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.

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.

A Few World Events Bullish for Metals

I noticed a few important world events happened in the last 24 to 48 hours and triggered dramatic rallies of a few related metals, including palladium, platinum, nickel and aluminum. Let me discuss those events.

First, something that must be described as a paradigm shift event in the palladium market. No one noticed this Bloomberg news except for a few fast thinkers, who immediately responded. Palladium price instant jumpped up $12. But more spectacular is the spike in the palladium lease rate. I have NEVER see such a big lease rate spike in any precious metal! Please read this to understand the significance of metal leasing rate.


Quote from the news:

The metal (palladium) rallied after Russia's OAO GMK Norilsk Nickel, the world's biggest producer, said its stockpiles of the metal may be "depleted'' in one to five
years as the government reduces its holdings.

One to five years? Why such a big margin of uncertainty? I think they are really explicitly saying it's zero years, there is virtually no more government palladium stockpile left. This is a gigantic paradigm shift event that palladium investors have been waiting for for years, and that many speculate it is getting closer, the depletion of Russian palladium stockpile. This is a paradigm shift because over past years, massive Russian stockpile palladium sale, up to the tune of 2 million ounces per year, was the reason that the Pd market was in surplus. But the stockpile has to be depleted one day, and when it happens, the palladium market shifts from structural surplus to a large structural deficit, which is extremely bullish. Some strong hand investors have been waiting for this since 2003, as I discussed before, and looked at again recently. Read today's mineweb piece: The Russian palladium stockpile - do we need to worry?

Second event that just happened, is also very significant. Nickel rallied strongly up 6%+ on Thursday, as investors now believe nickel is in supply shortage again, rather than surplus. This is caused by the supply disruption due to the big natural gas blow up in western Australia. But more importantly, BHP announced today that it shuts down the Kalgoorlie smelter for at least four month, removing 2% worth of the world's nickel supply. This news is quite bullish for nickel.

Third event came from China. A whole batch of nickel producers in China are shutting down production. During the strong nickel rally which peaked at $50/kg in may, 2007, a number of producers of the so called nickel pig iron emerged. The nickel pig iron production process is highly pollutive, energy intensive and costly but was profitable at $50/kg nickel price. As nickel pig iron flooded the market, nickel price now drops to an unprofitable level for these producers. On top of that, electricity tariff has been inreased by 170%. The higher cost forces producers to shut down. Another reason is China is preparing for the Summer Olympics and so a whole lot of air polluting industries were ordered to shut down in order to clean the air pollution. As a result, now traders widely believe that the nickel market has turned around to supply shortage again and price must surge.

The year 2008, China Olympics Year, is a pretty big deal in China. The folks consider the number 2008, which ends with an 8, a lucky number, on top of it, Olympics is first held in China. So there are lots of jewelry and souvenir buyings and lots of young Chinese couples are getting married this year, boosting demand on precious metal wedding bands. This development is bullish for both PGM metals, palladium and platinum, as I talked before.

But the most important development as far as PGM metals are concerned, of course is the PGM production disruption in South Africa, due to the on-going and long lasting electricity crisis there. Many people noticed the headline on January 25, 2008, and then soon forgot about it and assumed that everything is back to normal again in South Africa. The electricity supply there is far from normal and it is actually getting worse, and more bad news from ESKOM are revealed as days go by. I often visit the ESKOM web site and click on the Media Rooms->News on ESKOM link. So I keep track of things happening there.

ESKOM now claims that the electricity crisis will last at least seven more years. After tracking the news and analyzing the data from ESKOM, I draw the conclusion that the South African electricity crisis is more than just a problem of outdated facilities and lack of electricity generation capacity, but a coal supply problem as well. Most importantly it is a money problem. And sealing it all, it is a problem of lack of leadership and lack of vision, not just in ESKOM, but in South Africa Government, and even within the people of South Africa.

Money buys you things and pretty much fixes everything. ESKOM could get new electricity capacity built and coal supply secured, on a fast track, to fix the electricity supply problem, IF it had the money. But it does NOT have the money. It is broken, bankrupt! That's a fundamental problem. With money, most everything can be solved. Without money, nothing can be fixed.

It's a problem when you run a country on socialist principles instead of on free market. South Africans pay the lowest electricity tariff in the world when energy cost is skyrocketing: 11 cents per KWH for foreign customers, 17 cents for domestic industry, and 41 cents for households. That's in South African Rand. Divide it by 8.1 to convert to US$. It cost far more for ESKOM to generate the electricity, than it gets paid.

Let's look at ESKOM's 2007 Financial Report. Electricity tariffs collected was R40.068B (US$4.95B). Cost to acquire fuels, namely coal, natural gas, diesel and uranium, was R13.040B. ESKOM distributed 241.170 billion KWH of electricity in 2007. So average tariff was R0.166, or US$0.0205 per KWH. I think we in America are now paying up to 25 cents per KWH! Using the energy equivalence calculator, and use quoted energy efficiency of about 35% of SA power plants and that they use the low quality coal (lignite), it costs about 0.59 kilograms of coal to generate one KWH of electricity. So they burned roughly 143 million tons of coal in 2007, roughly nearly half million ton per day.

And it costed ESKOM only R13.040B to acquire the coal and other fuels? That's only R91.20 per metric ton of coal, or US$11.26 per metric ton. Where did ESKOM get coal so cheap? Where can ESKOM continue to get such cheap coal? Internationa coal price is now approaching $160 per metric ton. The Indians are happily coming to South African harbors and pay well over US$100/ton thermal coal at free on board basis. I am quoting this, which is just hilarious:

I think it just reflected poorly on Eskom in terms of their coal purchasing.
After the mining indaba in Cape Town in February it was quite amazing - we
were flying in to have a look at the Camden Power Station with two to three
days supply in front of it, and it just so happened that at the time there
was a train with 200 wagons of export quality thermal coal chuffing past.

Clearly ESKOM doesn't have the money, and can't compete with foreign customers for South Africa's coal. I can not believe they paid US$11.26 per ton. Using trucks to transport coals to the power plants would cost more than that, even if they get the coal for free from mines. The root of problem is South Africans are paying too little for electricity. That's the whole reason ESKOM wants an immediate 53% tariff increase. But every one said NO and Mboweni wants only 6% electricity tariff increase, and the labor union is planning a massive strike against the electricity tariff increase.

With no hope of dramatic increase of tariff income, ESKOM must borrow money to fill the hole of coal cost. But who would lend knowing they can't pay back? South Africa, with double digit inflation rate, above 35% unemployment, and people impossible to accept a 53% increase of a super cheap electricity tariff, is a broken system with broken leadership, and there is no hope of fixing the electricity crisis any time soon. With winter approaching, it's almost guaranteed they will run into another round of deep electricity supply crisis, disrupting mine productions, including PGM mines.

It's important for people to pay attention to what's happening in South Africa, because PGM supply shortfall there provides a virtually guaranteed bullish case for palladium and platinum. That turns North America's only two PGM mining companies, PAL and SWC, into extremely excellent investment opportunity, with high reward virtually guaranteed in the near future.

The recent nickel rebounce further strengthens the bullish case for PAL, who produces nickel as a significant byproduct. I am also trying to look for other cheap nickel players. Norilsk Nickel (NILSY) has fallen down from recent high but it is not cheap at all. I noticed that FNX Mining (FNXMF.PK) has recently been added to the naked short list. The price seems to be at a low level. I need to spend more time research it. But many times, stocks on naked short list may rally strongly on ensuring short squeezes. One example is LDK's rally from its recent lows in March. I noticed there was heavy naked short going on on LDK at that time, so I curiously watched and surely it put up some nice rally when the nakes shorts covered.

Some one asked about aluminum stocks. Many aluminum stocks had been red hot and have since fallen from their recent highs, like AA, ACH, CENX, KALU, NX, SPSX, TG. All of them have fallen down, even though aluminum price is still near its historical high. Why? Are these aluminum stocks at a good price to buy? ACH caught my attention in mid August, 2007. I watched it rally from $40 to $80, but I wasn't impressed at all and never thought about buying it, now ACH is right back to below $40.

The reason I never got interested in aluminum, is because as a natural resource investor, I know aluminum is a virtually unlimited natural resource. You could never exhaust the aluminum mineral reserve of the world. Production of aluminum is just a matter of transporting the raw material, and then producing it using electricity. When the supply is tight, any one can spend some money set up a shop to process aluminum, so the competition diminishes profit margin. And then skyrocketing energy cost really cuts into the corner of any aluminum producers. That's why I could never become interested in any aluminum player.

For any natural resource player, you need to look into the basic economic fundamentals of supply and demand. Look at where the raw material comes from. Is it scarce or abundant? What's the cost of processing it. Also look at the demand side, is it price elastic or inelastic.

Using these principles, I am not too big a fan of coal. I really liked JRCC and bought it at $4 a share only because I found the share price incredibly low, the price/sales ratio was incredibly low, and the quarterly loss was only a small fraction of the sales revenue, and I knew coal price has got to go up. But coal price has gone up too far, too fast and I do not think it can last. Nowadays you can not go to a financial web site without seeing names of coal mining companies being mentioned by every one, like PCX, ACI, APA, BTU, JOYG. If every one is talking about coal stocks, that sounds a bit like a bubble. the world still has plenty of coal reserves left. According to recent BP survey of global coal production, consumption and reserve, global coal supply/demand is roughly in balance. The shortage is no more than 1%. So any disruption is local and temporary in nature. Recent coal price raise of double or even triple is not warranted by the supply/demand relationship and could be in large part attributed to speculator bidding price up.

My advice is it may be time to sell your coal stocks before they reach the top. Move on to something else. don't try to catch the very top, which few people can do. I would think natural gas is way much better than coal. Natural gas is limited, depleting faster than oil, and is less talked about than oil. have a look at natural gas stocks like CHK, SWN, CNP, NGAS, NFX, WMB. The Atlantic hurricane season is coming and natural gas may get a boost if this hurricane season is relatively active and may hit some platiforms in the Mexican gulf.

But I think nothing beats the scarcity and price inflexibility of PGM metals, platinum, palladium, rhodium, the narrow play field (only PAL and SWC in North America), and the lack of mentioning of these two stocks in the investment community. Plus isn't it true that South Africa's winter is fast approaching and will come earlier than the first Atlantic hurricane?

So I am sticking with my PGM plays, SWC and PAL, and will only consider putting small stakes in natural gas fund UNG, and a few select natural gas stocks.

P.S. The author is heavily invested in the stocks of PAL and SWC.