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.

Looming Peak Coal in South Africa and the World

South Africa is about to reach Peak Coal, or has already passed it. Mean while the world will reach Peak Coal soon, said Cal Tech scientist David Rutledge. Mr. Rutledge surveyed coal production history of major producing counries all the way back to 1880, and applied the math model pioneered by King Hubbert, who accurately predicted the 1971 Peak Oil production in the USA, using his math model. Rutledge concluded that previous estimates of global coal reserves were outdated and too optimistic. He believes that there were roughly 662 billion tons of ultimate recoverable coal reserve on earth, among which 59%, or 400 billion tons, still remain underground. To put the numbers in prospect, the world produces and consumes about 7 billion tons of coal a year. China is responsible for about half of that number, or about 3.5 billion tons.

South Africa produces 242 million tons of coal last year. David Rutledge predicts that South Africa's production will peak in 2011 at 253 million tons a year. Peak Coal in South Africa has huge implication to the global economy and to the supply/demand of a critical natural resource that the world can not be without, especially as we move towards alternative energy solutions. South Africa is responsible for 85% of the world's platinum production and 40% of palladium, two noble metals used extensively as catalysts to cut air pollution from automobile emissions, and as catalysts to produce synthetic fuels and used in fuel cells, among other things.

Peak Coal in South Africa also means Peak PGM for the world, just as the world has an increasing demand of PGM metals for the environmental and alternative energy needs.

I discussed previously that mining of Platinum Group Metals (PGM), platinum, palladium and rhodium etc., is extremely energy intensive. Based on reports available from South African PGM mining companies like Anglo Platinum (AGPPY.PK), it costs roughly 1x10^10 joules of energy to produce just one troy ounce of PGM metals. That is the direct energy cost. If you include the indirect energy cost, the energy required to build and replace the mining equipments, build and maintain the mine and provide for the mining workers etc, the total energy cost to mine one ounce of platinum or palladium could be five times higher, or roughly 5x10^10 joules.

The 5x10^10 joules total energy cost to produce one ounce of platinum or palladium is equivalent to 13,890 kwh of electricity, or 7.64 metric tons of coal, or 30 barrels of crude oil, or 160,000 cubic feet of natural gas, or 0.556 miligrams of mass. At their recent prices in the US market, these energy commodities would be worth $472 in electricity, or $955 in coal, $655 in natural gas, or $2730 in crude oil. (Calculated using $0.034 per kwh electricity, $125 per ton of coal, $4.09 per thousand cubic feet of natural gas, and $91 per barrel oil.)

Remember in early 2008, electricity shortage almost knocked out the electricity grid in South Africa. The PGM and other mining industry was forced to shut down for 5 days, causing a market panic that sent platinum price to $2300/oz and palladium to near $600/oz.

Has ESKOM, the nation's semi-governmental electricity company, fixed the electricity supply problem in that country? Not by a long stretch! So far ESKOM has not even touched ground to start building any new power plant, even though there has been lots of talks. They promised in 2008 to quickly return three mothballed coal fired power plants back to service in a few months, but the first of the three mothballed power plant did not return to service until October, 2010.

The problem is that ESKOM is financially crippled due to the low electricity tariff in South Africa. Based on their latest annual report, ESKOM burned 122.7 million tons of coal and generated 215940 GWH of electricity, or roughly 0.57 kilograms of coal to generate each kwh of electricity.
Cost of electricity generation was 0.282 rands per kwh, half of which is fuel, mostly coal cost. So ESKOM paid roughly 250 rands per ton for coal, or US$25 per ton, using last year's exchange rate. Current international coal price runs as high as US$125 per ton. Imagine what kind of craps (discard coal) ESKOM burns to generate electricity as they could only pay a fraction of the going market price of coal!

ESKOM is vulnerable to lose its domestic coal supply to international buyers who have insatiable demands and who can pay much higher prices. Look at India with an economy growing at 8% and who faces peak hour electricity shortage of 14%, and who will boost coal import from 80 to 100 million tons next year. The increased will mostly come from South Africa. China is also approaching peak coal. China begins coal import from South Africa just as Asia tops Europe to become South African coal's biggest buyer. China experiences such acute coal shortage in major cities recently that they inadvertently cut power supply to critical oil refineries, resulting in a diesel shortage that crippled the truck transportation, leading to skyrocketing vegetable prices while some produces are left rotting in the fields unharvested.

Let's look at South Africa's coal again. Last year's 242M tons of coal production was mostly used by ESKOM (123-million tonnes), Sasol (40-million tonnes) and export (66-million tonnes). ESKOM's expansion program can use an extra 50M tons while Sasol's new project requires an extra 20M tons annually. And we are also talking about insatiable international demands from India, China and Europe. There is no way South Africa can meet all these coal demands.

Some one has to yield! Who is least capable of affording high coal price, namely, ESKOM, must yield! ESKOM must drastically cut electricity supply and aggressively boost electricity price to stay in business and keep the country's electric grid up and running.

We are not talking about events a few years down the road. These events are rapidly unfolding in front of our eyes now. I have been monitoring coal price and see how it rallied from $90/ton in August, 2010 to now $125/ton, a 40% surge in just 4 months.

What's the implication if ESKOM has to take those drastic measures? The country's energy intensive PGM mining industry will crumble! Simply put, platinum and palladium will have to be produced at much higher cost. The production volume has to be cut dramatically. The PGM mining companies will demand much higher metal prices to compensate for the increased cost to stay in business.

That, of course is bad news for the world, but music to the ears of wise investors who put their money in physical precious metals, palladium and platinum. These two metals, particularly palladium, are the ultimate alternative energy investments as I discussed.

Full disclosure: The author is heavily invested in palladium and owns large long positions in North America's only palladium mining company, Stillwater Mining (SWC) and North American Palladium (PAL). The author is also heavily invested in coal mining company PCX and is looking to buy other coal mining stocks.

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.

BP Well Pressure Test Proves a Leak Exists Under Seabed!

BP scientists puzzled on why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected 8000 to 9000 PSI pressure, but reached only 6700 PSI after the first 24 hours and 6745 PSI after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.

BP scientists offer only two possible explanations:
1. There is a significant underground leak from the well.
2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.

I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so slow for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should promptly raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.

Let me explain the basic physics how fast the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.

How fast the pressure builds up to equilibrium level depends on three things:

1. How fast the reservoir oil can gush in under the pressure difference. The faster the oil gushes, the faster the pressure builds up.

2. How big a volume the oil in the well is confined to. The more room there is, the longer it takes to squeeze in extra oil to build up the pressure.

3. How compressible is the oil. The less compressible the oil is, the harder it is squeeze extra oil into the volume and therefore the faster the pressure reaches equilibrium.

Based on the estimate that reservoir oil was gushing into the well at a flow rate of 50,000 barrels per day, the total confined volume of oil the well is no more than 6500 barrels. And the compressibility of that amount of oil (liquid is not very compressible!) gives no more than 50 barrels extra space under full pressure. It takes roughly 3 * 50/50,000 of one day, or roughly 5 minutes, for the pressure in the well to build up to equilibrium level.

But now it's taking much longer than 5 minutes, and the pressure is far from stabilized yet. At the start the pressure was at 5000 feet deep water pressure level, or 2250 PSI. After the first 24 hours it reached 6700 PSI. After 48 hours it was 6745 PSI. After 72 hours it was 6775 PSI. Now after 4 days it's nearly 6800 PSI. The fact it is raising so slowing, and the pressure fails to stabilize, is a very troubling sign.

The data tells us that the oil is confined in a volume way much bigger than just the well itself. As the oil gushes into the well, it simutaneously leaks out of the well, through a pierced opening, into a way much bigger pocket of storage within the seabed rocks. This is why the pressure builds up extremely slowly. Lots of oil is being squeezed out through the leak point into the giant pocket in the seabed, to build up the pressure there slowly over time.

There is no question that the well casing is compromised and there is a huge leak some where in the well casing.

So why can't BP spot any seepage of oil out of the sea floor, if the oil is leaking out of the well into the seabed? That's because the well itself is 3 miles deep under the sea floor. If the oil seeps through the seabed and leak out from sea floor, it does not necessarily come out of the vicinity of the well site. It can come out at ANY spot within a roughly 3 miles radius from the well site. That is a pretty wide area to look for leaks. It is also pitch dark at the sea floor, the ROV video camera must use artificial lighting and can not see more than a living room's area of sea floor at at time.

if there is one single leak out of the sea floor within a 3 mile radius, it will take forever for BP to discover it using those under-sea ROVs. If BP find one leak, that means there must be hundreds of un-discovered leaks out of the sea floor!

What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.

As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.

It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.

Full Disclose: The author currently owns a small short position of BP. But my main stock portfolio are on long positions on my favorite palladium mining stocks, SWC and PAL, as well as silver mining stocks such as SSRI, CDE, PAAS. The author does intend to increase BP shorts over time, if there is significant recovery of the BP stock price.

Principles of Wealth Preservation Through Physical Assets

Yesterday, barely one week after the fall of Fannie Mae (FNM) and Freddie Mac (FRE), we saw the fall of the third and fourth largest financial institution at the same time. Lehman Brothers (LEH) filed for bankruptcy. Merrill Lynch (MER) sold to Bank of America (BAC) in a hurry. Dow plummeted more than 500 points. We are looking at an un-precedent financial tsunami and it is at times like now that people MUST preserve their wealthy through safe haven investments, or risk losing everything.

When it comes to safe haven investment, people immediate think about physical assets like gold, silver, oil, land, real estate. There is a reason for it. Physical things have intrinsic values. Value of a paper fiat currency, or a stock, can fall to zero. But value of any physical assets can not fall to zero. The intrinsic values of physical assets are the reasons why they preserve wealth during times of financial and economic crises.

It is important to understand why physical assets like commodities have intrinsic values and how are they determined. Without this knowledge you might end up over-paying for something and losing your wealth. Those folks buying gold at the $800+ high in 1980 ended up losing big time and they may never be able to recoup their losses, because they chased the gold maniac and over-paid well above the intrinsic value of gold. Knowing how to measure the intrinsic values is more important as the value of the US dollar is changing dramatically, so the dollar price no longer provides an objective comparison.

To understand how intrinsic values of commodities like gold are determined, a few common misunderstandings must be demystified. Those common misunderstandings include:

A commodity's value is determined by its usefulness, or how much people are willing to pay.

A commodity's value is determined by supply and demand, the more scarce the more valuable it is. The more abundant the cheaper it should be.

Both notions are considered common sense by most people. But both notions are actually wrong if you think them through. Why are both notions wrong? Let me use one example to illustrate why these two notions are wrong. Let's talk about water, potable, drinkable water.

Water, of course is extremely useful and important. Water is needed to sustain life. But yet water is cheaply available. So something useful doesn't necessarily make it expensive.

Water is also abundant. Coca Cola (KO) can produce as much soft-drink as people of the whole earth needs to drink, and much more, there is even competition from Pepsi (PEP) and others. The Saudis can buy as much water as they need. Some one can filter the sea water to produce any amount of fresh water as long as the Saudis pay the right price. But the abundant water is not exactly cheap as dirt. Vise versa, something scarce doesn't necessarily make it expensive, either. Remember I mentioned KO and PEP for a potential short? I believe both companies will survive a severe economic recession or depression. But profits are going to plummet as consumers cut back on discretional spending on soft drinks.

The case of water provides a good example of the intrinsic value of a commodity. A one-gallon bottled water is sold roughly at about the cost to produce and ship it, plus a bit of marginal profit. The reason is very simple: If price of bottled water is too low to be profitable, then no one is willing to produce bottled water and so supply immediately falls, bringing the price back up. But if price is a bit too high, then driven by good profit, competitions will bring in extra production, which brings price down again. This leads to the important principle I want to talk about:

A Commodity's Intrinsic Value Is the Cost of Replacement

In my past articles, I have emphasized the basic economic principle that

Supply and Demand Drives the Price

And now I am talking about that commodities should be valued at the cost of producing them. Have I changed my mind? Am I contradicting myself? No! There is no contradiction. Both principles are valid and they are consistent with each other. The reason these two principles are compatible between them is that the replacement cost, the cost of producing the commodity, is NOT a constant. The production cost itself is driven by supply and demand.

That's because when the demand weakens and the price fall, businesses that produce at higher cost will fail, reducing the supply and leaving only the lower cost suppliers in play, hence the replacement cost is reduced until things reach equilibrium.

Likewise, when demand exceeds the supply, price must go up, and new source of supply where it previous was too costly to produce can now come into play profitably. So this is the case where strong demand drives up price as well as the production cost.

Let's use natural gas as one example. Some predicted that natural gas price should fall and they point out recent US production increase. What they failed to mention is that due to international market competition, LNG (Liquefied Natural Gas) import into USA has collapsed so the increased domestic production can barely make up for the drop of importation. The weekly NG storage number is significantly lower than the level last year, meaning the market has consumed more than the available supply for the past year. Further, almost 100% of the domestic production increase comes from the so called shale gas, a resource impossible to produce in the past and is still prohibitively expensive to produce today. The horizontal wells are very hard to drill and production from each well is very slow. Some estimate that shale gas is unprofitable to produce unless the natural gas price remains at $10 or more per MM BTU. Current spot price is at $7.39.

More over, from an energy equivalence point of view, one MM BTU natural gas is equivalent to 6.5 barrels of petroleum. So current price of natural gas is equivalent to only $48 per barrel oil, even though it is a cleaner fuel. Comparing with petroleum, natural gas is now in an extremely oversold condition. Using the principle that commodities should be priced at the production cost, which is at least $10, I am seeing United States Natural Gas Fund (UNG), is an excellent buy here and I see it less affected by turbulence in the general market. I bought UNG at around $33 myself. I also call for buying NGAS as it is an unconventional natural gas play, with a nice ticker name others are jealous for.

Let me come back to the topic of safe haven investments. The most important feature of a safe haven investment is not to make money, although that will be nice, but the main goal is to protect and safeguard your wealth. It must be something physical, with intrinsic value that does not fall, and is under your control and disposal. Safe haven assets are something you accumulate and you are not supposed to sell at any price, until time is getting real bad. And then these hard assets you own will protect you and your family. It's like buying a gun for your self-defense, do you buy it one day and then sell the gun next week, thinking that as you were not in danger that you do not need it any more? No! You buy and just own a gun indefinitely if you want protection. It's the same principle for safe haven assets.

Trading paper futures contracts, buying one day and selling another day and gambling on daily charts, like hedge funds are doing, is NOT safe haven investment. Safe haven assets are physical asset you just acquire while they are still cheap, and hold on for rainy days, as such, suitable physical assets to acquire must not only preserve and grow in value, but they must be easy to store, transport and safeguard as well. This leaves very few suitable options. You can not store coal, oil, natural gas or even helium in your backyard. The only practical things to consider are gold, silver, platinum and palladium. Even silver is considered too bulky in comparison with other precious metals. But for average Joes who do not have a lot of net worth, silver is perfect as a safe haven asset.

In near term, I am bullish in precious metal producers; I am bullish in natural gas and in crude oil. But I am now bearish in coal. I called for the coal producer, JRCC, at $4, and then called for taking profit in JRCC at $60+. My calls were perfect. I called for JRCC to reach low $20-ish and it is here today. The bullish sentiment in the coal sector is still too strong. But the fundamentals of the US economy does not support a bullish US coal market. If a large amount of US coal is shipped to Europe we might continue to see a coal bull market. But the dry bulk shipping rate is collapsing, as reflected in the stock price of DryShips (DRYS). The falling dry bulk shipping rate show there really isn't a lot of coal being shipping around the world. If investors are hoarding coal in their backyard, it might provide additional demand. I have not heard any one hoarding coal at home, though.

I am seeing JRCC to continue to fall to low double digits, in the $10 to $12 range. If you are in JRCC, or in other US coal players like ACI, ANR, BTU, CNX, FCL, ICO, MEE, PCX, dump them on the next rally up. It's no longer time for a coal bull market. There are better bullish investments some where else.

The best commodity bull plays right now, are precious metal producers. This is especially true as many precious metal players are now at ridiculously low prices. It's a basic supply and demand thing. A big part of the demand now comes from investment demand. If you look at the big picture, that investors large or small must now purchase physical precious metals as safe haven assets to protect themselves. The argument of investment demand now supercede any argument regarding the industry demand, because the investment demand can be orders of magnitude larger than industry demand.

Once again, physical commodities provide protection of value because their intrinsic value is the replacement cost. They can not fall below that replacement cost for extended period of time, because when it happens, it quickly kills off the supply, and then the price is brought back up. The intrinsic value also goes up as production cost goes up due to inflation and high material cost.

So which precious metals provides the best value protection as well as the best potential for gain, depends on its current price relative to its replacement cost. Gold I think is the worst. Gold's current price allows most of gold producers to be comfortably profitable. The huge above ground gold stockpile means there is no lack of gold even if many producers go out of business. So gold does not provide very good bottom price protection here. On the up size, there is currently enough incentive for new gold project to be developed, bringing extra supply to the market. So that limits the up side potential as well.

Silver is better than gold because current silver price is unprofitable for many primary silver producers. Current silver price just does not provide incentive for new silver supply to come online. Further, according to USGS, the world's remaining silver resource will be depleted in about 13 years at current production rate. So silver has very limited down side here and much greater up side than gold. I have recently purchased silver players like PAAS, HL, and SIL.

But I think PGM metals, platinum and palladium, provide best of all worlds. PGM source is pretty much limited to South Africa, Russia and two North American producers, Stillwater Mining (SWC) and North American Palladium (PAL). South Africa, by far the dominant supplier, producing 85% of the world's platinum and 35% of palladium, saw PGM production collapsed due to the country's electricity supply crisis, which is a long term problem with no solution in sight. In August alone, their PGM production falls by 32.8% from a year ago, while the 2007 production was also down significantly from 2006 level.

The investment community has completely ignored South Africa's electricity woe and production fall, while totally exaggerated the demand set back in the auto catalytic converter sector, and in the jewelry sector. In my last article, I point out that diamond demand is actually booming. That alone point to a higher jewelry demand of platinum and palladium. A loose diamond can not be worn. It must be set in a precious metal setting, platinum and palladium.

Investors also forget that their own purchasing of the physical PGM metal constitute a physical demand, on top of any industry demand. At current prices of $1120 per ounce platinum and $230 per ounce palladium, this is pretty much a bottom price which is already below the replacement cost. None of the South African PGM mines can make a profit producing platinum at $1120 per ounce. Do you know it takes 20 tons of hard rock ores and 5 months of total processing time to produce just one ounce of platinum?

Regardless of the precise industry demand figure, if the market does not begin to pay a better price, South African PGM producers will have to cut back production so the price will boost. That alone is a strong argument for investors to purchase platinum at current price. I wonder why the South African PGM industry would not shut half of their mines down to help alleviate the country's electricity crisis, and make much greater profit from half of the production. It seems they are not worried about weak demand or over-supply at all as they see the purchases are strong. They would rather worry about potential demand destruction if they do not strive to produce as much as possible to supply the market. Nothing can be more bullish when the main suppliers tell you that they worry about not having enough supply, instead of not having enough demand, when the platinum price is already so low.

Platinum's sister metal, palladium, should be a better buy than platinum because it is currently only 1/5 of the price of platinum. Historically the prices of the two were close to each other, as these two metals are inter-changeable in many applications. Industry users tend to use more of the less expensive metal, reducing the price gap over time. Palladium, being mostly a byproduct metal, except for that only SWC and PAL produce the metal as main product, is way much less price elastic in the supply, hence it has more explosive price rally potential. Palladium coins are now rare and hard to find. You should buy any palladium coin you can find with a decent premium. Of course the better buy would be the producers themselves, stocks of SWC and PAL.

How do you decide on the valuation of these two palladium producers, SWC and PAL? Look at historical price figure. The performance of the two tracks each other at roughly a 3:2 ratio, with SWC being about 1.5 times the price of PAL. The price of PAL collapsed in November, 2007 after a catastrophic secondary offer diluting the shares and provided an excellent short target to the naked shorter. Same story as what happened to Hecla Mining (HL) recently.

Consider that SWC still has lots of proven and probably mineral reserves, 23 million ounces worth of PGM metals, and they have hardly touched the tip of the iceberg of the gigantic stillwater igneous complex, and that there is opportunity to expand into the bullish chromium sector, while PAL's current mine is near depleted and they have yet to develop the rich Offset High Grade Zone. I think I would put a fair price ration between SWC and PAL at roughly 5:2.

Nevertheless, both companies are strong buy on the palladium play. Both stocks have been heavily shorted and heavily manipulated. The high outstanding short interests can not be safely unwounded, even at current low prices. Both companies have a very strong and patient majority or near majority stake holder behind them.

Behind PAL is billionaire investor George Kaiser, who own nearly 50% stake for many years, presumably because he believe palladium has an extremely bullish future. If Mr. George Kaiser wants, he can easily lift up global palladium price single handedly.

Behind SWC is an even stronger player, a 54% stake holder, Russia's Norilsk Nickel (NILSY.PK), the largest palladium producer in the world. They took all the trouble to acquired SWC to control over 50% of the world's palladium supply in the first place. Their strategic aim is clear: dominance of the global palladium supply, not for charity to the humanity, but for maximum profit. The Russia can name the palladium price any way they see fit if they want to. They have not taken any action to boost palladium price so far. But I guess a Russian checkmate is just a matter of time. They do not acquire SWC just to supply the world with dirt cheap palladium at a price far below cost.

I really can not see a market more bullish than that! And I really can not comprehend why so few investors can see what the Russians are up to. Time to buy some SWC and PAL. This will be an investment of a lifetime. Mr. George Kaiser has been waiting patiently for nearly 10 years so I think I can wait for a few more months. I am hoping that SWC or PAL suspend palladium sale at the spot market because it makes no sense for any company to sell products at a heavy loss. They could even buy back palladium at spot price! Even Gold Corp (GG) has suspended an unprofitable mine due to current gold price. If either SWC or PAL suspend sales or buy back palladium from the spot market, a lot of fun could happen fast. The global palladium market is so narrow that any one might squeeze the supply and pump up price.

P.S. The author is heavily invested in SWC and PAL, and hold long positions in HL, UNG, NGAS, PAAS and SIL.

Market Manipulation and Extreme Volatility In Commodities

In recent weeks, we see the worst sell off of commodities in the history of commodity trading. The magnitude and viciousness of the sell offs made many traders wonder, when they look at the price charts, that now a slowing global economy could mean commodities are no longer bullish fundamentally. Not surprisingly, paid talking heads like Jon Nadler jump all over the places excited by US dollar rally and the plummet of gold and silver, spinning out articles faster than I can read them.

I can not write up stuff as fast as Jon Nadler does! When one has to think with a brain, it really slows you down! If you are a paid market commentator, stop using your brain, or you could be fired for being too slow. As they are using computer blackbox programs to automatically trade stocks and paint tapes, they might as well use a computer program to generate today's media junks quicker and cheaper: "Today platinum dropped because traders feel demand may be weaning"; "Today platinum rallied because traders feel it's over sold"; "Today platinum dropped because US dollar rallied so precious metals are no longer needed". Too easy! Except computers really do not have a single ounce of intelligence.

The commodities sell offs are precisely synchronized in timing, which subject them into suspicion of market manipulation and government intervention. Food grains, precious metals, base metals all move up together in one hour and then all fall off a cliff in the next hour. I guess the fundamentals of basic supply and demand of everything must now be fluctuating up and down in a time scale of hours, not years. How ridiculous! If you want to know the big picture, read Jim Sinclair daily, read GoldSeek daily, and listen to what Jim Rogers is saying.

As vicious and relentless as recent sell offs are, there has been absolutely no fundamental change in the multi-year commodities boom and dollar bearishness. It is all just inherit market volatility which naturally exists in any commodity in short supply. The volatility is due to sentimental fluctuation of too many market participants chasing too narrow a market. The narrower the market is, the tighter the supply, the more people are involved in a particular sector, the more extreme volatility we will see in the market place. Gold is less volatile than silver because the silver market is much narrower than gold. Palladium has been more volatile than platinum and silver because the palladium market is even narrower.

I first learned the concept that a tight market supply must be associated with extreme market volatility, when I first learned about Peak Oil. It is a known fact that when supplies are abundant, the price tend to be very stable over long period of time, and when supplies are tight, prices tend to shot up rapidly, then drop viciously only to bounce back and shot up even more. Rhodium and cobalt prices are very good recent examples. I recommended cobalt as a better silver and pitched OM Group (OMG) as cobalt play, remember?

Why tight supply must be associated with extreme volatility and abundant supply must lead to flat prices? That's because when the supply is abundant, there will be abundant inventory at every segment of the supply chain, buffering any price shock and smooth out any price fluctuation. Producers will be able to plan in advance and adjust production to meet the level of demand, based on the inventory level and price movement.

But in a tight supply situation, inventories are depleted, which could lead to panic buying and hoarding by end users and skyrocketing price. And then the buyers thought the price is too high and held off further purchases. Sellers suddenly find buyers are all gone and wonder what happens and have to slash price to attract buyers, which actually drives buyers further away to wait for even better deals. Speculator who were attracted by the tight supply in the first place further add fuel to the volatility by joining the bids on the rally and joining the panic selling on the way down. Eventually price falls to an extreme bottom and savvy investors have patiently purchased away all the selling near the bottom. Industrial users who now has depleted their hoarding figure the price is at the bottom now, and start to buy, and suddenly they find there is no more supply because some savvy investors have purchased away all the available supplies. And hence it starts the panic buying again and another round of strong rally and vicious sell off.

BHP Billiton (BHP)'s recent cobalt sales history is a textbook example, as buyers on August 22, 2008 suddenly all jumped in together after waiting on the sideline for months. I watched the $24/pound price tag that day and how I wished I had enough cash to buy. They told me minimum order was two metric tons.

I wonder that during recent platinum and palladium price free fall, there might be a few big savvy investors quietly loading up all the physical metal being sold off. I know Jim Rogers likes palladium. I know George Kaiser loves palladium as a long term investment and he owns almost a majority stake in North American Palladium (PAL) for years and recently increased his stakes. Metals analysts like Jefferey Christian of CPM Group are very bullish on PGM metals. I know Norilsk Nickel (NILSY.PK), world's dorminant palladium producer, pushed for direct negotiation between President Bush and President Putin to reach the deal to acquire a majority stake in Stillwater Mining (SWC) in 2003. Their strategic goal of global dorminance of palladium market is clear. They don't do it for global charity to supply cheap metal, but for their own best interest.

The case for a palladium super bull cycle is so indisputable, SWC's presentation at 1:30pm on Sep. 9 presents very concrete data and facts why the PGM market fundamentals remain bullish. Latest news of South Africa's -32.8% PGM production shortfall should make the bullish case even stronger. There must got to be some big players very interested in the metals and would love to buy at the lower prices. So I am not too worried about the recent price plummet. Some one some where must be planning to corner the palladium market to rip huge profits. The supply is so tight; the global palladium market is so narrow, any one with a decent high net worth could corner the market for profit as the reward/risk ratio is just so irresistable, some one MUST be doing it!

Talking about cornering markets, the most successful case is De Beers successfully cornered the global diamond market for over a century. About diamond I have a wonderful story to tell which will do wonderful things to the PGM metals. But first let me tell the story of De Beers cornering the global diamond market, because it has some implications on what to come in the looming global economic crisis.

For over a century, De Beers monopolize the global diamond market and created a gigantic consumer market for it. They purchased virtually all of the world's raw diamond production and put into an inventory, then release the supply to the market in carefully controled quantity, creating artificial shortage to raise prices. Mean while they launched a successful global marketing campaign to promote diamond as a symbol for love and commitment. It's very successful! Ladies and gentlemen all over the world, most recently in China, fall in love with this precious crystal with excellent physical characters.

A Diamond Is Forever!

That's the most successful advertising slogan in the 20th century. So it also seems De Beers is also forever as they continue to be the monopoly of the global diamond market. And people continue to love diamond, in good times and bad times. But De Beers is recently under threat as the word FOREVER begins to crack apart in the middle. It now reads "FOR EVER y one"!

A Diamond Is For every one!

Who said that? A top secret private company called Apollo Diamond. You must read this amazing story which entertains you like the best 007, KGB and CIA spy stories. Suffice to say that modern technology is now ripe to bring artificial grown diamond, bigger and with better quality than natural ones, massively to the global consuming population, at a price much more affordable, and an availability virtually unlimited. A diamond is truely for every one!

Not yet right now. Under a constant death threat, and not wanting to ruin the market price and their huge profit potential, Apollo Diamond has been very cautious and only releasing a limited amount of their lab grown diamonds to test water in the market, at a price not much cheaper than the natural ones. I know by now you must be dropping water from your mouth wanting to jump in to invest in Apollo Diamond immediately. Nada a zilch chance! They are privately held and they do not need new investment to share their potential profit at all.

But never mind. The Apollo Diamond technology, based on CVD, Chemical Vapor Deposition, is nothing new and nothing proprietary. Their only secret is the right recipe of gas compositions, temperature and pressure, which they discovered by trial and error. As they have already demonstrated that it can be done, any one with a decent amount of money can put together a team of CVD experts and figure out the correct recipe on their own, and break Apollo Diamond's short lived technology monopoly on growing jewelry grade clear colored diamonds. Huge profit potentials will bring in competitions, bring down the price and bring up the availability and make diamond truely for every one, rich or poor!!!

And that does wonder to platinum and palladium! You can not wear a loose diamond by itself. It has got to be set into something solid. You surely do not want to mount a diamond on a plastic ring or a copper ring. It's got to be something more precious and more long lasting. Gold's yellowish color is ugly for a crystal clear diamond. White gold? The Chinese hate any precious metal that is not pure, as do people of other cultures. The only fitting pure white precious metals that do not tarnish in air are platinum and palladium.

So "A Diamond Is For Every One" really means a lot of jewelry demand of platinum and palladium, more than current global supply can provide, as annual global platinum and palladium production is worth about 0.035 grams of each of the metals for each person on earth. One diamond ring probably will cost about 5 grams of the metals. Maybe rich people can have platinum diamond rings, middle class wear palladium diamond rings, poor ladies can have silver diamond rings. For rich or poor, for silver or platinum, a diamond is always a symbol for love and commitment for every one, and should really be the standard affair for every engagement proposals!

As the US dollar is being desperately pumped up and precious metals and all other commodities are on free fall, many wonder are we facing a deflational future or an inflational one. I think the diamond provides the correct answer as while the crooks knock down precious metal prices, they have forgotten to also knock down diamond prices. Read the Diamond Registry for the big picture. I recommend read this one: The "Diamond Lining" To All the Clouds.

This is the business that has survived numerous recessions because it is a
business based on love, and love endures, and even grows stronger, through hard
times. People will always fall in love, and get engaged and married — and when
they do they will do it, they will mark those events with diamonds.

No wonder China's diamond import tripled in a year and is still growing rapidly. No wonder global diamond price has increased 30% from a year ago and is still growing rapidly and there is no such thing as a price correction in diamond, as there is no paper diamond trading in COMEX, as diamond is purchased not by hedge funds but by the mass populance, who look for diamond not just as a symbol for love, but also as an investment and a preservation of wealth in this inflational environment. Tiffany & Co. (TIF)'s rapid sales growth reflects that reality, so as the report from Harry Winston Inc. (HWD).

Shame on the talking heads who spread the myth that higher platinum and palladium prices suppressed the jewelry demand. Have they looked at the booming diamond demand? A typical platinum diamond ring costs any where from $2000 to $5000 or higher a piece, with 90% of the cost in the diamond. The metal cost is a mere fraction, $200 a piece even at $1500 per ounce platinum. If it's palladium, the metal cost at $400/oz palladium is only $65 a piece, comparing with the $2000-$5000 price tag of the whole diamond ring. If the Chinese are buying three times more diamond at 30% higher diamond price, then people can afford 300% higher platinum price in buying a platinum diamond wedding ring for the commitment of a lifetime love.

So I believe platinum, particularly palladium, are the best physical assets to buy at current ridiculous low prices which are now below mining cost. Stocks of the only primary palladium producers in the world, SWC and PAL, are now the best stocks to buy.

Amid the looming IKE hurricane, I think now it's an excellent time to buy oil and natural gas players. I recommend buying USO, UNG. I also recommend buying NGAS, CHK. I personally bought them but as always I encourage people to do their own due diligence study. The natural gas price has fallen to below production cost of some of the producers, so it is a solid bottom. Any time a commodity falls through the production cost, it is pretty much a bottom.

Like wise, as silver and gold price now drops to below many producer's production cost, it is now near bottom to buy some of the worst punished gold and silver players. My favorites are PAAS, HL and SIL. Of course I bought them recently. There are many others. I also like CDE, SSRI, among other things. But I can not buy them all. Top of them all, people should buy SLV and GLD. You've got to like the physical metal ETFs before you can like the mining companies.

On the coal sector, ACI, PCX, BTU, JRCC all have seen even a worse bloodshed than precious metal mining companies. I called on JRCC at $4, and I called profit taking on JRCC one day before it peaked at $62.83 and I was right. I predicted low $20-ish JRCC and I now see further downside to go, as the coal sector really has not seen a serious correction yet, which it must. So wait till JRCC to fall through $20, before you consider whether JRCC can be a buy. Ultimately JRCC can reach $100 one day. But now, precious metals especially platinum and palladium is where you want to be, not coal.

P.S. The author is heavily invested in SWC and PAL but also hold long positions in a number of beaten down commodity stocks, including UNG, USO, NGAS, CHK, HL, PAAS, SIL.