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.

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.

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.

Safe Haven in a Global Crisis of Trust

All investments are about buying something at lower cost to get higher return later. Investors must try to understand the values of things they buy and sell. Warren Buffett said you should never buy something that you do not understand. At a crisis time like today, investors must have a profound understanding of values not just of physical things, but of none-physical things as well, to survive and prosper.

In my last article, I discussed why physical things have intrinsic values and how are they determined. The article I am writing now is meant to be a sequel, so I shall continue on to discuss values of non-physical assets. Such discussion is urgently needed, and is made even more relevant today due to the unfolding global financial crisis and the Bailout Fiasco.

Our current financial and credit crisis is like a blackhole that Albert Einstein predicted. A blackhole is formed when a huge mass is packed within a very small volume. A blackhole's gravity pull is so strong that everything is sucked in and not even light can escape. So a blackhole will keep growing bigger as it keeps sucking in more matter. When the Large Hadron Collider was recently turned on to search for a ghost particle called Higgs, some feared it could generate a blackhole which could swallow the earth. But instead of swallowing the earth, the LHC merely spitted out a ton of helium before it was shut down, maybe for good, as nations in the world can no longer afford giant science projects like LHC.

But the real blackhole that threatens our survival is in the global financial system. Something that Warren Buffett called "Financial Weapons of Mass Destruction", the so called OTC Derivatives, a thing that no one really understands. It's such an enormous monster that by some estimate there's $1.14 quadrillion of them! That's a ONE followed by FIFTEEN(15) ZEROs. US$1,140,000,000,000,000 in OTC Derivatives! Where exactly is this huge amount of fortune physically located? This huge amount of fortune is actually nothing but merely some digits stored on some 3.5 inch hard drives within some computers in the Wall Street. That, my friend, is the definition of a blackhole, a giant mass stored within a tiny space.

The blackhole is swallowing everything around it, starting small and growing exponentially bigger. First it was New Century Financial (NEWC.PK), then Countrywide Mortgages (CFC), then Bear Sterns (BSC), Lehman Brothers(LEH), Merrill Lynch (MER), Fannie Mae (FNM), Freddie Mac (FRE), IndyMac Bank (IMB), Washington Mutual (WM), Wachovia Bank (WB). Who knows what's next! Now the US Congress wants to toss in trillions of dollars in a Bailout? Do they understand that you CAN NOT feed a blackhole?

The ongoing financial crisis is not a housing bubble or sub-prime mortgage crisis. It is not even a liquidity or credit crisis. Mr. Karl Denninger sums it up best in a 10 minutes video which all Americans need to watch and think carefully:

IT IS A CRISIS OF TRUST

Let me emphasize the keyword TRUST, because TRUST is the very reason any none-physical asset has value at all. It is also the reason why people must seek physical assets as the only trustable safe haven assets during times of crisis. It's easier to understand that physical things have intrinsic values because it costs something to produce physical things. When demand is high and supply can not catch up, people go to extra length to produce more at higher cost in order to meet the demand, and so the intrinsic value, as well as price, goes up in response.

Do non-physical things have value? They do. If you lend some money to your neighbor, you want to make sure your neighbor will pay back. There is a promise that you will be paid back. You trust that promise so it has value. The promise could be in any form: a notarized contract on paper, or just an oral promise, or merely mutual trust. As long as there is trust, the lending relationship has an intrinsic value based on the trust. And when there is no trust, a legal document is just a piece of worthless paper.

Lots of things in the economic cycles rely on trust and retain their values based on trust: loans, business contracts, agreements between nations. Without trust, the contracts written on paper are worth less than the ink and paper they are written with. Without trust, relationships can not exist. Without trust, marriages may break apart; organizations may disintegrate; financial systems may collapse and great nations may fall.

TRUST is THE single most precious thing in human society, bar none!

The US dollar is just a piece of colored paper. Does it have intrinsic value? I say it does have intrinsic value. The dollar's intrinsic value is not in the physical ink and paper, but in the trust that it represents. The value of the dollar is backed by the "full faith and credibility" of the US government. In the past our government did have pretty good faith and credibility. It was so trusted that the US dollar is the world's reserve currency and central banks felt more comfortable holding dollars instead of physical gold as their reserves.

But we have destroyed that trust and credibility by our chronicle reckless fiscal policy of debts and spending, from the top level leadership all the way down to average Americans. We spend way beyond our means, accumulate debts way beyond our ability to pay back. That destroyed our credibility and trust. That is the root cause of today's crisis, the systematic destruction of TRUST in the system, at all levels.

The US dollar is doomed! The only thing that can salvage the dollar is restoring the trust that the dollar is based on, by paying off our foreign debts using honest money, and then living within our means. I don't see any one discussing that solution, and I don't see how it can be done, physically, without breaking the back of our nation!

The US dollar is doomed, with or without the $700B bailout. Even restoring the gold standard is not going to help the dollar. The world simply do not have enough gold to back the amount of dollar in circulation, and our gold may not even be in Fort Knox any more. The dollar can only be based on TRUST, something infinitely more valuable than gold, but something that has been systematically destroyed in the whole system over a long period of time.

When there is no more trust in the system, you must get rid of any and all paper assets whose value is based on trust, and that means the only assets that are safe are those whose values are not based on trust: physical assets under your full control. Their values are derived from the mere fact that it costs something to produce them in the first place.

But when it comes to safe haven investments, I must reject the misconceptions and hypes some gold or silver bugs are attempting to inject into people's mind set. Notions that portrait gold and silver as money and hence the only good safe haven investment, and that anything not labeled as money is therefore not good. Of course gold and silver is money. That's a piece of 7000 years old news so it does not constitute a good reason why you need to buy or sell gold for a particular price, at a particular time. Folks who bought gold at the $800+ peak in 1980 lost heavily instead of found safety.

To avoid mistakes like in the 1980 gold and silver maniac, one must be able to correctly judge a physical asset's true intrinsic value, with all sentiments and hypes removed. Read my previous article on the discussion. A physical assets intrinsic value is its replacement cost, no more, and no less, and no sentiment or opinion attached here.

Some clarification is needed to the principle of intrinsic value as cited in my last article. Let me revise it as following:

A Commodity's Intrinsic Value Equals to the Marginal Production Cost

The cost varies when different producers produce the same thing. Marginal production cost is the cost of the most expensive supply source needed to meet demand. For example, the world consumes and produces 85M barrels of oil a day. 60M barrel come from easily oil fields at a cost of only $5 a barrel; 20M barrels come from oil fields that costs $50 per barrel; the last 5M barrels come from difficult marginal producing fields that cost $100 per barrel. What do you think the intrinsic value of oil is, then? We have to pay $100 or more to make it incentive enough for the marginal 5M barrels fields to keep producing to meet the 85M barrels a day demand. So the fair value of any commodity is always priced at the higher cost of marginal producers that's needed to balance the supply and demand.

All physical assets more or less serve as safe haven assets, where trust based paper assets can not be trusted. The only considerations to be given are their current price relative to their replacement cost, and the difficulties and costs in guarding, moving, storing and preserving those assets. All precious metals have excellent properties in those aspects due to their durability and high density of value in compact sizes. They are preferred choices as safe haven assets. So which one is best buy boils down to the question of current price relative to their intrinsic values.

Based on what I know, gold's current price is enough to keep most of the world's gold producers happily profitable. So gold is currently priced fairly. There is not much room for gold to gain in terms of real purchase power. Not to mention the world has a huge stockpile of above ground gold enough to last the world for hundreds of years. I expect the majority of people will continue to run towards gold. But I insist that gold is definitely NOT the best safe haven assets to buy today and I feel comfortable holding that minority opinion, as the majority in the market place is always wrong. For this reason I never bought GLD.

Silver is a bit different. 70% of the global silver supply is produced as a byproduct from base metal mining. Only 30% of silver is produced as a main product. Primary silver producers I monitor include Pan American Silver (PAAS), Silver Standard (SSRI), Hecla Mining (HL). Based on current silver price, I hardly see these primary silver companies make profits. Some silver companies have already started shutting down unprofitable mines. More over, even those mining companies that produce silver as byproduct, are now unprofitable, due to raising costs and weaker pricing of their main base metal products. As these companies are forced to reduce or shut down their base metal operations, it will also reduce the silver supply. So silver is definitely under-priced now and it is a better buy than gold.

But platinum, especially palladium, is extremely under-priced now, if you understand who produce these metals and what their cost basis are, and particularly if you understand the continuing South African electricity crisis. South Africa produces 85% of the world's platinum, and 35% of palladium. According to a recent survey, SA's PGM industry average cash cost is about US$1000 per ounce basket PGM metal (60% platinum, 35% palladium and 5% rhodium). That was based on one year old data. Today, due to high inflation rate in SA and US dollar depreciation, the cash cost is probably close to $1200 per ounce basket metal. Adding administrative overhead cost, the total operating cost is probably some where in the neighborhood of US$1350 per ounce basket metal.

Today's market price of the basket PGM metal price is $870 (=$1000*60% + $200*35% + $4000*5%). That's way below the $1350 needed for profitability of the SA's PGM mining industry. No business can operate at heavy loss indefinitely. The market must soon start to pay better prices, or SA will be forced to reduce production or shut down mines. I am wondering why they have not already done this. It would help ESKOM to reduce electricity load and help they profit! But I think it is only a matter of time they will do something.

When it comes to palladium, the world's largest producer is a nickel mine in Russia, Norilsk Nickel (NILSY.PK), with main product nickel and copper. Let's look at their cost basis. In 2007, the Norilsk mine's total operating cost was US$8.5B while metal sales revenue was US$14B. Using today's depressed metal prices, the metals would sell for only US$7.7B, while inflation will bring the cost higher to US$10B, making Norilsk totally unprofitable today. Norilsk's share price plummet reflect the reality of heavy operational loss at current metal prices.

Not to mention the incalculable cost of environmental destruction, as Norilsk is ranked No. 7 on the list of the TOP TEN most polluted places on earth, contributing a whole 1% of the world's sulfur dioxide emission. The pollution is so bad that there is not a single live tree or fish within a 48 kilometers radius from the mine! Why should such a heavy polluter continue to produce, if it can not at least turn a profit? Mr. Alexander Bulygin, RUSAL CEO, after visiting the site recently, issued an open letter calling the environmental situation as on the "brink of catastrophe".

According to an information bit that Jack Lifton discussed in his article, shutting down the now unprofitable Norilsk mine, and hence removing 45% of global palladium production, is now quite a strong possibility. A news story on Sep. 30, 08, where Mr. Anton Berlin strongly hinted at Norilsk's intention to cut production soon in response to weak nickel price, further enhances such a possibility. Remember I first mentioned Mr. Anton Berlin on June 12. At the time his comments caused a knee-jerk reaction in the global palladium market.

If Mr. Oleg Deripaska, who currently own 25% of Norilsk, gets his way and shut down Norilsk mine to clean up the pollution and wait for nickel price to recover, it will be the ultimate Russian Checkmate in the global palladium market!

Could such a Russian Checkmate happen? Could it not happen?! Why the Russians should continue to produce this environmental catastrophe, at a heavy operational loss, and for how long?

We are talking about a narrow market where industrial demand already exceed supply, and now 45% of that supply is further removed! I can't even imagine how high palladium price can go! Remember it took less than 4% shortage to jack up rhodium price from $300 to $10000!

In 2004, Norilsk acquired a 54% stake of Stillwater Mining (SWC), America's ONLY producer of platinum group metals, strategic materials of extremely critical importance to the nation's security, especially at war time, after some highly political negotiations involving Bush and Putin. Norilsk promised it was a purely non-political business deal. There is no Russian face on the board of SWC. But Norilsk's strategic aim of dominating over 50% of the global palladium supply is crystal clear.

Are the Russians going to use their monopoly power for profit, or would they rather act like a Santa Clause, operating a global charity organization, polluting their own fatherland and providing the world with cheap palladium at a price far below cost? The answer is clear.

In light of recent plummet of platinum and palladium prices, I have never seen a commodity market so completely rigged to the opposite of fundamentals, defying every logic and rationality. Palladium is now so under-valued that you look around the world, there is not a single palladium producer who can produce the metal and make a profit: Not Norilsk; not any South African PGM mine, not SWC and certainly not PAL. They all produce at potentially heavy loss now. This is not the normal affair of any market.

Can you name another commodity which every single one of the producers in the world is producing at a heavy loss? Have you seen another commodity price chart like this one, or this one, where price shot up on a straight line and then fall perpendicular down?

The excuse is lack of recent ESKOM news so people assume they have fixed South Africa's electricity crisis. I know better. Another excuse is slow economy and high gasoline price suppressed auto sales and reduced PGM metal demands in the auto catalytic converter sector. I know it's not true. Globally auto sales is still growing due to strong demand in emerging economies offsetting any fall back in western markets. According to General Motors (GM)'s own data, in the US market, even though GM delivered fewer vehicles to dealers in September comparing with a year ago, at the retail level, the retail sales were 303,300 in September, up from 255,744 in last September. That is 18.8% up y-o-y.

The credit crisis forced auto makers and dealers to massively reduce inventory, but people still need vehicles for their daily needs. Higher gasoline pushes up demand from people to junk their oil guzzlers in favor of a new fuel efficient car. Even for those people who decide to keep their old vehicle longer, the catalytic converter in their old vehicle will be unavailable for recycling, so it doesn't change the PGM supply/demand balance.

More over, the lesson from the year 1980 is that although auto demand did collapse that year, platinum and palladium price nevertheless run to a peak together with gold and silver, as investors hoard all precious metals as safe haven assets at that time. When there is significant investment demand of the physical metal, the industry demand becomes a moot argument.

Absurdity is now the norm of the marketplace. Like in the global coal market, I discussed on June 20th, 08 that the global coal supply and demand is largely balanced, with abundant coal reserve. I did not know how the coal price managed to triple in a few months, and called for folks invested in coal stocks, like ACI, ANR, BTU, CNX, FCL, FDG, JRCC, to take profit. The call was proven to be timely. The plummeting dry shipper stocks, like DryShips (DRYS), suggests there is not a lot of coal shipped across the oceans, so US coal market remains a local market. Amid a looming US economic depression, I see the US coal market as bearish in short to mid-term. Get out of any coal stock at the next rally! I am seeing JRCC dropping to the low $10-ish, for example.

Natural gas is a different story and remains bullish due to fast depletion of conventional natural gas sources, and drop of imported LNG volume. I own some NGAS and UNG by the way.

Needless to say I am still heavily invested in SWC and PAL, two of my favorite palladium stocks, and I suffer heavy losses in them. I have repeatedly checked my original thesis of a palladium super bull market but could not find anything wrong. I still believe this is one of the best investments I can find in short term, so I am sticking to my convictions. Is it any strange that today logic and rational thinking has been replaced by manipulation, distortion and absurdity? Otherwise we would not have a global financial crisis like we see today. At the end of day things will have to return to the way natural laws mean them to be. As billionaire Mr. George Kaiser is still patiently holding nearly a majority stake in PAL, I think I have patience to wait for natural things to happen as well.

Full Disclosure: The author is heavily invested in SWC and PAL, and also owns OMG, SLV, PAAS, HL, SIL, NGAS and UNG.

The Brightest Stars in the Commodity Boom Part One

Thursday sees the market's knee jerk reaction of oil dropping of $4 a barrel, in response to China's announcement of gasoline and diesel price boost of 16%. Most traders perceived higher price will supress Chinese demand on oil. They know nothing about what's going on in China. After the price boost, gasoline still costs only US$3 a gallon, far cheaper than prices in the US and Europe. It will not supress demand at all, consider that only wealthest 3% of households in China own a vehicle. The Chinese transportation fuel market is in severe short supply. Refineries are unwilling to increase production because the crude prices are high, while the refinery product must be sold at government controled low prices, well below cost. The government hopes the price boost will encourage refineries to INCREASE fuel supply to ease the shortage. It actually will boost oil demand. Consider buying USO for a quick rebounce once the market realize they got it totally wrong!

Commodity guru Jim Rogers is my hero not only because he correctly predicted the commodity boom as early as 1999, but because the way he does market research and due diligence study is very inspiring to me. His millenium adventure around the world, which I recommend every one to read in his bestseller books, was not a safari, but a real adventure with real danger to his life. I do not think I can be as brave. I wish I knew him and read his books earlier. Commodity investments provided some of the most spectacular returns in recent years. You look at the spectacular chart below. Don't you wish you have bought some rhodium in early 2004? Me? I wish I had studied about CD-RW and bought tellurium in earth 2004 for $10. I want to talk about rhodium in more details in a later article since this is a very interesting case study on how to find commodity super stars, before they shine.


Jim said the commodity boom is far from over, which I agree. Although the current commodity bull cycle started in 2000, many of the raw materials did not start the earnest rally until pretty recently. Copper did not take off until late 2003/2004. Food grains and fertilizers did not take off until early 2007. As for coal, it doesn't make much movement until early 2008 when it all of a sudden rallied spectacularly, running from $45 a ton to well over $160 per ton in a few short months, surprising every one including me. I had the vision to load up heavily the coal mining stock JRCC at $4 last year, but did not have the foresight to see that it could reach almost $60 today, in just a few short months.

JRCC gained 15 fold in 10 months, or more than 12.5 fold in exactly 7 months. How often do you see such an incredible rally. How you wish you have grabbed that opportunity. I did catch it at the start but did not hold it through the whole course. I remember on Nov. 19, 2007 I was watching JRCC and I really wanted to buy it back but I had no dry powder. I knew I was giving up an opportunity but never knew how big an opportunity I had gave up. I wish had paid closer attention to the coal market and discovered this article last year.

Of course, JRCC is not the only coal stock that see spectacular rallies lately. There are a dozen others, PCX, BTU, ACI, CNX, FCL, FDG, MEE, ANR all gained tremendously.

How do you discover such bullish commodity players, before they take off, and how can you hold on to them for the whole course? And even more importantly, how do you decide your exit strategy? One word, due diligence research. If you know the market fundamentals and supply/demand trends, you can spot a bullish commodity player before it takes off, and you will have the conviction to hold through the highs and lows to rip full profit potential, and you will also know when it becomes over-valued and it is time to move on.

Coal's recent rally far exceeded my original expectation. I believed coal was bullish but I thought it's a long term play, at least 2 or 3 years out in the future. It is worth going back and re-example my original assessment of the coal market, and see if I missed anything.

As I discussed before, for any commodity play you need to exam the supply/demand relationship to see how bullish it is. You concentrate on several things:

• Is the natural source of the raw material scarce or abundant?
• What's the supply/demand numbers. How bad is the shortage?
• How price elastic is the supply. How high does the price need to go to boost supply, and how soon will it happen?
• How price elastic is the demand. Can demand be reduced or replaced if the cost is too high. How high the price need to go to cause that to happen?

I looked at all four criterias for coal and could not find a very solid bullish case. Global coal reserve is still abundant, worth a few hundred years of production. The global coal supply and demand figures in 2007 were 3135.6MT and 3177.5MT respectively. The shortage was 41.9MT, about 1.3% of annual demand. A very small percentage of shortage worth about 5 days of global consumption. Coal is mostly used as fuel in power stations, which often stock up to 3 or 4 weeks worth of coal. That should be plenty of buffering to absorb 1% or 2% of shortage in any given year. From the price elasticity point of view, the high coal price can not last long. China's coal production in 2007 was up 7% year-over-year. Recent news indicate that due to higher prices, the largest coal producer in China is boosting coal production at an annual pace of 13.3% or more. The global coal shortage may end soon right when every one is talking about higher coal prices.

So why did coal price double or triple in just a few months? I guess several reasons.

1. Global coal market is huge. But most coal supplies are already tied up in multi-year long term supply contracts netween producers and power stations. So the amount of coal available on the spot market is pretty limited and so is very sensitive to any temporary supply disruptions.
2. Mid to long term, both the coal supply and demand is quite price elastic. But in very short term, both supply and demand could be completely price inelastic. If a power station is running low on coal reserve and face the danger of shutting down electricity, they pay any price to ensure uninterrupted electricity supply. Mean while disruption at Australia's Newcastle Port forces many dry bulk ships, up to 30 at a time, waiting for weeks to be loaded with export coal. Can't load faster no matter what price you pay.
3. A few global events caused short term supply shortage. Those include the disruption in Australia's NewCastle Port, a major coal export port. By the end of last year, the Chinese government launched a crackdown which shut down a whole batch of small scale private coal mines operated under unsafe conditions, removing a significant portion of the production. As the coal shortage becomes evident, the government is now urging those small coal mines to resume production as soon as possible, when safety has improved.
4. It can not be ruled out that international hedge funds may be speculating on the coal market and bid up the price on the futures market.

Currently most coal mining stocks are prices so high that their prices are justified on the basis that coal price will continue to climb, and will stay high for the foreseeable future. If you look at the history of coal prices there have been periods of quick booms and bursts. JRCC itself emerged from a bankruptcy just a few years ago, and it is still heavily in debt today. So my advice to all the folks holding coal stocks is to sell now and move to something else. I am not calling a top, few people can recognize a top right when it occurs. I am definitely not calling for shorting coals. In all likelihood, the coal fever may well continue for some time and make new highs, but the big crowd has arrived. When big crowds arrive it is often time to move on to something else. There is always a bigger opportunity some where else where the big crowds have not gathered yet.

The biggest crowds in commodity investment probably concentrate on oil, coal, alternative energy, and gold. The gold crowd is too crowded. Today you can not visit an investment site or even tune to a radio or TV station, without hearing some one pitching gold. The most famous gold bug operate a free web site which I read daily. I appreciate the education on fiat currency, the credit crisis and the need of individuals to protect themselves from inflation. But why should gold be pitched as the only good hedge against inflation, and no mentioning of other precious metals, like platinum, palladium, even rhodium? I don't buy gold! You have nothing to gain in gold, in real term, comparing with other physical commodity investments. The only way you can make profit from gold is when you sell it to another gold investor, who just like you, hopes to be able to sell gold for yet higher price to the next gold investor in the line. Pretty much sounds like the bigger fool theory? The world has accumulated 320,000 tons of gold. There is never shortage of gold.

Relatively, the palladium investment crowd is far smaller and far quiet. Lots of gold bugs and silver bugs on the internet. But I have yet to find a palladium bug. Even the respected metals analysts don't understand the palladium market. Year after year they made bearish predictions based on the notion that Russian stockpile palladium flooded the market, each year they were proven wrong as palladium moved up and they scratch their heads wondring why they were wrong. Does it really stretch the mind to understand that Russian stockpile HAS to run out one day, and that will result in an industrial shortage, sending the metal price flying? Look at the sudden boom of investmenet interest since late 2003. Some one must had a Eureka Moment at that time and had been quietly loading up on this unprecedent investment opportunity ever since, driving the price up.

And now, on Nov 11th, 2008 the Russians themselves admitted they are running out of palladium stockpile. Is there any wonder that palladium price surged 12% in one week time since then? People are getting it and jumping on the wagen but unfortunately even a highly respected and award winning metals analyst, Rhona O'Donnell, didn't get it at all! She believed there was still some palladium stockpile some where "available to the market".

Hello! Whoever hoarded palladium since 2003 do NOT do it for a global charity. It's for making money! If the price is not right, it is NOT "available" to any one at all. On such notion of "large stockpile available", then shouldn't some one argue then that gold price should fall just because there are huge stockpiles in the world? No one ever made such a ridiculous argument. Whoever hoarded palladium waited exactly for such a Russian checkmate moment, and now the Checkmate Time in palladium is coming rapidly. The data contained in the Rhona O'Donnell article confirms that without Russian stockpile palladium, the market is in a pretty big gap of supply shortage. Do you notice that the palladium lease market may be halted?

Could palladium be the next rhodium? It could be possible. At least it's a way much better physical metal investment than gold. So you can never go wrong buying some palladium coins or metal bars. Of course, buying the stocks of the only two primary palladium producers in the world, SWC and PAL, may provide higher leveraged investment gains.

PGM metals are unique. Unlike gold, whose largest demand is investment demand, which is unpredictable and can not be counted on. PGM metals are critical to many important industrial applications whose demand can not be supressed even at very high price levels. But at the same time, the physical metals can also be hoarded away by investors, increasing the physical demand and adding to the shortage, driving up price. The global PGM market is so narrow and so tight that minimal investment demand can send the price to very high levels.

That is quite different from other commodity investments. I buy SWC and PAL stocks but I also buy physical palladium metal bars. All your folks who buy coal or oil stocks, do you also stack up a ton of black coal or a couple hundred barrels of crude oil in your backyard. If I visit Goldman Sachs office, do I expect to find a truckload of coal just delivered? No, there can never be any real physical demand from speculative investors, not even in the futures market. All trades are done on paper and when the contracts is about to expire they roll it to the next month. No delivery is ever taken so there is no physical investment demand in coal, oil, food grain etc.

I think I would rather invest in something that can be physically hold in my hands. But maybe I will just buy enough USO to hedge the gasoline price I pay at the pump, UNG to hedge my monthly natural gas bill. Finally read an interesting speech by Kevin Crisp which explains why PGM metals are critically important to the industries.

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

Investing In a Resource Constrained World Part Four

Recent developments in the general market make it necessary for me to continue this serial article about investing in a resource constrained world. I will be talking about food, agriculture and energy related investment topics this time.

In the part three article, I debunked Mr. Epstein's commodity bubble burst theory. The market quickly proved me right in a strong return of the commodity bull. Oil price jumped to record breaking $118 a barrel. Retail gasoline price now almost $4 a gallon. Food prices worldwide, leading by rice, rocket up and there's panic buying and hoarding of rice and other essential food all over the world. I bought 10 bags of rice three weeks ago before they were all gone. My rice bags made it into national headline news, thanks to Mr. Josh Gerstein. It wasn't a matter of me trying to save a few bucks. It's a matter of availability. Folks holding FSLR stocks tried to argue with me that tellurium is still quite affordable to FSLR. They do not understand it's a matter of availability, not affordability. Why don't folks contact FSLR and demand a specific and quantitative answer on their tellurium supply?

The availability vs. affordability debate will always bring up a very unpleasant topic that must be told, Demand Destruction, and an even more unpleasant but absolutely true topic, Malthusian Catastrophe on population growth. I will talk about it in more details in later articles.

We are entering a phase of severe global economic recession, triggered by the global credit crisis. Normally an economic recession means reduced demand on commodities. But it's different this time. I mentioned that for the first time, we are hitting the natural limit of supply on many non-renewable natural resources. The current crisis is caused not just due to imbalance in the economy, but also due to depletion of natural resources like petroleum, precious metals and base metals. If you are unfamiliar with the topic of Peak Oil, I advise you to buy a copy of Twilight in the Desert and visit TheOilDrum.com. In simple language, when exactly half of a non-renewable natural resource has been consumed, trying to produce the remaining half becomes every increasingly difficult and the annual production will be ever declining, until it's all gone.

Not only oil has peaked, a lot of other natural resources have peaked, or will be peaking soon. Those include helium, which has peaked long ago. You might consider APD for helium play. Copper has peaked and there is only 27 years worth of identified copper reserves left. Nickel has peaked as well. Silver production has long peaked and now there is only 13 years worth of silver left to be mined, based on USGS data.

The PGM (platinum group metals), on the other hand, is no where near peak yet. But I happen to believe the PGM will be the best natural resource play in short and long term, due to rapidly expanding usages and price inelastic nature of both supply and demand. That's why I like the only two primary palladium mining company in the whole world, PAL and SWC, as my most favorite stocks. Please read VM Group's recent research paper on PGM metals.

I have now heavily invested my 401K account into just two stocks, mainly PAL, and then some SWC, as price of both have dropped to a very attractive level, and all the bullish factors remain intact. The South African electricity crisis is becoming worse as they approach winter now, greatly impacting PGM metals production. Not only regularly scheduled load shedding is carried out daily, but ESKOM now stopped releasing info on power alert indicator or the total amount of load shedding, probably for fear of disclosing bad news. Auto sales in China grows at 25% or higher pace, now reaching 10.32 million per annum while the sale in the US only dropped 0.4%. That's a great boost of auto catalyst demand on PGM metals. Year 2008 is a huge Chinese wedding year and lots of ladies will purchase platinum or palladium diamond wedding rings.

I don't understand why people sell off platinum and palladium, knowing there is an industry deficit for both metals. Why should the stock of PAL be pushed to near multi-year low, while the metal prices are near multi-year highs? Dirt cheap stock price of a company of bullish outlook is an excellent buying opportunity. Insiders of PAL, North American Palladium, are buying shares of their own company from open market, according to recent filings found on SEDI.CA. At a time when most company insiders are selling their stocks like crazy, it's refreshing to see PAL insiders buying from the open market with their own money.

Most market participants are incapable of doing quality due diligence research and can only blindly chase stock price momentums, at the end of day the mobs always lose and savvy investors who stick to fundamentals win big time. At this time I do not even own FSLR short positions and have nothing to gain if FSLR suddenly collapses tomorrow. But I must insist on telling the truth of my research on the global tellurium shortage. If you hold FSLR, it's in your own interest to do your own research to find out what's going on, or at least push for FSLR to reveal quantitative information on their tellurium supply and usage. I believe that insisting on objective discussions of facts and logic helps return the market to a healthy state where companies are more fairly priced to their real valuation, instead of being rigged by professional market manipulators on the Wall Street. Do we need more ENRONs or BSCs?

Now return to commodities. Oddly, none of the best performing commodities in recent times are near any geological peak. Food, of course, leads all commodities in recent rally, as well as fertilizers. Price of coal skyrocketed, although the world still has plenty of coal left. Thanks to the coal price rally, stocks like ACI, BTU, BUCY, CNX, JRCC and MEE boomed. JRCC rallied from $4, where I purchased some, to a recent high of $25.37. When I purchased JRCC I figured that coal price may soon start to go up and JRCC may start to turn profitable. It is my belief that when a company goes from not profitable to profitable, the stock price appreciates fastest during the transition period. I figured that JRCC could go to $40 and it would take three years to get there. But the strong coal rally took me by a big surprise. I sold JRCC way too early and was never able to buy JRCC back. A lost opportunity and lesson learned that when you locked onto a bullish stock, you should never be swayed into selling by some temporary corrections.

Related to the global food shortage and food price rally, agriculture stocks are also on fire. Particularly in the fertilizer sector, we see some incredible rally in stocks like POT, MOS, AGU. The rally do seems to be justified, as the global fertilizer prices skyrocketed. What is worth noting is POT, which is the the largest potash fertilizer producer in the world, at about 9 million tons per year production scale.

How high will the rice and other grain prices go? How high can prices of fertilizers like potash go? Even though my 10 bags rice hoarding went on national news, my opinion is the boom and burst cycle of food grain will be relatively short, as proven time and again by history. A great famine is always followed by a great harvest. Oddly, historic records rarely show skyhigh food prices during famines. The reason is food prices are very price elastic. Most foods are consumed by poor people, the majority of the global population. They have no choice but cut back in face of higher prices, because they have limited money to spend. Instead of paying more, which they can't, they buy less, eat something else more affordable, or worse, die off due to hungry and malnutrition. Demand destruction at its cruelest. The population thus is reduced to the level where the available food can sustain. If a global natural disaster destroys half of the world's harvest in one year, then the poorest half of the world's 6 billion population will die off. Next year a good harvest may bring the food production back to normal level but there is no longer 6 billion mouths to feed, and food prices may collapse.

Some argue that as living standard of China and India improves, people eat more meat, hence mandating more food consumption to feed the animals and hence food price must continue to go higher. But food grains are merely taken away from the mouths of the poorest people in order to feed the animals. Wealthy people always eat meat and poor people never have enough to eat. The world is never fair to begin with.

Food is both perishable and completely renewable. The world will never run out of food. The next harvest is always less than 6 months away. So the grain bull market can not last for much more than a year or so. The food price can not go up indefinitely, either. When the food prices exceed the level where the poorest people can afford, they stop going up further. Rich people have money but they only have one stomach. So although I agree with Jim Rogers who predicts many more years of commodity bull market despite of the coming recession, I disagree with his emphasis on agriculture as the most bullish of all commodities.

Relating to the booming food prices, is the booming fertilizer prices. Players in this sector includes POT, MOS, AGU, TRA and a recent IPI. What is particular worth noting is POT, Potash Corporation of Saskatchew, No. 1 of the world in potash fertilizers, No. 2 in nitrate and No. 3 in phosphorite. The skyrocketing stock price of POT is mainly due to skyrocketing potash price. As recent as in year 2002 potash price was as low as $75 per short ton, now the news just break that the Chinese are paying $355 per ton more, raising from last year's $270 to now $625 per metric ton, for a total of 0.75 million metric tons worth of potash. More recent news says $1000 per ton is possible for the second half of the year. Such stunning news of course pushed POT share price to all time high of $216. Michael Pento discussed the agriculture boom and proudly declared that there is no bubble here in POT.

I beg to opine differently. When every one is talking about fertilizers and what a great company POT is, it's already too late for late comers and there might be a bubble forming. The world's population has been growing and has been eating for decades. Artificial fertilizers have been used for many decades. Potash supply, demand and price has been flat for three decades. So what has been changed in recent three years? A flooded mine in Russia last year and POT took the monopoly advantage and suspended sale, causing panic amongst the unprepared fertilizer buyers in the third world countries. The global potash market is tightly controled by two entities, Canpotex and BPC, leaving the major fertilizer buyers of China, India and Brazil no bargaining power at all. It's a good lesson learned that major countries like China and India MUST establish national strategic stockpile of fertilizers worth at least 3 years consumption. It is not just a matter of food security, but gives these countries greater bargaining power. I notice that POT has 13.25 million tons annual potash production capacity, but currently produces only 9 million tons. This looks like they use their monopoly power to limit supply and price gauge the global potash market.

I think POT is abusing its dominance power for the short term gain, but will hurt itself in the long term, like killing a hen to retrieve all the eggs at once. Natural plantations grow without potash fertilizer, because dead plants decompose on the spot, releasing potash back to the soil. Traditional agriculture removes only a very small eatable portion of the grain plantations, and return the bulk of the plant bodies to the fields, after decomposition or burning as cooking fuel. So the fields remain fertile. In recent years, Chinese farmers abandoned the traditional methods in favor of the easier potash fertilizer, due to increased income and affordability. Excessive application of fertilizers do not always result in the expected result, as potash is quite solveable in water. Rain water washes off the excessive amount of fertilizers, polluting major rivers. Will the Chinese farmers return to more sustainable traditional husbandary methods, in face of skyrocketing potash price? We will see.

The earth is plentiful in the potassium element. But rich, cheaply produceable potash resources concentrate in only a handful spots. At today's high potash price, many previous uneconomical potash resources all over the world can now be produced profitably. Many countries, including China, has been producing potash fertilizers from salty lakes. For decades, Isreal and Jordan are producing a combined 3.77 million tons of potash from the Dead Sea, which is only 8 times saltier than the ocean. All of the salty lakes of the world provide great opportunities to expand potash production. If the price remain even at half of today's price, I don't see why can't any one start to produce potash from the ocean itself. I see a potash price bubble bursting in the next year or two as the world adapts. POT, a company which has limited room to increase either the production, or the unit price, currently at a high P/E reserved only for companies perceived to have unlimited growth potential, is a clearly over-priced bubble. I would NOT short it here yet because I know the giant inertia force of group mentality of investors. But watch closely for an opportunity to short after the harvest season.

Watch JRCC and other coal mining company for opportunities to buy on the dip, as coal price is still cheap and has some more room to go up. But I believe the PGM metals, my favorite, has way much bigger room for price gain. Just look at rhodium. Went up from $300 to $9000 per ounce in 4 short years. Is this a peak already? Hardly! That's what a commodity of extreme price inelasticity can do.

PGM metals are extremely price inelastic, because few places in the world produce these metals. Russia's Norilsk mine has been produced for decades and now is in steppy decline. Largest PGM producer, South Africa, is crippled by a destructive electricity crisis. It can't even maintain current production, let alone expand capacity in the next few years. Outside Russia and South Africa, SWC and PAL are the only primary PGM metals producers. That's the price inelasticity on the supply side. On the demand side, the PGM demand in various applications are booming: auto catalyst; catalyst for oil refinery, chemical industry and fertilizer production; electronic application in MLCC (multi-layer ceramic capacitor), which see one trillion annual production and growing, and in LCD big screen TVs, etc.; Palladium dental fillings; palladium food inserts for preservation; fuel cell applications, etc. etc. PGM metals must be used in all these industries, there is virtually no replacement available, and quantity used per unit of product is usually small so the cost is not a big factor.

Take the dominant PGM metal usage, auto catalyst, for example. Some believe an economic recession may reduce automobile demand and hence autocatalyst demand. But according to this article, China's auto sale is growing at 21% or higher annual growth rate and now reaches 10.32 million units per year, that compare to a mere 0.4% drop in the US market. If you look at recent gasoline prices, you know the whole world has an insatiable demand on oil, and an insatiable demand on automobiles, and hence an insatiable demand on autocatalyst and the PGM metals used. Bad economic times also encourage catalyst converter thefts, leading to increased demand on replacements.

Vehicles must have catalyst converters that comply to tightening environmental control regulations, for good reasons. Global air pollution causes more than 4 million unnatural deaths per year, far more than traffic accident deaths. Without catalyst converters reducing the air pollution, the air pollution related deaths could triple to 12 million per year. So the annual consumption of 8 million ounces of platinum and palladium in auto catalyst applications saved 8 million lives a year. One life saved per ounce of metal. How much is one human life worth? How much is once ounce of platinum or palladium worth? No wonder the 2007 Nobel Chemistry Prize was awarded to the work that leaded to the invention of PGM based auto catalyst converters. The scientist have saved a population several times the total deaths of WW II. I am humbled to say that is the most deserving Nobel Prize awarded to a noble research work on the noble metals.

Unlike food, which every one eats, rich or poor, automobiles are only for those wealthy enough to afford them. And unlike fertilizers, for which plants can grow with less or with alternatives, PGM metal usage in auto catalyst converters can not be reduced. Decades of research have already exhausted most thrifting opportunities. Tightening environment regulations probably mean more metals need to be used in order to improve efficiency. It's ridiculous for some industry vest interesters to spread unsubstantiated technology news, making claims like silver based catalyst converters replacing PGM metals. We all know silver readily reacts with sulphur dioxide in the exhaust gas, rendering it useless. People who can afford to buy a car surely can afford to pay for a few extra grams of noble PGM metals, for the noble cause of save some human lives from air pollution. We are supposed to believe that silver catalyst converters will go into commercial usage in 2012. By that time, every one will have forgotten the story.

With such bullish outlook of the PGM metals price, how could I not get heavily invested in the only two PGM metals players in North America, PAL and SWC? Especially at such ridiculous low prices. I see nothing better to buy. I am a firm believer of Warren Buffett philosophy. He said if you really know what you are buying, there is no need for diversification.

Update April 25,08: Mitsui Mining now back stepped from their original silver catalyst converter claim, and now says it's "for use in farming and construction machinery, rather than car engines" WHAT A SCAM! Jack Lifton also commented on the story.

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