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.

The True Rationale of Commodities Supply and Demand

The price of rhodium staged an impressive rally in recent weeks. At the bottom of recent commodities sell off at the end of October, 08, rhodium dropped to $750 per ounce, from the high of $10,000 just a few months ago. Since the October bottom, rhodium price has raised to $1650 per ounce, a surge of up 120%, while gold is up only 25%, silver up 36%, platinum is up 58% and palladium is up 38%. Clearly rhodium has been the best performing precious metal.

But if you ask the metals analysts, they will tell a bearish story. Rhodium has no investment demand, as the metal is extremely hard to buy and sell, and there is no futures trading on rhodium. Rhodium's demand is purely industrial, with auto sector accounts for over 90% of the total. The auto sales are weak, so the rhodium demand should be weak and the price must drop.

Analysts get one thing wrong. For an easily hoarded metal like rhodium, the true industry demand does NOT equal to the immediate consumption need. The true demand is how much industry users are willing to buy, at current price, NOT how much their current needs are. Analysts have confused purchase demand, the force that drives price, with consumption demand, which doesn't affect price.

Like wise, the true supply of the metal is NOT how much the mining companies have produced, but rather, how much they are willing to sell, at current price. I suspect some South African PGM mines may hold back some of their rhodium to wait for a better price in the future.

As the metal is dirt cheap now, industry users will want to buy more, much more than they would need for the next 3 months, 6 months or even 10 years. The cost is minimal to store rhodium for long term. It makes perfect economic sense to buy extra at $1600/oz, so you can buy less when the price runs up to $10,000 again. It's common sense people should buy more when things are cheap, and buy less when they are expensive.

Such rationales, as well as the fact that PGM prices rallied strongly off their recent lows, are proofs that the bearish calls on the PGM metals, such as bearish calls made by the Fortis Group, do not reflect the reality and are completely unfounded. Investors would do better looking at the complete picture and do not let the analysts do the thinking for you.

The same rationale can be applied to other easily hoarded commodities, like industrial base metals: copper, zinc, nickel, cobalt, aluminum. That might be the reason why most commodities bottomed at roughly the same time, and then all rallied up since. People in the industry understand they can not expect prices to stay low forever. If prices are lower than marginal production cost, producers will have to cut back and prices must go up to reflect the real cost. So it is prudent for industry users to buy more, hoard more for their future needs, if they can, while the prices are low.

One exception is coal, as coal is cheap and bulky. It is costly to store large quantity of coal if it is not used soon. That's why coal price hasn't recovered yet like other commodities do. I would caution about buying coal stocks now, like BTU, ACI, CNX, MEE and JRCC.

The Chinese government understands the economic principles of commodities pricing. There are reports that China has been aggressively spending out its US dollar reserves to buy and stockpile all sorts of industrial materials. Some speculate that China's purchases could be the reason behind recent surge of copper price. Copper is unique as its price never significantly fall below production cost, and few producers actually cut copper production as they are still making profits. For example, Southern Copper Corp. (PCU) could still break even in Q4, 08. Read "copper standard" on recent China speculations in copper.

If China and other countries are stockpiling industry raw materials, then it's a good bet that dry bulk shipping stocks will continue to be bullish, as you need ships to transport bulk materials around the world. All shipping stocks are still dirt cheap to buy, like EXM, EGLE, DRYS, TBSI, GNK, NM, DSX, OCNF, SBLK. My favorite shippers are EXM, EGLE, TBSI, due to their high ratio of shipping capacity versus current market capital, and DRYS due to its asset of ultra deep water drilling rigs. Watch Transocean (RIG) to get an idea on deep water oil drilling.

The biggest metal story is about my favorite metal palladium. On sunday April 19, CBS 60 Minutes carried a special TV program about the science that will shape our energy future: Cold Fusion! You can watch it or read it. Read my previous comment on the breaking news.

The 60 Minutes program, titled "Cold Fusion is Hot Again", is a powerful endorsement on the science of LENR, Low Energy Nuclear Reactions, previously known as Cold Fusion, an important physics discovery previously discredited, but picked up research interests again as new evidences have convinced many former cold fusion skeptics.

It's an impressive CBS report to watch or read. CBS contacted American Physical Society, who sent Dr. Robert Duncan to help to make a determination. Dr. Duncan was a cold fusion skeptic. They flew him to the Israel lab to spend several days there. Let him scrutinize every detail and ask tough questions. At the end, Dr. Duncan was totally impressed and convinced by the compelling cold fusion experimental evidences. The fact that CBS brought alone a skeptical physicist to visit the cold fusion researchers and convinced him that the experiments were legitimate is pretty impressive. On the other side, Dr. Richard Garwin's claim in the TV program that the researchers measured the input energy wrong for 20 years (?!), was decidedly unimpressive. Watch the program and judge by yourself.

Cold fusion relies on the precious metal palladium. Successful commercialization of cold fusion will mean humanity will have a cheap and virtually inexhaustible new energy source, and hence we can put the threat of Peak Oil Crisis behind us. If you are concerned about our energy future, if you care about our children's future, you need to contact politicians and urge them for support of cold fusion research. This science was suppressed for 20 years. We can not allow it to be suppressed any more, for our children, as Peak Oil has already become the reality.

Cold fusion will take some time to be developed into a commercial reality. But when it does, palladium price could go up to unimaginably high level. Such a great investment is worth buying and holding patiently for long term. So now is time to buy any physical palladium you can lay your hands on. It is also a good time to buy stocks of Stillwater Mining (SWC) and North American Palladium (PAL). They are the only PGM producers in North America. As I explained, when things are priced ridiculously low, it is a good time to buy.

Full disclosure: The author is heavily invested in palladium mining stocks SWC and PAL and own AAUK. I also hold large stakes in shipping stocks EXM, EGLE, DRYS, TBSI, GNK, and ETF shares of USO, UNG and SLV.

Recent Developments in Precious Metals and Shipping

Gold rush 2009 is on! Gold is the front runner in precious metals so far. Gold is now only 10% away from its early 2008 high; silver is 39% off; platinum is still 57% off the high; palladium is still 67% off the 2008 high. Gold is the front runner and palladium is the laggard.

Don't buy the front runner, buy the laggard! Chasing the front runner and big crowds is the fastest way of losing money. Just look at recent bloodshed in DryShips (DRYS), a front runner in shipping stocks. I switched from DRYS to EXM and cautioned about DRYS in mid January, 09. So I was lucky to have avoided the massacre in DRYS. There are inherit problems in DRYS that are now exposed, but big crowd sentiments added to the severity of plummet.

Gold is currently the front runner of precious metal because most people intuitively know what is gold. But few people have heard about palladium. Recent stories from Russia and South Africa indicate that palladium and platinum has the most bullish fundamentals among precious metals, while gold has the weakest fundamentals.

First, palladium. Norilsk Nickel, producer of 45% of the world's palladium, just released the Q4 and full year 2008 production. The palladium production dropped to 2.702M ounces, much lower than the 3.05M ounces in 2007, even though the nickel production is in line with 2007. Norilsk expects another drop of 7% in palladium production in 2009 to bring it down to about 2.5M ounces. The reason cited is lower grade of PGM content in the ores. I explained before that Norilsk has two types of minerals: the one high in nickel and low in palladium content, and the one low in nickel and high in palladium. Due to current low nickel price, they must opt to mine the high nickel ores, hence produce less palladium.

Base on my calculation of their mineral ores grades, if they produce the highest nickel grade while maintaining the nickel production level, the 2009 palladium production could drop to only 2.0M ounces, from 3.05M ounces in 2007. More likely, Norilsk will be forced to cut nickel production to meet weaker global demand. In that case, palladium production could fall significantly below 2.0M ounces.

Adding to the bullish case is news from South Africa of a looming mining worker strike to protest against the job cuts. I think the mining companies there, hurt by low PGM prices, would LOVE to see the strike proceed so as to drive up the metal prices.

The bullish case of palladium can not be better. Look at the supply/demand picture starting with data from Impala Platinum (IMPUY.PK); we will be talking about global demand of roughly 8.215M ounces. On the supply side, South Africa can provide roughly 2.2M ounces if current production cuts are implemented. Russian will provide 2.0M ounces, North America will provide about 0.33M from Stillwater Mining (SWC), other sources count for about 0.3M, and there will be little recycling as low palladium price discourages recycling.

Summing it up; we are looking at about 4.83M in palladium supply, versus 8.215M in industrial demand, not counting any investment demand on the physical metal. The deficit will be 3.385M ounces, or 41% of industrial demand. No other metal has such a large margin of deficit!

Remember, a less than 4% deficit in rhodium was all it took to drive the metal from $300 to $10000 per ounces!!! What would a 41% deficit in palladium do, to the price? What would investors do, when they jump on the palladium shortage wagon and help drive up the price?

Remember, the Russian Government is trying to help Norilsk Nickel with its financial difficulties due to current low metal prices. There have been talks that the government will purchase some of the precious metals from Norilsk Nickel and re-stock the government's depleted strategic stockpile. The Russians can easily drive palladium price up to $2000, $3000 or even $5000 per ounce, if they so choose. I don't see why not! The Polar Bears are not Santa Clause! They want to make money just like every one does.

In 2000/2001, upon one false rumor that Russian government was terminating the annual palladium stockpile sale, the panic buying drove palladium price up from $300 to $1100 per ounce. There was only one investment fund noticed the palladium rally, and profited from it. At the time gold was at the low and there was no interest in precious metals as safe haven assets.

Today, it is a material fact that Russian government stockpile sale ended, and Norilsk's palladium production is down, and Russian government may be buying the metals to help Norilsk as well as replenish its strategic stockpile. And today there is plenty of interest in all precious metals as safe haven assets as the financial crisis unfolds. Rest assured there will be a lot more investment interest in palladium than last time.

It's not too late to buy physical palladium. And time to buy stocks of the world's only primary palladium producers, Stillwater Mining Company (SWC) and North American Palladium (PAL).

I am openly calling these two companies to consider how they can help the average investors to acquire the physical metal easily, and hence be able to participate in and gain from the coming palladium boom. I believe that the precious natural PGM resources are NOT the private properties of mining companies, but belong to the people. These two companies, blessed with the privilege to produce the natural resources, have the social responsibility that they must maximize the value of the metals they produce so as to pay back the community.

Likewise, the Governments of the USA and Canada have the responsibility to ensure any minerals produced from their soil must maximize the values and must not be sold below cost. If the metals are priced below cost, then the governments should purchase and stockpile these precious strategic metals. The Chinese government is already stockpiling strategic metals to protect its domestic mining industry and take advantage of recent low commodity prices. The US and Canadian governments must do the same for their respective national interests.

Now let's talk about gold. Current price of gold is about $900 per ounce. I believe gold is fairly priced as most gold mining companies are making comfortable profits. I believe there is now no good reason for average Joe to buy gold at this price. Joe makes $40K per year, or $28K after tax. He makes $112 per work day after tax. So to buy a one ounce gold coin, he needs to work at least 8 full work days to earn enough money for it.

Joe might as well take 8 days off to go prospecting for gold. Some gold prospecting web sites claim you can collect up to two ounces of gold a day. Sounds like a better deal than earning a salary to buy gold. Maybe California the golden state should have zero unemployment? Lost your job? Go prospecting for gold and you get yourself a job making tax-free real money.

The economic incentive to prospect for gold rather than to buy gold puts a reasonable natural cap on gold price, in terms of purchase power. But silver, platinum and palladium are different as you can NOT prospect for these other precious metals. So these other precious metals should have bigger room for gain. My only advice is stay away from ETFs like GLD and SLV. Instead buy physical metals and precious metal mining shares. I am suspicious of these two ETFs after I browsed through their physical metal bars serial number lists. I will not elaborate here. Spend your time scrutinizing the lists to see if you can find some red flags.

What about shipping and the recent bloodshed in DRYS? The Baltic Dry Index has been going up strongly for TEN consecutive trade days in a row, reaching 1099. The low was 666 on Dec. 4, 08. How often do you see something going up 10 days in a row? That says the shipping is recovering strongly. The plummet of shipping rate last year was largely due to credit crunch freezing up trading activities, NOT due to supply and demand. As the credit now eases up, there will be pent-up demand to clean up the goods previously piled up on harbors.

The short term outlook of dry bulk shipping is bullish, the long term prospect is even better, as governments around the world, particularly China, are ramping up gigantic economic stimulation programs. Governments can print money out of thin air. They print paper money not to hoard their own money, but to spend the money.

When governments spend money, every dollar spent is a demand on physical goods and services, just like average Joe's grocery spending. So it is really a moot point talking about consumers spending less and saving 3% of their incomes, when the governments are racking up deficit spending in the tune of multiple trillion dollars.

China is one big driving force behind growing global demand on commodities, as well as growing demand on global shipping, and will continue to be, for many years to come. It's not just a matter of economic development; it is a matter of China's very survival. That's because China is rich in cheap labor forces, but poor in critical natural resources.

As Jim Rogers correctly pointed out, China's very survival hangs in one thing: WATER. China's biggest engineering projects are all water related. The most famous one is the Three Gorges Dam, the world's largest hydro-electric dam. At its peak of construction, this one project alone consumes 1/4 of the world's cement and steel production.

But Three Gorges Dam is nothing comparing with another mammoth project that's already well underway in China, but little talked about in the western world, China's South to North Water Diversion Project, which is at least TEN TIMES as big as the Three Gorges project. It's been talked about for half a century but was only recently rushed through the approval by the People's Parliament in a hurry without much debate: There is simply not much to debate about: Beijing, with its 14 million populations, is depleted of water resources and desperately needs the water to quench the thirsty! It's a non-negotiable, survival issue!

The South-to-North Water Transfer Project was supposed to take at least half a century to finish due to its gigantic scale, but will be rushed probably in a decade, due to the urgency of the water crisis in Northern China. Just think about how much concrete, steel, construction machineries and materials this one project will demands from the world! The infrastructure projects in China will ensure a global commodity and shipping boom for many years to come.

What do I think about DRYS's recent plummet? The panic was caused by DRYS's disclosure that two banks notified it that it was in breach of the loan covenants, as the fair market value of its ships has fallen below a certain percentage of the debts, and that DRYS was trying to raise $500M cash by selling shares in the open market, hence dilute the share value.

I do NOT think the loan covenant thing is too much a deal. How do you define a ship's fair value? I think any physical property's fair value is its replacement cost. But the convention is use recent market transactions of similar properties to determine the "fair market value". I think such terminology is ironic! The market is never a fair place to begin with so the word "fair" and "market" don't come together. Why would it be a "fair price" when a ship owner is coerced to sell its ship far below inherit value, under financial stress? Such unfair price is then used as "fair price" to undercut the assets of every one else and force many more defaults and stress sells, further escalating the crisis. This unfair "mark to market" rule results in distorted values of physical assets. It is one of the culprits of current crisis in real estates and other sectors. It must be abolished and replaced by a "mark to cost" rule.

In light of the continuous surging BDI index, the value of ships goes up with BDI. Banks know this and they don't want to bring an unnecessary crisis on themselves. They will work with shippers to find acceptable solutions to the loan covenants. It's in their best interest to do so.

My biggest worry about DRYS is the ongoing sell of shares to raise $500M. This will greatly dilute the value of DRYS shares. How much dilution? No one knows. So even though DRYS has become much cheaper, I would advice wait a little bit till the dust settles, just to see how much the share dilution factor is. Mean while I believe other shipping stocks like EXM, EGLE, GNK, DSX, TBSI and NM are better buys than DRYS, until we know more about DRYS's share dilutions. For the same reason, avoid OCNF for now.

Full Disclosure: The author is heavily invested in SWC, EXM and EGLE. I also own shares of PAL, OMG, TBSI, DRYS and USO. I do not own other stocks mentioned but positions may change at any time.

The Real Supply and Demand of Oil and Other Commodities

The market irrationality has reached a new record. Spot price of the crude oil free falls to $31.41 a barrel (WTI Cushing Spot) two days after OPEC cut production by 2.2MB per day and made clear that they wanted to see $75 oil and will continue to cut if necessary. As OPEC vowed to keep cutting until they see $75 oil, oil should go up, but it actually went down. What gives?

In search for an answer, people blame it on "the oil demand has collapsed". Global oil demand did NOT suddenly collapse in the two days after the OPEC announcement. Look in a mirror for the answer. Yes that says you! Every one bet on raising oil after OPEC cut. The market ALWAYS fools most of the people most of the time, logical or not. Fundamentals work in long terms, not in short term moves. If you bet on short term moves, try to bet against most people, instead of bet on fundamentals.

Has the global oil demand collapsed? US oil import in October actually surged. Read the EIA provided weekly US oil import data. In the week ending Dec. 19, total US oil imports were 12.780M/day, versus 12.907M/day in the same week a year ago. That's only a 1.0% drop. Consider the surging oil demand in China, Russia, India, the global oil demand probably sees a slight increase or at least remain flat.

Do not forget Peak Oil. The world's top ten oil fields are all in steep production declines. Mexico's Cantarell Oil Field is declining more than 33% a year! According to Matt Simmons, Mexico, our 2nd largest oil supplier, will CEASE to export oil by the end of 2009.

The free fall of oil completely defied logic. I did purchase some USO a bit too early after the OPEC decision. Judging from what happened to other commodities, oil price may continue to drop to such low level that most oil producers can no longer make a profit. At that point people may finally be convinced that oil producers will cut production for real, instead of cheating on the OPEC production quota.

The fundamentals of commodities supply and demand can not change in just a few months. As I discussed before, the global credit crunch resulted in forced liquidation of global supply chains, as every one liquidate their inventory to raise cash in order to survive. The inventory sales flood the market to create a false over-supply situation while supply destruction is playing out at break-neck pace as unprofitable mines are shut down.

Due to the credit crisis, global commercial activities are brought to a grinding halt due to lack of credit. The global shipping industry is hit hardest. Read my analysis on what happened in the shipping industry and why I bought shipping stocks like DryShips (DRYS) near the low. If you followed my past articles, you know I have followed DRYS for a long time but never bought before. I believe DRYS could be like the coal stock JRCC I picked up around $4 last year, gaining some 15+ fold from the low in a matter of a few months!

BTW I continue to call for people to sell JRCC and other coal stocks (ACI, ANR, BTU, CNX, FCL and FDG) at any good rally. The US coal market is now a bear market. Coal is long term bullish but short term bearish. Obama's Global Warming team doesn't help coal either. I knew Steve Chu when I attended his seminar on his laser atom trapping research, two years before he was awarded the Nobel Prize in Physics. I am sad a brilliant physicist was tricked by the Global Warming Hoax. He was too occupied to spend 10 minutes scrutinizing the global warming claims using his basic physics training. But in any case, the coal sector is not going to be a happy sector for a while. Mr. Secretary Steve Chu, please spare a few dimes to the Cold Fusion research scientists, you know, as an experimental physicist, no one could continue to do the same experiments for 19 years, unless there really IS something in it. Cold fusion is real science and humanity's best hope of overcoming the energy crisis due to fossil fuel depletion.

We need to make a distinction between the aberration caused by the credit freeze up, and the real fundamentals of supply and demand. The credit freeze up only has a temporary effect in halting global goods movements and suppressing or delaying demand. It can not last long. Governments around the worlds are printing fiat money like crazy and injecting huge liquidities to get the credit moving again. There are clear signs it's starting to work. Banks are NOT in the business to hoard cash. They are in the business of taking in deposits and then loan money out to earn the spread of interest rates. If banks do not resume regular business soon, the whole banking industry will disappear from our society. That is not going to happen.

The real supply and demand is no where near a catastrophe. World Bank predicted a 2% drop in international trade next year. MasterCard reported a 3% y-o-y drop in US gasoline purchases. US Census Bureau reports a 4.4% increase of goods exports and 3.9% increase of goods imports in October, compare with last year. The scariest number is Japanese government reported a 26% drop in export to the USA in a recent month. Well dah?! Japanese count numbers in Japanese Yen, the same US$ amount is now 23% lower in Yen compared with a year ago. So Japanese export in US$ terms probably dropped a mere 3%. Every one is shouting "demand destruction" but how many actually dig into the data and scrutinized the facts?

As I discussed, the modernization of China, India etc. is the fundamental driving force behind the global commodities bull cycle. This transition has been going on for some 30 years and can go on for decades more, as the per capital consumption of many raw materials and goods in China is still far below even the global averages. Read "China Eats the World". China's current highway mileage is worth about ONE INCH of highway per person. There is a gigantic demand of steel and cement if China provides its citizens at least one finger or one foot of highway.

The basic demands come from basic human needs. During bad economy times, people cut spending on luxuries but continue to demand on things that are essential. So let's exam what is luxury and what is necessity in the people's lives. First let's not confuse luxury with expensive items. Something expensive doesn't necessarily make it a luxury, and something cheap doesn't mean it is a necessity. This is important to keep in mind.

Drinking Coca-Cola is a luxury; driving a car to work is NOT; Brushing your teeth with tooth paste, rinse your mouth using mouth rinse liquid, or using shaving creams while shaving, is a luxury; but visiting a dentist for dental cleaning or a dental crowning, is a necessity. Watching big screen TV is a luxury, but owning a computer to surf the internet, is essential. Living in a 5-star hotel is a luxury, but living in a place with roof over your head, is absolutely essential.

Companies that produce "luxury" items should be considered good short target now, particularly those big blue chips stocks few thought about shorting. In early August, 08 I called for shorting soft drink companies like Coca Cola (KO) and Pepsi (PEP) as I believe soft drinks will become non-essential luxury items. These two stocks have moved down a bit but they are still good long term shorts.

Now come to think about it, do people really need to use an ever growing amount of toothpaste, mouth rinse liquid or shaving creams? Even Albert Einstein did not use shaving cream. He just used warm water. I am thinking about shorting related stocks like Colgate-Palmolive Co. (CL). With a saturated market and shrinking profit margin, it's ridiculous that CL is priced at more than twice its annual sales and 15 times its book value. The short ratio seems to be low so CL may be a good long term short. On similar consideration maybe one should also consider Procter & Gamble Co. (PG) as a possible short. The difference is PG's is at a more reasonable 2.83 times book value, and it is well diversified into a lot of different products. So I will be cautious and want to do more DD before shorting PG.

Three things in life are absolutely essential: eating, living and moving. Eating is of course the most important. However there is a lot of room in cutting eating cost, without cutting nutrition. People will cut on non-essential and unhealthy processed food, and rely more on cheaper fresh food. One example is potato chips and pop corns. Why would any one eat these junk food? Frito Lay came to mind but it's part of Pepsi Co (PEP). Any one can recommend a good snack food producer to short?

There is much less to be compromised in living. For 99.99% of Americans not living under a roof is unthinkable. You either own a home or rent a home, one way or another. Surprisingly, the majority of the home builders, like DHI, CTX, LEN, RYL, are still around today. People either own a home, or have to rent one. So if people are not buying houses, then there must be a booming rental market and a booming business building rental units. Is it time to buy home builders as many of them seem to have gone up from their lows? I am skeptical. We need to see at least half of home builders go out of business to remove enough excessive capacity, before the remaining ones can return to profitability. There are so many good things to buy now. It's not time to go into home builders yet.

I see even less room to be compromised on moving. The mobility is an essential human needs more important than eating and living. In the Great Depression movie "The Grapes of Wrath", the family lost everything and they had little to eat. But they kept their family truck, which allowed them to move to California, find a job and find a place to live. Without a four wheels car you are reduced to just two legs. Without two legs and you are reduced to two wheels. That's how important mobility is.

Car ownership is an essential part of American lifestyle. You need a car to go to work or go shopping. Even if you do not have a job, you still need a car to move around looking for jobs, or go get some help, or to move to a better place. Has the global auto demand collapsed? Not by a long stretch! Just look at the global oil consumption. The Big Three US auto makers, particularly GM, are at the mercy of government help now. But it is a problem of the Big Three unable to compete with foreign auto makers, not a problem in fundamentals of the global auto industry.

The current credit crisis forced many people to delay buying new cars, but it also means a strong pent-up demand to come back soon. Historically, due to the skyrocketing oil prices and inflation, auto demand collapsed in early 1980s and GM stock hit a low in mid 1982. But just a little over a year later, in 1983, US auto sales reached a new record high as consumers who delayed car purchases found they still need a new car when the old car breaks down.

I believe it is in America's best national interest, as well as in the interest of the consumers, to keep the Big Three alive and keep the competition alive, and the vehicle prices low. But I do NOT advocate buying GM stocks as an investment. There is no reason to believe they can pay off the huge mountain of debt and pension obligation, and start to make profit any time soon. So there is no reason to invest. Both the longs and shorts in GM stocks right now are just gambling against each other, trying to pick a few dollars from each other's pocket.

We should invest in companies that have been indiscriminately hit hardest, but are financially strong and have good future prospect of profitability. The best sectors to be in right now are mining companies and bulk shipping companies. The shipping sector should rebound sooner and stronger than anything else, due to the pent-up shopping demand from the goods stockpiled on harbors waiting for credit letters. That is why I started massively purchasing shipping stocks like DRYS and EXM. There are others, like DSX, EGLE and GNK.

But my best favorites remain the by-product rare metals, palladium, and cobalt. Both metals are critical both during peace times and during war times. Stillwater mining (SWC), America's only palladium mine, remains my biggest holdings, although DRYS now catch up to be my No. 2. Another palladium mining company to own is North American Palladium (PAL). I also own a significant stake in OM Group (OMG), the world's dominant cobalt chemical company.

You've got to like palladium and cobalt because both metals are mostly by-product metals, and supply of both could be interrupted by a single-point-of-failure, which is very real. I talked about a possible Russian Checkmate. Norilsk Nickel (NILSY.PK) could suspend unprofitable production due to low nickel price, hence cut off 45% of the world's palladium supply.

Now it seems things at Norilsk are playing out in better favor of palladium than I thought! Norilsk resumed the US$2B stock buyback. That leaves them $2B less in cash and closer to a liquidity squeeze that will force them to shut down the unprofitable mine soon. Norilsk also announced production cut. Nickel production in 2008 cut to 298K tons from planned 300K tons, and reduces to 290K to 305K tons next year. The cut in palladium is much more dramatic, from a planned 3.05M ounces to actually 2.764M ounces in 2008, and 2.61M to 2.62M ounces production next year. Why the production cut in palladium is much bigger than nickel?

Norilsk explained there are two reasons for lower palladium production:

Reason 1: they will reduce local mineral ore production and purchase third party intermediates (metal concentrates) to supplement nickel production. Nickel concentrates purchased from third party will contain no palladium, only nickel.

Reason 2: much lower PGM content in the ores. Norilsk's mineral reserve statement shows that the nickel rich part of ores actually contain less palladium (2.91% Ni and 7.41g/t Pd) while the nickel poor ores contain more palladium (1.19% Ni and 11.92g/t Pd) . If they seek to reduce capital expenditures, they will produce the ores rich in nickel and poor in palladium. Using the content ratio of the richest nickel ore, if Norilsk's polar region nickel production is 225K tons, then the palladium production will only be 1.922M ounces, versus the normal 3.05M ounce.

It's end of December now and the annual Russian government stockpile palladium shipment has NOT showed up in Switzerland. Maybe the Russian palladium stockpile sale has finally ended for good. It's in Russian's strategic defense stockpile. There is no reason to sell at current low palladium price. The Russian Government has taken effective control of Norilsk Nickel, and will support the mining company by buying up its metal products.

What better support can the Russian Government extend, than to simply buy up Norilsk's palladium production and re-stock the nation's defense stockpile? In doing so they can bid up the global price of palladium to over $2000 an ounce, which means a cool extra $6B per year for Norilsk, a money they desperately need right now.

These numbers and facts continue to convince me that Stillwater Mining (SWC) is the best mining stock I can own for the next 5 years. That is the reason I continue to hold a dominant position in this mining stock, America's ONLY producer of the strategic PGM metals.

Full Disclosure: The author is heavily invested in SWC, DRYS, OMG and PAL. I currently have no position in GM, KO, PEP or CL.

The Brightest Stars in the Commodities Boom Part Two

Wow, what a slaughter in the coal sector on Wednesday, July 2nd, 08, as coal spot price plummeted nearly 10% in one day! I have warned on June 20 that there was something not right in the coal sector. The coal rally has gone too far too fast. The basic numbers of supply and demand does not warrant such a strong coal rally. I warned folks invested in coal stocks to take profit now, and move to other, more bullish commodity sectors. It's been proven correct and timely. Coal stocks peaked on June 23, right after I issued the warning.

Let's survey the damage: JRCC closed at $62.14 on June 23rd, and at $44.15 on July 3rd, a drop of 28.95%; NCOC went from $10.55 to $6.39, a drop of 39.43%; PCX went from $145.99 to $126.73, a 13.19% drop; MEE went from $93.38 to $75.46, a 19.19% plummet. In one day July 2nd, BTU dropped 9.3%; ACI saw a 17.2% haircut; ANR slashed 16%; CNX -14.6%; FCL - 11.7%; FDG - 12.7%; ICO - 19.7%. What a catastrophe in this whole sector. I believe coal is bullish long term. But there is no fundamental justification for coal price to triple in just 6 months.

Almost all traders focused their attention to NYMEX coal future trade, or Australian Newcastle Port coal spot price, which continues to climb up at scary pace to this day! But on a typical day about 20 contracts for any particular month are traded on NYMEX, with each contract worth 1550 tons. In a typical week about 2 million tons of coal is loaded to ships docked at the Newcastle Port. Those numbers are a drop in the bucket comparing with the scale of global coal supply and demand, which according to BP is over 3 billion tons a year, or nearly 6 billion tons according to other sources.

What people don't understand is that the global coal market is largely a LOCAL market. Shipping coal half an earth away is too expensive and getting ever more so with skyrocketing oil price and extremely tight global dry bulk shipping capacity. Good luck for any major US coal producers to sell thousands of future contracts on NYMEX when the daily trade volume is only 20, or find enough ships to shop the bulk of their production to Europe. They really can't rip profit from current high spot price either buy selling futures contracts, or by shipping a considerable portion of their coal production overseas. If they do, they merely collapse the NYMEX futures market, or simply drive up the dry bulk shipping rate to sky high levels that force international coal buyers to stay back. Good fortune to the Aussies, though. Producing only 6.9% of the world's coal, they are nevertheless the world's Saudi in coal, with 75% of their coal production exported in the first place.

Global coal exports can NOT expand significantly due to the bottleneck of global dry bulk shipping capacity. The Europeans might be so desperate that they are willing to buy coal at $200 a ton and want to import more. But they will not pay $200 a ton at Virginia harbors. Instead they probably pay $60/ton to Americans and then pay $140/ton to the Panamans (the ships). So if you really believe the global coal export market is tight, sell your coal stocks and buy dry bulk shipping stocks like DRYS, DSX. The bottleneck of coal market is NOT coal production, but coal shipment across the oceans. Don't be misled by the coal spot price at shipping ports!

I insist on looking at commodities at their basic supply and demand numbers, and future trend, and how elastic or inelastic the supply and demand responds to price changes. I don't think coal is the best long term commodity play judging from all I see.

In last article I mentioned the spectacular price rally of the PGM metal, rhodium, on a mere 4% shortage. Let's look behind reasons for rhodium's its stellar performance as it gives us a perfect example what makes a superstar in the commodities boom. I will then talk about prospect of PGM demand in the auto industry in light of the auto sales drop recently. Finally I will talk about another spectacular minor metal called cobalt.

According to Johnson Matthey's Platinum 2008 Yearbook, annual rhodium supply in 2007 was 822,000 ounces, while demand, net scrap recycling, was 856,000 ounces. The net shortage was only 34,000 ounces, or 4% of the demand. Such an insignificant shortage was enough to drive rhodium price to $10000 per ounce in 5 short years! So what is rhodium used for, and why it's so price inelastic?

Rhodium has two unique characters among the PGM metals. First, it's the most rigid and has the highest melting point among PGM metals. Second it is the only one that facilitates chemical reactions involving nitrogen, while being the only one strong enough to resist even the nitric acid. These two characters make rhodium virtually indispensible in all its applications.

Biggest demand of rhodium, over 81%, is usage in auto catalyst converters to neutralize the harmful nitrogen oxides (which are responsible for the acid rains) into harmless nitrogen, a role neither platinum nor palladium can play. There is no replacement possible and there is only so much auto makers can do to reduce the rhodium loading. If sub-standard catalyst converter is used, the vehicle may fail to meet the emission control standard after a few years of usage, so replacement will be required and it actually ends up increasing the rhodium demand.

Rhodium is also used as catalyst in a number of very important chemical processes, including the Ostwald Process to produce nitric acid, and the Monsanto Process that produces acetic acid. Nitric acid is the basis of the nitrogen fertilizer industry and a whole family of many chemical products. Acetic acid is the basis for a whole family of chemical products we see in our daily life, including wood glue that holds our furniture together, and plastic soft drink bottles.

Rhodium alloyed with platinum is also used in making high quality glass, including glass used in LCD displays, like computer monitors and big screen LCD TVs. High purity rhodium is made into the crucibles used in the production the high quality optical fibers used in high speed computer networks. The crucible is essentially just a container for the fused glass. So why must it made of pure rhodium and not any other metals? Because the fused silica material in the optical fiber used in long distance computer networks are extremely pure and extremely transparent. It's more transparent than even the air. This allows light to travel many kilograms in the optical fiber without much attenuation, enabling long distance communication using the light signal. In making such material of extreme purity, crucibles made of almost any thing would dissolve just a tiny bit into the fused silica, hence induces impurity and renders the material useless. Only rhodium, the toughest of all PGM metals, is perfectly rigid and inert, with very high melting point, and does not induce impurity into the material.

Without rhodium, computer fiber optics networks would not be possible, production of nitrogen fertilizers would not be possible, a lot of synthetic materials would not be possible to make. You look around yourself, 60% of all the stuffs we use everyday have something to do with rhodium in one way or another. Don't you think then such a magical, indispensible noble metal really should be worth more than ten times the price of gold?

Without gold, life on earth goes on and nothing much has been missed, without rhodium, half of the world's population would not survive because there will be no nitrogen fertilizers to boost food production to feed the hungry population. Without rhodium, companies like Monsanto (MON), Agrium Inc. (AGU), Potash Corp (POT), DOW Chemical (DOW) will have to shut down a major portion of their businesses. That's the whole reason why rhodium, at a mere 4% supply shortage, can reach such astronomical price level, US$10000 for one troy ounce.

The lesson from rhodium: A commodity that is in shortage, and that increased production is unlikely, and that is absolutely essential and indispensible in critical applications, will likely be one of the brightest stars in the commodities boom.

Most rhodium is produced in South Africa and Russia. But one of my two favorite palladium producers, Stillwater Mining Inc. (SWC) in Montana does produce 4,000 ounces of rhodium a year, and recycles about 28,000 ounces from spent catalyst converters. These are not trivial numbers consider that each 100 ounces of rhodium is worth one million dollars!

I have talked in the past that due to the ongoing South African electricity crisis disruption the supply of PGM metals, platinum and palladium; imminent depletion of the Russian government stockpile of palladium; increasing requirement of these metals in auto catalytic converters; emerging new applications of these metals; more over, due to strong investment demand, platinum and palladium will be extremely bullish in the next few years. The best way of leverage the platinum and palladium bull will be to buy the stocks of PAL, North American Palladium, and SWC, Stillwater Mining.

But first I need to address many people's concern that slowing US auto sales and slowing jewelry demand may hurt PGM metals demand. My viewpoints are that you need to study the details to get the accurate picture:

1. Auto sales in China, India, Russia and other emerging countries are booming and the increase more than offset the shortfall in the US market. China's passenger car sale increased 17% year over year. Combined with commercial vehicle sales China's auto sale now exceeds 10 million unions per year. The foreign auto sales in Russia are growing at 54% annual rate. GM reported record Q1,08 auto sales in Europe. Looking globally, the demand on automobiles is very strong. You only need to check out recent gasoline price raise to realize the fact that the world has an insatiable demand on automobiles.

2. Customers are increasingly looking to buy small fuel efficient cars, but auto makers do not produce enough of the small cars to meet demand. They over-supplied the market with oil guzzlers but do not have enough small cars for offering. As auto makers adjust their production plans accordingly to meet customer demand, I actually see a booming new car market in the next few years. The reality of high oil price is forcing many people to retire their oil guzzlers well ahead of time. They need to buy smaller, more fuel efficient cars as replacements to continue to meet their daily commute needs. Simple math! Assuming you drive 12,000 miles a year, keeping a SUV that gives you 15 MPG for the next 5 years costs you way much more money than buying a brand new Prius that gives you 60 MPG, consider that gasoline will go to $5, $10 or even $20 a gallon.

3. There is a myth that higher platinum or palladium price may suppress jewelry demand. Annually the amount of PGM metals used in jewelries is a couple million ounces, or roughly 0.01 grams per person in the world. Clearly platinum and palladium jewelries are NOT for every one. There is only enough metal for the wealthiest 0.08% of the world's population. Platinum and palladium jewelries are mostly for high end jewelries, like bridal jewelries. A typical diamond wedding band set probably cost $5000 or more, and contains maybe 6 grams of platinum. The metal cost is worth about $400, far less than the diamond itself. Platinum price goes up from $1500 to $2000 only increase the cost of a $5000 diamond ring by $100. A typical American wedding costs US$50K to US$100K. A typical Chinese wedding costs US$10K to US$50K. No one will cancel a platinum diamond wedding ring just for $100 extra cost!!!

4. John Reade did not know that year 2008 is a big Chinese wedding year. As the number of weddings will double, so will the purchase of bridal jewelries. He probably observed how jewelry dealers responded to PGM price changes and concluded that demand in this sector was pretty price elastic. It's absolutely wrong. Jewelry dealers, like any trader, always seek to reduce their cost, so they tend to double their purchases when the price drops a few dollars, and slash their purchases or even sell some, when the price rally a few dollars. But at the consumer end, the demand is not price elastic at all. At the end of day jewelry dealers will have to buy at any price to meet that consumer demand.

But most analysts missed two big issues on PGM metals fundamentals. One is investment demand on the physical metals. The other is the demand of industrial users to hoard stockpiles to secure their supply, especially in light of tight supply, and that investment demand may squeeze the already tight supply, and even worse, the possibility that some investors might intend to corner the PGM market.

The investment demand on physical PGM metals is very real. One only needs to look at the rapid increase of the physical metal holdings at the ETF Securities. Based on the dollar value of latest holdings of ETF Securities, the percentage of investment interests are respectively: Gold 54.90%, silver 7.78%, platinum 32.54%, palladium 4.78%. Such percentages reflect a very strong investment demand on platinum and palladium, if you consider how narrow the PGM market is in relative comparison to the gold and silver market.

Many gold bugs pitch gold as the best hedge against inflation. My opinion is any physical asset probably can be used as hedge against inflation, and contrary to common myth, gold is the WORST of all inflation hedges. Just ask the people who bought gold neat the $800 peak in 1980, or people who bought before the peak, but held right through the peak and eventually sold at a loss. In the next wave of gold maniac, it's quite possible gold may actually reach $2000, $3000 or even higher. But do you actually gain in real term of purchase power?

Gold might be useful to people who has too much money to be invested in anything else but gold, because everything else has a market capital way much less than the gold market.

But even Warren Buffett doesn't like gold. He had this to say:

[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.

Almost every one laughed at Warren Buffett's gold comment. I did at one point. But after giving it some thought, I found that he actually said something in wisdom.

Why humanity continues all the efforts to dig gold out of the ground, when the world has already accumulated enough gold to last a thousand year? Why do we spend all the energy, resources and human efforts to mine something that we already have plenty? It doesn't make sense especially at a time when we are fast depleting our limited fossil fuels and other natural resources. Our efforts could be better spent on producing something that is useful, and that is in short supply.

I would rather buy SLV and PGM metals than GLD. But now I have found something way much better than silver: the metal cobalt. It is rare, in short supply, and the demand is surging due to increased production of batteries used in hybrid electric vehicles, and increased demand on special alloys containing cobalt. I believe this metal will do way much better than silver in the next few years. If you know a place where folks can buy small quantities of cobalt metal, please share the information with me. I will talk about this magic metal in greater details in my next article. For now if you are interested in cobalt play, have a look at a stock called OMG, "Oh-My-God", which I first noticed during its run up from $35 to $60. I think now it's cheap to buy.

P.S. The author is heavily invested in SWC and PAL, and holds shares in OMG.