Richest Billionaires Must Also Be Biggest Losers

It sounds ironic. People who worked their lifetime to become some of the richest billionaires must have some good quality in their characters to ensure their success. But some how once the richest billonaires reach their pinnacles, their fortunes inevitably begin to decline, despite of their best efforts and intentions to keep growing their stakes to something even bigger.

But it is also absolutely true! The richest billionaires are also the biggest losers.

I am not just talking about the financial crisis of 2008, in which probably most people lose money anyway. I am talking about it as a generally true fact, like in the last ten years. In 1999, Bill Gates was the richest person in the world, with a net worth of $90B. Remember that was in terms of 1998 US dollars, when gold was $288 an ounce by the year end. So Bill Gates was worth 313 million ounces of gold then. Warren Buffet's $36B would have been worth 125 million ounces of gold at the time.

By 2005, Bill Gates was worth $46.5B, Warren Buffet was worth $44B, and Carlos Slim of Mexico was worth $23.8B. In terms of gold, which was $437/oz (end of 2004), Gates was worth 106.4M ounces, Buffet was worth 100.7M ounces, and Slim was 54.5M ounces. Gates was only 1/3 as rich as he was in 1999. Mr. Bill Gates probably wished that he had sold his company in 1999 and staked away his fortune in gold bars at a secret location.

By today, after the market plummet in 2008 and then an incredible recovery in 2009 and 2010, let's check the score again. Carlos Slim is worth $74B, Gates is worth $53B, and Buffet is worth $47B. Gold was $1422/oz at the end of 2010. So in terms of gold, these three richest billionaires are worth 52M ounces, 39.4M ounces and 35.2M ounces, respectively. The combined fortune of all three is only worth 40% of what Bill Gates alone was worth in 1999.

These two charts track the top billionaire's networth in US$ and in gold ounces, in last 10 years:

It's really surprising. Warren Buffet is known to be the world's most successful value based investor, with all the good characters of investment success: patient, determined, diligent. He had the track record of consistently gaining about 40% each year, in his investment career spanning over 4 decades. But in the last 10 years, his fortune barely gained anything even in terms of the depreciation US dollars.

In terms of gold ounces, or real purchasing power term, Warren Buffet lost more than HALF of his fortune in the last ten years. He lost that much fortune despite of all his personal DD efforts working 12 hours a day, and a team of hundreds of the world's best financial geniuses working with him. All these time and energy spent trying to make the best investment decisions for the world's most respected investment firm Berkshire Hathaway, and they still lose money?

Warren Buffet is famously know for his despise of gold, which he doesn't understand:

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

That famous gold quotation sounds reasonable with me and I actually agree with him. An ounce of gold is forever just an ounce of gold. It doesn't grow. Gold is only worth what it costs to extract an ounce of gold from the ground. That certainly is worth a lot of money but it is not growing. Gold is merely a storage of value, not a growth of value. So gold is really not an investment.

But Warren Buffet could well have digged a hole 10 years ago and buried all his fortune in gold bars. His stake would not have grown had he done that, but his fortune at least would not have shrunken like it happened. In the last ten years Warren Buffet diligently managed his investment firm, trying to find valuable companies to buy, selling any asset that seems to cost him money, his giant investment kindom accumulates huge amount of profits and dividends, allowing him to buy up more assets. But despite of all these, his net fortune is barely flatline in US dollar terms, and shrunk to barely 1/4 where he once was, in terms of gold ounces.

Why top billionaires must necessarily once day become top losers? It's not because these rich people have grown too old to think rationally, but simply because they have become too big to grow. Young Warren Buffet could buy a six-pack soda for 25 cents and then sold each can separately, and make an instant 20% gain in an afternoon. Senior Warren Buffet, with his net fortune worth $47B, would now have to buy 18 billion of six-pack sodas for $2.50 each, and find a giant beach with 108 billion thirsty people to vendor individual cans of soda to them for 50 cents each, to grow his fortune 20%.

The world does not have a beach that big. The world is a small place. The universe has a finite size. Persistent growth is not possible in a finite world. When you hit a certain size, you simply can not grow any more. Rapid growth is only possible when you are small. Warren Buffet once purchased a lot of silver bullions, about 1/3 of what the whole world had to offer. It costed only 2% of his fortune. But he could not keep even just 2% of his fortune in physical silver. He was forced to sell his silver.

To the average Joe investors, it's pleasant to know that you can beat the billionaires easily. You can easily make more money than billionaires do, in making the kind of investment decisions that billionaires could not make: Warren Buffet could not buy silver, but an average Joe can walk into a coin store and purchase a couple hundred ounces any time. Had you bought physical silver a mere two and a half years ago, your fortune has more than quadrupled from your initial investment, an investment gain that few of the world's billionaires could achieved.

I pitched physical tellurium investment a few years ago when tellurium was $40 a pound, today it's nearly $500 per kilogram, with the price surged 50% in just the last two months, marching with certainty towards gold price as I predicted. Had I pitched tellurium investment to Mr. Warren Buffet, he would have brushed me away as if I told him to vendor soda packs on the beaches. Folks like him are too big to be concerned in such narrow markets, but an average Joe Six-Pack could have bought six buckets of tellurium for less than 10 grands, and make himself a millionaire in a few short years.

It's great to be a small investor since you have many great opportunities to easily grow much bigger. Those opportunities are not available to billionaires. I notice that Mr. Jim Rogers, my most respected commodity investment guru, pitched silver and my favorite palladium to his audiences since early 2009. The annual global production of silver is only 600M ounces. After industry demand is meet, there is no more than 100M available to investors, or $1B in early 2009 silver price. Palladium's annual global production is slightly over 6M ounces. There is no palladium left for investors after industry demand is meet. But even if there are some palladium ounces available, there are probably no more than 500K ounces per year available to investors. At early 2009 prices, the market liquidity of silver and palladium was $1.1B and $0.1B respectively. If you bought either metal at the lows, your money would have quadrupled by now. But I don't think Jim Roger's fortune had quadrupled during the same time. Mr. Jim Rogers himself is probably too rich for those two narrow precious metal market. Both silver and palladium and excellent investment opportunities for the average Joes, and un-available to billionaires. Jim Rogers could not buy the metals himself that he urged people to buy.

So, do NOT listen to the world's top billionaires. You should be inspired by the stories how they accumulated their fortune, and their general philosophy of the society and of life in the world. But do NOT listen to top billionaires as far as investment decision goes. They have now become irrelevant losers while you are the winners. You need to listen to the small guys like me and other Seeking Alpha authors, and then do your own thinking. Warren Buffet would not tell you to buy gold, silver, palladium and he probably doesn't know what is tellurium. I will tell you to buy tellurium, buy palladium, and other investment opportunities meant for the small guys. At the end of days the billionaires are proven wrong, and small people like me are proven right.

Full Disclosure: I am heavily invested in physical palladium and silver, and related mining companies, but otherwise have no specific positions related to the discussion of this article.

Grave Warnings to Precious Metal Investors - Buyer Beware!

I am a palladium bug, not a silver bug or gold bug. Although I do like silver and gold and I like all precious metal investments. My favorite remains palladium. But regardless what precious metal you like best, I urge all precious metal investors to own ONLY physical metals and stocks of their favorite precious metal mining companies.

I strongly discourage owning any Exchange Traded Funds, ETFs that invest only on future contracts or other paper instruments. I cited UNG and USO as perfect bad examples. At a point of time UNG was once the second largest long position in my portfolio, right after SWC. I still can not help but pad myself on my back for promptly realizing the fundamental problem with a paper based "commodity" ETF such as UNG, and sold without hesitation. Had I held UNG till this day I would have been much poorer. Unfortunately such ETF funds continue to make many unsuspect investors poorer by the day. So I urge every investor to carefully read why paper based ETFs do not work.

I do expect that 99% of the people will attack my view point that paper ETFs will not work. I don't mind as I know 99% of the people simply could not grasp the concept until they have lost all their money. I will be very happy if 1% of people feel that I have helped them to avoid costly mistakes and to make smart investment decisions.

Like advocators Jim Sinclair and Ted Butler, I always encourage people to directly own physical precious metals. I do not trust the physical gold ETF, GLD, and the physical silver ETF, SLV. Like some other folks I expressed skeptism whether these funds actually hold the physical precious metals as they claimed. These ETF funds were hosted by entities known to be hostile to precious metal investors and known to have large short positions in silver so why should people trust them? At one point I went so far as scrutinizing the almost 10,000 pages long silver bars list posted by iShares Silver Trust (SLV), and discovered plenty of red flags.

But what I just discovered may shock the raw core out of every SLV investors' shells. If you read the following and you still feel comfortable investing in SLV, and do not feel a need to scrutinize the fund a little bit more yourself, then maybe you are too numb to even invest money in the dangerous marketplace of today, and it is probably a good thing you lose money, if indeed this is exposed to be one of the biggest scam of our time.

This is a nuclear bomb I am dropping, so before I continue let me make a few things clear for my own legal protection. I am a US Citizen with constitutional right to free speech, and conscious forces me to speak out. I do not have a short position in SLV and stands for no monetary gain out of this disclosure. I am a supporter of precious metal investments and want to see higher silver price. I have no vested interest against any entity involved, other than that I insist seeing honesty and integrity of all involved parties.

That said, I have noticed that iShare recently hired an independent auditor to inspect the silver bars in their vault, and issue audit certificates such as this most recent one. I urge you to follow the link to immediately download a copy of the inspection certificate and save it on your computer, lest it disappear soon! The auditor, Inspectorate International Limited, is a very reputable commodity inspector for 150 years in the business. Very good! I welcome iShare's move to hire a reputable auditor to look at their silver bars and disclose it to the public. If you trust Inspectorate, and they visited iShare vaults and come back to tell us they see all the silver bars stored in the vaults, then it should put all skeptism at rest and people should feel safe to invest in SLV shares, right?

Not so fast! Not so dandy fast and easy, I say folks! Look at this Audit Certificate once again. It's only two pages. Print it out, friend. But Inspectorate is a big company and it just so happens that the same Mr. Paul Alston, a nice and respectable English gentlemen, was also hired to do audit for GoldMoney.com, and issued audit reports like this, this, this, this and most recently this.

Do you see anything unusual, folks, when you compare the two pages SLV audit report and the 14+ pages GoldMoney audit reports, alleged done by the same Mr. Paul Alston?

1. SLV has a two page lousy report that says almost nothing, while GoldMoney has much more elaborate reports detailing every aspect of the inspection process, including such seemingly unimportant information like the brand of the sale used for weighing, even though SLV has way much more silver to be inspected.

2.Inspectorate issued a paper audit certificate to GoldMoney and they have to use an awkward optical scanner to scan the image of the paper certificate and post on the web. More awkwardly, the brits use a paper size narrower than standard American letter size, thus the scanning exposes the ugly paper edge, telling the size of the margin to the edge of the paper. Wouldn't it be nice to do like what iShare did, create a nice and clean electronic PDF document, leaving no trace of the paper, and just digitally embed the Inspectorate logo, and an image of Mr. Paul Alston's signature? Except that anybody with a computer can do it. It's not hard to find a sample image of Mr. Paul Alston's signature off the web, right? (Don't try it at home, kids!)

3.Unfortunately Bank of New York Mellon is in America and speaks a different kind of English than the one spoken by Mr. Paul Alston, a nice British gentleman. And the vaults are supposed to be in England. They forgot such unimportant details and let a lousy American created that Inspectorate Report. Congradulations on getting the paper size to be the correct A4 size, but they need to work on small details, for example Inspectorate would not begin the sentence with "The Bank of New York" as the sentence subject and would not use the ® mark when referring to third party names, and the British would refer a date as 7^th of July, 2010, not in the lousy American style July 7, 2010. I encourage them to really spend some time studying how Inspectorate issue their audit certificates. They should have done that before they post it.

I will stop here and let people draw their own conclusions. But I do NOT for a single bit believe that Mr. Paul Alston himself personally counted and inspected 308,542 pieces of silver bars, and sampled and measured each one bar out of each pallet of 30 bars all by himself and his gangs, and issued that SLV audit certificate and signed his name on it. Not a bit at all.

Full Disclosure: The author is fully invested in mining stock SWC, PAL and precious metal palladium. The author also holds physical silver and silver mining stocks like SSRI, CDE and HL, but has no position in ETF funds GLD, SLV, UNG and USO.

Peak Oil, Alternative Energy and Platinum Group Metals

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

Peak Coal in South African and the Global PGM Supply

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

Peak Nickel in Russia and the Russian Checkmate on Palladium

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

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

The Ultimate Energy Investments

You read that title right, I am talking about The Ultimate Energy Investments, not the "Alternative Energy" investments. Alternative energy is a very sexy word to the ears of investors, in recent years. I am all for alternative energy developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe LENR, or Cold Fusion, which involves precious metal palladium, is humanity's only solution to Peak Oil energy crisis.

We face the Peak Oil reality, a reality that the total energy supply of the world will begin to decline, instead of continue to increase. The world must cope with and live within the reality of ever declining energy supply, until a new abundant energy source can be developed to replace the depleting fossil fuels of the earth.

It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard energy itself, as a commodity investment? This is why I gave the title of this article as "The Ultimate Energy Investments". Yes I am talking about HOARDING ENERGY itself.

How do you hoard energy? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?

It is not possible to hoard energy directly, but it is possible to hoard energy indirectly. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.

The ultimate energy investments are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.

Precious metals, particularly PGM metals, platinum and palladium, are such ultimate energy hoarding investments, because these metals cost huge amount of energy to produce. According to the annual report of Anglo Platinum (AGPPY.PK), the direct electrical energy cost of producing just one ounce of PGM metal, is almost 7GJ in 2008, or 7x10^9 Joules. In terms of electricity that's roughly 2000 kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.

I guestimate that all direct and indirect energy cost combined, it costs about 10,000 KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in six tons of coal.

ONE OUNCE of PGM metal equals SIX TONS of coal. Remember that and think about it!

The platinum engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed one ton of coal to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!

When you buy a one ounce platinum or palladium coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.

As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.

Isn't it great that you can hoard energy itself, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: one ounce of platinum or palladium equals to six metric tons of coal.

The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is aluminum. There is no scarcity in the raw material to produce aluminum. Aluminum production is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.

If you want to hoard electricity, you can hoard aluminum bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like Alcoa Inc. (AA) or Aluminum Corp. of China (ACH) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.

Recently, another energy source, natural gas, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.

What can you buy to invest in natural gas, besides producers like CHK, COG, APC, PETD? Many people talk about natural gas ETF funds like UNG, FCG, UNL, WCAT. I must point out that people should NOT touch any of these ETFs that are based on nothing but paper. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have worthless papers created out of thin air by counter-parties. I have learned my lesson in UNG, fortunately without suffering any loss. I argued why people should NOT invest in UNG, USO, or any other paper based ETFs. It is extremely important that you read it and try to understand the difference between paper and physical goods.

Is there no way to hoard physical natural gas for an investment? Well, there IS a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called urea, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce urea, comes from natural gas. No other raw material is involves. Urea is stable, safe and cost effective to store. By hoarding urea, you are hoarding natural gas in solid form. Current urea price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.

Go ahead to hoard urea at current low price if you want to invest in physical natural gas.

As for me, I have been a long term advocater of palladium investment. There is now even more reason to invest in palladium, besides the bullish factors I have talked about repeatedly. At current price of only $578/oz, it is nice to know that one ounce of palladium represents at least six metric tons of coal, right at your finger tip. Since the December, 2008 lows of precious metals, the performance of palladium has beaten other precious metals: gold, silver and platinum. Palladium will continue to outperform the other precious metals, until at least it reaches a price parity with platinum.

Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like ABX, GG, AU, NEM, PAAS, SSRI, CDE, HL, just to name a few.

When it comes to platinum, there are much fewer choices: AGPPY.PK, IMPUY.PK, LNMIY.PK, AGPBF.PK and NMPNF.PK.

When it comes to palladium, the only primary mining plays available is Stillwater Mining (SWC), and North American Palladium (PAL).

Full Disclosure: The author holds shares in SWC as the largest long position. The author also holds shares in PAL, SSRI, CDE, PAAS, HL, PCX. The author hoards physical palladium metal but currently has no plan to hoard physical urea due to lack of suitable market access. The author has no long or short position in any of the ETF funds mentioned.

A Beatiful Science Dream Came True On The 20th Anniversary!

Two news items make the bullish case for precious metal palladium stronger.

First, a 20 years old beautiful science dream is finally confirmed this week. The breaking news quickly spreads through the global Medias. Read it here, here, here and here. On the 20th anniversary of the initial Fleischmann-Pons announcement of the original Cold Fusion, and on the same University of Utah campus, scientists from the US Navy SPAWAR lab presented their experimental work that convincingly proved that Cold Fusion is real, at the annual American Chemical Society meetings.

This news brings renewed hope that we may finally have a virtually inexhaustible new energy source to replace the world's depleting fossil fuels, cut carbon emission (Secretary Steve Chu are you listening?), and overcome the world's looming Peak Oil energy crisis.

I have previously discussed the connection between Cold Fusion and palladium. Cold fusion relies on palladium as the metal has a unique property: its extreme affinity to hydrogen and deuterium helps the deuterium nucleus to get closer and fuse into helium, releasing lots of energy. I have followed cold fusion developments, and tracked the research of Pamela Mosier-Boss and colleagues at SPAWAR. I also mentioned the Arata public demo, the first successful public demo, in a previous Seeking Alpha article. Read the heated debates in the comments.

For the first time, the SPAWAR discovery is accepted as real, as no one, not even the skeptics would question the credibility of the experiments any more. The remaining controversy is in the interpretation of the observations. To any one who knows physics, it's conclusive that nuclear reaction must have happened, as neutrons and gamma rays are detected.

No wonder the news quickly spread through the global Medias in less than 24 hours! I can not emphasize enough how important this break through means to humanity's energy future! I immediately called my Congress representatives but found out that they have already noticed the story, and have printed copies sitting right on their desks!

How many investors immediately realize the connection between palladium and cold fusion, and are quick to seize one of the best investment opportunities in a generation?

How many politicians realize the EXTREME DANGER if the cold fusion technology falls into the wrong hands? It can be developed into a new energy source, or a new thermal nuclear bomb! The research can be done with a couple million dollars, the materials are readily available: palladium and heavy water. Such a horrible weapon can be easily smuggled in undetected. There is no radiation. No suspicion could be raised as the heavy water is perfectly drinkable and the palladium is merely a precious metal! A terrorist could also pull a "Cold Fusion Bomb" hoax and the threat must be treated as credible, as we have no way of discrediting such a hoax if we do not grasp the Cold Fusion technology ourselves!

I urge people to contact elected politicians and urge for support of the Cold Fusion research, not only to secure our energy future, but also to prevent this potentially dangerous technology from falling into the wrong hands!

Now back to palladium. One Russian news story makes the metal extremely bullish, in the immediate future. The news suggests that Norilsk Nickel (NILSY.PK), the world's largest nickel and palladium mine, may run out of cash and could be on the brink of shut down. A Norilsk Nickel shut down will have a huge impact on the global supply of nickel, palladium and platinum, as they supply 20% of the world's nickel, 45% of palladium and 12% of platinum. Their shut down could immediately send prices of all three metals flying in the ensuring panic of shortage, particularly palladium.

The latest news that Russian Deputy Prime Minister Igor Sechin was inquiring about Norilsk's finances knocked the stock (NILSY.PK) down as much as 14%. Mr. Sechin demanded an explanation of the 86 billion rubles (US$2.6 billion) share buyback and other matters.

At the end of August, 08, Norilsk Nickel launched a controversial stock buyback program to buy back 7,947,000 shares at 6167 Roubles per share, or 49 billion Roubles (US$2B). The buyback proceeded even as some share holders fought against it in court, denouncing the program for depleting the company's cash reserve and push it to the brink of bankruptcy.

Then on March 11, 09, Norilsk announced that they are re-selling the buyback shares for a mere $355M, getting only 18 cents back on the dollar. It's absolutely hilarious! As commodities collapsed, companies are suspending dividends, issue new shares and do all they can to raise and preserve cash liquidity. But Norilsk Nickel threw cash away in a meaningless stock buyback, and then had to re-sell the shares for a fraction of the cash. WHY?

This story and the Russian Government investigation of Norilsk Nickel finances imply that they could be in a deep financial mess concealed to the public, and that they are desperate for cash, as their mining operation is losing money heavily at current low nickel and copper prices (my estimate is a loss of $0.5B to $1B per quarter). If they run out of cash, they must shut down the mining operations. It will send the palladium price to the moon when that happens.

To seize the opportunity, you can buy any physical palladium metal you can find. Better yet, buy shares of Stillwater Mining (SWC) and North American Palladium (PAL). These two are the only primary palladium producers in the world. You can also buy South African PGM mining companies, like Anglo Platinum (AAUK) and Impala Platinum (IMPUY.PK). Palladium metal can be bought from APMEX and PAMP or other precious metal dealers. I am trying to talk with SWC and PAL to see how they can help average folks to acquire physical palladium more easily for investment.

The FED has unleashed the nuclear option: US debts monetization. It means mass printing of money and inevitable collapse of the US dollar. It makes a compelling case for owning precious metals to safeguard your financial security: Gold, Silver, Platinum and Palladium. I will talk about outlook of US dollar and how to survive the hyper-inflation in the next articles.

Looking at the fundamentals of supply and demand, palladium beats other precious metals hands down. Again I want to caution people against buying Gold ETF (GLD) and Silver ETF (SLV), as I do not see convincing evidences that physical metals actually exist to back these two ETFs, and the silver bars serial number list contains lots of red flags to be trusted. If you like silver, you'd better owning physical silver or silver mining stocks like SSRI, PAAS, HL and CDE.

Some thought on what looming hyper-inflation would do to banks. I believe that NO BANK can survive the hyper-inflation, regardless of how sound their balance sheets look. The reason is simple: Why would any one leave money in a bank if the currency is losing value rapidly? All banks will fail if people are withdrawing cash en mass. But please do NOT rush to your bank to withdraw your cash tomorrow. I do NOT want to cause bank runs. You still have enough time to gradually and orderly withdraw money from your bank and put the money into precious metals and other valuable physical assets.

I am looking for short opportunities in all bank stocks. Jim Rogers said he was shorting JP Morgan (JPM), which looks to be a good choice. Some other bank names come to consider: Bank of America (BAC), Citibank (C), Wells Fargo (WFC), Bank of New York (BK). All banks ultimately will fail or be nationalized. There is absolutely no investment value in any bank. Bottom line: There can be NO healthy banking industry without a sound monetary system, just like no fish can live without water. But too many people have already shorted banking stocks. In light of the on-going short squeeze in financial stocks, it is better to wait patiently a little longer, before entering short positions in banking stocks at higher price levels.

Full Disclosure: The author is heavily invested in SWC and PAL, and shipping stocks like EXM, DRYS, EGLE, TBSI, GNK, NM. I own silver mining stocks SSRI, PAAS and HL. I do not currently have short positions in banks but am waiting for opportunity to short.

Precious Metal Fundamentals - Recent Developments

We live at a time where information, as well as ENTROPY, spreads at light speed. We must be able to use our own intelligence to discriminate and filter out the noise from the internet, otherwise the internet is nothing but a giant trash can. In this world with little trust left in the system, we can no longer trust the authority of any information source. Mr. Bernard Madoff has proven that higher authorities CAN tell much bigger lies for much longer time. Everything we hear must be scrutinized using facts, logic and reasoning. I spotted an internet fraud and developments so far proved me completely right.

Recently Mazda repeated its claim of their single-nano catalyst technology which cuts usage of PGM metals in vehicle catalytic converters by up to 70%. Their technology uses smaller PGM particles and a proprietary agglomeration prohibition material. As a PGM metal investor I always pay close attention to such news that may bring change to the PGM supply/demand fundamentals. So how much can we believe in Mazda's claim and how soon do we expect an impact on the PGM metals demand?

History is the best teacher! In 2002, Daihatsu, announced that they invented a perovskite based Self-Regenerating "Intelligent Catalyst", which dramatically cut PGM metal usage while making the catalytic converters more durable. The idea was pretty good. Frankly the 2002 Daihatsu claim was much more credible than today's Mazda claim. There were independent researches on the perovskite based self-regenerating catalyst at the time. Now six years later, where is Daihatsu's "smart catalyst" today? Has it leads to any reduction in autocatalyst consumption of PGM metal? Not a zilch! If Mazda's idea of reducing metal particle size could work, it would have been tried long ago. My physics background allows me to conclude confidently that the so called single-nano technology CAN NOT work reliably and durably. I do not believe it until they get an EPA approval.

I am not saying that Daihatsu or Mazda made false claims. But scientific researches and commercial applications are two different worlds. In reality, 99% of research advances never make it into commercial products. Those few that do make it into the commercial world, take a long time to get there, and could still be ultimately rejected by the market, for non-technical reasons. Inventor Thomas Edison got cold water poured over himself when he tried to patent one of his first inventions, a voting machine that can precisely tally up voting results. Why we struggled with hanging chads in 2000? Politicians would rather prefer Diebold.

Why recent PGM thrifting news only came from small Japanese auto makers like Daihatsu and Mazda, but never from bigger names like Toyota Motor (TM), or Johnson Matthey, who is responsible for 1/3 of the world's autocatalytic converters? Mazda is NOT setting its priorities right. Each catalytic converter contains about 4 to 5 grams of palladium, worth about $24 at today's price. How can they cut corners and sell vehicles with sub-quality parts to customers? There were so many complaints about defective catalytic converters that even EPA had paid attention. You think consumers will let you get away with it?

Auto makers should boost the palladium content in catalytic converters and make them reliable and durable. Green cars with reliable emission control should then be exempted from the costly ($60+) annual SMOG tests in California and other states. Consumers will welcome the saving of money and hassle as it is worth far more than the extra cost of PGM metals.

I am convinced that the bullish fundamentals of palladium are even better in 2009. Recently Impala Platinum (IMPUY.PK) updated their estimate of platinum and palladium supply/demand data for 2008. Notice the significant drop of Russian supply? The annual sale of Russian Strategic stockpile palladium, about 1.5M to 2M ounces a year, finally ENDED! Back on June 11, 08, the palladium market knee-jerked when Norilsk Nickel (NILSY.PK) merely suggested the termination of the stockpile palladium sale. Now it really ENDS, how will people react when it becomes widely known? Russia maintains a Defense Strategic Stockpile for its own war time needs, not for selling PGM metals below cost to the world.

In Impala's estimates, recycling accounts for 1.1M ounces of palladium supply in 2008. CPM Group estimated the recycling as high as 1.6M ounces a year. The good news is this supply will also be removed in 2009. A new catalytic converter contains about 4 grams of palladium. An old one has about 2 grams left. Recycling recovers about 75%, or 1.5 grams each, worth about $9 in palladium at today's price. The PGM recycling is a long complicated and costly process. At today's low price there is simply no incentive for recycling. Stillwater Mining (SWC) is better off dropping the PGM recycling business now and concentrate on mining. This can boost the metal's market price as well as unlock large working capital that was locked up in the recycling materials inventory, and hence enhance the company's balance sheet.

On recycling, more than 1M ounces of palladium supply are removed. Mining production also dropped significantly. Norilsk Nickel estimated the 2009 palladium production to drop to 2.6M ounces from 3.0M as they now mine the nickel rich and palladium poor minerals to reduce cost, as well as process third party nickel concentrates which contain no palladium. North America Palladium (PAL) shut the mine down earlier, removing another 0.280M ounces supply. South Africa also saw about 10% drop of palladium production, or 0.25M ounces. Stillwater Mining (SWC) also expects reduced production in 2009.

When you add up all the supply disruptions and halt of Russian stockpile sale, despite of a 5.3% drop in auto catalyst demand, we are looking at an unprecedented palladium deficit in 2009, far bigger than in any other precious metals. And we haven't added in potential investor demands! Who wouldn't want to buy some palladium if you know what's going on!

The collapse of PGM prices in recent months was NOT due to fundamentals; rather it was due to investment funds as well as big auto makers were forced to liquidate their precious metals holdings to raise cash. Especially General Motors (GM). Auto makers normally keep 6 months of PGM metals supply to weather any supply shocks. When GM struggled for its survival, it had to sell its PGM inventory at cheap prices. Now that GM says it can expect to survive without more government money. It's time for GM to rebuild the inventory in light of the looming shortage.

Palladium has by far the strongest fundamentals and the best potential for an explosive rally, among all precious metals. I still believe that due to the huge above ground inventory of gold, and the current price above the intrinsic value of production cost, the yellow metal has little room to gain in real value. Gold is a liquid and stable currency, but has no investment value if you are looking for gains.

I like silver better than gold. Silver is mostly a by-product metal so the supply is price-inelastic. As a safe haven investment, silver is more appealing to Joe-Six-Packs as it is more affordable, while gold is more appealing to rich people due to its high density of value. Most people on the GoldIsMoney forum believe silver is more bullish.

But none of the silver bugs even presented specific and quantitative data on silver supply and demand so I want to have a closer look. Photography usage of silver, which traditionally accounts for 1/3 of the demand, is now diminished as digital cameras replace analog ones. Sterling silverwares like spoons and goblets are also going into history. Industrial demand saw some increase in recent year but is uncertain as the global economy goes into recession.

The biggest uncertainty factor is silver jewelry. Silver jewelries are low end cheap jewelries. They are those cheap bling-blings you pick up in a mall or a grocery store when you happen to have a few extra dollars and you just like what you see. So in a sense silver jewelries are discretional spending items and are vulnerable in a slowing economy.

The high end jewelries made of gold, especially platinum and palladium are different from silver. They are rarer, and are more likely purchased as some special gift rather than casual spending. No one would buy a silver earring or necklace as an engagement gift, for example. Your fiance(e) will expect a diamond ring made of platinum, palladium or white gold. People will not tender their platinum wedding bands to pawn shops for cash, but they are perfectly happy to toss out old silver jewelry pieces.

Unlike PGM recycling, which is complicated and costly, recycling from scrap silver jewelries is simple and inexpensive as the materials contain high concentration of silver. Silver recycling remained at near constant high level over the past years, regardless of silver price. The PGM metals are different as low PGM prices discourage recycling and reduce the supply.

I believe silver remains bullish due to investment demand. But due to uncertainties in industry demand, I recently reduced my silver mining stock holdings in SSRI, PAAS and HL, and concentrated more on palladium mining stocks, SWC and PAL. The continued strong rally in Baltic Dry Shipping Index (BDI) shows I made the right call on the shipping sector. So I continue to hold large positions in shipping stocks, like EXM, EGLE, GNK, OCNF and DRYS.

Full Disclosure: The Author is heavily invested in palladium mining stock SWC and shipping stocks EXM, EGLE, GNK, OCNF and DRYS. I also hold positions in PAL, USO and OMG.

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.

Safe Haven Investments: Survival of the Fittest

Important update [Oct. 23, 08]: The story of Norilsk selling SWC stake might NOT be true. Please my latest comment on my suspicion and do your own due diligence.

This is part 4 of my series articles discussing the true valuation of physical assets, paper assets and currencies, vital knowledge needed to survive the unfolding global financial crisis. This is a sequel to part1, part 2, part 3. Read previous articles if you have not.

I wanted to discuss the valuation of US dollar; why it rallied so strongly; why we will see a sudden and abrupt reversal of the dollar rally; and why such a reversal will come imminently. I wanted to spend more time giving it more thoughts. But some big breaking news happened yesterday, forcing me to discuss the new developments immediately.

In previous articles, I emphasized that physical commodities can serve as reliable safe haven assets because their intrinsic values are decided by the marginal production cost. When something is sold BELOW production cost, the low price can not last long as no business can operate at loss indefinitely. SUPPLY DESTRUCTION will happen, tilting the supply/demand relationship to a shortage. Price will then be restored to profitable level to allow producers to resume profitable operation. Therefore when you see a commodity traded far below its production cost, it is the best investment you can buy. You can just sit back and wait for it to appreciate soon, in inflation adjusted term, knowing for certain that the price just has to recover regardless of the demand side.

Looks like the supply destruction is indeed happening at neck-breaking pace, in all commodity sectors, and many analysts have noticed the phenomena and openly discussed the idea of supply destruction. As I am a precious metal investor with particular interest in palladium, two news happened yesterday caught my attention and made me very happy, as things that I predicted are happening far sooner than I expected. The news involves two of my favorite stocks, North American Palladium (PAL) and Stillwater Mining (SWC).

PAL announced today that they are temporarily suspending the production at the Lac Des Illes mine, and suspending metal sales due to current low metal prices. I am pleasantly surprised that the new CEO, Mr. Bigger, could act so quickly. I openly called for PAL to suspend operation due to current low palladium price. It's not an easy decision to let 350 hard working mining workers go, through no fault of their own, but the company must preserve precious mineral reserves and liquid assets, and ultimately it is also good for the workers themselves.

I believe that PAL, as the only palladium producer who sells to the spot market, has enough leverage power on its own to turn the palladium market around, and major stake holder George Kaiser also has a capacity on his own to move palladium price. Now PAL is not selling, who will sell in the palladium spot market? Who has the metal to sell? Are they going to sell paper palladium now? The market must realize that it must pay a fair price to get the physical metal. Unfair prices can only buy you paper, as producers simply can not operate at heavy loss to produce metals like a charity organization.

But the next piece of news shocked me so much that I jumped up, could not believe what I just read!!! Russia's Norilsk Nickel (NILSY.PK), the world's largest nickel and palladium producer, 55.4% stake holder of America's Stillwater Mining (SWC), is now offering to sell their SWC stake!

This is incredible! This says the Russian Checkmate in palladium, which I discussed before, is playing out right today, right in front of our eyes. This is incredibly bullish for the price of palladium. Let me explain.

Norilsk Nickel produces 45% of the world's palladium. In 2004, they acquired a majority stake in SWC, America's ONLY mine of palladium and platinum, two strategic metals of critical importance to the security and survival of the United States, through quite some political maneuvers that involved direct negotiations between President Bush and President Putin. Norilsk's strategic acquisition obviously was aimed at achieving a 50% dominance of global palladium supply in order to assert monopoly power. Norilsk never sold a single share of SWC. Such a strategic asset is never to be sold for some cheap money.

Not for sale, UNLESS Norilsk is in a desperate need of cash urgently. Norilsk is huge, producing 20% of the world's nickel, 45% of palladium and 12% of platinum. Last year, Norilsk was on a buying spree, spent US$6.3B in CASH to acquire a small nickel player, LionOre, among other purchases. And today Norilsk needs to sell its strategic SWC stake for maybe a meager $230M cash for lunch money?

They are in a terrible liquidity squeeze if they are so desperate they need $230M in cash now. Current low nickel price really hurts them. My estimate is they probably lose $1B to $2B per quarter. So $230M is probably good to last them another 2 or 3 weeks. I see that shutting down the Norilsk Mine, is an inevitable decision they are forced to make urgently, regardless what they say publicly. They either shut down, or go broken then shut down. Not to mention Norilsk Mine is an environmental catastrophe that needs urgent cleanup.

That would be fantastic news to SWC and PAL, the only primary palladium producers in the world. Shutting down Norilsk would remove 45% of the world's palladium supply. When it comes to PGM metals, look at rhodium! A mere 4% shortage was enough to drive rhodium price from $300 to $10000 per ounce!!! What will a 45% shortage do to palladium? Would the Russians boost palladium price so they can get a better deal on SWC?

It is outrageous Norilsk is suggesting another foreign buyers to take over its SWC stake. It was heart breaking to see our precious national treasure sold out to the Russians, by our president. Do we want to sell SWC to a foreign country again? If an American billionaire investor reads this, please consider seizing this opportunity to buy up the SWC stake, not just because of patriotism, but because of the huge profit opportunity. The nation needs our treasure back! Senator McCain: You can demonstrate you are not Bush No. 2. You can take SWC back from the hands of the Russians.

South Africa is another catastrophe waiting to happen, benefiting the two North America based producers. Current platinum and rhodium price is simply too low for any South African PGM mine to make ends meet, not to mention the on going electricity crisis in the country and ongoing limit of only 90% power supply to the mining industry. SA's PGM industry has entered a Survival Dimension, facing a choice of either cut production to boost metal prices, or a certainty of bleeding to death. Many analysts and shareholders have openly called for production cutback. PAL has already made the right move; South Africa should move soon to cut.

That, of course, is a great incentive for investors to buy and hoard physical palladium and platinum. The investment buying will boost prices so buying begets more buying. History has proven in 1980 that when people need to buy safe haven assets during financial crises, they buy every precious metal, not just gold and silver. When there is strong investment buying, weak industry demand becomes irrelevant.

I am not totally dismissing the factor of industry demand of PGM metals, especially in the auto sector. But the weaker auto sale has been exaggerated. Owning a car is a necessity, not a luxury. How you can walk 30 miles to work or 10 miles to shop? Tight family budget may postpone buying a new car for a while, but only till the old car breaks. You may turn down a customer's request for a car loan but you can not remove the need for a car. Gasoline consumption in the USA hardly reduced, year over year. From the fundamental point of view of the mobility needs, suppression of auto demand is only temporary, not permanent.

More over, history has shown when the industry demand of PGM metals weaken, the extra supply has always been absorbed by jewelry demand as the metals become more affordable.

Out of all precious metals, gold is the least I like. I have not purchased any GLD so far. The current gold price is still well above profitability of most gold mines. Humanity has been digging this almost useless yellow metal for thousands of years till today. There's too much gold sitting there just to collect dusts. If we do need more gold, maybe we can all quit our day time job and go to the beaches panning for gold, like the folks at Jamestown.

Silver is a different story. 70% of silver today is produced as a by-product from base metal mining. Even for the 30% silver that's produced as main product, base metal by-products are also important part of the revenue. The whole silver industry is suffering not only from current low silver price, but also low base metal prices as well. Production cut is expected, reducing supply, at a time when physical silver investment products are in high demand. I believe physical silver price will go up much more than gold. I own SLV and recently increased my SLV stake on the dip to the low $9 area. The silver industry has continuously announced news of mine shut downs recently. Even mentor of the most famous silver bug, Israel Friedman, has openly called for CDE to suspend silver sales.

Silver mining companies are different stories. I have purchased a few silver stocks like SIL, PAAS, SSRI, HL, CDE. But after carefully examine them one by one, I find that all of them are hurt from low base metal prices, not just low silver price. None of they are pure silver play. So instead of providing a leveraged gain over silver, these mining companies provided a leveraged loss over silver. If I am already invested in silver itself, why do I need to buy any silver mining share? I wish there are pure silver players around.

Silver Wheaton (SLW) claims to be a pure silver play. I bought SLW a couple of years ago before I knew better. But once I figured out SLW's business model I never touched it again. It's a holdings company basing its value purely on some contracts. Basically they borrow a ton of money from banks to pay to the mining companies in exchange for the mining companies to sell the by-product silver to SLW for only $3.90 per ounce. SLW will pocket the difference. Sounds good? But I don't see how physical fortune can be made in playing paper contracts, instead of digging real mines. Now the danger of SLW, a danger not unlike sub-prime loans, has been exposed: What prevents these contracted mining companies from shutting down their un-profitable base metal operations, hence cut off SLW's silver supply?

In current turbulent commodity market, the mining world is a world of survival of the fittest. Who has the richest mineral reserves, the most cash and the least debt, will survive and prosper. The long term bullish cycle of commodities will continue, as Jim Rogers pointed out, due to the damage of producers thanks to the credit crunch. A whole bunch of unfit commodity producers will probably be eliminated. But the survivors will get to enjoy the next wave of commodities rally, which I believe is not too far away, despite of a weakening global economy, because the damage to supply is much worse than the damage to demand.

The fundamental bullishness of commodities attribute in large part to the fundamental bearishness of the world's fiat currencies, notably the US dollar, but not just the US dollar.

The dollar staged the strongest rally in recent years, just as the global credit crisis deepens, and the Fed is printing money like crazy to inject huge liquidity into the market. Every bit of liquidity the Fed injects simply disappeared once it's absorbed by the market. It totally defies logic and stunned many market observers. Is it manipulation? Conspiracy theory is always an easy answer. But we must look for the real reason behind the logic-defying dollar rally, to make correct investment decision.

The real reason is that the global credit crunch creates such panic that most people retreat to the basic instinct of "Cash Is King". Liquidity is being hoarded away, instead of circulating in the market. The velocity of money approaches zero, making the dollar seem more valuable relative to surplus goods squeezed out of supply chains. This is a temporary aberration and can NOT be allowed to last. When the velocity of money approaches zero, so does the velocity of goods movement. If goods are not moving, then the society will collapse. The money printing will get both money and goods to move again. Once that happens, the dollars will suddenly flood the market while the supply of goods will dry up, leading to the sudden collapse of the US dollar.

Let me use an analogy. We are riding on a car rushing up a high cliff overseeing the ocean underneath. You will panic and your intuitive response is buckle up your safety belt to strip yourself in. You think you are safe in your safety belt. Well at impact point, you go from no liquidity to hitting an ocean of liquidity in a split second. There is absolutely no time for you to untie your safety belt before you are drowned. The safety belt is the US treasury bonds. Warren Buffet recently sees danger in treasury bonds and he is all out spending cash to load up equities. Follow the Oracle of Omaha as he is the one with market wisdom!

Full Disclosure: The author is fully invested in SWC, PAL, and OMG. I am also loaded in SLV and traded in and out in a few selected silver stocks like SSRI, HL, PAAS and SIL.