BP Well Pressure Test Proves a Leak Exists Under Seabed!

BP scientists puzzled on why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected 8000 to 9000 PSI pressure, but reached only 6700 PSI after the first 24 hours and 6745 PSI after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.

BP scientists offer only two possible explanations:
1. There is a significant underground leak from the well.
2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.

I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so slow for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should promptly raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.

Let me explain the basic physics how fast the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.

How fast the pressure builds up to equilibrium level depends on three things:

1. How fast the reservoir oil can gush in under the pressure difference. The faster the oil gushes, the faster the pressure builds up.

2. How big a volume the oil in the well is confined to. The more room there is, the longer it takes to squeeze in extra oil to build up the pressure.

3. How compressible is the oil. The less compressible the oil is, the harder it is squeeze extra oil into the volume and therefore the faster the pressure reaches equilibrium.

Based on the estimate that reservoir oil was gushing into the well at a flow rate of 50,000 barrels per day, the total confined volume of oil the well is no more than 6500 barrels. And the compressibility of that amount of oil (liquid is not very compressible!) gives no more than 50 barrels extra space under full pressure. It takes roughly 3 * 50/50,000 of one day, or roughly 5 minutes, for the pressure in the well to build up to equilibrium level.

But now it's taking much longer than 5 minutes, and the pressure is far from stabilized yet. At the start the pressure was at 5000 feet deep water pressure level, or 2250 PSI. After the first 24 hours it reached 6700 PSI. After 48 hours it was 6745 PSI. After 72 hours it was 6775 PSI. Now after 4 days it's nearly 6800 PSI. The fact it is raising so slowing, and the pressure fails to stabilize, is a very troubling sign.

The data tells us that the oil is confined in a volume way much bigger than just the well itself. As the oil gushes into the well, it simutaneously leaks out of the well, through a pierced opening, into a way much bigger pocket of storage within the seabed rocks. This is why the pressure builds up extremely slowly. Lots of oil is being squeezed out through the leak point into the giant pocket in the seabed, to build up the pressure there slowly over time.

There is no question that the well casing is compromised and there is a huge leak some where in the well casing.

So why can't BP spot any seepage of oil out of the sea floor, if the oil is leaking out of the well into the seabed? That's because the well itself is 3 miles deep under the sea floor. If the oil seeps through the seabed and leak out from sea floor, it does not necessarily come out of the vicinity of the well site. It can come out at ANY spot within a roughly 3 miles radius from the well site. That is a pretty wide area to look for leaks. It is also pitch dark at the sea floor, the ROV video camera must use artificial lighting and can not see more than a living room's area of sea floor at at time.

if there is one single leak out of the sea floor within a 3 mile radius, it will take forever for BP to discover it using those under-sea ROVs. If BP find one leak, that means there must be hundreds of un-discovered leaks out of the sea floor!

What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.

As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.

It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.

Full Disclose: The author currently owns a small short position of BP. But my main stock portfolio are on long positions on my favorite palladium mining stocks, SWC and PAL, as well as silver mining stocks such as SSRI, CDE, PAAS. The author does intend to increase BP shorts over time, if there is significant recovery of the BP stock price.

Warning to BP: Stop the Relief Wells Or Expect a Much Bigger Catastrophe!

I issue a serious warning to BP: Stop it right now, do NOT drill the last few feet of the relief wells. Do NOT punch that hole through. Think everything through very carefully! If BP proceeds to puncture the hole through to the original blowout well, it opens up a Pandora's Box which may lead to a much bigger catastrophe than any one has ever bargained for!

BP must halt now and invite all experts for a good debate on exactly what could happen. Build a computer model and test all scenaries. Build a physical model and run tests on it. BP is foolhardy to just proceed and pray/gamble for a success. Because what could happen is not just another failure, but rather a much bigger catastrophe!

BP explains how a relief well works. You drill another well nearby which intercepts and punches a hole through the casing of the original well, at 18000 feet below sea level, or 135,000 feet below the sea floor. Then heavy mud is injected through the relief well into the original blowout well, filing it up from near the bottom. Since the density of the mud is heavy, the gravity of the mud column generates a pressure enough to counters the pressure of the oil and gas from the reservoir, hence the oil/gas flowis stopped. Once the oil/gas flow is stopped the well can then be sealed off using cement.

It sounds simple. But due the the extreme depth of the well and the extreme pressure from the reservoir, some technical details makes the plan virtually impossible to work. Let me explain.

For the plan to work. BP needs to ensure several things:
1. The mud must have a density heavy enough to counter the pressure of the oil from the reservoir and to stop the flow of oil from the reservoir.

2. The mud must be pumped into the junction point fast enough to prevent it from being diluted by oil and gas coming from the reservoir. See condition 1.

3. The mud must not be too heavy that it seeps down into the fracture of rocks, damaging the rock formation, fracturing the sea floor which releases oil and gas in an uncontrolable way.

4. BP must have enough mud at hand. If it ever runs out of mud it's game over for BP. But not so much mud that it all go down into the rock fractures and causes the sea floor to rupture. See condition 3 again.

I don't see how BP can pull it off.

For the discussion below, let's keep one thing in mind, when liquid flows thorugh a path, pressure drops the further you go alone the path. Part of the pressure is lost to overcome the resistance to the flow. The higher the viscosity (sticker) is, the narrower the flow path is, the more pressure drops along the path. On the other hand, if the liquid is not flowing, then there is no pressure drop due to liquid flowing.

In the first phase of operation, mud is injected from the relief well through the junction point into the blowout well, expelling the oil and gas originally in the blowout well out of the exit point, while stopping the flow of oil and gas from the reservoir below.

When the oil from reservoir is to seep through the rock fractures and then gush out of the blow out well, the pressure at the junction point is way much lower than the reservoir pressure, because it is much harder for the oil to seep through the rock fractures then to flow through the blowout well. Hence more pressure is lost at the rock fractures, than the pressure loss needed to push the oil up through the well. What it means is once the oil below the junction point stops, the pressure at the junction point quickly raises to a much higher level. And BP needs to be able to counter this much higher junction pressure and still be able to push the mud in.

Now consider the path of the mud. It is pushed down the relief well and then it pushes the oil and gas up the blowout well. Note the exit point is free flowing. The pressure of the mud must be high enough that while the mud is flowing at very high rate, it still generate high enough pressure at the junction point to fight the static pressure from the oil in the reservoir. That goal is extremely hard to achieve, because most of the mud pressure is lost in pushing the mud through the resistance of the relief well.

Likewise, the original oil and gas must be pushed to gush out of the blowout well even faster than the free flowing rate, to generate enough back pressure to push back the oil coming from the reservoir. Failing that, the oil will continue to flow from below to mix with the mud, hence diluting the mud entering the blowout well. This, again, is virtually impossible for BP to achieve. We are talking about pushing the mud in at more than twice the rate how free flowing oil and gas gushes out of the blowout well.

To put things into formulas, let's call the pressure at the junction point Pj:

Formula One, Junction Pressure from the Relief Well:
(1) Pj = P(Pump) + P(Mud Column) - Q2(Mud Flow) * Rm(Mud Resistance in Relief Well)

Formula TWO, Junction Pressure from the Blowout Well:
(2) Pj = P(Sea Floor) + P(Oil Column) + Q2(Oil Flow) * Ro(Oil Resistance in Blowout Well)

Formula THREE, Junction Pressure from the oil from the Reservoir:
(3) Pj = P(Reservoir) - P(Oil Below) - Zero (Oil below not flowing)

Let's define net pressures, which is the pressures the three source of liquid would generate at the junction point if we put a flow stopper there, as such:

P(Net Relief Well) = P(Pump) + P(Mud Column)
P(Net Reservoir) = P(Reservoir) - P(Oil Below)
P(Net Blowout Well) = P(Sea Floor) + P(Oil Column)

The relationships can be re-written as such:

(4) (P(Net Relief) - P(Net Reservoir))/(P(Net Blowout) - P(Net Reservoir))
= Rm(Mud Resistance in Relief Well)/Ro(Oil Resistance in Blowout Well)

Let me explain it in layman's English. Let's imagine the reservoir is directly connected to the junction point with no resistance to the flow movement in either direction. The net force that pushes the mud down into the oil reservoir must be pushing the mud down at the same rate that the oil from the reservoir is able to push oil up to gush out of the blowout well, in terms of barrels per day.

I don't see how BP can have mud heavy enough to achieve this goal. The fact that viscosity of mud is significant higher than the viscosity of oil, hense mud flow experiences much higher resistance than the oil flow, makes it even harder.

Now that is just one condition, being able to inject mud and completely fill the blowout well with it, without being diluted by the gushing oil. It requires mud heavy enough. This condition directly contradict another condition, which is that the mud must not be so heavy that it is able to seep into the rock fractures, which requires mud that is not so heavy.

The second condition, preventing mud from seeping into the rock formation, can simply be written as:

(5) (P(Net Relief) - P(Net Reservoir)) <= 0 This second conditon, formula (5), can not be achieved at the same time that first condition, formula (4) is achieved. I predict that BP's relief wells are not going to be successful.

A MORE SERIOUS warning to BP: If the relief wells fail as I predicted, do NOT resort to the desperate act of using nuclear options. If you use nuclear option, there is a good possibility it will trigger chain reaction of methane eruption on a global scale, turning the local catastrophe into a global catastrophe!!!

Full Disclosure:
The author does not currently have any short or long position in BP, but plan to short BP if irrational exuberance pushes BP share price higher leading to the near finish of the relief wells giving people false hope it's going to be successful.

Eco Emissions - Great Innovation and Huge Demand Potential for Platinum Group Metals

There are eureka moments when you slap on your thighes and ask yourself: "Why haven't I thought about THAT!" The time when I first learned about Eco Emissions is one such moment.

But let me first remind people on the on-going and ever worsening Gulf Oil Spill caused by British Petroleum (BP). Many predicts that the disaster is so bad that a BP bankruptcy is a certainty. That includes Matthew Simmons, author of Twilight in the Desert, who calls for a BP demise in a month. I have high respect for Matthew Simmons but I believe he owe an appology to the world for getting his math wrong, by orders of magnitude. I believe that the fate of BP is now a political issue with Peak Oil implication which goes far beyond the mere fate of one big company. If death of BP means the death of the deep water oil drilling industry, there may be political will to save BP after all. But I will not touch BP either way at this moment as there are too many uncertainties. I will discuss when is best time to buy BP in another article.

The real story: Fossil fuels are bad pollutants, both BEFORE and AFTER they are burned. Before the oil is burned, they could pollute the ocean and kill birds. After the oil is burned, carbon dioxide and sulphur dioxide is emitted to pollute the air and destroy rain forests. But if oil is only partially burned, the pollution is way much worse: it results in emissions containing carbon monoxide, a toxic gas which is several hundred times worse than carbon dioxide in its greenhouse effect; and various nitrogen oxides which kills infants and senior citizens; and worse, particulate matters which are cancer agents which causes millions of deaths per year. The world collectively generates a thousand BP oil spill environmental disaster per year by producing and burning fossil fuels, accumulatively killed many times more people than was killed in WW II.

Incomplete burning of fuel is a big problem, it reduces fuel efficiency and creates air pollution. Scientists have worked relentlessly to solve the problem. The biggest progress of ourse is the global adaption of catalytic converters on automobiles. Using PGM metals, platinum, palladium and rhodium, as catalyst metals in catalytic converters, auto makers like FORD (F), GM (GMGMQ.PK), and TOYOTA (TM) are the largest industry users of PGM. What occurs in catalytic converters is basically after-burning: the incompletely burned fuel is once more burned more thoroughly in the catalytic converters, hence it cuts the pollutant emissions.

But catalytic converters do not solved all problems: They do not improve the fuel burning within the combustion chamber and hence do not improve fuel efficiency. More over, ocean traveling ships are currently not required to be equipped with catalytic converters, although there are pending new regulations which may finally impose such requirements on ships and also on gasoline-operated lawn machines.

This is going to change big time, thanks to a startup company called Eco Emissions Systems, founded only in 2008. The idea is simple: just directly introduce the catalyst in the combustion chambers of diesel engines! Doing so makes the fuel burn more thorough and hence improves engine efficiency. It also means less pollutants are emitted into the air. The technology is already there: platinum metal can be use to make nano-solutions containing tiny particles of the metal. The liquid can be turned into moist and injected into the diesel engine combustion chamber through the air intake. The catalyst contained in the moist then meets the fuel and promote the thorough burning, resulting in great savings of fuel cost. A simple idea worth billions of dollars.

At roughly 10% or more fuel savings, a typical dry bulk ship could save $1M per year just in fuel cost. For a shipping company like DRYS, EXM or EGLE, applying the technology on a fleet of 40 ships means a saving of $40M per year. That is a huge boost of their financial bottom line.

Too bad I did not come up with the idea early enough: Eco Emissions Systems already patented the idea globally and they stand to rip huge profit from the patent. Their stock symbol is ECMZ.PK or ECMB.OB. They are already well into business as their systems are being tested on a Holland America cruise ship, before being expanded to the whole fleet. I can see Royal Caribbean Cruises (RCL) and Carnival Corp (CCL) expressing interest soon. According to their web site, the company already has more than $132M documented product demands and that was in 2009, a mere one year after the founding of the company. I can see they grow much bigger! Who would not like the idea of saving cost?!

I would like to come up another novel idea which might be worth billions of dollars as well, but instead of patenting it I would give it out for free to big oil companies like BP, XOM and CVX: Why not simply add the platinum containing nano-solution to the diesel fuel itself, and hence achieve the same fuel efficiency improvements, without the need to retro-fit existing diesel engines to modify the air intake system? This way, their diesel fuel products will be more competitive. But then I guess the big oil may not like the idea: they want consumers to pay higher prices for oil and burn more fuels, not less. But if an idea can save consumers money, it will catch on like wild fire, regardless whether big oil like it or not.

Where is the investment opportunity here? The Eco Emissions technology, and similar technologies that put PGM catalysts directly into fuel combustion chambers can create huge demand for the PGM metals! Even though only a small amount of platinum is consumed, consider the fact that the world consumes one cubic miles of oil per year while producing no more than a cube of 8 feet worth of platinum annually, this new demand on PGM metals could mean paradigm shift in the global supply/demand picture, sending the prices skyrocketing.

How do you invest in this opportunity? Venture capitalists might want to talk to Eco Emissions Systems and get a good gauge what their growth potential is. For average investors, it's time to hoard physical platinum and palladium, and invest in two physical metal backed ETFs: PPLT and PALL. More leveraged play would be investing in stocks of platinum and palladium mining companies, like South Africa's Anglo Platinum (AGPPY.PK) and Impala Platinum (IMPUY.PK). Some one keeps refering Norilsk Nickel (NILSY.PK) as a palladium play. But even though I keep mentioning Norilsk Nickel as the world's largest palladium producer, they are a nickel play, not a palladium play, as palladium is only their by-product.

Of course, my most favorite PGM play remains Stillwater Mining (SWC) and North American Palladium (PAL). They are closer to home in North America, and they are the world's only primary palladium producers. SWC recently published a market study, A Case For Palladium, which documents how various factors, like the termination of the decades long Russian government palladium stockpile sales, and ongoing South African electricity crisis, could create a ten year bull market in palladium.

More than 95% of my 401K retirement account is invested in SWC and PAL, mostly SWC. I keep hearing people calling me crazy on that. One day they will know it's crazy not to have a big chunk of that stock in your portfoio, knowing the huge potential in palladium. Cold Fusion which uses palladium was considered a crazy idea to begin with, but it's now getting more and more acceptance in the mainstream. Peak Oil is still considered a crazy idea by most, but it is a looming reality right now right this moment. All great investors were called crazy at certain point of their investment career. Warren Buffett was called crazy putting all his eggs in just one busket, purchasing that bankrupt textile mill no one heard about. He was crazy. But the company by the original name which is now known globally is totally out of the textile business and into quite something else. You know the rest of the history of Berkshire Hathaway (BRK-A and BRK-B).

Full Disclosure: The author is heavily invested in SWC and PAL and own palladium metal bullion coins. The author also owns shipping stocks mentioned: EXM and EGLE. The author currently has no position in BP or other stocks mentioned and has no connection to Eco Emissions Systems other than learning it from the news.

Debunking the Shrinking M3 Money Supply Myth

Recently an article published on the UK newspaper Daily Telegraph received wide-spread global attention and debate. The article titled US money supply plunges at 1930s pace as Obama eyes fresh stimulus and claimed that M3, the broadest measure of total US dollars in circulation, is shrinking, rather expanding, at rapid pace.

The claim of a shrinking M3 can not stand the scrutiny of logic and fool even a three year old child. The US Treasury Department has been conducting bi-weekly treasury auctions of unprecedent and astronomical amounts. The treasury auctions never fail. There are always willing buyers bidding for the US treasuries at pathetically low, almost zero yields.

Regardless who those misterious US treasury buyers are and why they are buying at such low yields, any one who buys US treasury must tender US dollars to buy the treasuries. The money tendered must be US dollars in one form or another and hence must be part of the circulating M3 of US dollar.

If the total M3 is shrinking, where does the spare money come from that buys the US treasuries? Coming out of thin air? And where does the money go once they are tendered to the US treasury Department? Vanish into thin air again? A shrinking M3 makes no sense at all.

Now where does the idea of shrinking M3 come from? Read the history of M3b here. Notice that the FED stopped publishing statistics of M3 as of March, 2006. So there is no longer any official data on M3 after March, 2006. Any M3 number we see after the FED stopped publishing it, are NOT official numbers, but mere the guess work of private parties. These unofficial M3 numbers, or M3b, thus may not be accurate.

I studied how M3b is constructed ever since it was first published. I believe the person who originated the formulation to calculate M3b made a fatal mistake which renders the data useless.

That is, an important component of M3 is the so called eurodollar. Do not be mislead by the suffix "euro" in the word eurodollar. It has nothing to do with Europe or euro. Eurodollar means all US dollars outside the US territory, i.e., US dollar deposited in foreign banks or held by foreign individuals and organizations.

The official statistics of eurodollar is no longer published by FED. Without this data you can not construct the total M3. The inventor of M3b get around this problem by noting that eurodollar constitute only 3% of M3, and assumed that eurodollar is either a constant, or fluctuate only slightly with oil price.

Such assumption might be true a few years ago before the current global financial crisis. But it is absolutely wrong now. Eurodollar is no longer only a small percentage of total M3, nor is it just a constant. Trillion dollars worth of money is dashing around the world, rushing across borders in so called Hot Money, seeking safe havens and investment opportunities some where else. More over, the FED itself enacts numerous currency swap agreements with foreign central banks, exchanging huge amount of one kind of printed color paper funny money with another kind of printed color paper funny money.

How could any one still believe that the total amount of eurodollar is still small, and is still nearly constant? With all the US dollar rushing across borders?

The so called shrinking M3b tells one true story which is that huge amount of money is escaping from the US soil and going to foreign land. The M3 within the US boarder may indeed be shrinking, despite of the FED's mad printing of money, thus draining the money supply within the US boarder, causing an illusion of monetary deflation in the USA. But the money does NOT disappear. It simply gets hoarded up by foreigners and foreign central banks. Countries like China doesn't like to hoard more US dollar at all, despite of being forced to do so. China is trying all it can to block the inflow of US dollar hot money.

The total US dollar M3, globally, is NOT shrinking, but expanding rapidly. No one has an accurate account of the amount of hot money flowing around. Monetary inflation in countries like China and India are rampant. Eventually when foreigners have it enough, all those overseas US dollar will be flooded back home, causing hyperinflation in the USA.

The temporary illusion of monetary deflation in the USA is only a prelude to the looming hyperinflation to come when the eurodollars come back home. It is like rapidly receeding water right before a tsunami hits. If you are on a beach and you see suddenly receeding water, don't rush in to pick sea shells, immediately rush to the high ground for your dear life! When you actually see the water coming back, it is already too late!!!

People need to protect their financial lives by hoarding physical precious metals: gold, silver, platinum, but best of all, palladium is my favorite precious metal, before it is too late and inflation sign is already seen by every one.

China Now a Failed Seller of Its Treasuries

I intentionally made this title to rhyme with the title of my last article "China Now the Biggest Seller of U.S. Treasuries". On April 9th, 2010, ZeroHedge published a new article that caught my attention: Gray Swan? Chinese Bill Auctions Fail. Basically China tried to sell a very small amount of very short period treasury bills of its own, CNY15 billion of 91-day bills and CNY20 billion of 273-day bills. But it failed to attact enough interest in the treasuries.

China wants to borrow some money and could not find a willing lender? You would expect it to happen to Uncle Sam instead, wouldn't you? A few days ago Seeking Alpha author Chris Martenson, in The FED's Shell Game Continues, was poundering exactly who is lending trillions of dollars to the US government. That's a well researched paper worth reading.

Would I be lending a couple of million dollars to my rich next door neighbor, if I need to borrow a couple thousand dollars myself? Probably not. I will lend money if I have the excessive liquidity, and I trust that the one I lend the money to will be able to pay it back. If I need to borrow money to spend, why would I have anything to lend to some one else? The same should apply to organizations and even nations.

The question people need to ask is: exactly who in the world has the capacity to lend trillions of dollars to the US government, in the form of purchasing the US treasuries? Foreign governments?

WHICH foreign government in the world runs a budget surplus, and hence has excessive money to lend to the USA?

Is it Japan? No! Japanese government runs a huge budget deficit and it is more than 700 trillion yen in debt? Is it UK? The UK government runs such a huge budget deficit and it is so deep in debts that Jim Rogers sees a collapse of the British pounds in months. Is it China? The Chinese government isn't shy in running budget deficit and print money out of thi air either. Where do you think they get the 4 trillion yuan economic stimulus money to spent, if it were not printed out of thin air?

I could NOT name a single government in the world who runs a budget surplus. Can you? No one runs a budget surplus. So why would any of these countries have any excessive money to lend to Uncle Sam?

It's the people who have the money. People who work hard and save their money to build a wealth. These people themselves would not be buying the US treasury using their money, because they know better usage of their money than lending it to some one who has no credible capability to pay it back in real term. But they trusted their governments and their banks, they gave their money to the Chinese government, and to the banks, thinking their money is in the hands of a good steward. But then the central banks turn around and betrayed their trust, and used the money to buy US treasuries.

The same story happens in the UK, in Japan, and also in the USA. All the American people who think they still have their money in the good hands. Well think again! Some where behind the back doors your money is already quietly lended out to Uncle Sam, without you knowing it. No wonder Uncle Sam would never fail to find willing lenders in each of every massive US treasury auctions. China could fail a treasury auction, but never could the US Treasury Department.

It's all a Ponzi Scheme on a global scale.

I just wonder how longer can it last before the scheme collapses.

Physical precious metals and other physical assets hold in your own name, is the only safe haven to protect your financial wealth. Equities of companies producing these safe haven assets, is how you make money from the looming crisis.

Norilsk Nickel Metals Production Projection for 2010

Russia's Norilsk Nickel Mine (NILSY.PK) is the world's largest nickel mine, with its by-product palladium account for 45% of the world’s mine production.

Recent termination of Russian government palladium stockpile sale, due to depletion of the stockpile, is just one of the reasons why palladium has extremely bullish supply/demand fundamentals, and why palladium performed the best among all four precious metals in 2009.

Reduction of palladium production from Norilsk Mine could further restraint the supply, and may prompt major industry users to panic hoard like in 2000/2001.

One must correctly project Norilsk Nickel's 2010 metals production, to have an accurate picture of global platinum and palladium supply/demand outlook for 2010.

Norilsk's Russian operation has two divisions, the Polar Division, which produces platinum and palladium as by-products, and the Kola Division, which contains only nickel and copper.

The Polar Division proven reserve mineral ore contents are as following:

Ore Type	Ni (%)	Cu (%)	Pt (g/ton)	Pd (g/ton)	Cu/Ni Ratio
Rich	2.86%	3.98%	1.49	7.04	1.392
Cuprous	1.13%	4.58%	2.57	10.80	4.053
Disseminated	0.49%	0.89%	1.45	3.97	1.816

There are mainly two types of ores, as disseminated is insignificant:

1. Rich type, which is rich in nickel but poor in copper, platinum and palladium content.


2. Cuprous type, the opposite, poor in nickel, but rich in copper, platinum and palladium.

In the past I pointed out that Norilsk was switching to the rich nickel ore to cut cost and increase nickel revenue, or simply due to the geology structure of the ore body being mined.

The effect of the production switch is that for the same amount of nickel, much less copper, platinum and palladium will be produced, as I predicted.

The data in the past two years and Norilsk’s own projection for 2010 have confirmed my prediction. The ore type switch can be closely monitored by looking at the Copper/Nickel production ratio and see how it changes over time.

Here are the Norilsk Nickel Russian production (Polar + Kola Divisions) over the years, plus 2010 projections:

Year	Ni (tons)	Cu (tons)	Pt (troy oz)	±%	Pd (troy oz)	±%	Cu/Ni
2005	243,000	427,000	751,000		3,133,000		1.757
2006	244,000	425,000	752,000	+0.13%	3,164,000	+0.99%	1.742
2007	234,454	404,465	727,000	-3.32%	3,049,000	-3.63%	1.725
2008	232,302	400,338	632,000	-13.1%	2,702,000	-11.4%	1,723
2009	232,813	382,443	636,000	+0.63%	2,676,000	-0.96%	1.643
2010*	234,000	363,000	655,000	+2.99%	2,715,000	+1.46%	1.551

(* Based on Norilsk Nickel projection for 2010)

We are interested in palladium, so we want to see only the productions of the Polar Division. After subtracting the Kola Division, here are the numbers for the Polar Division:

Year	Ni (tons)	Cu (tons)	Pt (troy oz)	±%	Pd (troy oz)	±%	Cu/Ni
2005	123,000	361,000	751,000		3,133,000		2.935
2006	122,000	351,000	752,000	+0.13%	3,164,000	+0.99%	2.877
2007	119,000	338,000	727,000	-3.32%	3,049,000	-3.63%	2.840
2008	122,000	339,000	632,000	-13.1%	2,702,000	-11.4%	2.779
2009	122,813	321,443	636,000	+0.63%	2,676,000	-0.96%	2.617
2010*	124,000	302,000	655,000	+2.99%	2,715,000	+1.46%	2.435

(* Based on Norilsk Nickel projection for 2010)

As shown in the chart, nickel production is maintained pretty flat over the years. However the copper/nickel ratio consistently dropped. The drop of the Cu/Ni ratio accelerated since 2008 and continues to go significantly down in 2010 projections.

As a result, I predict Norilsk’s palladium production in 2010 will not raise slightly as projected by Norilsk Nickel itself, but rather should continue to drop significantly from 2009 level, commensurate with the drop of copper/nickel production ratio.

I am predicting a palladium production level at 2.55M ounces for 2010, and platinum at 600K ounces level.

Is it ridiculous that people should believe my prediction, rather than Norilsk’s own prediction? From early 2008 on, based on my observation of the ore type switch, I insisted on my prediction of Norilsk palladium production at 2.7M level for 2008.

But Norilsk re-iterated, in its Q1 production release, that it’s on target to reach 2008 palladium production level at 3.02M to 3.07M ounces. In the Q2, 2008 report they still insisted that previous full year projections were unchanged. In Q3 they did not revise annual guidance either. When the final result of 2008 came out to be 2.7M ounces, I was right, Norilsk Nickel was wrong. Why would they insist on a wrong and overly optimistic guidance, is beyond me.

The bullish case of the global palladium market now looks even better.

Investors in the world’s only primary palladium producers, Stillwater Mining (SWC) and North American Palladium (PAL), will stands to profit from the expected palladium price surge in 2010.

After falling for a continuous 8 days for a healthy correction from recent high, it’s now time to buy back these two stocks, SWC and PAL.

Data sources:
Norilsk Nickel Company Web Page
Norilsk Nickel Production Result Releases
Norilsk Nickel 2009 Production and Projection for 2010
Norilsk Nickel Mineral Reserves and Resources Statement
Norilsk Nickel Mining Operations

Full Disclosure: The author hoards physical precious metal palladium, and hold large positions in SWC and PAL. 95% of my 401K account is in SWC and PAL.

Unwinding of Currency Swap = Looming US Dollar Crisis!

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Why palladium? FOUR things make palladium extremely bullish:

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

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

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

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

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

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

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

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

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

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

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


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