Safe Haven Investments: Survival of the Fittest

Important update [Oct. 23, 08]: The story of Norilsk selling SWC stake might NOT be true. Please my latest comment on my suspicion and do your own due diligence.

This is part 4 of my series articles discussing the true valuation of physical assets, paper assets and currencies, vital knowledge needed to survive the unfolding global financial crisis. This is a sequel to part1, part 2, part 3. Read previous articles if you have not.

I wanted to discuss the valuation of US dollar; why it rallied so strongly; why we will see a sudden and abrupt reversal of the dollar rally; and why such a reversal will come imminently. I wanted to spend more time giving it more thoughts. But some big breaking news happened yesterday, forcing me to discuss the new developments immediately.

In previous articles, I emphasized that physical commodities can serve as reliable safe haven assets because their intrinsic values are decided by the marginal production cost. When something is sold BELOW production cost, the low price can not last long as no business can operate at loss indefinitely. SUPPLY DESTRUCTION will happen, tilting the supply/demand relationship to a shortage. Price will then be restored to profitable level to allow producers to resume profitable operation. Therefore when you see a commodity traded far below its production cost, it is the best investment you can buy. You can just sit back and wait for it to appreciate soon, in inflation adjusted term, knowing for certain that the price just has to recover regardless of the demand side.

Looks like the supply destruction is indeed happening at neck-breaking pace, in all commodity sectors, and many analysts have noticed the phenomena and openly discussed the idea of supply destruction. As I am a precious metal investor with particular interest in palladium, two news happened yesterday caught my attention and made me very happy, as things that I predicted are happening far sooner than I expected. The news involves two of my favorite stocks, North American Palladium (PAL) and Stillwater Mining (SWC).

PAL announced today that they are temporarily suspending the production at the Lac Des Illes mine, and suspending metal sales due to current low metal prices. I am pleasantly surprised that the new CEO, Mr. Bigger, could act so quickly. I openly called for PAL to suspend operation due to current low palladium price. It's not an easy decision to let 350 hard working mining workers go, through no fault of their own, but the company must preserve precious mineral reserves and liquid assets, and ultimately it is also good for the workers themselves.

I believe that PAL, as the only palladium producer who sells to the spot market, has enough leverage power on its own to turn the palladium market around, and major stake holder George Kaiser also has a capacity on his own to move palladium price. Now PAL is not selling, who will sell in the palladium spot market? Who has the metal to sell? Are they going to sell paper palladium now? The market must realize that it must pay a fair price to get the physical metal. Unfair prices can only buy you paper, as producers simply can not operate at heavy loss to produce metals like a charity organization.

But the next piece of news shocked me so much that I jumped up, could not believe what I just read!!! Russia's Norilsk Nickel (NILSY.PK), the world's largest nickel and palladium producer, 55.4% stake holder of America's Stillwater Mining (SWC), is now offering to sell their SWC stake!

This is incredible! This says the Russian Checkmate in palladium, which I discussed before, is playing out right today, right in front of our eyes. This is incredibly bullish for the price of palladium. Let me explain.

Norilsk Nickel produces 45% of the world's palladium. In 2004, they acquired a majority stake in SWC, America's ONLY mine of palladium and platinum, two strategic metals of critical importance to the security and survival of the United States, through quite some political maneuvers that involved direct negotiations between President Bush and President Putin. Norilsk's strategic acquisition obviously was aimed at achieving a 50% dominance of global palladium supply in order to assert monopoly power. Norilsk never sold a single share of SWC. Such a strategic asset is never to be sold for some cheap money.

Not for sale, UNLESS Norilsk is in a desperate need of cash urgently. Norilsk is huge, producing 20% of the world's nickel, 45% of palladium and 12% of platinum. Last year, Norilsk was on a buying spree, spent US$6.3B in CASH to acquire a small nickel player, LionOre, among other purchases. And today Norilsk needs to sell its strategic SWC stake for maybe a meager $230M cash for lunch money?

They are in a terrible liquidity squeeze if they are so desperate they need $230M in cash now. Current low nickel price really hurts them. My estimate is they probably lose $1B to $2B per quarter. So $230M is probably good to last them another 2 or 3 weeks. I see that shutting down the Norilsk Mine, is an inevitable decision they are forced to make urgently, regardless what they say publicly. They either shut down, or go broken then shut down. Not to mention Norilsk Mine is an environmental catastrophe that needs urgent cleanup.

That would be fantastic news to SWC and PAL, the only primary palladium producers in the world. Shutting down Norilsk would remove 45% of the world's palladium supply. When it comes to PGM metals, look at rhodium! A mere 4% shortage was enough to drive rhodium price from $300 to $10000 per ounce!!! What will a 45% shortage do to palladium? Would the Russians boost palladium price so they can get a better deal on SWC?

It is outrageous Norilsk is suggesting another foreign buyers to take over its SWC stake. It was heart breaking to see our precious national treasure sold out to the Russians, by our president. Do we want to sell SWC to a foreign country again? If an American billionaire investor reads this, please consider seizing this opportunity to buy up the SWC stake, not just because of patriotism, but because of the huge profit opportunity. The nation needs our treasure back! Senator McCain: You can demonstrate you are not Bush No. 2. You can take SWC back from the hands of the Russians.

South Africa is another catastrophe waiting to happen, benefiting the two North America based producers. Current platinum and rhodium price is simply too low for any South African PGM mine to make ends meet, not to mention the on going electricity crisis in the country and ongoing limit of only 90% power supply to the mining industry. SA's PGM industry has entered a Survival Dimension, facing a choice of either cut production to boost metal prices, or a certainty of bleeding to death. Many analysts and shareholders have openly called for production cutback. PAL has already made the right move; South Africa should move soon to cut.

That, of course, is a great incentive for investors to buy and hoard physical palladium and platinum. The investment buying will boost prices so buying begets more buying. History has proven in 1980 that when people need to buy safe haven assets during financial crises, they buy every precious metal, not just gold and silver. When there is strong investment buying, weak industry demand becomes irrelevant.

I am not totally dismissing the factor of industry demand of PGM metals, especially in the auto sector. But the weaker auto sale has been exaggerated. Owning a car is a necessity, not a luxury. How you can walk 30 miles to work or 10 miles to shop? Tight family budget may postpone buying a new car for a while, but only till the old car breaks. You may turn down a customer's request for a car loan but you can not remove the need for a car. Gasoline consumption in the USA hardly reduced, year over year. From the fundamental point of view of the mobility needs, suppression of auto demand is only temporary, not permanent.

More over, history has shown when the industry demand of PGM metals weaken, the extra supply has always been absorbed by jewelry demand as the metals become more affordable.

Out of all precious metals, gold is the least I like. I have not purchased any GLD so far. The current gold price is still well above profitability of most gold mines. Humanity has been digging this almost useless yellow metal for thousands of years till today. There's too much gold sitting there just to collect dusts. If we do need more gold, maybe we can all quit our day time job and go to the beaches panning for gold, like the folks at Jamestown.

Silver is a different story. 70% of silver today is produced as a by-product from base metal mining. Even for the 30% silver that's produced as main product, base metal by-products are also important part of the revenue. The whole silver industry is suffering not only from current low silver price, but also low base metal prices as well. Production cut is expected, reducing supply, at a time when physical silver investment products are in high demand. I believe physical silver price will go up much more than gold. I own SLV and recently increased my SLV stake on the dip to the low $9 area. The silver industry has continuously announced news of mine shut downs recently. Even mentor of the most famous silver bug, Israel Friedman, has openly called for CDE to suspend silver sales.

Silver mining companies are different stories. I have purchased a few silver stocks like SIL, PAAS, SSRI, HL, CDE. But after carefully examine them one by one, I find that all of them are hurt from low base metal prices, not just low silver price. None of they are pure silver play. So instead of providing a leveraged gain over silver, these mining companies provided a leveraged loss over silver. If I am already invested in silver itself, why do I need to buy any silver mining share? I wish there are pure silver players around.

Silver Wheaton (SLW) claims to be a pure silver play. I bought SLW a couple of years ago before I knew better. But once I figured out SLW's business model I never touched it again. It's a holdings company basing its value purely on some contracts. Basically they borrow a ton of money from banks to pay to the mining companies in exchange for the mining companies to sell the by-product silver to SLW for only $3.90 per ounce. SLW will pocket the difference. Sounds good? But I don't see how physical fortune can be made in playing paper contracts, instead of digging real mines. Now the danger of SLW, a danger not unlike sub-prime loans, has been exposed: What prevents these contracted mining companies from shutting down their un-profitable base metal operations, hence cut off SLW's silver supply?

In current turbulent commodity market, the mining world is a world of survival of the fittest. Who has the richest mineral reserves, the most cash and the least debt, will survive and prosper. The long term bullish cycle of commodities will continue, as Jim Rogers pointed out, due to the damage of producers thanks to the credit crunch. A whole bunch of unfit commodity producers will probably be eliminated. But the survivors will get to enjoy the next wave of commodities rally, which I believe is not too far away, despite of a weakening global economy, because the damage to supply is much worse than the damage to demand.

The fundamental bullishness of commodities attribute in large part to the fundamental bearishness of the world's fiat currencies, notably the US dollar, but not just the US dollar.

The dollar staged the strongest rally in recent years, just as the global credit crisis deepens, and the Fed is printing money like crazy to inject huge liquidity into the market. Every bit of liquidity the Fed injects simply disappeared once it's absorbed by the market. It totally defies logic and stunned many market observers. Is it manipulation? Conspiracy theory is always an easy answer. But we must look for the real reason behind the logic-defying dollar rally, to make correct investment decision.

The real reason is that the global credit crunch creates such panic that most people retreat to the basic instinct of "Cash Is King". Liquidity is being hoarded away, instead of circulating in the market. The velocity of money approaches zero, making the dollar seem more valuable relative to surplus goods squeezed out of supply chains. This is a temporary aberration and can NOT be allowed to last. When the velocity of money approaches zero, so does the velocity of goods movement. If goods are not moving, then the society will collapse. The money printing will get both money and goods to move again. Once that happens, the dollars will suddenly flood the market while the supply of goods will dry up, leading to the sudden collapse of the US dollar.

Let me use an analogy. We are riding on a car rushing up a high cliff overseeing the ocean underneath. You will panic and your intuitive response is buckle up your safety belt to strip yourself in. You think you are safe in your safety belt. Well at impact point, you go from no liquidity to hitting an ocean of liquidity in a split second. There is absolutely no time for you to untie your safety belt before you are drowned. The safety belt is the US treasury bonds. Warren Buffet recently sees danger in treasury bonds and he is all out spending cash to load up equities. Follow the Oracle of Omaha as he is the one with market wisdom!

Full Disclosure: The author is fully invested in SWC, PAL, and OMG. I am also loaded in SLV and traded in and out in a few selected silver stocks like SSRI, HL, PAAS and SIL.

True Safe Haven Investments: Inflation or Deflation?

Is it deflation, stagflation, or hyperinflation, in the current global economic crisis? That's the quadrillion dollar question investors must get right. This article will answer that big question but it is also meant to be a sequel to part one and part two of the serial articles talking about valuations of physical and non-physical assets as well as currencies. Please read the first two parts of the articles if you have not. It's critical to understand valuation of commodities and currencies first, before the big question of inflation versus deflation.

Recently, as the credit crisis unfolds, we saw the worst commodity price plummet in history, while the US dollar index rallied amid the unfolding financial crisis. Many people wonder that the commodity bull market has ended as the global economy enters a recession. Their reasoning is that due to credit squeeze, people cut back on spending as they could not borrow any more.

Such notion is wrong. While people looked at the weaker demand side, they failed to notice the destruction on the supply side! On the consumer spending side, people are NOT cutting back in TOTAL spending. Actually people are squeezed to spend every dollar from their monthly income, just to keep heads above water. More and more people are living from paycheck to paycheck, meaning they have to spend every dollar of they take in, and have nothing to save. They might be forced to cut spending on some specific items and spending more money on other things. The total spending in dollar terms is up.

Recent commodity price plummet is NOT a fundamental change in the supply/demand relationship. Fundamentals do not change abruptly in just three months.

The real reason is that the global credit crunch squeezes out inventories in the supply chains, causing a temporary and false supply surge, depressing the price. Such price depressing effect is only momentarily. It will be corrected violently to the bullish side once the false surge of supply is exhausted and the effect of supply destruction becomes evident.

In any commodity market, besides the supply side and the demand side, there is a long supply chain connecting the supply and the demand. In different parts of the supply chain, there are sizeable stockpiles of the materials. Under normal supply, the stockpiles at different parts of the supply chain will buffer out supply disruptions and ease out price shocks. That's why when a commodity is in adequate and abundant supply, the price will be flat.

However, stockpiling materials requires operational capitals. Often time money tied up in inventories is credit provided by banks, in the form of so called commercial papers. Things work fine if the credit market is healthy and adequately funded.

Unfortunately in a credit crunch, borrowing money is expensive or virtually impossible even for good businesses. Faced with a liquidity squeeze, businesses must raise cash for operational needs or to merely service debts. That means selling off inventories and cut spending in purchase of raw materials and equipments. When producers cut spending in productive activities, the supply destruction is in the pipelines!

Not only corporations are selling, hedge funds invested in commodities are also selling like there is no tomorrow. Every one is liquidating everything to raise cash and stuck the money in safes. That is absolutely foolish! While governments around the world are printing astronomical amount of money out of thing air, people are hoarding the funny papers in their pillows? We are in the making of a Weimar Republic on a planetary scale, and you hoard the fiat money?

When businesses at all levels suddenly sell off the inventories and at the same time halted purchase of new feedstock materials, prices are depressed prompting more sell offs. This leads to the false illusion of supply surplus, while hiding the fact that production of further supply is being suffocated. It's an extremely dangerous situation, as it could lead to a sudden onset of supply disruptions just as every one cheer at cheaper prices, without realizing that the supply chains have been squeezed empty.

My wife told me the best sell always happen right before a store goes out of business! When you go shopping this weekend and enjoy the lowest prices you haven't seen in a long while, you'd better ask the manager when will the next delivery truck arrive, or will it arrive at all! It's economic 101, all businesses are for profit. No one can operate at loss sustainable.

What do you expect when the supply chain stockpiles are depleted? There is no longer a buffer to absorb supply disruption and price shock. The market will suddenly discover that the supply has dried up. So the price will rally violently, in an extreme volatile way. That is what I predict will happen in all commodities in the coming weeks, including oil, food grains, and metals.

The market of platinum and palladium metal (PGM) is probably a good case study. About half of these metals are used in making the catalytic converters on vehicles. To reduce the risk of price volatility and supply disruptions, auto makers normally maintain a stockpile of PGM metals worth about 6 months to one year's consumption. Jack Lifton from Resource Investors described a very interesting case when one man's attempt to modify that inventory level caused dramatic reaction in the tightly traded rhodium and platinum market.

I am a big fan of palladium and platinum investment due to these metals bullish prospects. After the headline news of South African electricity crisis in early January caused the platinum and palladium prices to shot up, they stayed at the relative high level till the end of June. And then, at the onset of global financial crisis, they plummeted in a free fall fashion, all the while South Africa's PGM production continue to suffer from tight electricity supply. What gives? Who is selling? Every metals analyst is puzzled by the mind boggling fall of platinum and palladium.

The Big Three US auto makers, General Motors (GM), Ford (F) and Chrysler are facing a severe liquidity squeeze. They have been aggressively reducing inventory levels for months. When you are in a liquidity crisis, you sell whatever asset you can sell quickly to raise cash. The most liquid asset, of course, is the platinum and palladium precious metal stockpile.

In the narrow platinum and palladium spot market, when inventories from auto makers were sold out, it creates a lot of downward pressure. If industry users are selling, speculative hedge funds will be selling as well. The only buyers therefore must be the value-based long term investors. A recent Resource Investor article by Nathan Becker also provided explanation that hedge funds have to sell their precious metal hoardings due to liquidity squeeze.

I agree with Nathan Becker mostly but I must point out that he only considered the demand side and failed to recognize the damage that low metal prices may inflict on the supply side. No one can produce metals at heavy loss sustainable. Businesses must scale back production or shut down, if they can not make a profit. Anglo Platinum (AAUK) is currently producing at an average cost of US$1250 per ounce basket PGM metal (60% of Pt, 33% of Pd and 7% Rh) while the current market price of the PGM basket is only US$778 per ounce. It's only a matter of time before South African producers must start to reduce production if the prices do not improve to profitable level soon.

Last week's market plummet creates one of the rarest buying opportunities in our times for savvy investors with cash at hands ready to buy. How often do you get to go to an out of business sale and pick up things at prices far below their cost? Nickel is on out of business sale, copper is on out of business sale, grains like wheat, corn and rice are all suddenly on nose bleeding out of business sales. Grab them while you can. It may not be there tomorrow.

Do you think mining companies and farmers can continue to sell you nickel at $5.00 a pound, wheat at $5.53 per bushel, corn at $3.84 per bushel, and expect to continue the business at all selling things well below cost? It's the same out of business sale like what your wife told you!

The absolute best out of business sale is the palladium, metal of the 21st century, currently at $185/ounce bid. Gold mines are every where, silver is mined everywhere. But only four places in the world produce significant amount of platinum and palladium: Norilsk Nickel (NILSY.PK) in Russia; the Bushweld Complex in South Africa; Stillwater Mining (SWC) in USA; and North American Palladium (PAL) in Canada.

None of the four palladium producers are operating at a profit at current prices of nickel, platinum and palladium. They must each or together decide to slash production to boost metal prices, or face eventual bankruptcy. Any of these four have enough leverage power to boost metal prices on their own, and I believe there will be strong will to do that, as no business wishes to operate at a loss if they have a choice.

That is reason enough for investors to purchase physical palladium at current price, as there is a virtual guarantee the price must go up to reflect real cost, regardless of industry demand. 1980 was a good historic example when auto industrial demand of PGM metals collapsed, but investment demand still pushed the metals to all time high, together with gold and silver.

Out of the four, Norilsk is in bad shape and is most likely to slash production, due to low nickel price, now stands at $4.93 per pound versus the high of $25 per pound last year. There are also huge political pressures to shut the mine down to clean up the environmental catastrophe.

But South Africa is in a much worse shape as Rand dropped nearly 20% in one day versus US dollar. When a country's currency can drops 20% in a day, it's pretty much a broken and bankrupt country. The light of South African will go out, so will the light for that country's PGM mining industry. I previously pointed out that ESKOM, SA's electricity company, has to keep borrowing money and burn lowest quality trash to keep operation going. Now the global credit crunch means they have lost the ability to borrow. It's soon before it all blows up.

South Africa blowing up, as hinted imminent by the Rand's 20% one day drop, means removal of 85% of world's platinum and 35% of palladium supply! You can not have a more bullish story than that, on any other commodities. Stillwater Mining (SWC), with their palladium sale protected by a hedge floor price well above current market, is the best to weather out current market and best to leverage the coming bull market in palladium and platinum.

The only other metal that is even close to the bullishness of palladium/platinum, is the metal cobalt. There are strong and rapidly increasing industrial demands due to alternative energy applications, and due to the need of more drilling equipments in the oil/gas industry, and due to the metal's strategic importance in military applications. I wish to dedicate one article just to talk about cobalt. But suffice to say for now I consider cobalt a better physical metal to buy than silver and it should appreciate at least 10 fold relative to silver. Like PGM metals, 90% of the world's cobalt supply is concentrated in one country, Congo, which has been in years of civil wars and the conflict looks like flaring up again. So the supply is vulnerable while the demand is strong and growing. That's a perfect making of a bull market.

The best cobalt play I found is a stock called OM Group (OMG) (Oh-My-God). It is current a very decent buy at ridiculous low valuation. If you know any other cobalt play, or know places other than BHP Billiton (BHP)'s Cobalt Open Sale that I can buy physical cobalt, tell me!

Now, back to the US dollar. We are creating trillions of dollars out of vacuum and throw them into a blackhole. Make no mistake; it is inherently hyper-inflational. It's a big dilemma the whole planet is facing today. Short term it is about liquidity preservation or die. A little bit longer term it is about valuation preservation or die. Hoarding fiat currency while new money is created out of thin air preserves liquidity but loses value. Hoarding physical assets preserves value but reduces your liquidity.

I think we will see a very sudden and abrupt switch from a false US dollar rally caused by every one hoarding the cash, to a hyper inflation scenario where every one wants to spend out the cash as fast as possible. In physics it's like a high pressure and high temperature phase transition. The credit will go straight from solid ice to rapidly expanding vapor, skipping the liquid phase altogether, blowing everything out. The phase change will come imminently and suddenly, so be prepared for it!

A few side notes: I called for shorting Coca Cola (KO) and Pepsi (PEP), now it looks like I was right. I called for selling coal stocks like ACI, ANR, BTU, CNX, FCL, FDG, JRCC repeatedly since June 20th and I continue to make such call as I see the US coal market is now bearish. I can see JRCC drops to near $10 or even below. Continue to watch DRYS as it is a good indicator of the global economy.

Full Disclosure: The Author is fully invested in SWC and PAL, and is also heavily loading OMG recently. I am also buying SLV, GLD, SSRI, PAAS, SIL.

Safe Haven in a Global Crisis of Trust

All investments are about buying something at lower cost to get higher return later. Investors must try to understand the values of things they buy and sell. Warren Buffett said you should never buy something that you do not understand. At a crisis time like today, investors must have a profound understanding of values not just of physical things, but of none-physical things as well, to survive and prosper.

In my last article, I discussed why physical things have intrinsic values and how are they determined. The article I am writing now is meant to be a sequel, so I shall continue on to discuss values of non-physical assets. Such discussion is urgently needed, and is made even more relevant today due to the unfolding global financial crisis and the Bailout Fiasco.

Our current financial and credit crisis is like a blackhole that Albert Einstein predicted. A blackhole is formed when a huge mass is packed within a very small volume. A blackhole's gravity pull is so strong that everything is sucked in and not even light can escape. So a blackhole will keep growing bigger as it keeps sucking in more matter. When the Large Hadron Collider was recently turned on to search for a ghost particle called Higgs, some feared it could generate a blackhole which could swallow the earth. But instead of swallowing the earth, the LHC merely spitted out a ton of helium before it was shut down, maybe for good, as nations in the world can no longer afford giant science projects like LHC.

But the real blackhole that threatens our survival is in the global financial system. Something that Warren Buffett called "Financial Weapons of Mass Destruction", the so called OTC Derivatives, a thing that no one really understands. It's such an enormous monster that by some estimate there's $1.14 quadrillion of them! That's a ONE followed by FIFTEEN(15) ZEROs. US$1,140,000,000,000,000 in OTC Derivatives! Where exactly is this huge amount of fortune physically located? This huge amount of fortune is actually nothing but merely some digits stored on some 3.5 inch hard drives within some computers in the Wall Street. That, my friend, is the definition of a blackhole, a giant mass stored within a tiny space.

The blackhole is swallowing everything around it, starting small and growing exponentially bigger. First it was New Century Financial (NEWC.PK), then Countrywide Mortgages (CFC), then Bear Sterns (BSC), Lehman Brothers(LEH), Merrill Lynch (MER), Fannie Mae (FNM), Freddie Mac (FRE), IndyMac Bank (IMB), Washington Mutual (WM), Wachovia Bank (WB). Who knows what's next! Now the US Congress wants to toss in trillions of dollars in a Bailout? Do they understand that you CAN NOT feed a blackhole?

The ongoing financial crisis is not a housing bubble or sub-prime mortgage crisis. It is not even a liquidity or credit crisis. Mr. Karl Denninger sums it up best in a 10 minutes video which all Americans need to watch and think carefully:

IT IS A CRISIS OF TRUST

Let me emphasize the keyword TRUST, because TRUST is the very reason any none-physical asset has value at all. It is also the reason why people must seek physical assets as the only trustable safe haven assets during times of crisis. It's easier to understand that physical things have intrinsic values because it costs something to produce physical things. When demand is high and supply can not catch up, people go to extra length to produce more at higher cost in order to meet the demand, and so the intrinsic value, as well as price, goes up in response.

Do non-physical things have value? They do. If you lend some money to your neighbor, you want to make sure your neighbor will pay back. There is a promise that you will be paid back. You trust that promise so it has value. The promise could be in any form: a notarized contract on paper, or just an oral promise, or merely mutual trust. As long as there is trust, the lending relationship has an intrinsic value based on the trust. And when there is no trust, a legal document is just a piece of worthless paper.

Lots of things in the economic cycles rely on trust and retain their values based on trust: loans, business contracts, agreements between nations. Without trust, the contracts written on paper are worth less than the ink and paper they are written with. Without trust, relationships can not exist. Without trust, marriages may break apart; organizations may disintegrate; financial systems may collapse and great nations may fall.

TRUST is THE single most precious thing in human society, bar none!

The US dollar is just a piece of colored paper. Does it have intrinsic value? I say it does have intrinsic value. The dollar's intrinsic value is not in the physical ink and paper, but in the trust that it represents. The value of the dollar is backed by the "full faith and credibility" of the US government. In the past our government did have pretty good faith and credibility. It was so trusted that the US dollar is the world's reserve currency and central banks felt more comfortable holding dollars instead of physical gold as their reserves.

But we have destroyed that trust and credibility by our chronicle reckless fiscal policy of debts and spending, from the top level leadership all the way down to average Americans. We spend way beyond our means, accumulate debts way beyond our ability to pay back. That destroyed our credibility and trust. That is the root cause of today's crisis, the systematic destruction of TRUST in the system, at all levels.

The US dollar is doomed! The only thing that can salvage the dollar is restoring the trust that the dollar is based on, by paying off our foreign debts using honest money, and then living within our means. I don't see any one discussing that solution, and I don't see how it can be done, physically, without breaking the back of our nation!

The US dollar is doomed, with or without the $700B bailout. Even restoring the gold standard is not going to help the dollar. The world simply do not have enough gold to back the amount of dollar in circulation, and our gold may not even be in Fort Knox any more. The dollar can only be based on TRUST, something infinitely more valuable than gold, but something that has been systematically destroyed in the whole system over a long period of time.

When there is no more trust in the system, you must get rid of any and all paper assets whose value is based on trust, and that means the only assets that are safe are those whose values are not based on trust: physical assets under your full control. Their values are derived from the mere fact that it costs something to produce them in the first place.

But when it comes to safe haven investments, I must reject the misconceptions and hypes some gold or silver bugs are attempting to inject into people's mind set. Notions that portrait gold and silver as money and hence the only good safe haven investment, and that anything not labeled as money is therefore not good. Of course gold and silver is money. That's a piece of 7000 years old news so it does not constitute a good reason why you need to buy or sell gold for a particular price, at a particular time. Folks who bought gold at the $800+ peak in 1980 lost heavily instead of found safety.

To avoid mistakes like in the 1980 gold and silver maniac, one must be able to correctly judge a physical asset's true intrinsic value, with all sentiments and hypes removed. Read my previous article on the discussion. A physical assets intrinsic value is its replacement cost, no more, and no less, and no sentiment or opinion attached here.

Some clarification is needed to the principle of intrinsic value as cited in my last article. Let me revise it as following:

A Commodity's Intrinsic Value Equals to the Marginal Production Cost

The cost varies when different producers produce the same thing. Marginal production cost is the cost of the most expensive supply source needed to meet demand. For example, the world consumes and produces 85M barrels of oil a day. 60M barrel come from easily oil fields at a cost of only $5 a barrel; 20M barrels come from oil fields that costs $50 per barrel; the last 5M barrels come from difficult marginal producing fields that cost $100 per barrel. What do you think the intrinsic value of oil is, then? We have to pay $100 or more to make it incentive enough for the marginal 5M barrels fields to keep producing to meet the 85M barrels a day demand. So the fair value of any commodity is always priced at the higher cost of marginal producers that's needed to balance the supply and demand.

All physical assets more or less serve as safe haven assets, where trust based paper assets can not be trusted. The only considerations to be given are their current price relative to their replacement cost, and the difficulties and costs in guarding, moving, storing and preserving those assets. All precious metals have excellent properties in those aspects due to their durability and high density of value in compact sizes. They are preferred choices as safe haven assets. So which one is best buy boils down to the question of current price relative to their intrinsic values.

Based on what I know, gold's current price is enough to keep most of the world's gold producers happily profitable. So gold is currently priced fairly. There is not much room for gold to gain in terms of real purchase power. Not to mention the world has a huge stockpile of above ground gold enough to last the world for hundreds of years. I expect the majority of people will continue to run towards gold. But I insist that gold is definitely NOT the best safe haven assets to buy today and I feel comfortable holding that minority opinion, as the majority in the market place is always wrong. For this reason I never bought GLD.

Silver is a bit different. 70% of the global silver supply is produced as a byproduct from base metal mining. Only 30% of silver is produced as a main product. Primary silver producers I monitor include Pan American Silver (PAAS), Silver Standard (SSRI), Hecla Mining (HL). Based on current silver price, I hardly see these primary silver companies make profits. Some silver companies have already started shutting down unprofitable mines. More over, even those mining companies that produce silver as byproduct, are now unprofitable, due to raising costs and weaker pricing of their main base metal products. As these companies are forced to reduce or shut down their base metal operations, it will also reduce the silver supply. So silver is definitely under-priced now and it is a better buy than gold.

But platinum, especially palladium, is extremely under-priced now, if you understand who produce these metals and what their cost basis are, and particularly if you understand the continuing South African electricity crisis. South Africa produces 85% of the world's platinum, and 35% of palladium. According to a recent survey, SA's PGM industry average cash cost is about US$1000 per ounce basket PGM metal (60% platinum, 35% palladium and 5% rhodium). That was based on one year old data. Today, due to high inflation rate in SA and US dollar depreciation, the cash cost is probably close to $1200 per ounce basket metal. Adding administrative overhead cost, the total operating cost is probably some where in the neighborhood of US$1350 per ounce basket metal.

Today's market price of the basket PGM metal price is $870 (=$1000*60% + $200*35% + $4000*5%). That's way below the $1350 needed for profitability of the SA's PGM mining industry. No business can operate at heavy loss indefinitely. The market must soon start to pay better prices, or SA will be forced to reduce production or shut down mines. I am wondering why they have not already done this. It would help ESKOM to reduce electricity load and help they profit! But I think it is only a matter of time they will do something.

When it comes to palladium, the world's largest producer is a nickel mine in Russia, Norilsk Nickel (NILSY.PK), with main product nickel and copper. Let's look at their cost basis. In 2007, the Norilsk mine's total operating cost was US$8.5B while metal sales revenue was US$14B. Using today's depressed metal prices, the metals would sell for only US$7.7B, while inflation will bring the cost higher to US$10B, making Norilsk totally unprofitable today. Norilsk's share price plummet reflect the reality of heavy operational loss at current metal prices.

Not to mention the incalculable cost of environmental destruction, as Norilsk is ranked No. 7 on the list of the TOP TEN most polluted places on earth, contributing a whole 1% of the world's sulfur dioxide emission. The pollution is so bad that there is not a single live tree or fish within a 48 kilometers radius from the mine! Why should such a heavy polluter continue to produce, if it can not at least turn a profit? Mr. Alexander Bulygin, RUSAL CEO, after visiting the site recently, issued an open letter calling the environmental situation as on the "brink of catastrophe".

According to an information bit that Jack Lifton discussed in his article, shutting down the now unprofitable Norilsk mine, and hence removing 45% of global palladium production, is now quite a strong possibility. A news story on Sep. 30, 08, where Mr. Anton Berlin strongly hinted at Norilsk's intention to cut production soon in response to weak nickel price, further enhances such a possibility. Remember I first mentioned Mr. Anton Berlin on June 12. At the time his comments caused a knee-jerk reaction in the global palladium market.

If Mr. Oleg Deripaska, who currently own 25% of Norilsk, gets his way and shut down Norilsk mine to clean up the pollution and wait for nickel price to recover, it will be the ultimate Russian Checkmate in the global palladium market!

Could such a Russian Checkmate happen? Could it not happen?! Why the Russians should continue to produce this environmental catastrophe, at a heavy operational loss, and for how long?

We are talking about a narrow market where industrial demand already exceed supply, and now 45% of that supply is further removed! I can't even imagine how high palladium price can go! Remember it took less than 4% shortage to jack up rhodium price from $300 to $10000!

In 2004, Norilsk acquired a 54% stake of Stillwater Mining (SWC), America's ONLY producer of platinum group metals, strategic materials of extremely critical importance to the nation's security, especially at war time, after some highly political negotiations involving Bush and Putin. Norilsk promised it was a purely non-political business deal. There is no Russian face on the board of SWC. But Norilsk's strategic aim of dominating over 50% of the global palladium supply is crystal clear.

Are the Russians going to use their monopoly power for profit, or would they rather act like a Santa Clause, operating a global charity organization, polluting their own fatherland and providing the world with cheap palladium at a price far below cost? The answer is clear.

In light of recent plummet of platinum and palladium prices, I have never seen a commodity market so completely rigged to the opposite of fundamentals, defying every logic and rationality. Palladium is now so under-valued that you look around the world, there is not a single palladium producer who can produce the metal and make a profit: Not Norilsk; not any South African PGM mine, not SWC and certainly not PAL. They all produce at potentially heavy loss now. This is not the normal affair of any market.

Can you name another commodity which every single one of the producers in the world is producing at a heavy loss? Have you seen another commodity price chart like this one, or this one, where price shot up on a straight line and then fall perpendicular down?

The excuse is lack of recent ESKOM news so people assume they have fixed South Africa's electricity crisis. I know better. Another excuse is slow economy and high gasoline price suppressed auto sales and reduced PGM metal demands in the auto catalytic converter sector. I know it's not true. Globally auto sales is still growing due to strong demand in emerging economies offsetting any fall back in western markets. According to General Motors (GM)'s own data, in the US market, even though GM delivered fewer vehicles to dealers in September comparing with a year ago, at the retail level, the retail sales were 303,300 in September, up from 255,744 in last September. That is 18.8% up y-o-y.

The credit crisis forced auto makers and dealers to massively reduce inventory, but people still need vehicles for their daily needs. Higher gasoline pushes up demand from people to junk their oil guzzlers in favor of a new fuel efficient car. Even for those people who decide to keep their old vehicle longer, the catalytic converter in their old vehicle will be unavailable for recycling, so it doesn't change the PGM supply/demand balance.

More over, the lesson from the year 1980 is that although auto demand did collapse that year, platinum and palladium price nevertheless run to a peak together with gold and silver, as investors hoard all precious metals as safe haven assets at that time. When there is significant investment demand of the physical metal, the industry demand becomes a moot argument.

Absurdity is now the norm of the marketplace. Like in the global coal market, I discussed on June 20th, 08 that the global coal supply and demand is largely balanced, with abundant coal reserve. I did not know how the coal price managed to triple in a few months, and called for folks invested in coal stocks, like ACI, ANR, BTU, CNX, FCL, FDG, JRCC, to take profit. The call was proven to be timely. The plummeting dry shipper stocks, like DryShips (DRYS), suggests there is not a lot of coal shipped across the oceans, so US coal market remains a local market. Amid a looming US economic depression, I see the US coal market as bearish in short to mid-term. Get out of any coal stock at the next rally! I am seeing JRCC dropping to the low $10-ish, for example.

Natural gas is a different story and remains bullish due to fast depletion of conventional natural gas sources, and drop of imported LNG volume. I own some NGAS and UNG by the way.

Needless to say I am still heavily invested in SWC and PAL, two of my favorite palladium stocks, and I suffer heavy losses in them. I have repeatedly checked my original thesis of a palladium super bull market but could not find anything wrong. I still believe this is one of the best investments I can find in short term, so I am sticking to my convictions. Is it any strange that today logic and rational thinking has been replaced by manipulation, distortion and absurdity? Otherwise we would not have a global financial crisis like we see today. At the end of day things will have to return to the way natural laws mean them to be. As billionaire Mr. George Kaiser is still patiently holding nearly a majority stake in PAL, I think I have patience to wait for natural things to happen as well.

Full Disclosure: The author is heavily invested in SWC and PAL, and also owns OMG, SLV, PAAS, HL, SIL, NGAS and UNG.

Principles of Wealth Preservation Through Physical Assets

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

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

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

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

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

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

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

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

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

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

A Commodity's Intrinsic Value Is the Cost of Replacement

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

Supply and Demand Drives the Price

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market Manipulation and Extreme Volatility In Commodities

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

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

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

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

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

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

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

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

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

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

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

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

A Diamond Is Forever!

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

A Diamond Is For every one!

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

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

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

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

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

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

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

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

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

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

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

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

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

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