, global commercial activities are brought to a grinding halt due to lack of credit. The global shipping industry is hit hardest. Read my analysis on what happened in the shipping industry and why I bought shipping stocks like DryShips (DRYS) near the low. If you followed my past articles, you know I have followed DRYS for a long time but never bought before. I believe DRYS could be like the coal stock JRCC I picked up around $4 last year, gaining some 15+ fold from the low in a matter of a few months!

BTW I continue to call for people to sell JRCC and other coal stocks (ACI, ANR, BTU, CNX, FCL and FDG) at any good rally. The US coal market is now a bear market. Coal is long term bullish but short term bearish. Obama's Global Warming team doesn't help coal either. I knew Steve Chu when I attended his seminar on his laser atom trapping research, two years before he was awarded the Nobel Prize in Physics. I am sad a brilliant physicist was tricked by the Global Warming Hoax. He was too occupied to spend 10 minutes scrutinizing the global warming claims using his basic physics training. But in any case, the coal sector is not going to be a happy sector for a while. Mr. Secretary Steve Chu, please spare a few dimes to the Cold Fusion research scientists, you know, as an experimental physicist, no one could continue to do the same experiments for 19 years, unless there really IS something in it. Cold fusion is real science and humanity's best hope of overcoming the energy crisis due to fossil fuel depletion.

We need to make a distinction between the aberration caused by the credit freeze up, and the real fundamentals of supply and demand. The credit freeze up only has a temporary effect in halting global goods movements and suppressing or delaying demand. It can not last long. Governments around the worlds are printing fiat money like crazy and injecting huge liquidities to get the credit moving again. There are clear signs it's starting to work. Banks are NOT in the business to hoard cash. They are in the business of taking in deposits and then loan money out to earn the spread of interest rates. If banks do not resume regular business soon, the whole banking industry will disappear from our society. That is not going to happen.

The real supply and demand is no where near a catastrophe. World Bank predicted a 2% drop in international trade next year. MasterCard reported a 3% y-o-y drop in US gasoline purchases. US Census Bureau reports a 4.4% increase of goods exports and 3.9% increase of goods imports in October, compare with last year. The scariest number is Japanese government reported a 26% drop in export to the USA in a recent month. Well dah?! Japanese count numbers in Japanese Yen, the same US$ amount is now 23% lower in Yen compared with a year ago. So Japanese export in US$ terms probably dropped a mere 3%. Every one is shouting "demand destruction" but how many actually dig into the data and scrutinized the facts?

As I discussed, the modernization of China, India etc. is the fundamental driving force behind the global commodities bull cycle. This transition has been going on for some 30 years and can go on for decades more, as the per capital consumption of many raw materials and goods in China is still far below even the global averages. Read "China Eats the World". China's current highway mileage is worth about ONE INCH of highway per person. There is a gigantic demand of steel and cement if China provides its citizens at least one finger or one foot of highway.

The basic demands come from basic human needs. During bad economy times, people cut spending on luxuries but continue to demand on things that are essential. So let's exam what is luxury and what is necessity in the people's lives. First let's not confuse luxury with expensive items. Something expensive doesn't necessarily make it a luxury, and something cheap doesn't mean it is a necessity. This is important to keep in mind.

Drinking Coca-Cola is a luxury; driving a car to work is NOT; Brushing your teeth with tooth paste, rinse your mouth using mouth rinse liquid, or using shaving creams while shaving, is a luxury; but visiting a dentist for dental cleaning or a dental crowning, is a necessity. Watching big screen TV is a luxury, but owning a computer to surf the internet, is essential. Living in a 5-star hotel is a luxury, but living in a place with roof over your head, is absolutely essential.

Companies that produce "luxury" items should be considered good short target now, particularly those big blue chips stocks few thought about shorting. In early August, 08 I called for shorting soft drink companies like Coca Cola (KO) and Pepsi (PEP) as I believe soft drinks will become non-essential luxury items. These two stocks have moved down a bit but they are still good long term shorts.

Now come to think about it, do people really need to use an ever growing amount of toothpaste, mouth rinse liquid or shaving creams? Even Albert Einstein did not use shaving cream. He just used warm water. I am thinking about shorting related stocks like Colgate-Palmolive Co. (CL). With a saturated market and shrinking profit margin, it's ridiculous that CL is priced at more than twice its annual sales and 15 times its book value. The short ratio seems to be low so CL may be a good long term short. On similar consideration maybe one should also consider Procter & Gamble Co. (PG) as a possible short. The difference is PG's is at a more reasonable 2.83 times book value, and it is well diversified into a lot of different products. So I will be cautious and want to do more DD before shorting PG.

Three things in life are absolutely essential: eating, living and moving. Eating is of course the most important. However there is a lot of room in cutting eating cost, without cutting nutrition. People will cut on non-essential and unhealthy processed food, and rely more on cheaper fresh food. One example is potato chips and pop corns. Why would any one eat these junk food? Frito Lay came to mind but it's part of Pepsi Co (PEP). Any one can recommend a good snack food producer to short?

There is much less to be compromised in living. For 99.99% of Americans not living under a roof is unthinkable. You either own a home or rent a home, one way or another. Surprisingly, the majority of the home builders, like DHI, CTX, LEN, RYL, are still around today. People either own a home, or have to rent one. So if people are not buying houses, then there must be a booming rental market and a booming business building rental units. Is it time to buy home builders as many of them seem to have gone up from their lows? I am skeptical. We need to see at least half of home builders go out of business to remove enough excessive capacity, before the remaining ones can return to profitability. There are so many good things to buy now. It's not time to go into home builders yet.

I see even less room to be compromised on moving. The mobility is an essential human needs more important than eating and living. In the Great Depression movie "The Grapes of Wrath", the family lost everything and they had little to eat. But they kept their family truck, which allowed them to move to California, find a job and find a place to live. Without a four wheels car you are reduced to just two legs. Without two legs and you are reduced to two wheels. That's how important mobility is.

Car ownership is an essential part of American lifestyle. You need a car to go to work or go shopping. Even if you do not have a job, you still need a car to move around looking for jobs, or go get some help, or to move to a better place. Has the global auto demand collapsed? Not by a long stretch! Just look at the global oil consumption. The Big Three US auto makers, particularly GM, are at the mercy of government help now. But it is a problem of the Big Three unable to compete with foreign auto makers, not a problem in fundamentals of the global auto industry.

The current credit crisis forced many people to delay buying new cars, but it also means a strong pent-up demand to come back soon. Historically, due to the skyrocketing oil prices and inflation, auto demand collapsed in early 1980s and GM stock hit a low in mid 1982. But just a little over a year later, in 1983, US auto sales reached a new record high as consumers who delayed car purchases found they still need a new car when the old car breaks down.

I believe it is in America's best national interest, as well as in the interest of the consumers, to keep the Big Three alive and keep the competition alive, and the vehicle prices low. But I do NOT advocate buying GM stocks as an investment. There is no reason to believe they can pay off the huge mountain of debt and pension obligation, and start to make profit any time soon. So there is no reason to invest. Both the longs and shorts in GM stocks right now are just gambling against each other, trying to pick a few dollars from each other's pocket.

We should invest in companies that have been indiscriminately hit hardest, but are financially strong and have good future prospect of profitability. The best sectors to be in right now are mining companies and bulk shipping companies. The shipping sector should rebound sooner and stronger than anything else, due to the pent-up shopping demand from the goods stockpiled on harbors waiting for credit letters. That is why I started massively purchasing shipping stocks like DRYS and EXM. There are others, like DSX, EGLE and GNK.

But my best favorites remain the by-product rare metals, palladium, and cobalt. Both metals are critical both during peace times and during war times. Stillwater mining (SWC), America's only palladium mine, remains my biggest holdings, although DRYS now catch up to be my No. 2. Another palladium mining company to own is North American Palladium (PAL). I also own a significant stake in OM Group (OMG), the world's dominant cobalt chemical company.

You've got to like palladium and cobalt because both metals are mostly by-product metals, and supply of both could be interrupted by a single-point-of-failure, which is very real. I talked about a possible Russian Checkmate. Norilsk Nickel (NILSY.PK) could suspend unprofitable production due to low nickel price, hence cut off 45% of the world's palladium supply.

Now it seems things at Norilsk are playing out in better favor of palladium than I thought! Norilsk resumed the US$2B stock buyback. That leaves them $2B less in cash and closer to a liquidity squeeze that will force them to shut down the unprofitable mine soon. Norilsk also announced production cut. Nickel production in 2008 cut to 298K tons from planned 300K tons, and reduces to 290K to 305K tons next year. The cut in palladium is much more dramatic, from a planned 3.05M ounces to actually 2.764M ounces in 2008, and 2.61M to 2.62M ounces production next year. Why the production cut in palladium is much bigger than nickel?

Norilsk explained there are two reasons for lower palladium production:

Reason 1: they will reduce local mineral ore production and purchase third party intermediates (metal concentrates) to supplement nickel production. Nickel concentrates purchased from third party will contain no palladium, only nickel.

Reason 2: much lower PGM content in the ores. Norilsk's mineral reserve statement shows that the nickel rich part of ores actually contain less palladium (2.91% Ni and 7.41g/t Pd) while the nickel poor ores contain more palladium (1.19% Ni and 11.92g/t Pd) . If they seek to reduce capital expenditures, they will produce the ores rich in nickel and poor in palladium. Using the content ratio of the richest nickel ore, if Norilsk's polar region nickel production is 225K tons, then the palladium production will only be 1.922M ounces, versus the normal 3.05M ounce.

It's end of December now and the annual Russian government stockpile palladium shipment has NOT showed up in Switzerland. Maybe the Russian palladium stockpile sale has finally ended for good. It's in Russian's strategic defense stockpile. There is no reason to sell at current low palladium price. The Russian Government has taken effective control of Norilsk Nickel, and will support the mining company by buying up its metal products.

What better support can the Russian Government extend, than to simply buy up Norilsk's palladium production and re-stock the nation's defense stockpile? In doing so they can bid up the global price of palladium to over $2000 an ounce, which means a cool extra $6B per year for Norilsk, a money they desperately need right now.

These numbers and facts continue to convince me that Stillwater Mining (SWC) is the best mining stock I can own for the next 5 years. That is the reason I continue to hold a dominant position in this mining stock, America's ONLY producer of the strategic PGM metals.

Full Disclosure: The author is heavily invested in SWC, DRYS, OMG and PAL. I currently have no position in GM, KO, PEP or CL.

Safe Haven Investments: Imminent Danger and Opportunities!

When people see danger in the market, their animal instinct response is to liquidate everything and go fully in cash to ride out the storms. The conventional wisdom is "Cash is King". But conventional wisdom doesn't work anymore, as this is unconventional time. If you are fully loaded in cash or US Treasury Bonds, this news first noted by Karl Denninger should completely shock you out of your shell:

$2.29 Trillion Dollars US Treasury Bonds Failed To Deliver!

Note it is $2.29 TRILLION, with a T for Trillion! I never heard one can short US Treasury Bonds, let alone naked shorting US T-Bonds! The T-Bonds are considered some of the safest investments, with the full faith and credit of the US government guaranteeing the principal, and you get an interest payment. So shorting US T-Bonds is virtually guaranteed to lose money. You will have to payback the principal plus the interest. You do NOT short the US T-Bonds, let alone naked shorting, let alone as much as $2.29 Trillion.

That is UNLESS you are a really BIG player and you clearly see imminent danger of the collapse of the US T-Bonds, and of the US dollar itself. I wrote before that Warren Buffet saw extreme danger in the US Treasury Bonds and he was completely out of the bonds and fully into the equities market now. Of course people should respect and follow this guy's wisdom. But small potatoes like Warren Buffet could not have naked shorted $2.3 Trillion US T-Bonds. Some one much bigger and knows better did it. I will not speculate. Please read Karl Benninger's comment.

Money created out of thin air is NOT King! The Kings now are precious metals. Never mind the fact that the dollar staged a shocking rally and precious metals plummeted. The dollar rally is nothing but a bubble, while current precious metal prices, especially platinum and palladium, is nothing but absurdity. Physical commodities MUST be priced above their production cost, or the supply will simply dry out, as no one can continue produce metals at a loss. So if I am sitting on my precious metals, I pretty much have the guarantee that they will soon appreciate in real purchase power term. On the other hand, if you are sitting on trillion of dollars of the fiat currency, and the currency falls, the only guarantee you will have is they will continue to fall further down, until eventually they reach zero.

The general market always manages to fool most people most of time, and causes more people to lose more money in unexpected way, and rewards only the selected few who has the wisdom and who has the determination to stick to their wisdom. The current global crisis necessarily means an astronomical amount of fortune must be totally wiped out. What could be a better, cleaner and quicker way of wiping out trillions of dollars of fortune instantly, than to first herd the sheeples into holding nothing but cash, and then the currency suddenly collapses? Of course the US dollar rallies big time if every one is herded into buying dollars. A bubble is something pumped up to a valuation much higher than where it should be.

Fiat money is completely at odd with the economy basics of supply and demand. For anything physical, equilibrium can be reached as the price impact positively on supply and negatively on demand. Higher price encourages more production while low price suppresses the supply. When the price falls below cost, supply dries up as no one can continue to produce and sell something at loss. On the demand side, the price has exactly the opposite effect. High price suppresses demand while low price encourages consumption.

Fiat money acts in exactly the opposite way. The less valuable a currency becomes, the more is being produced out of thin air. The cheaper the currency becomes, the less people desire to own and keep them, and the faster people want to get rid of them. When people want to get rid of their paper money as fast as possible, it speed up the velocity of money, and cause the value of the currency to plummet even more, forcing the government to print more money. The vicious cycle continues until the currency is totally destroyed. Throughout civilized history of mankind, every single experiment of fiat currency has failed. No exceptions.

In Chinese the word CRISIS contains two characters, DANGER and OPPORTUNITY. We are in extreme danger but also with extremely good investment opportunities. The opportunities are made even better because every one runs away from them and run towards a gigantic death trap with a sign "Cash Is King". Remember one thing, safe havens must be small, with narrow spaces that accomodate only a few refugees.

It reminds me of the Bible story of Noah's Ark. People ridiculed Noah as he was building his ark, thought it had never rained a single drop for a year, how could the flood come? The flood did come as Noah expected. Had these people listened to Noah and seek refuge in his Ark, would it make a difference? No! The Noah's Ark was still only big enough to contain just one pair of each kind of animals. It wouldn't be a Noah's Ark if it was made any bigger. Likewise, today's financial safe haven wouldn't be a safe haven, but a death trap if it was big enough to allow every one in!

Although we do not see a drop of rain yet, trillion dollars of wealth will soon be flushed away by the coming financial flood of hyperinflation. Have you built your Noah's Ark yet? There is definitely NOT enough material to build a big enough Noah's Ark to save every one.

I can't understand it! There are tons of investment opportunities in commodities right now. You can buy a few metric tons of nickel or copper or cobalt or a number of other things. You know they are priced far below their production cost right now. So it is absolutely a guarantee they must appreciate to at least the fair price of their cost. Can you find any better investment, with such absolute certainty of making double, triple and quadruple the money in the next few months, regardless of the demand? How could people be so blind and not seeing the opportunities? They all rush to cash and T-Bonds waiting to be slaughtered, and they actually thought it was safe to be with the biggest group of mobs?

Nickel is now less than 1/6 its price of May, 2007? Hello?!

ENOUGH IS ENOUGH! When enough is enough, the eruption is fierce!

On Monday, third largest nickel producer in Russia, Ufaleynickel, responsible for slightly less than 1% of global supply, announced that they are shutting down production, as the nickel price is simply too low. They need to see at least $26,000 per metric ton to break even.

Instantly nickel shot up to touch $5.00 a pound, from Friday's $4.00. That's a one day rally of 25%. It's probably the biggest one day rally of any commodity in history. Removing 1% of global supply doesn't really change supply/demand that much. But the price was suppressed too much so the bounce had to be fierce. Had you bought nickel at $4, you have made 25% profit in just a day. And yet people rush away to buy US T-Bonds to earn 3% annual interest while waiting to be slaughtered in the looming implosion of the bonds market?

Want to make a 10 fold return in two months, and maybe two weeks? Go buy some palladium metal. Any palladium metal you can find. Palladium price can go from $170 per ounce to $1700 per ounce in no time, once the Russian Checkmate plays out.

The Russian Checkmate event will be Norilsk Nickel (NILSY.PK) shut down production. They are the No. 1 nickel producer in Russia. No. 3 has shut down already. Would No. 1 be far away? Norilsk shut down, and 45% of global palladium supply is gone. I can't even start to predict where palladium price could go up to, with 45% of supply removed instantly. In 2000/2001, one false rumor from Russia was enough to send palladium up to $1100. It would be fun to watch the effect of 45% of palladium supply removed.

Of course, you can get better leveraged gain investing in the palladium stock Stillwater Mining (SWC) and North American Palladium (PAL).

Will Norilsk shut down? They are facing a severe liquidity squeeze. In first half of 2008, Norilsk group reported a profit of $2.682B, at 32% profit margin. If you look up metal prices as of Oct. 24, 08, and re-run the numbers, they would have to write down -$4.594B of sales revenue for the whole group, or $3.634B for the main Norilsk Mine, resulting in heavy losses. The cash drain will be nearly $2B per half year.

Norilsk group had $4.8B cash as of end of June, 08. The main Norilsk mine probably had $4B in cash. They spent $2B in a recent stock buyback, a senseless decision which Mr. Mikhail Prokhorov denounced as "capable of putting the company on the verge of bankruptcy". Operation loss since June probably costs them another $1B. They have a debt payment of $400M due in November. Do they have any cash left? Can they continue to operate the mine at heavy loss? Why would they continue to operate with heavy loss until bankruptcy?

The bullish case for palladium can not be disputed if you understand how bad a shape Norilsk Nickel is in today.

Yesterday's news of Ufaleynickel shut down mentioned OM Group (OMG) and reminded me that OMG is the best cobalt play, because it dominates the chemical sector involving cobalt. I consider cobalt as a better metal to buy than silver, with the potential of 10 fold appreciation in a short period of time. Check out news on Minor Metals. If the speculation of Katanga Mining shut down plays out, cobalt price should fly soon. You can buy cobalt from BHP Billiton (BHP).

There are so many beaten down silver and gold mining shares now. All are very good buys: PAAS, SSRI, SIL, HL, NEM, AUY, NAK, IVN, NG. There are so many to name. Even Southern Copper (PCU), my very first commodity play, is now back below where I first bought in late 2005. Anything in mining is good nowadays. I would not touch Silver Wheaton (SLW)though, because of counter party risks. Also forget about any coal player now. I continue to call for selling JRCC, ACI, ANR, BTU, CNX, at any rally. The US coal market is a local market and is now bearish. Again watch Dry Ships (DRYS) share movement as it is an important indicator of the health of the global economy. I might even consider buying some DRYS as the valuation has become so attractive. But I first need to get a conformation that cross ocean shipping activity is recovering.

I will keep a portion of my portfolio in iShares Silver Trust (SLV). I will not buy gold or SPDR Gold Shares (GLD). I believe gold is adequately priced at current level. The money spent on gold is better spent on something else. Even buying a ton of nickel or copper is better than gold.

But the best of all is still palladium, and the only two pure palladium plays, SWC and PAL. We are witnessing a singularity event unfolding in the palladium market as Norilsk Nickel will inevitably shut down, to protect its own best interest. What is singularity? A singularity is the kind of extremes like what you get when you try to divide a number by zero!

Full Disclosures: The author is heavily invested in SWC, PAL, has considerable stake in OMG and SLV, and will continue to buy some select silver shares including SSRI, HL, PAAS and SIL. I am also looking for opportunity to buy DRYS soon.

True Safe Haven Investments: Inflation or Deflation?

Is it deflation, stagflation, or hyperinflation, in the current global economic crisis? That's the quadrillion dollar question investors must get right. This article will answer that big question but it is also meant to be a sequel to part one and part two of the serial articles talking about valuations of physical and non-physical assets as well as currencies. Please read the first two parts of the articles if you have not. It's critical to understand valuation of commodities and currencies first, before the big question of inflation versus deflation.

Recently, as the credit crisis unfolds, we saw the worst commodity price plummet in history, while the US dollar index rallied amid the unfolding financial crisis. Many people wonder that the commodity bull market has ended as the global economy enters a recession. Their reasoning is that due to credit squeeze, people cut back on spending as they could not borrow any more.

Such notion is wrong. While people looked at the weaker demand side, they failed to notice the destruction on the supply side! On the consumer spending side, people are NOT cutting back in TOTAL spending. Actually people are squeezed to spend every dollar from their monthly income, just to keep heads above water. More and more people are living from paycheck to paycheck, meaning they have to spend every dollar of they take in, and have nothing to save. They might be forced to cut spending on some specific items and spending more money on other things. The total spending in dollar terms is up.

Recent commodity price plummet is NOT a fundamental change in the supply/demand relationship. Fundamentals do not change abruptly in just three months.

The real reason is that the global credit crunch squeezes out inventories in the supply chains, causing a temporary and false supply surge, depressing the price. Such price depressing effect is only momentarily. It will be corrected violently to the bullish side once the false surge of supply is exhausted and the effect of supply destruction becomes evident.

In any commodity market, besides the supply side and the demand side, there is a long supply chain connecting the supply and the demand. In different parts of the supply chain, there are sizeable stockpiles of the materials. Under normal supply, the stockpiles at different parts of the supply chain will buffer out supply disruptions and ease out price shocks. That's why when a commodity is in adequate and abundant supply, the price will be flat.

However, stockpiling materials requires operational capitals. Often time money tied up in inventories is credit provided by banks, in the form of so called commercial papers. Things work fine if the credit market is healthy and adequately funded.

Unfortunately in a credit crunch, borrowing money is expensive or virtually impossible even for good businesses. Faced with a liquidity squeeze, businesses must raise cash for operational needs or to merely service debts. That means selling off inventories and cut spending in purchase of raw materials and equipments. When producers cut spending in productive activities, the supply destruction is in the pipelines!

Not only corporations are selling, hedge funds invested in commodities are also selling like there is no tomorrow. Every one is liquidating everything to raise cash and stuck the money in safes. That is absolutely foolish! While governments around the world are printing astronomical amount of money out of thing air, people are hoarding the funny papers in their pillows? We are in the making of a Weimar Republic on a planetary scale, and you hoard the fiat money?

When businesses at all levels suddenly sell off the inventories and at the same time halted purchase of new feedstock materials, prices are depressed prompting more sell offs. This leads to the false illusion of supply surplus, while hiding the fact that production of further supply is being suffocated. It's an extremely dangerous situation, as it could lead to a sudden onset of supply disruptions just as every one cheer at cheaper prices, without realizing that the supply chains have been squeezed empty.

My wife told me the best sell always happen right before a store goes out of business! When you go shopping this weekend and enjoy the lowest prices you haven't seen in a long while, you'd better ask the manager when will the next delivery truck arrive, or will it arrive at all! It's economic 101, all businesses are for profit. No one can operate at loss sustainable.

What do you expect when the supply chain stockpiles are depleted? There is no longer a buffer to absorb supply disruption and price shock. The market will suddenly discover that the supply has dried up. So the price will rally violently, in an extreme volatile way. That is what I predict will happen in all commodities in the coming weeks, including oil, food grains, and metals.

The market of platinum and palladium metal (PGM) is probably a good case study. About half of these metals are used in making the catalytic converters on vehicles. To reduce the risk of price volatility and supply disruptions, auto makers normally maintain a stockpile of PGM metals worth about 6 months to one year's consumption. Jack Lifton from Resource Investors described a very interesting case when one man's attempt to modify that inventory level caused dramatic reaction in the tightly traded rhodium and platinum market.

I am a big fan of palladium and platinum investment due to these metals bullish prospects. After the headline news of South African electricity crisis in early January caused the platinum and palladium prices to shot up, they stayed at the relative high level till the end of June. And then, at the onset of global financial crisis, they plummeted in a free fall fashion, all the while South Africa's PGM production continue to suffer from tight electricity supply. What gives? Who is selling? Every metals analyst is puzzled by the mind boggling fall of platinum and palladium.

The Big Three US auto makers, General Motors (GM), Ford (F) and Chrysler are facing a severe liquidity squeeze. They have been aggressively reducing inventory levels for months. When you are in a liquidity crisis, you sell whatever asset you can sell quickly to raise cash. The most liquid asset, of course, is the platinum and palladium precious metal stockpile.

In the narrow platinum and palladium spot market, when inventories from auto makers were sold out, it creates a lot of downward pressure. If industry users are selling, speculative hedge funds will be selling as well. The only buyers therefore must be the value-based long term investors. A recent Resource Investor article by Nathan Becker also provided explanation that hedge funds have to sell their precious metal hoardings due to liquidity squeeze.

I agree with Nathan Becker mostly but I must point out that he only considered the demand side and failed to recognize the damage that low metal prices may inflict on the supply side. No one can produce metals at heavy loss sustainable. Businesses must scale back production or shut down, if they can not make a profit. Anglo Platinum (AAUK) is currently producing at an average cost of US$1250 per ounce basket PGM metal (60% of Pt, 33% of Pd and 7% Rh) while the current market price of the PGM basket is only US$778 per ounce. It's only a matter of time before South African producers must start to reduce production if the prices do not improve to profitable level soon.

Last week's market plummet creates one of the rarest buying opportunities in our times for savvy investors with cash at hands ready to buy. How often do you get to go to an out of business sale and pick up things at prices far below their cost? Nickel is on out of business sale, copper is on out of business sale, grains like wheat, corn and rice are all suddenly on nose bleeding out of business sales. Grab them while you can. It may not be there tomorrow.

Do you think mining companies and farmers can continue to sell you nickel at $5.00 a pound, wheat at $5.53 per bushel, corn at $3.84 per bushel, and expect to continue the business at all selling things well below cost? It's the same out of business sale like what your wife told you!

The absolute best out of business sale is the palladium, metal of the 21st century, currently at $185/ounce bid. Gold mines are every where, silver is mined everywhere. But only four places in the world produce significant amount of platinum and palladium: Norilsk Nickel (NILSY.PK) in Russia; the Bushweld Complex in South Africa; Stillwater Mining (SWC) in USA; and North American Palladium (PAL) in Canada.

None of the four palladium producers are operating at a profit at current prices of nickel, platinum and palladium. They must each or together decide to slash production to boost metal prices, or face eventual bankruptcy. Any of these four have enough leverage power to boost metal prices on their own, and I believe there will be strong will to do that, as no business wishes to operate at a loss if they have a choice.

That is reason enough for investors to purchase physical palladium at current price, as there is a virtual guarantee the price must go up to reflect real cost, regardless of industry demand. 1980 was a good historic example when auto industrial demand of PGM metals collapsed, but investment demand still pushed the metals to all time high, together with gold and silver.

Out of the four, Norilsk is in bad shape and is most likely to slash production, due to low nickel price, now stands at $4.93 per pound versus the high of $25 per pound last year. There are also huge political pressures to shut the mine down to clean up the environmental catastrophe.

But South Africa is in a much worse shape as Rand dropped nearly 20% in one day versus US dollar. When a country's currency can drops 20% in a day, it's pretty much a broken and bankrupt country. The light of South African will go out, so will the light for that country's PGM mining industry. I previously pointed out that ESKOM, SA's electricity company, has to keep borrowing money and burn lowest quality trash to keep operation going. Now the global credit crunch means they have lost the ability to borrow. It's soon before it all blows up.

South Africa blowing up, as hinted imminent by the Rand's 20% one day drop, means removal of 85% of world's platinum and 35% of palladium supply! You can not have a more bullish story than that, on any other commodities. Stillwater Mining (SWC), with their palladium sale protected by a hedge floor price well above current market, is the best to weather out current market and best to leverage the coming bull market in palladium and platinum.

The only other metal that is even close to the bullishness of palladium/platinum, is the metal cobalt. There are strong and rapidly increasing industrial demands due to alternative energy applications, and due to the need of more drilling equipments in the oil/gas industry, and due to the metal's strategic importance in military applications. I wish to dedicate one article just to talk about cobalt. But suffice to say for now I consider cobalt a better physical metal to buy than silver and it should appreciate at least 10 fold relative to silver. Like PGM metals, 90% of the world's cobalt supply is concentrated in one country, Congo, which has been in years of civil wars and the conflict looks like flaring up again. So the supply is vulnerable while the demand is strong and growing. That's a perfect making of a bull market.

The best cobalt play I found is a stock called OM Group (OMG) (Oh-My-God). It is current a very decent buy at ridiculous low valuation. If you know any other cobalt play, or know places other than BHP Billiton (BHP)'s Cobalt Open Sale that I can buy physical cobalt, tell me!

Now, back to the US dollar. We are creating trillions of dollars out of vacuum and throw them into a blackhole. Make no mistake; it is inherently hyper-inflational. It's a big dilemma the whole planet is facing today. Short term it is about liquidity preservation or die. A little bit longer term it is about valuation preservation or die. Hoarding fiat currency while new money is created out of thin air preserves liquidity but loses value. Hoarding physical assets preserves value but reduces your liquidity.

I think we will see a very sudden and abrupt switch from a false US dollar rally caused by every one hoarding the cash, to a hyper inflation scenario where every one wants to spend out the cash as fast as possible. In physics it's like a high pressure and high temperature phase transition. The credit will go straight from solid ice to rapidly expanding vapor, skipping the liquid phase altogether, blowing everything out. The phase change will come imminently and suddenly, so be prepared for it!

A few side notes: I called for shorting Coca Cola (KO) and Pepsi (PEP), now it looks like I was right. I called for selling coal stocks like ACI, ANR, BTU, CNX, FCL, FDG, JRCC repeatedly since June 20th and I continue to make such call as I see the US coal market is now bearish. I can see JRCC drops to near $10 or even below. Continue to watch DRYS as it is a good indicator of the global economy.

Full Disclosure: The Author is fully invested in SWC and PAL, and is also heavily loading OMG recently. I am also buying SLV, GLD, SSRI, PAAS, SIL.