More On the Coming Palladium Paradigm Shift

In early December, 2010, I pointed that there will be a huge paradigm shift in the supply/demand of the global palladium and platinum market. Norilsk Nickel (NILSY.PK), the largest nickel mine in the world who is also responsible for 45% of the world's palladium and 10% of platinum, is abandoning the traditional pyrometallurgy process and adopting the more efficient Activox Process, hydrometallurgy that extracts base metals from mineral ores by chemical leaching. The change is necessary due to severe pollution and deteriorating ore grade.

Knowing the physics in mining, I saw something with hugely significance: While the new technology can extract nickel and copper at near 100% efficiency at low cost, it also means that the chemically stable PGM contents, platinum and palladium, will be extremely difficult to extract. Norilsk will cease to be a major supplier of palladium and platinum. The supply disruption will cause a panic in the global market, sending the price of palladium to the sky!!!

After my article was published, some folks raised some questions. I have done more research on this issue and collected more information. The more I looked at it the more I am convinced of the unescapable conclusion. I will summarize the important points here:

1. Will Norilsk Nickel switch to Activox Process if they could lose PGM revenue?

They have to switch! Maintaining status quo is not sustainable:

a. Due to heavy pollution thanks to the traditional pyrometallurgy, Norilsk City tops the world's most polluted places. 98% of the people are sick. There is not a single live tree within a 30 miles radius. The company is paying 2.6 times higher salary for mining workers, but still can not retain the workforce. If the cost is losing your heath and lose the ability to to raise heathy children, who would want to work in such a filthy place? The government would not turn a blind eye forever.

b. Pyrometallurgy is extremely energy intensive. Even though the technology can extract up to 70% of the base metals and palladium, higher energy cost and deteriorating ore grade means the process could become un-profitable, even if you don't consider the cost to the environment.

c. Activox Process consumes much less energy. The chemicals can be recycled and reused. Not to mention that it extracts nearly 100% of the base metals, versus 70% in pyrometallurgy. The lower cost, more efficient extraction of nickel and copper more than offset loss of PGM revenue.

d. All information indicates that Norilsk is making the switch. They paid US$6.5B cash to acquire LionOre to obtain the Activox Process technology, and rename it to Norilsk Process. They announced aggressive projects to improve mining process. They announced that beginning in 2013, the sulphur emission will be cut from nearly one million tons a year, to only 0.2 million. Such drastic pollution reduction can only happen with the switch to Activox.

Although in the same investor presentation, Norilsk projected continued palladium and platinum production at near flat level. Many readers quoted that report and criticized my conclusion. My response is that Norilsk did not develop the technology, it purchased it. The investor report was prepared by high level management who know very little of the actual physics in mining process. From their point of view, whatever is in the ore, they assume it can be extracted. Whatever technology that do not exist today to extract certain metal content, they assume will become available some years down the road. When making long term projections you are not encumbed by limitation of what is feasible today, but you aim for the long term goal. So I don't blame Norilsk for making the projection that they are going to continue to produce palladium. But the projection is too rosy. It is unrealistic.

But investors need to scrutinize what can or can not be done today or in the near future. We have to get to the intimate details to dig out the facts. With known physics, I do NOT see how they can continue to extract PGM metals once they switch to Activox.

2. Is it really impossible to extract PGM metals once Activox Process is adopted

We have to look at the basic physics of mining process. After mineral ores are collecetd from a mine, the first step, called milling, is to crush the materials into small particles so the rocks and the metal containing grains can then be separated. In traditional mining process, a technology with over a hundred years of history is used, called Froth Flotation. Let me explain it.

Different material stick to oil or other liquid differently. Some will soak in the liquid, some will form oil like droplets as they don't stick. Using this property, we can pour the crushed mineral grains into certain water solutions, and then blow bubbled from the bottom. The metal grains will more likely stick to the bubbles and be bought to the surface, while rock particles remain on the bottom. We can then skim off the top layer which contains metal rich concentrates. This process is called froth flotation.

Mining engineers will tell you that for effective froth flotation, the ores must be grinded to proper particle size. If it is grinded too coarsely, then the metals and rocks are still mixed in the same particles. But if it is over-grinded, it results in particles so tiny that they are almost equally likely to stick to the bubbles, thus it is unable to separate metal and non-metal content. The over-grinding is also called sliming.

How much grinding is over-grinding? This paper and many others suggest that roughly 30 to 80 microns is the ideal particle size for optimum froth flotation recovery. For particles 10 microns or less, the recovery rate quickly falls off.

Chemical leaching, like Activox Process, has a different grinding requirement. For effective leaching, the ores must be ultra fine grinded so as to thoroughly expose the metals to the chemical solution. Literatures on Activox, like this, and this, describe that the ores are grinded to 10 microns or less before feeding into the leach process.

Based on the flow chart, the PGM metals are left in the solid leach residue. The material is then send to a Froth Flotation process to attempt to extract the PGM particles. That was the original design intention. In the actual Tati Nickel demostration plant, the PGM flotation unit was never actually built to test the feasibility of this extra PGM extraction step.

In Norilsk ores, 99.98% of the metal content is nickel and copper. Platinum and palladium is only 0.02%. Starting with 10 microns metal particles, going through chemical leaching which dis-solves 99.98% of the nickel and copper, there is just a tiny bit of the original metal particles remaining. I calculated the resulting PGM particles will be less than 0.6 microns in diameter.

The 0.6 microns number assumes that during the chemical leaching, metal particles do not break down into bits, but remain whole grains. Most likely the particles do break into bits, thus the PGM content probably will become such tiny dusts that they are simply lost within the leach waste. It's just not possibel to recover anything through the conventional froth flotation method, which requires 30 to 120 microns particles. There is no other known technology to pick up such metal dusts efficiently from the waste material.

So the inevitable conclusion, based on physics, is: Norilsk Nickel can NOT produce platinum and palladium any more once they move towards Activox. But they must switch over to the process!

3. How do you leverage the opportunity?

Buy any palladium coins or metal bars you can find; Purchase the PALL and PPLT, which are ETFs backed by physical palladium and platinum metals. But more attractive is to buy shares of the world's only primary palladium producers: Stillwater Mining (SWC) and North American Palladium (PAL).

I encourage metals analysts, and experts from major PGM metal industry users, to really look into this looming palladium supply issue, and consult mining experts to verify my conclusion.

Disclosure: The author is heavily invested in palladium and in stocks of SWC and PAL.

Blatant Manipulation in the Precious Metal Market

Recently the CME Group had been raising margin requirements on silver and other commodities almost on a daily basis. The relentless margin hacking up ultimately caused a plummet of silver price from near $50/oz, to around $35/oz, a roughly 30% drop, in less than one week. Such plummet in silver price was un-precedent. The plummet in silver price wiped out a lot of speculative silver investors.

A number of precious metal analysts call the CME margin increase blatant market manipulation. I agree. It's blatant market manipulation conducted by the CME exchange itself. It is unfair. The policy change is clearly tilted in favor of one group of market participants against another group. Whether such blatant market manipulation has broken any SEC regulation, or whether some one should go to jail for it, I will leave it to lawyers to decide. But one thing is clear: The actions of CME had caused disturbing disruption in the precious metal and commodity market.

The problem is not with the increased margin requirement. It is completely in an exchange's right and duty to set proper margin requirements and adjust it periodically to ensure orderly market trading activities. The problem is with the manner in which the CME raises margin requirement.

Instead of a gradual and smooth adjustment of the margin requirement over a long period of time, CME choose to leave the margin unchanged while the silver price was raising rapidly early in the year. And then, right before the "sell in may, go away" season, they suddenly begin to hack up silver future's margin aggressively on a daily basis. The consequence is predictable. Instead of stabolizing the market, they disrupted the market. Why they do not adjust the margin down accordingly, now that silver has lost 1/3 of its recent price high? Why are the margin adjustment asymmetic? One has to wonder whether the decision to successively jack up margin ratio was purposeful, with the goal of suppressing silver price in aim.

The margin requirement in its current forms are asymmetric, because the long side is being punished while the short side is rewarded. It is unfair because it requires CASH deposits on both the long and the short. This torelates and encourages illegal naked shorting of futures contracts.

Let me explain. A silver future's contract is a binding legal contract between the contract writer (the seller, or the short side), and the contract holder (the buyer, or the long side), that at a future time, the seller shall deliver an agreed amount of physical silver, for consideration of an agreed amount of cash tendered by the buyer. Alternatively, the buyer may choose to settle the contract in cash instead of take physical delivery. But that should be up to the buyer to choose, NOT up to the seller to decide whether the contract can be settled in cash or delivery be made. Failure to do either cash settlement or delivery by contract expiration date is a breach of the binding contract, and the side which causes the failure is the side at fault. Please note, if the contract buyer demands a physical delivery but the seller could not honor the request, it is a contract default even if the two sides could settle in cash.

Margin requirement is a requirement of maintaining minimum asset, imposed by the exchange to ensure that futures contracts will be fulfilled, and no default shall occur. It is reasonable to impose a cash margin requirement, so in the case the contract holder is unable or unwilling to tender the full cash amount for delivery, he/she is able to choose instead settle in cash and be able to pay the difference in cash.

But what about margin requirement on the contract seller side. The existing margin requirement on sellers is in CASH, just like the requirement on buyers. This ensures that the seller can pay the cash difference in the case the contracts are settled in cash. But what about the cases that the contract holder request physical delivery but the seller is unable to honor the request? Remember, it is up to the buyer, not the seller, to choose physical delivery.

What assurance does the exchange has that when the contract buyer demands physical delivery, that it will be honored, and there will be no failure of delivery? Nothing. There is simply no such guarantee. I think that is a big problem. Maybe the exchange reason in imposing a cash margin requirement on the short is that as long as the short has the cash, he she can always go to the spot market to acquire physical silver, and make good on the delivery request.

Such reasoning is frauded. The physical spot market is limited, while the volume of contracts that can be written and sold has no limit. It is impossible to deliver more silver that what's actually exist out of there. As a matter of fact, if all existing silver future's contracts are settled in physical delivery, the delivery requirement will be many times more than silver that is available.

I believe silver future contract writers must be required to pose a certain amount of physical silver, or demonstrate ability to delivery physical silver (like for mining companies), instead of pose cash, to meet the margin requirement.

Allowing silver future contract writers, most of them have no business in silver mining and have no possession of an ounce of silver, to meet their margin requirement in cash instead of silver bullions, not only is unfair and frauded, but probably is ILLEGAL, too.

Knowingly enter into a business contract with knowledge that he/she can not and will not fulfill, is not just a SCAM, but a CRIME punisheable under contract laws and criminal laws.

If one trader naked short 2 million shares of a company's stock, knowing there's only one million shares outstanding and that he/she could not possibly borrow two million shares, is ILLEGAL under SEC regulations. You can go to jail for doing that.

If you write up a contract to sell a bridge in Brooklyn, New York, and actually collected an idiot's money from it, knowing full well that you do not own that bridge, is a crime. You go to jail for it. I am not sure though, about some one who sells real estate property on the moon, as some obviously is doing. But at least the guy claims he owns the moon, and the buyers do not insist on delivery.

Shouldn't there be some legal repercussions for the nake shorters of silver, especially the biggest naked shorters of silver who happen to be big banks? They write and sell a huge volume of silver future contracts to knock price down within a very short period of time, rip profits doing so, knowing full well those futures contracts are invalid, because they could NOT be honored if physical delivery is requested. There were far more silver future's contracts sold and outstanding, than physical silver that is available.

I hereby request that CME and other commodity exchanges consider imposing margin requirements in physical commodity, rather than in cash, on future contract writers. And I want to see if the authority is up to its task to investigate whether there has been illegal naked shorting in the precious metal and commodity future's market, activities that certain parties write future contracts that they know full well can not be honored. But I do not hold out hope on that happening any time soon.

To precious metal investors, I say you either take physical delivery, or do not even participate in the market. What is the point of buying a contract but do not take delivery? Future's trading is a zero sum paper game. As I explained in the past, if you want to profit from the commodity bull market, take possession of physical goods is the only way. If you don't hold it, you don't have it.

Full Disclosure: The author is heavily invested in physical palladium metal, and have very large positions in palladium mining stocks SWC and PAL. The author also owns a number of silver mining stocks but does not own any share of GLD, the gold ETF, or of SLV, the silver ETF.

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.

Norilsk Nickel's Strategic Moves and Palladium Super Bull

Russia's Norilsk Nickel, the world's single largest nickel producer who is also responsible for 45% of the world's palladium mine production, made two big strategic moves, one of which escaped everyone's attention except for mine, and another one caused every one's attention but still caught me by a big surprise.

The surprise move is that Norilsk Nickel actually meant it when they said early in the year that they were going to sell their stake in Stillwater Mining (SWC), the only US based palladium and platinum mine, an extremely important strategic asset that Norilsk Nickel acquired in 2004, after going through the trouble of getting two superpower presidents involved in the negotiation, among other things. I could not believe Norilsk Nickel will sell their SWC stake, because Norilsk Nickel and SWC combined gives them the monopoly power of controling more than half of the world's palladium supply. But they did just sell their SWC stake. They acquired their SWC stake for US$100M cash and 877K ounces of palladium, valued at today's market value, their investment did not bring them much profit after all.

What made the Russians change their strategic mind regarding palladium, at a time when palladium price looks spiralling higher by the day? They no longer consider themselves a key palladium supplier to the world in the future?

The Russian riddle is solved when I noticed another less noticed, but much more significant strategic move made by Norilsk Nickel. The story goes back to 2007 when Norilsk Nickel outbid Xstrata to acquire LionOre in an all cash offer worth more than US$6.5B. At the time analysts could not understand why Norilsk Nickel paid such high price for a mining company of limited mineral reserves. The answer became clear only recently, long after the LionOre acquisition, in a Bloomberg news story:

Norilsk Nickel Plans $20 Billion Program to Boost Arctic Output

New Technology

“We’re considering switching from pyro-metallurgy to hydro-metallurgy based on Activox technology,” Muravyov said. Within a year, the company will test whether the technology, which Norilsk bought in 2007 as part of its $6.5 billion LionOre acquisition, will be suitable for Arctic ores. Activox uses chemicals to dissolve nickel from concentrate and then produce the pure metal.

“The cost of applying Activox in Norilsk still needs to be evaluated,” Muravyov said. Installing the technology at all of Norilsk Nickel’s facilities, at a cost of as much as $10 billion, would allow the company to “remove all ecological problems and cut electricity and gas consumption,” he said.

I suddenly had an eureka moment: The Activox Process, originally owned by LionOre, was the real reason for Norilsk acquisition. Norilsk Nickel mine, being one of the top ten most polluted places on earth due to sulphur dioxide and heavy metal emission from the smelters, and facing deteriorating nickel ore grade in coming years, desperately needs this new chemicals based metal producing technology that cuts pollution and production cost drastically.

Except for one catch. Platinum and palladium are very stable and extremely chemical inert metals. Therefore unlike nickel and copper which are easily dis-solved, these two precious metals are virtually impossible to be leached from the mineral ores, using any chemical solution. A demonstration chart of the Activox Process confirms my intuition. The lower left corner of the flow chart indicates that the leach residue, containing the precious metals, are either simply disposed, or be send to alternative precious metal recovery process.

After base metals are extracted, the leach residue would contain virtually all of the original material from the mineral ores: rocks, sands, dirts grinded into fine powder, and wet with all the nasty chemicals mixed in during leaching. It probably contains no more than a few part per million precious metal content. Once again those precious metals: palladium and platinum, are chemically inert and can not be extracted efficiently using any chemical solution. The only way to process them is to use high temperature smelters, which bring back all the air pollution problem and high energy cost, problems that Norilsk wanted to solve in the first place, moving away from smelter based pyrometallurgy towards Activox Process based hydrometallurgy.

The unescapable conclusion is that Norilsk Nickel will become just a low cost nickel and copper producer, and will cease to produce palladium and platinum as byproducts, once they adopt the Activox Process!!! This is true unless palladium and platinum prices are driven to such high levels that it makes economical sense to try to recover the trace amount of precious metals contained in the leach residue despite of the high processing cost!

A technical paper discussing the Activox Process running at the Norilsk Nickel owned Tati plant in Botzwana, written by experts of that plant, confirms my conclusion. The 16 pages technical paper contains not a single word mentioning of either palladium or platinum:

Solvent extraction design consideration for the Tati Activox® plant

This shocking development is very bullish for palladium and is a very good news to fellow palladium investors. We are talking about 45% of the world's supply of palladium removed when Norilsk ceases to produce byproduct PGM metals. Of course, I do not expect this paradigm shift to occur overnight. But shouldn't it be time that precious metal investors leverage the opportunity to hoard the palladium metal and ride the palladium super bull up to the moon, and mean while industry users like GM (GM), FORD (F) and TOYOTA (TM) need to start panic now and build their strategic palladium inventories before it is too late. If 4% of shortage was enough to drive rhodium price from $300-ish to $11000 per ounce, I don't know how high palladium price can go to if we have more than 50% shortage in the global supply!!!

Maybe, just maybe, the recent remarkable surge of palladium price indicates that some investors out there have already figured out what the Activox Process means to Norilsk Nickel and to global palladium supply, and are already quietly loading up while keeping their lips sealed.

Full disclosure: The author has studied global palladium market for a few years and is heavily invested in physical palladium metal, as well as in stocks of the world's only primary palladium mining companies: SWC and PAL. The author has no position in Norilsk Nickel (NILSY.PK).

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.

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.

Unwinding of Currency Swap = Looming US Dollar Crisis!

The Daily Gold blogger Harvey Organ reports that ECB and other Central Banks are terminating the currency swap with the US Federal Reserve Bank as of Feb. 1, 2010. How they are going to unwind the currency swap is something very interesting to watch. It could finally trigger the long expected US dollar crisis: Collapse of the US treasury market and the US dollar itself.

In a currency swap, two central banks print their own currency out of thin air and swap them in a zero interest loan according to the exchange rate. Then after a period of time, they return the loaned currency to each other. For example the FED will loan US dollars to Bank of England (BOE) while BOE loans British Pounds to the FED. Upon the end of currency swap agreement, they unwind the trade by the BOE returning the US dollar, and the FED returning the British Pounds.

The question is how they are going to be able to unwind? The total swap is believed to be as high as US$500B. Some say as high as US$2T. If the central banks merely locked up the cash in a vault, they could easily return the money. But that would defeat the whole purpose of currency swap. Instead of being locked up in a vault, the swapped currency must have been SPENT in some way. Then the question is how do they get the money back if it is already spent, sold out or otherwise given away?

For example I long suspected where did the British get the money to buy US treasuries over recent times? According to latest official data, UK's holdings of US treasuries was up $145.1B in 12 months, while China's holdings went up only $76.4B.

Where did the UK get the money to buy US treasuries? Unlike China which earns US dollar from its trade surplus against the USA, The UK has a huge trade deficit against the USA. It spend US$2 buying US goods for each US$1 it earns selling products to the USA. Where did they get the US dollars to purchase US treasuries? If it was not from trade balance, it must be from the give out by the FED, in the name of currency swap. It cost UK nothing to print British pounds and then exchange for the dollar, just like it costs the FED nothing to print the dollars.

In a sense, FED is secretly buying our own debts through foreign hands, via the currency swap agreements!!!! Now, how is the currency swap going to be unwinded? What magic are they going to pull this time, asn the BOE has already SPEND out the US dollar in buying US treasuries. It does NOT have the money to return to the FED.

Likewise, probably the FED does not have the money to return to BOE either. They must have spent out the British Pounds as well as other foreign currencies, in repeated attempts to sell foreign currency and buy US dollars, to support the dollar, in recent times.

It's going to be fun to watch how the unwinding can be done. If my speculation is right, BOE must sell its holding of US treasuries to raise US dollar to unwind the loan, and the FED must also need to sell dollar and buy British Pounds to unwind its loan as well. Both would be fatal blow to the value of US treasury and US dollar.

Time to run to precious metals as your financial safe haven. Don't run to euro, as the eurozone is crumbling down. Don't run to Japanese yen. Japan has an even worse debt problem. When Japan collases under its debt it must sell US treasuries to salvage its own currency, which will trigger a domino effect leading to the fall of the dollar. The only thing safe are precious metals and commodities.

But unlike most other precious metal bugs I will not tell you to run to gold, or silver. Every one talks about gold as if it is the only safe haven. When every one talks about one thing, be careful. The world is not in shortage of gold. The world has plenty of gold that could easily lasts a couple thousand years if we do not produce gold any more. Warren Buffet famously critized gold by saying that you dig out the metal from the ground, and then dig another hole to hold up, and have to pay armed guards to watch it, what for?

I am also questioning the wisdom of silver investment. Silver bugs have been calling for silver shortage for years. But I never see any solid data to back up the claim of shortage. If there is no shortage, if a precious metal's price is only supported by investment demand, then there is a problem because anything that is purely supported by investment demand, is by definition a bubble, the investment demand could easily turn into investment supply in an instance.

The only good precious metal investment, must be one which is based on REAL industrial shortage, not by the hypothetical investment demand. If there is an industrial shortage, the price MUST go up regardless what investors believe. And price movement due to real shortage, on the other hand, can create solid and reliable investment demand. Such precious metals will provide the best performance way much better than gold.

The only two precious metals I see solid data to support a supply shortage case, are platinum and palladium. Of course my favorite is PALLADIUM. My most favorite mining stocks are Stllwater Mining (SWC) and North American Palladium (PAL), the only primary palladium producers. Russia's Norilsk Nickel (NILSY.PK) is world's largest palladium but they are mainly a nickel producer. South Africa's Anglo Platinum (AGPPY.PK) and Impala Platinum (IMPUY.PK) produces by-product palladium. Watching Platinum Today on related PGM metals news, and KITCO for price movements.


The parabolic price rally of palladium in the past one year, a performance that is far better than gold, silver and platinum, has vindicated my conviction on a palladium bull case.

Why palladium? FOUR things make palladium extremely bullish:

1. Termination of Russian government palladium stockpile sale, due to stockpile depletion.

2. Looming South African electricity crisis could strike again any time, just like two years ago.

3. Launch of ETF Securities physical palladium fund (PALL) in the US market.

4. Long term potential of palladium used in Cold Fusion, make it a must have strategic metal.

I have discussed these points in many of my past articles which I will not repeat. I merely needs to point out that Impala Platinum's PGM Supply Demand data confirms dramatic reduction in Russian palladium supply, as the stockpile sale has ended. There is now a big strictural deficit. Read more detailed discussions on GIM forums.

I do not have to cover the recent launch of ETFS platinum and palladium funds, either.You can see the powerful price surge of palladium recently, and read what fellow SA contributors have to say:

Why Gold ETFs Should Be Afraid of Platinum Cousins
Platinum and Palladium ETFs: Dare They Outshine Gold?
Platinum, Palladium ETFs Are a Home Run
Pent-Up Demand Is Behind Platinum Fund's Success
New ETFs Off to Roaring Start
Don’t Blame Platinum, Palladium ETFs

Sadly, even though people have caught attention to platinum and palladium. There has been absolutely NO mentioning of the end of the Russian palladium stockpile sale, and how palladium rallied from $300 to $1100 in 2000 merely because of a FALSE rumor related to the stockpile sale. Nobody mentioned the South African electricity crisis either, even it triggered quite a rally in PGM prices in early 2008, and another South African electricity crisis is looming again in the near future. Please read the background discussions.

And yet most people don't even know about platinum and palladium. All they know is gold gold gold, silver silver silver.

Let them have gold. I want to have palladium. And I can not own enough stocks of SWC and PAL. I have been predicting and advocating for a super bullish palladium rally for almost two years. No one paid attention until it really happens.

But this is just the start! The real fun will begin when auto makers realize what's going on in Russia and South Africa, and start to panic hoard. If it were not for the foolishness of major industrial user like TOYOTA(TM), GM and FORD (F), rhodium would never see gigantic price swings from $300 to $11000. Shouldn't industrial users acquire and keep a plentifully large stockpile when rhodium was at $300, so they do not need to pay $11000 an ounce a few years later? They never learn.


Full Disclosure: The author is heavily invested in palladium mining stocks SWC and PAL, and own PALL. The author owns silver mining stocks like CDE, SSRI, PAAS but have no interest in ETF funds GLD and SLV, as I do not trust their gold and silver holdings.

Hot Money, Hot Commodities and the US Dollar Carry Trade Part 3

In part one of the article, I argued why the collapse of the US dollar is inevitable and commodities are the only safe haven in the event of currency collapse; In part two of the article I begin to demystify some mis-conceptions about commodities investment. Some times even Jim Rogers could be wrong. I specifically cited the example of the UNG natural gas fund.

In this part three, I will elaborate more on what are the correct approaches for commodities investment, and what is the best commodity to invest in. I am going to discuss the things that Jim Rogers was wrong about.

I can not emphasize this enough: When you invest in something, you should always ask the question WHO PAYS FOR YOUR PROFIT. You can't create money out of thin air. Some one has to pay you for you to make a profit. If you can not figure out who pays for your profit, then your investment thesis has a problem.

In the market, the majority of people must be the losers so as to allow a few people in the minority to make obscene amount of profits. That's how the world works. Always think for yourself, do not let other people do your thinking for you. I have high respect for Jim Cramer who I think is a smart guy. Unfortunately too big a crowd gathered around him, so that the biggest crowd must necessarily be the biggest crowd of fools and losers, by definition. That's not Jim Cramer's fault, but his success, as an entertainer.

Warren Buffet is the buy-and-hold-forever type of investor. Who pays Warren Buffet if he nevr sells? The companies he own keep operating profitable businesses to genenate fortune for him.

Who pays the day traders who buy and sell equities in short periods? It's got to be fellow day traders. So day trading is nothing but gambling, a zero sum game with 50/50 winning and losing odds. In recorded history no one becomes a billionaire through day trading.

Who pays you when you invest in something for long term? The rest of the investor community, Mr. market pays you. All long term profitable investments requres two things:

1. You need to have the wisdom to recognize the long term value of your investment.
2. The rest of the world must disagree with you, so you can buy your investment cheap.

I must particularly emphasize the second point. For your investment thesis to be correct, people must disagree with you. They will ridicule you, curse you, calling you all sorts of names. If people laughed at you, don't be discouraged and don't get angry. Instead take their laugh as a compliment and take comfort in the fact that most people disagree with you, so you are in the minority, so you are probably right.

But you still need to make sure you are right in the first place. This requires hard work doing your due diligence research. This also requires that there need to be some people, who, after spending time doing their own due diligence, no longer laugh at you and start to agree with you. That is important. If every one in the world laughs at you, then you are an idiot. If 99% of people laugh at you but 1% do take you seriously, then it says you are a genius and the world is a fool.

All the successful investors receive more than enough of their fair share of being laughed at, in the early stages of their investment careers, including Warren Buffet and Jim Rogers. But no one laughs at Warren Buffet any more. Every one takes him seriously now. That's his problem. Anything he wants to buy, it leaks out before he could buy enough so he ended up paying more. Any time he wants to sell, people beat him before he could sell much. When you have a big crowd around you, it makes a billionaire very hard to make his next move.

Jim Rogers also have a big fan group, so even though he deserves high respect from me, I will take him with a few grains of salt. His pitch on agriculture commodities, his best favor, for example, I think is flawed. Let me discuss why. hope some one can pass this note to Jim Rogers himself, so he knows why he is wrong, or argues with me why he is still right.

Jim noted that every one needs to eat, and there is limited land resource to produce all the food people need to eat. That is a fact. But that is a fact known by every one already, and it is a true fact for millions of years already. The best invest ideas always come from facts that are recent news, and that few people know, not from something every one already know for a long time. So this immediately rings an alarming bell on Jim's agriculture commodity thesis.

Jim failed to notice that the threshold for demand destruction is low for food, and hence it caps the value appreciation potential of food. Poor peoplein poor countries already dedicate 75% to 90% of their disposable income on food. How are they going to pay more? There is not much room to go from spending 90% of income to spending 100%. People will just have to eat less and eat what their income can afford them. So this reduces demand and caps the price appreciation. In fiat currency term, the price can still go up a lot. But in purchase power term, there is virtually no room for growth.

Consider that no one can spend more than 100% of disposable income, and that food expenses are already the biggest percentage of people's spending, I would say that in terms of purchase power, agriculture products are probably the WORST of commodity investments, not the best.

Applying the same thinking, I think Jim's another pitch is a great one: Water. Water is more important than food to sustain human lifes. How much an average family spends on water, in terms of percentage of disposable income? I am paying roughly $1.50 for one unit, about 97 gallons. That's only 1.5 cents a gallon. So there is a lot of appreciation potential. If there is water shortage, when water bills hit 25% of a family's spendings, people will start to use less while each gallon will become more expensive. Pushing the theoretical limit, you can probably survive reasonably well on just two gallons of water per day and the water will costs a family of four about $1000 per month. That's roughly $4 per gallon water. So that's a lot of appreciation potential going from 1.5 cents to $4 per gallon of water. That price target is actually realistic, as people in some Arab country are already paying more per gallon for water, than for gasoline!!!

Water is just an example to stimulate thinking. Investing in water is tough. How do you store water at low cost for long time without spoil it, besides there is no shortage of water on earth. There is only a shortage of water purification treatments and transportation. Maybe investing $1000 or so for a secured drinking water supply, is a wise investment for your family.

I consider precious metals as commodities in a broad sense. Many gold bugs consider gold as a sacret cow, different from other commodities. I disagree. Gold or any precious metal is simply a metal that is precious. Nothing more and nothing less. Sacret cow only exists in religions.

What's the best commodity to invest in? As I discussed in my last article, the only sensible to invest in a commodity is to either hoard the physical stuff, or invest in the companies that produce the stuff. So an ideal commodity to invest in should be easy to store, and has the largest price appreciation potential:

1. It should be compact and easy to store, and remain safe and stable for long term. This immediately rules out any thing gaseous or liquid, because they are hard to store.


2. It should be price inelastic on the demand side. That means price can be driven up to very high level, and the industry consumers can still afford it. This immediately rules out food products and base metals that are used in bulk quantities, like steel, copper and aluminum.


3. It should also be price inelastic on the supply side, that means it should probably be a by-product. Most producers will not bother to increase the production of their main product just to produce more by-product and marginally increase their by-product profits.

Once you apply these rules, there are not many commodities that can qualify as the best commodities investment. Three metals meet all the requirements: Palladium, silver and tellurium. No. 46, 47 and 52 on the periodic table.

Silver is almost as widely known as gold, and more widely used as money than gold, throughout human history. People in China and other Asian countries love silver better than gold. Recent news from China indicate that silver investment is red hot, while the gold market is flat. Jim Rogers himself encourages the Chinese to buy silver and palladium, rather than gold.

Over 70% of global silver supply is produced as a base metal by-product, only 30% is produced from primary silver mines. So silver can be classified as a by-product metal. On the demand side, silver is price inelastic. Silver is widely used in the electronics industry, but so little silver is used in individual components, that the cost is never a concern. On the jewelry side, material cost ofsilver is a very small percentage of total cost of most silver jewelries, so at current price level, silver jewelries are price inelastic as well.

I like silver as a storage of wealth. But I like palladium much better, as an investment. For decades, there is a large structural deficit in global palladium supply. The global palladium deficit was only filled in by the annual Russian Government paladium stockpile sale, which is about 1 to 2 million ounces a year. Global mine production is about 6.5 million ounces per year while consumption well exceed 8 million ounces per year. Read Platinum 2009 Interim Review to get an idea of platinum/palladium supply/demand numbers.

Russia has the world's largest nickel mine, Norilsk Nickel (Nilsy.PK), which is also the world's largest palladium producer, since they produce palladium as a by-product. The Russian government accumulated the excess palladium production during the Soviet Era in their strategic metals stockpile. You must read the 2003 report by Alan Williamson to understand the Russian palladium stockpile and how its size could be estimated. A false rumor regarding the Russian palladium stockpile trigger the palladium price spike of 2000/2001.

Many metals analysts have been speculating that this Russian palladium stockpile is near depletion. If that is the case, it will be a paradigm shift event which could send the metal price sky high, far exceeding the 2000/2001 price peak of palladium price.

Two recent news items confirms that the Russian palladium stockpile has indeed depleted. One is on August 31, 09, another is on October 15, 09. So far, this news has not caused much attention and has not resulted in explosive palladium rally yet. My favorite palladium mines, SWC and PAL, have moved up in share price. But they are still far from the heights where I expect to see them to reach.

But looking at the performance of palladium price in the past year, how could any one still complain? As fellow SA contributor John Lounsbury also noticed, Palladium already did far better than platinum, silver and gold in the past 12 months. I just wish more people learn the story of the depleting Russian palladium stockpile.

Many years ago, Warren Buffett correctly pointed out that Mr. Market is a fool. My own experience tells me that I could never underestimate the foolishness of Mr. Market, or the stupidness of the world. You only need to look at the global warming hysteric fiasco.

The foolishness of the general investor community can be best reflected in the tellurium story. Two years ago I advocated for hoarding physical tellurium and predicted that the business of First Solar (FSLR) is not going any where, as they could be suffocated by a global tellurium shortage brought about due to the emerging new applications of tellurium based electronic devices, like phase-change memory. How many people listened and believed me? More people in the world understand Einstein's Relativity Theory, then people who understand tellurium supply and demand! Now Numonrx was able to make multi-layer phase-change-memory chips. This is a paradigm shift in the electronics industry. As advanced as the modern microelectronics industry is, they were never able to produce a multi-layer computer chip. It's going to be huge for tellurium and a gigantic jackpot for the tellurium investors.

But for now, people still fight hand over fist to buy FSLR stocks, believing that First Solar can grow its business unlimited. Some investors actually believed that tellurium can be extracted from sewages, because I told them most tellurium is extracted from the slime mud produced during copper electrolysis production. Yeah right! Just don't do it at home and don't dig out the sewage pipe in your toilet. I assure you there is no tellurium to be found.

Full Disclosure: The author hoards physical tellurium, physical palladium, and has large long positions in SWC and PAL, as well as silver mining stocks SSRI, PAAS and CDE. The author no longer holds position in UNG and has no short or long position in FSLR. The author holds other positions unrelated to the discussion in this article.

Hot Money, Hot Commodities and the US Dollar Carry Trade Part 1

The collapse of the US dollar has passed the point of no return. An abrupt US currency collapse is now very possible. I hope we can see a gradual and orderly decline of the US dollar. But this best case scenario, as Peter Schiff hoped for, is now not likely. Peter Schiff still believes that there is still something that the FED or the US Government can do, to save the dollar. I disagree with him. Peter Schiff obviously does not understand how free market economy works, nor does Ron Paul, nor does Roubini. Jim Rogers is one of the few who understands and how free market capitalism works, and practices it by moving his family and assets to Asia. (President Obama: You still have two jobs to do: Buy the first lady an Iridium ring; and bring Jim Rogers home using Air Force One. That's all you need to have a strong family, a strong presidency and a strong nation. No kidding!)

This brings to me the Hot Money problem that China and other countries face. China has a gigantic foreign currency reserve that is composed mostly of US dollar assets, amid a looming prospect of ever falling dollar; China doesn't want to accumulate more dollars. But hot money keeps flowing in from the outside, smuggled in through Hong Kong, forcing China to print more RMB yuans to absorb the inflow of US dollars. China is not alone. Brazil recently slapped a 2% tax on foreign capital entering the nation's stock and exchange market. Australia is worried, too. Read how China's Commodity Carry Trade strategy of divesting the dollar: part 1 and part 2.

The Hot Money "problem" that China and the world worry about is actually free market principles working at their best. Basic Darwinism dictates that market capital will always go where it wants to go, not where the governments want it to go. Capital wants to get away from the soil that suffocates its growth, and move to fertile lands where it can thrive. Hot money flows out of the developed nations and into developing nations and nations with rich natural resources, because that's where opportunities of grow are.

Government interventions to stop the free flow of money are futile, fruitless and counter-productive; Government interventions to manipulate currencies and commodity prices are equally futile, fruitless, and counter-productive. Free market capitalism always works.

Recently Julian Robert thinks that the US faces Armageddon if the Chinese or Japanese stop buying the US debts, and that both countries maybe forced to sell US debts, due to domestic needs. He was right, except for the Norwegian part. The journalist asked: All the rich Norwegians have moved their money out of the country, so why do you invest there?

Good question! Capital money has its own mind. It wants to escape from hostile environments, and move to lands where it can grow and prosper. Rich Norwegians move their money out of the country because they are taxed to death. There are places where the taxation is less and the opportunity to grow is bigger. Again, government interventions are futile. China's effort to crack down on hot money inflow hardly made a dent. Equally futile was US government's tax cracking down on rich Americans who have foreign bank accounts. Such crack down is futile. If Americans want to move their money out of the country, there are plenty of ways to do it. Voting with feet is a more powerful than vote with a paper ballot. But if that's not enough, one could cast the ultimate vote with the US passport as the ballot ticket, at an overseas US consulate.

Instead of the futile crack down, the US government needs to exam itself in retrospect and ask why Americans are moving money to foreign soil, and what it can do to attract foreign money to come back to US soil. This is the key: When the money is leaving the US soil for foreign land, so are the job opportunities, so are our best investors, our best innovators and our best technical professionals, and so are our nation's future. So what do we have left? A dying US dollar and millions of jobless and hopeless hungry and angry people either sit at home waiting for the government to feed them, or else take to the street.

Peter Schiff believes that to save the dollar, all we need is the FED dramatically hike up the rate, stop money printing, and the US government massively cut spending and raise tax. The basic ideas are right. But if he believes those are realistic or possible, he really doesn't understand how free market works. What works is not what a government does, but rather what a government does NOT do. In China's history, every dynasty that prospered was only because the emperor taxed little and asserted little control of the society.

Great Chinese philosopher Lao Tzu said that governing a great nation is like cooking a small delicacy: You cook just enough so all the original flavors are preserved. If you over-cook then what comes out is anything but a delicacy. Sure America is a melting pot. But President Obama is cooking this melting pot way too hard that not only there is lots of capital spill over, but the melting pot itself is melting!!! Just ask the first lady how to cook!

Peter Schiff believes the FED can still dramatically hike up the rate and stop money printing, and the government can dramatically cut spending and hike tax, in order to save the US dollar. If it was that easy, if a government has the power to salvage its own currency, then why didn't Zimbabwe's President Mugabe do it? Did he not raise interest rate of Z$ dramatically? He has the money printer so he can afford to pay any high interest, right? Higher interest is meaningless if the principal itself, the value of one dollar drops even faster. The FED stops printing money? Who is going to buy our mountains of new issue US treasury bonds, if the FED doesn't print money out of thin air to buy our own debt?

How about the US government dramatically cut spending and hike up tax rate? You can't collect more tax from business that are not profitable, and hence has no tax to pay. Higher tax will force the profitable businesses to move to overseas, reducing, instead of increasing tax revenue. Cut spending? Which part do we cut? I think we should first cut the all the bailouts to the big banks and let them fail? But then do we want a nationwide bank runs and bank failures, and watch FDIC to go bankrupt? How about cut welfare and cut unemployment benefits. Then all the desperate people deprived of livelihoods probably will siege the White House, bringing their empty pots alone, banging and singing, until the resident has to get away on a helicopter.

Let's face reality, Mr. Peter Schiff. When you see the melting pot itself is melting and there's lots of boiling spill over, you are going to tell people that we can still have a great dinner if we do the right thing? NO! You should honestly tell the people that there is no more delicacy for dinner. The people HAVE to go to sleep with an empty stomach. What we can still do, is not to try save the delicacy, but to save the pot, so we can still cook a good meal tomorrow. Of course, Peter, you can not win votes by telling people they will be hungry. But that's the reality.

There is no salvation of the US dollar. But the US economy itself can survive and prosper. There are certain elements of the US economy, no, not the banks, not the Wall Street, but the real productive sections of the US economy, that will survive and prosper. American farmers will continue to produce food that the world needs. Intel (INTC), AMD and Microsoft (MSFT) will continue to produce computer hardware and software that the world needs. Catepillar (CAT) will continue to produce great construction machineries that China and the rest of the world wants. My most favorite mining company, Montana's Stillwater Mining Company (SWC), one of the world's only two primary palladium producers, will continue to produce palladium because the rest of the world still needs palladium, even though the bankrupt GM doesn't want to buy from SWC. Not to mention we have so many of America's world class science and technology products that the world needs from us. Not to mention our best treasure, the US constitution, one of the most beautiful constitution and the envy of the world's poor, tired, suppressed and desperate people.

Yes, the US dollar, a fiat currency, will collapse; No, the US economy itself will not collapse. A good historical precedence is hyperinflation Weimar Germany did not destroy Germany: It still had enough economic and military power to allow Hitler to launch World War Two.

Yes, the US Federal government is bankrupt, as is the FED; But No, the American nation, as well as individual states, will not go bankrupt. California will not go bankrupt. It has a constitution mandated balanced budget until recent years, and it is trying very hard to return to balanced budget, amid the difficult environment of tax revenue short fall and spending needs. It's heart breaking to see people start to talk about the possibility of session of individual states from the nation. But unless the federal government realize its own limit, and live within its limit, I think as we raise to the USSA we could well become the next USSR one day. The US government itself needs a bailout, not just the dollar.

I will discuss in the next part of this article how individual investors can protect themselves and make profit from the downfall of the dollar. Specifically I will talk about equities, commodities and US dollar carry trades, as well as how to use leverage to increase your gain.

Full Disclosure: The author is long precious metal palladium and silver, hold big positions in palladium mines SWC and PAL, as well as SSRI and CDE. I hold shipping stocks like EXM, EGLE, TBSI, DRYS, and natural gas fund UNG. I short the US dollar by holding some long positions in margin brokage account.