More On the Coming Palladium Paradigm Shift

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. How do you leverage the opportunity?

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

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

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

Blatant Manipulation in the Precious Metal Market

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Richest Billionaires Must Also Be Biggest Losers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Looming Peak Coal in South Africa and the World

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Norilsk Nickel's Strategic Moves and Palladium Super Bull

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

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

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

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

Norilsk Nickel Plans $20 Billion Program to Boost Arctic Output

New Technology

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

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

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

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

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

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

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

Solvent extraction design consideration for the Tati Activox® plant

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

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

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

Grave Warnings to Precious Metal Investors - Buyer Beware!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peak Oil, Alternative Energy and Platinum Group Metals

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

Peak Coal in South African and the Global PGM Supply

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

Peak Nickel in Russia and the Russian Checkmate on Palladium

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

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

The Ultimate Energy Investments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.