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.

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.

The Pitfalls of Almost Every ETF Investments

I am telling you something every investor should know, but no one has told you! Even the most successful investors like Warren Buffet or Jim Rogers has failed to tell you this important investment rule that you are about to hear from me. I believe Jim Rogers does not intend to withholding his investment knowhow from you, but he truely does NOT actually get it himself. It took me a while to get it as well.

When Jim Rogers pitched agriculture commodities and urged people to buy future contracts of those commodities, he did NOT know what he was talking about! I hope that some one close to Mr. Jim Rogers can bring my words to him and explain why he was wrong. I have high respect to Mr. Jim Rogers and I hope he gets what I am about to tell below. This is an investment mistake 99% of people make, including Jim Rogers himself.

If you believe something is bullish and want to invest in it, then you MUST own it outright.

Allowing some one else to own your investments for you, simply won't cut it. Owning something "indirectly", for example, by purchasing futures contracts, won't cut it, either. If you don't hold something outright, physically, under your own control, then you really don't own it. If you don't own something outright, then all you have is merely a piece of promise, written on a piece of paper. You are owning merely paper assets, not the physical assets. You should reject all assets that rely on a promise printed on a piece of paper, because a promise can be created out of thin air, and can just as easily vanish into thin air, with little or no repercussion to the one who breaks the promises, but tremendous loss to you who wrongly trusted that promise. Let me explain.

But first let me clarify that owning equities, i.e., owning shares of stocks of publicly traded companies, is NOT owning paper asset. The company, like the Stillwater Mining Company whose stock I own, is a real physical business entity, if I push a computer button to buy shares of SWC through TD AmeriTrade, I do own a small piece of that company. My ownership is recognized as legitimate. If I have any doubt I can request physical stock certificate. If there is still any doubt regarding the ownership, then the stock should not be bought. So let's make it clear, equities, as long as the ownership is not in question, are physical assets, not paper assets.

But all indirect ownership of physical assets, or ownership of derivatives of physical assets, are paper assets because they rely on a promise made by some body, written on a piece of paper. Take for example the physical gold ETF, the GLD, and physical silver ETF, the SLV. The respective investment prospectus claims these funds are backed by physical gold and silver, and hence owning shares of these two ETFs are equivalent to owning actual physical precious metal.

Maybe these ETFs are really backed by physical metals, maybe not. We don't know. All I know is by owning shares of either GLD and SLV, you are NOT owning physical gold or silver. Not at all. You are owning something which is based on a mere promise, a promise that some how some where in a secret location in the world there are a pile of gold or silver bars and those bars really do belong to you, but you have no way of knowing and you have no access to it. Those physical precious metal bars might as well be put on the moon and you can point to the moon and tell your grandsons that you really do own something on the moon, and that some one promised it to you, you just don't have control or access to it.

Make no mistake about it: You are owning a piece of promise, not a piece of metal, by owning GLD or SLV. It's up to you to decide how much you can trust that promise and how much you value it. But to me, I don't even trust my best friend to hold a few palladion coins for me, why should I trust some guys that I don't even know personally to hold my precious metal in a fund called GLD and SLV? In the past I scrutinized the metal bars list of SLV and raised plenty of red flags. I determined that regardless whether those red flags have legitimate explanations, it is not worth risking my own investments to count on some Santa Clause keep a good promise.

Another categories of ETF funds are even worse. The GLD and SLV fund at least claims to be backed up by physical assets. But there are ETF funds which are backed up by nothing but paper. Most notably are the USO fund for crude oil, and UNG fund for natural gas. The USO fund does not own a single drop of oil and the UNG fund does not own a single cubic of natural gas. They own future contracts, i.e., promises made by some one, not physical commodities digged out of ground. Why do people buy these two funds and then expect to make profits when prices of the underlining comodity goes up, if there is not an ounce of the actual stuff involved? They don't. I recognized that fundamental fact on Oct. 29, 2009. I advise you to read that article again. It was a very important lesson I learned.

Lucky for me, once I recognize why the investment based on paper will not work, I quickly unwinded my entire investment in UNG, which was once the second largest position I held, without suffering any loss, and I never touched it again. In hind sight I have chills in my spine thinking what could happen had I not timely realized what's wrong with UNG, and other similar paper based ETF funds. Unlucky for many investors who still buy such paper ETFs thinking they are investing on the right thesis of bullish commodities, or bearish US dollar. These investors suffered great losses and will continue to suffer losses in the future, until they realize the problem with owning paper, or untill they lose all their money, whichever comes first.

Notice what the prices of crude oil and natural gas were doing, since the low of March, 2009, and what were the share prices of USO and UNG doing, during the same period? Do I need to bring your attention to what FAZ and FAS has been doing over the long term? They are supposed to be a pair of opposite financial ETFs and they are supposed to run in the opposite directions, but over the long term, both run down. Same story with UUP and UDN, the dollar up and dollar down funds. In short term they indeed run opposite to each other, but in longer term, both runs in the same dorection: downward. All those are paper instruments based on nothing but mere promises made by counter parties. So why should any one expect to make money out these papers? Why do you think those counterparties are nice Santa Clauses ready to deliver profits to you happily? They don't. These paper instruments are gamblings, not investments.

There have been recent criticisms on UNG, on GLD and on SLV, and even on USO. I share some of the criticisms on these ETF funds. But no one on Seeking Alpha has really touched the more fundamental reasons why paper-based, or promise-based ETFs, are fundamentally wrong as investment vehicles, regardless of the bullish fundamentals of the underlining commodities.

When it comes to investments, if you don't hold it, you don't own it. Please pause and think about it. Hopefully you learn something. Hopefully next time Mr. Jim Rogers tells you to buy agriculture commodity future's contracts, you can help me to explain to him why he was wrong; why people should not buy this index or that index, or this or that ETF, or buy future contracts or other derivatives. Hoarding the physical stuff is the only correct way to invest in a commodity.

I still remember when I first pitched physical tellurium investment, many analysts, some well known, immediately asked me where they can buy tellurium futures contracts. I should have told them that I am quite happy to write up and sell them some tellurium futures contracts, at good prices, but they are not going to make money out of me. If you want to make money from tellurium, you have to purchase and hoard physical tellurium, just like I did. It is true for all commodities. It is true for all investments. If you don't hold it, you don't own it.

Therefore I reject virtually all ETF investments as legitimate long term investment vehicles. If you want to invest in precious metals, you have to own the real metals, or own stocks of the related mining companies. I am happy to see that I am now vindicated and will continue to do well in my insistence that palladium will be the best precious metal to invest in, and my insistence on the only known primary palladium producers, SWC and PAL. It was not a love affair. It was a firm conclusion from my own objective investment analysis. I just wish that if investors are bullish on palladium, they should go out of their ways and purchase any ounce of physical palladium they can find, instead of counting on buying palladium future contracts.

Full Disclosures: The author owns SWC as the largest position on his investment portfolio, and is invested in physical palladium metal. The author does not have position in USO, UNG, GLD, SLV, FAS, FAZ, TBT, UUP, UDN, and does not intend to enter any position either. Although the author hoards physical tellurium and is skeptical of FSLR, he holds no position in FSLR.

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 2

In the last part of the article I discussed the reason why the collapse of the US dollar is all but inevitable, but the US economy itself will be strong enough to survive. Let me say it again, collapse of the US dollar does not equal to collapse of the US economy. If the dollar becomes worthless, Microsoft (MSFT) or Intel can sell their hardware or software products for gold or coins. They can still manage to make a profit, because the world still want their products.

How do investors protect themselves during a currency collapse?

First, the majority of investors and the majority of average American people will be wiped out financially. That is a FACT of mathematical statistics when a country's currency collapses. Majority of people will be wiped out, but a selective few in the minority will be able to rip huge profit from the crisis. If you want to protect yourself, you can not be with the majority. You must be with the minority group of people. Do NOT let other people do the thinking for you.

So are you listening to the most popular economic analyst or the most popular financial TV host? If you do, you are in danger because you are together with the biggest group of fools! You find safety when you are forced to jump from a big boat to a small boat, not the other way around. Just ask Titanic survivors how they survived. They jumped onto very small boats instead of wait for something bigger than Titanic to come to their resque. Safe havens must necessarily be small and can not accomodate too many people.

Commodities are the only safe haven. As Jim Rogers said, commodities are the only asset class with fundamentals impaired, but improved. But there are lots of myths in the commodity investments. Even Jim Rogers himself had also spreaded some incorrect myths regarding commodities investment. Most people do not know how to invest in commodities because they have not even once laid their fingers on any physical commodity. The only thing they have ever touches is a computer keyboard and mouse. A computer and a brokage account is all you need to invest in commodities, right? Wrong!

The door for commodities investment is extremely narrow. Let me tell you a small story. I am a big fan of tellurium investment and hoard actual physical tellurium. The price low of tellurium a few years ago was about $10 per pound, recent high was about $140 per pound. I predicted tellurium price could go to multiples of gold price once phase change memory goes into wide application. Almost every one laughed at me. Some, a few, did take me up seriously but they ask me NOT where to buy the physical tellurium, but rather, where to buy paper future contracts of tellurium, or what mining stock they can buy. When they hear that these two investment instruments do not exist for palladium, they left with disappointment. Most market traders do not know what to do with physical asset. They would rather prefer the convenience of pushing a computer button to instantly buy and sell something. Till this day, I think there are far fewer tellurium investors than people who understand Einstein's Relativity.

I believe that pure computer trading is the wrong way to invest in commodities. To invest in commodities you HAVE to get your hands dirty and lay your hands on the physical things. Let me explain using the example of the United States Natural Gas (UNG) fund.

Recent dismay performance of UNG gave me pause to think about how to invest in commodities. Natural gas spot price recovered from the low of about $1.84 to now nearly $5, almost a triple, but the share price of UNG still struggles around $10. Why is UNG not tracking the price of the natural gas itself? The simple answer is it's killed by contango. But there is a deeper reason.

UNG does not hold the physical natural gas. Instead they hold futures contracts. In theory, when natural gas price goes up, the asset value of these futures contract also go up. But in reality such methodology is flawed. You are holding future contracts that you never intend to take delivery. So near the expiration of the future contracts, you are forced to sell them, at any low price. Mean while you must buy the next month's future contracts, at whatever high price they are offered. As a result, in each round of the roll-over, UNG loses positions and loses money.

More over, the more investors are interested in UNG, the worse a situation UNG finds itself in. (Remember, the bigger crowd is always the loser!!!) During each roll-over, UNG could be purchasing more future contracts than producers have products available to write those contracts, hence it bids up price on the buying end. Then it turn around to sell the future contracts to industry consumers, it has more to sell than the industry consumers can buy, hence it pushes the price down on the selling end. How could you not lose money? It's like two mechants compete with each other. They bid the price up purchasing produces from the same farm, and then cut each other's throat to sell to customers at super low prices. Both lose.

Since UNG purchases future contracts that it never intend to take delivery, conceiveably on the other end of trade could be some one who write future contracts that he never intended to deliver, as he does not have the product to deliver. As no delivery is ever demanded, such paper future contracts can be created out of thing air in unlimited quantity to "meet" investment demand. Basically one side provides empty promises of supply, the other side provides false demand that never materializes. This is nothing but a zero sum game. One party's loss is exactly the other party's gain.

Therefore it is flawed to believe that trading future contracts is investing in cmmodities. It is NOT. Future contracts are derivatives with which the two sides gamble against each other. The commodity may be bullish, but you have a 50/50 chance to beat your counter party to win.

If you are interested in commodity investment, do NOT buy paper derivatives, whose supply is unlimited. Buy the physical thing, which is limited, and take delivery.

Now from a fundamental point of view, every investor needs to ask: If I invest in something and I gain, WHO pays for my profit? You are not the FED so you can't create money out of thin air. If you make a profit, then some one or something must be paying you that profit. If you buy a stock and make money, it's because the business of the company generates revenue and income, or because another investor pays you more than your original cost. I invested in physical tellurium because I know some years down the line, First Solar (FSLR) or Intel (INTC) will pay me gold price to buy my tellurium hoard.

But who pays for your profit when you invest in a commodity? Do your fellow investors pay you? If so it sounds like a Ponzi scheme. It has to be industry users of the commodity that pays you the profit. The only way for you to get paid by industry users, is for you to participate in the supply and demand of the commodity, for you to become a physical demand and then a physical supply. That means the only sensible way of investing in commodities, is for you to take physical delivery, hold for long term, until the price is higher, then you sell to the industry users.

Once again, The door for commodities investment is extremely narrow. Most of supply and demand have been directly negotiated between industry suppliers and industry users, leaving you no opportunity to participate in the market. Natural gas is a good example. The opportunity to store natural gas is virtually non-existant for outsider investors. Any gain or loss is likely directly settles between industry suppliers and users, and that leaves investors out of the natural gas business and unable to rip profit from the price appreciation.

So if you think investing in commodities is as easy as pushing a computer button, and you do not have to deal with the huzzle of buying/selling, transporting and storing the actual physical stuff. Please pause and think again. WHO PAYS YOUR PROFIT if you are not taking all the huzzles?

For this reason I am inheritly suspicious about all sorts of commodity ETFs, like GLD and SLV. Particularly SLV. Read my previous Instablog regarding some red flags in the SLV fund. What troubles me is that these nice folks help you to take care of all the sweating and laboring to handle the physical stuff, and allow you comfortably making profit sitting in front of a computer. It just sounds too good to be true.

(to be continued...)

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 small positions in natural gas fund UNG. I short the US dollar by holding some long positions in margin brokage account.

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.

The Inflation/Deflation Debate and China's Commodity Carry Trade

The inflation vs. deflation debate is heated up again. The debate looks far from being settled, even among professional investors. The average Joes are probably more clueless. This may be the single most important debate in the investment world.

Jim Rogers, Peter Schiff, James Sinclair, Gerald Celente, Marc Faber and Congressman Ron Paul are on the inflation camp. The argument is simple: As the US government racks up trillion dollars of deficit spending, the money can come from neither raising tax, nor borrowing. So the only way out is print money out of thin air. In history, any time a government chooses to solve its fiscal problem through massive money printing, it always leads to hyper-inflation at the end. So that is going to happen. It might be postponed a bit but can not be avoided.

But I will not immediately dismiss the arguments from the deflation camp, either. Well known people on the deflation camp includes Mike Shedlock (MISH), Nouriel Roubini, and market ticker Karl Denninger. They present three strong arguments for deflation:

1. Credits are destroyed in the ongoing de-leveraging process. Credits are circulated as money so the destruction of credit means less liquidity in the system.


2. Although the government is massively printing money, most of the newly printed money is just hoarded away in the vaults of banks and do not enter circulation.


3. Where is the inflation today? It's no where to be found!

Debunking the second argument is simple. Banks keep a high reserve because they are highly leveraged and they fear a bank run. If banks hoard cash instead of extend consumer credits, people will have to withdraw cash so they have the money to spend. Such a bank de-leveraging process could escalade into a bank run, resulting in the destruction of the banks and massive release of cash into the general circulation.

De-leveraging of the financial derivatives bubble does not cause deflation. Look at the history of Dutch Tulip Mania and the subsequent collapse. Did it lead to price inflation and deflation of things unrelated to tulips? Of course it didn't. The Dutch grocery stores never took a flower as a payment for milk and bread. Can I use a credit default swap to pay for milk and bread today? I can't. Inflation is a currency phenomenon. It has nothing to do with leverage.

De-leveraging is the process that people abandon paper assets due to counter party risks, and turn towards physical assets with no such risk. Physical assets have intrinsic values: the marginal costs to replace them and maintain an adequate supply. So in the de-leveraging process, paper assets will lose value, and physical assets will gain value. The US dollar is a paper asset. The dollar is leveraged on the full faith and credit of the US government on its ability to pay off its huge amount of debts, which frankly does not look good at all.

The world knows the US dollar is going down. Chinese students laughed loudly when Tim Geithner told them China's US dollar assets are "very safe". Many very rich and successful Americans know the dollar is going down. People like Jim Rogers are moving their assets out of the US dollars and into China and other places. No wonder the US government is cracking down on Swiss Accounts owned by Americans.

So here is your answer where is the inflation. Blame it on guys like Jim Rogers are selling their US assets! Jim Rogers is a billionaire. He sold his house in New York, therefore New York real estate collapsed. He sold his furniture, sofas and tables and chairs, so that brings the furniture prices down. He sold his US stocks so the US equity market is down. He sold his stuff for US dollars, and bring his dollars away from the US soil, and into China. Jim Rogers drains liquidity from the US market, thus prices of everything drop :-) Speaking seriously: This is an ongoing BANKRUPTCY LIQUIDATION SALE, not a deflation. The low prices will not last.

I told you that is exactly what happened, in my last article. Liquidity is drained from the US market because smart capitals are escaping from US soil to look for opportunities in places like China. This is a huge liquidity drain from the US. But it also causes headache for the Chinese. They need to deal with all the "hot money", the US dollars flooded into China to be exchanged into Chinese Yuan, as speculators are betting on Yuan appreciation over the dollar.

In other words, currency speculators are EXPORTING our inflation to China by draining the liquidity from the US and bringing hot money to China.

How China handles the massive inflow of hot money? China simply print their own money to soak up all the inflowing US dollars. It costs them nothing to print the Yuan to buy the dollars, and they can spend all the dollars to purchase physical assets and raw materials around the world. This is the Commodity Carry Trade they are playing, very successfully.

Few people in the west recognize China's real strategy. They thought it is impossible for China to sell the dollar and exchange it into euro or yen. Why would China sell one paper just to exchange for another paper? They thought China's recent commodities buying spree is to merely boost price to help domestic producers, or to stockpile for strategic safety. But China's buying of aluminum, a material that China has plenty, signals that it goes far beyond strategic hoarding. Commodities ARE China's new foreign exchange reserves. China is not selling the dollars, China is SPENDING the dollars.

With continued inflow of US dollars, and with China's own money printers running at high speed, China has plenty of money to spend and continue the buying spree. With Yuan tightly pegged to the dollar, this game can continue indefinitely until currency speculators stop sending the dollars to China. Then the US will go from being the largest exporter to the largest importer of inflation, over night! All the dollars will fight their way back home at once. Goods and raw materials will flow out of the USA, until this land is ripped barren! I predict many people will be voting with their feet, before the nightmare scenery occurs.

The currency speculators did the wrong thing selling dollars buy the Yuan. The dollar is going down, but so will the Chinese Yuan. Investors should go to physical commodities, not Yuan or any foreign fiat paper money.

Some Chinese already realize that the Yuan is losing purchase power. In recent months, there was a SUDDEN turn up in real estate markets in major cities in China. The housing slump turned into red hot housing boom, literally over-night, caught many people in a big surprise.

Unless you read news in Chinese, you might think I was telling a fairy tale. But it is absolutely true. There is a sudden housing boom; an auto sales boom; a boom in bank loans. Mean while China could NOT sell its own treasury bonds. What does that tell you? China could not borrow a mere Y28 billion Yuan (US$7B) from its own people. Why would China be able or willing to extend another trillion dollars of credit to the US government?

Jim Rogers is absolutely right that commodity is the only asset class whose fundamentals have not been impaired, but improved. One of the best sectors to play the Chinese commodity buying spree is dry bulk shipping, as China's global buying spree is far from over.

Stocks in dry bulk shipping include the follow names:
EXM, EGLE, TBSI, DRYS, GNK, DSX, NM, OCNF and SBLK.

There is a shipping ETF called SEA. Do your own due diligence on specific positions.

Raw materials that China does not produce, but are critically important to China's economy, are the best commodities to buy. This includes platinum group metals, platinum and palladium; aviation metal titanium; battery technology metal cobalt. My best favorite is the palladium metal, and palladium mining plays: Stillwater Mining (SWC) and North American Palladium (PAL). Recently Andrew Snyder published an article pitching palladium as a critical metal for China, and SWC with a potential of 1,389% gain, without naming the names! I am not sure any one knows what China's next big purchase is. But it is a fact that palladium is one of the critical strategic metals that any modern country must stockpile. Look at TIE as a titanium play, and OMG as for cobalt play. I also recommend buying physical cobalt.

If you are interested in rare and strategically important metals, then follow Jack Lifton, a regular writer for Resource Investor. Jack's article on tellurium got me first interested in the metal. I actually bought some tellurium. Read a recent article on First Solar (FSLR) and tellurium: Hard to Find, Easy to Smell. It's amazing that FSLR still holds up well today and there is still no rush to buy tellurium. But as I predicted, Samsung bets big on tellurium based Phase Change Memory. The chip is already in commercial production. I recommend shorting FSLR if it raises near $200 a share. If you hold long or short position in FSLR, you have a fidelity to your money to demand the truth from FSLR on their tellurium supply.

I have high respect for Jim Rogers. But I have a huge disagreement with him on his love of agriculture commodities. I know his agriculture love is very influential and a lot of people agree with him. But I must point out that he is completely wrong on agriculture. In terms of dollar or any fiat currency, all commodities are bullish. But in terms of growth potential in real purchase power term, agriculture products will perform near the bottom, only better than gold.

I don't like gold (GLD) at current price at all. As the world is facing so many resource crisis, I can not understand why the world as a whole still dedicate a lot of efforts digging a metal that is least useful, and least in shortage. Sell gold to buy silver, physical silver, not SLV. After I carefully scrutinized the silver bars list I do NOT believe SLV has the actual silver bars.

On agriculture: granted that the world sees a food crisis looming; granted that every fact Jim Rogers cited is correct: Farmers can't get loans to buy fertilizer; Asian countries eat more meat; And that food is the single most important human need. Despite all these facts, Jim Rogers is still wrong on being overly too optimistic on growth potential of agriculture products.

Jim Rogers doesn't know how the poorest people in the world are struggling to feed their families. There is demand destruction. The poorest people in the world are already spending 80%, 90% or more of their income on food. Farmers could barely make any profit raising their cattle. If food price doubles, do you think the poor people will have more than 100% of their income to spend? Or a farmer can spend more to feed their cattle? No! Poor people will have to buy less and eat less, and farmers will have to slaughter their cattle.

Such demand destruction can quickly reduce food demand, and hence it tightly caps the price growth potential of agriculture products. This is why agriculture products will never be the most bullish of all commodity plays. Agriculture is still bullish, not bearish, but the growth potential is simply unattractive. A number of rare metal plays can easily beat any agriculture hands down.

My last article called to buy United States Natural Gas (UNG) fund. I was a bit premature. But at current price level, UNG has no more down side and plenty of explosive upside potential. A recent EIA report noted an important trend: At current low natural gas price, it could become economically incentive for power plants to switch to burning natural gas instead of coal to generate electricity! Please read that document carefully. If power stations switch from coal to natural gas, the huge demand boost will put a rock solid bottom at current natural gas price. In comparison, I will caution about adding position on US Oil Fund (USO).

Full Disclosure: The Author is heavily invested in palladium mining stocks SWC and PAL. I also hold significant positions on shipping stocks EXM, EGLE, TBSI, DRYS, GNK, as well as positions in UNG. I hoard physical tellurium metal but have no position in FSLR.