Friday, June 22, 2012

Opportunity Is Knocking in Both Gold and Platinum

Some investors in gold, silver and platinum are panicking over big price drops on Thursday, August 4. A lot of weak hands, who speculate across different markets, got hit with huge margin calls as the DOW (DIA) industrials plunged 513 points, with similar losses on the NASDAQ (QQQ) and S&P 500 (SPY) indexes. That caused a big sell-off, which caused a big drop in price as big moneyed short sellers opportunistically sent out their trading bots to capitalize on the event. Big sell offs, however, are not to be feared. They are to be embraced.

Even given probable implicit Federal Reserve backing, and even though they will take every opportunity to make a quick buck… short sellers are too smart to bankrupt themselves trying to prevent gold from rising. They are liquidating short positions into the margin call selling. They know that, in the long run, with repeated episodes of quantitative easing and cash injections by the Federal Reserve, Bank of England, Bank of Japan and the ECB, people are slowly but surely losing more and more faith in fiat currencies, no matter what country happens to print it. The process is just beginning. Even the central bank printers are buying gold, and the manipulative short-selling crowd knows it.

Gold is headed much higher and, in the long run, it is going to lift all precious metals along with it. Russia, Kazakhstan, Greece, Ukraine, Thailand, and Tajikistan added large amounts of goldto their reserves in the past few months. If short sellers at COMEX or the LBMA send out their trading bots to collapse gold prices again, as they did in 2008, they will find an eager group of “speculative” traders to take those new long positions and not give them back. There is nothing that would stop what at first glance might appear to be a mere speculative trader, from having hidden contracts for the sale of gold to various emerging market central banks. They could buy and buy, each limited only to his own speculative position limit, and force the derivatives dealers to physically deliver. That is why it is safer to close short positions, rather than push the envelope.

Aside from that, the wiser minds that exist at the Federal Reserve and its cable of cooperating commercial banks must realize that the only way for the United States to recover and pay back its debt is to debase the current Federal Reserve Note. Some are probably in favor of a continued rise in the price of gold. Given huge gold reserves, if the price of gold rises high enough to cover all American dollars, the U.S. government can eventually switch back to a gold standard, without admitting that it had no choice in order to stabilize the world economy. Quantitative easing is inevitable in order to speed up this process of dollar debasement, although it will probably come, in the future, under another name. Out of the ashes, gold will rise back to its historical status as the world’s only real reserve currency, and that means $10,000+ per troy ounce prices. This process will take years. Prices will fluctuate up and down as western central bank-connected price manipulators unleash trading robots for periodic attacks on the precious metal prices. But, in spite of ups and downs in the short term, as we are now seeing, the overall trend will be sharply higher because that is the only way the price can go, given the unsustainable debt load of all western nations. This will continue over the next 5-10 years at least.

Sometimes, in spite of the fantasy nature of the prices created at futures markets, we can learn things by following them carefully. On July 18, 2011, with the price of platinum hovering around $1,740-60 per ounce, this author made a prediction of a short-term sharp upward movement in platinum prices. Certain anomalies in NYMEX trading flows and a pseudo-backwardation of platinum prices, at that time, made this very likely to happen. The price rise was shorter-term than expected, and not as high, but, a few days later, the probability of large-scale strikes in the South African platinum mines became widespread news. The pricing anomalies described in the article published at that time were probably the result of a deeper knowledge of this situation among short sellers, than among the general investing public. The price of platinum rose into the low $1800s for a while, but has come back down as the likelihood of a settlement grows more real. Yet, even as speculative fervor is falling, strike risk still looms in the South African electricity sector, in the event of which, production of platinum will be crippled, regardless of any direct settlement between mining companies and striking workers. The price may well suddenly rise by a few hundred dollars per ounce, pushed upward by a strike in the platinum mines or in South Africa’s electric plants.

This author occasionally makes comments on the short-term direction of gold, silver and platinum. However, he repeatedly warns people not to risk any more on such speculations than what they would be willing to lose In gambling in Las Vegas. Individuals and non-connected banks, funds, and insurers will never be able to reap big profits by trading daily, weekly or even monthly no matter how accurate they may be on some of the ups and downs. Both profits and basic nest egg security can only be achieved by following long-term trends and gritting one’s teeth when the inevitable bumps hit along the way. Neither small investors, nor banks, insurers and/or funds that are not corruptly connected to Federal Reserve officials, can compete against the small set of players who do have deep and corrupt connections with that entity and the U.S. Treasury, as well as the Bank of England and ECB. Only people who know tomorrow’s news before it happens, and/or are in a position to help create the news, are able to reliably make money from short-term trading. For the rest of us, one big gain will surely be wiped out by the next loss.

With that in mind, there is only one key point that long-term investors can glean from the settlement of the recent labor action in South Africa, and it has nothing to do with timing the platinum and/or gold markets. The key is that the cost structure for gold and, even more so, for platinum miners is continually pressured upward by higher and higher wage demands coupled with ever-increasing commodity and energy prices. The problem of steadily increasing costs is more acute for platinum miners. Platinum is so rare that a lot more ore must be taken from the ground to obtain an equal amount of purified metal, and this costs more to do. For example, if platinum were to fall below $1,650 for a few months running, a platinum shortage would be the immediate result, because several of the high-cost mines would be forced to close. Demand for physical platinum (regardless of what happens in the paper NYMEX and London OTC derivatives markets) would continue to rise quickly, and the price would explode, resulting in the reopening of those mines and profits for platinum investors.

Of all the precious metals, including gold and silver, based on current prices, platinum is likely to rise most over the next 10 years. This is due to a number of important factors, working together. For example, even though overall U.S. passenger cars were uneven in July, 2011, diesel sales in the first half of 2011 amounted to 47,873, exceeding the first half of 2010 by 39%. Right now, in spite of an ongoing process of substitution for gold jewelry as the price of gold rises, catalytic converter manufacturers are the largest platinum users in the world. Diesel engine emission systems require 8 times as much platinum, on average, as gasoline engines.

Some people think that diesel is a phenomenon affecting only the upper end of the car market, but this is not true. Mid-priced auto maker, Volkswagen (VLKAF.PK), has seen increased sales volume of 42%, indicating clearly that diesel buyers are not confined to high income groups interested only in luxury vehicles. If we make a conservative assumption that sales will continue to increase at about this pace, without consideration of the fact that more diesel models are being announced for the North American market, about 108,249 small diesel passenger vehicles will be sold in 2011. This is 39% higher than 2010 total of 77,877.

Given a steady rise in gasoline prices, inherently greater efficiency of diesel engines, continuingly deeper American market penetration by the Volkswagen brand, and the new diesel models being announced for 2011 by Fiat-Chrysler, the 2011 numbers could end up higher than that. Meanwhile, Ford Motor Company (F) introduced a diesel powered Ford Fiesta to the U.K. market, in 2008, that gets 73 mpg. It vowed, at that time, and many times afterward, that it did not intend to ever release a small diesel car in America. Ford is now back peddling. On August 1, 2011, a Ford executive stated, publicly for the first time, that the company intends to introduce diesel powered cars, “if there’s market demand.” Obviously, based on the sales increase at all auto makers who already sell small diesel cars in America, the market demand exists. We expect Ford to introduce some of its very successful European diesel models into the US market very soon.

A Fiat-Chrysler diesel engine debuted in America in June 2011, and a diesel version of the Chevrolet (GM) Cruze will be available in 2013. Mazda (MZDAF.PK) has announced that its so-called “SKY-D clean diesel” will also be on sale in North America during the 2013 model year. Many more diesel models are planned for the American market to meet new Congressional fuel efficiency standards (CAFÉ). With the high price of oil likely to continue in the long run, regardless of sharp reversals in the shorter term, and as government “miles-per-gallon” requirements rise, new models will stream out of Audi, Volkswagen, Chrysler-Fiat, Mazda, General Motors and Toyota (TM). Fiat says it will offer the newly debuted American turbo-diesel, as an option on light-duty trucks, in over 40 countries.

J.D. Power & Associates estimates that North American market share of small diesel engines will more than double from 3.1 percent in 2011 to 7.4 percent by 2017. This translates to about 888,000 diesel vehicles (assuming U.S. production stalls at 12 million per year in spite of population increases), and an increase of 516,000 diesel cars in America alone. Because palladium cannot be fully substituted as a diesel catalyst, each vehicle will require an average of 8 grams of platinum per catalytic converter, compared with only 1 gram in a gasoline vehicle’s emission system. From the standpoint of platinum demand, this is the functional equivalent of a net increase in platinum demand of 133,000 troy ounces.

The calculation we have just engaged in involved ONLY American car sales. Auto industry executives in India, as well as similar emerging economies, predict an exponential increase in the market share of diesel-powered passenger vehicles. For example, Suzuki-India’s chief general manager of marketing and sales, Shashank Srivastava, says that while diesel powered engines accounted for 23% of India’s car sales in the 2005 model year, they currently amount to about 30%, and are expected to rise to 45 to 50% of total sales, within 3-4 years.

According to Wikipedia, India produced 3.7 million units in 2010. Of these, 30% were diesel powered, or 1,110,000. With a sharp rise in lending rates caused by the Indian central bank’s attempt to righten credit, Indian car production did fall in July, 2011. However, it rose by 33.9% in 2010. Now that the central bank sees that its efforts have led to a slowing of growth greater than expected, it is likely to ease up. Assume that vehicle production growth moderates to 10% per year. If we assume that the percentage market share of diesel increases as industry sources say it will, by 2015, slightly less than 1 million additional diesel-powered vehicles will be produced each year.

The Indian government imposed more stringent “Euro 4” standards as of 2010. This compares to the even more stringent Euro 5 standard imposed by the EU nations as of September 2009. But, research indicates that a Euro 4 diesel catalytic converter on average requires a platinum load of approximately 6 grams compared with 8 grams for a Euro 5 converter. It is entirely likely that India will raise its standard to Euro 5 by 2015, but even if we ignore that probability, a minimum of 190,000 extra troy ounces of additional platinum will be needed to service the needs of India’s expanding light duty diesel production.

We have now shown that with no overall auto sales growth in America, and minimal growth in India, those two nations, alone, will require an additional 323,000 troy ounces of platinum per year by 2017. The net will probably be higher than that, because we have extrapolated to 2017, whereas the Indian numbers will continue to rise, after 2015. Add in China, and the rest of the developing world, and we will probably need another 300,000 ounces. But, to this we must add another 750,000 to 1 million ounces per year, because of new requirements that heavy off-road diesel vehicles be fitted with catalytic converters in both North America and Japan. Platinum mining supply has stagnated for the last 10 years in the 6.1 million ounce range, in spite of quadrupled prices. If will be nearly impossible to find well over 1 million ounces of additional platinum supply by 2017, without huge price increases above and beyond the level of general inflation.

Indeed, Euro 6 standards are set to go into effect by September, 2014, in the EU nations. That is going to require even more platinum (and palladium also). Meeting the stringent air quality standards of Euro 6 is going to require an even higher weighting of platinum in every diesel engine catalytic converter, perhaps more than 10 grams of platinum per average vehicle converter. Thus, even if diesel sales in Europe go down and this is not likely in light of big sales increases in the eastern part of the union, the net platinum demand in Europe is likely to be up or, at the very least, flat.

Yet, as we noted above, getting both gold and platinum out of the ground is getting more expensive every year. The easily available ore has already been mined, and existing mines must be dug ever deeper. Lower quality deposits are now being developed into mines, and, in spite of prices that have hovered between $1,700 and $1,850 per ounce, at least one company has recently abandoned a new platinum deposit because the current price does not warrant its development. Threatened non-compensated expropriation of shareholder property, in favor of “indigenization” is a huge problem in Zimbabwe. Threats of compensated nationalization inhibits new gold and platinum mine development in South Africa. Digging mines deeper and opening new mines for lower quality ores involve increased energy and labor costs. South African workers are demanding wage increases of 10-15% per year, the electric company there is raising rates astronomically every year, and prices for all commodity inputs needed to run a mine have been soaring into the stratosphere. But, whereas there is a huge quantity of above-ground gold to buffer this inability to increase mine production in South Africa and elsewhere, there is very little platinum available except from mining and recycling used catalytic converters.

Central bankers and investors keep buying gold, and rightfully so. They are working together, unwittingly, to push up the price of gold very quickly. It will take at least 5-10 years for the western world to recover from its debt bomb, and probably a lot longer. During that period of time, it is almost certain that, on balance, the price of gold is going to continue rising. The price premium for platinum over gold has dropped to a historically low level of just $70 per troy ounce as this article is being written. This dramatic alteration of a long standing price relation, between the two metals, is not going unnoticed by savvy jewelry buyers. White gold is now the dominant metal used in wedding and engagement rings all over the world and represents about 7% of the gold jewelry market. Few people, however, are going to buy white gold if they can buy platinum for only a tiny price premium. Women are already switching to platinum. Platinum jewelry demand is surging in the Indianmarket, which also happens to be one of the key physical demand centers driving up the price of gold. Jewelers say that “the price of gold is selling platinum.” Platinum jewelry demand even rose 40% in the USA while rising 80% in China during the 1st quarter of 2011.

When thinking about investing in platinum, one must accept high volatility in the short term. This is partially governed by the same capricious manipulation by big banks and hedge funds that gold suffers through, although, occasionally, in the platinum market, the manipulation is on the upside. The volatility is heightened by changing requirements of the industries that platinum serves. Platinum is 15 times rarer than gold, and it is traded in a market that has less liquidity. Historically, though not recently, this market situation has added to the volatility by amplifying upward and downward movement. Naturally, because of the size of the market, it is easier for a big player to manipulate short term prices upward and downward, or prevent them from moving sharply in either direction, so as to stabilize prices, if that is the desire.

The fundamentals underlying all the precious metals, and especially platinum, are very sound. The intense stupidity that characterizes trading on NYMEX and the London OTC derivatives markets should be viewed for what it is. Speculative players move short-term prices of all commodities up and down with a complete disregard for the fundamentals of supply and demand, and rely upon rumor, fear and misinformation, being “stopped out” by big bank manipulators, and suffering from margin call liquidation to guide their trades. That is why they non-Fed-connected ones generally lose money and only a few select market makers and their associated hedge funds make money in the derivatives casinos.

Speculators are mostly short-term momentum chasers who are now being forced to sell precious metals to meet margin calls on stock investments they have also chased. Industrial demand for platinum and silver continues rising, while investment demand for physical gold is stronger than ever among banks, individual investors and even central bankers. But, because the world still believes that the prices created in London and New York are real, rather than fantasy prices, well-capitalized physical buyers can benefit from the travails of the paper market.

In the case of platinum, smart investors should keep in mind what most of the speculators do not understand. Platinum is intrinsically linked to gold. Gold prices rise when economic conditions are unstable. That means that the yellow metal is going to rise in value whether we eventually experience high inflation or deep deflation. Meanwhile, the substitution of platinum for white and yellow gold can and will more than compensate for any foreseeable loss of catalytic converter demand.

Most long side COMEX and NYMEX traders do not understand the linkage between platinum and gold. Short-side manipulators can and do scare platinum speculators out of the market at will just by emphasizing the industrial demand issue. The current panicked liquidation, however, is being driven by high leverage among the “pie-in-the-sky” get rich quick speculators. They are being flushed out of the market, not because they want to be, but because they are using the liquidity and built-in profits from precious metals speculations to cover losing bets in suddenly collapsing equities markets. The flushing out of such speculators also occurred in March 2009, and, when they were finally fully flushed into the monetary toilet, the precious metals complex surged upward. Flushing over-leveraged speculators is temporarily painful for real investors because so much of the world still believes that the fantasy prices created at derivatives markets are real prices. However, it is good news in the long run, and provides opportunities for physical buyers to get metal cheaper than they would, otherwise.

Events like the big price drop on August 4, are not to be feared, but, rather, they are the “big dips” that this writer has always encouraged people to buy into. The fact that gold prices dropped only marginally speaks strongly to fear of central bank demand and the fears of short sellers. They are covering their shorts into the liquidation panic of the long buyers. The only problem for well-capitalized buyers is finding an appropriate price to buy into this big dip. If prices continue to fall opportunities, of course, will get even better. But, timing one’s purchases perfectly is nearly impossible. Forget about it. Pick an acceptable price you can live with, and buy.

Prices may drop lower than where you buy in, just as they did back in March, 2009, but such a thing happens to the best investors who reap the biggest profits. Don’t worry about it. If prices drop below what you paid and you still have money left, buy more. Feel secure in the knowledge that prices will surely recover and more. It won’t really matter, in the long run, whether you buy gold at $1,550 or $1,650, or if you buy platinum at $1,650 or $1,750. If you are a long-term investor (and if you do not have corrupt connections to the Federal Reserve, you’d better be a long-term investor), just feel secure in knowing that, over the next 5-10 years, the price of both metals will rise to levels that are now unthinkable.

As I wrote in a previous article, a position in platinum can be taken using a number of different financial products:

You can buy small bars or coins at most coin shops, or secure larger wholesale sized bars from Fidelity Investments, which can send it to your home by FedEx if you ask them. Another option is to buy the ETFS Platinum Trust (PPLT), but a negative is that, like other such arrangements, including GLD and SLV, you pay a hefty 0.5% administrative fee every year. Another possibility is to invest in futures positions long at NYMEX. Going the NYMEX route, however, means dealing with what appears to be periodic attempts to "harvest" performance bonds by abruptly changing requirements, selling enormous quantities of short positions, and thereby kicking people out of their positions using margin calls, and stop loss order cascade triggering techniques. If you do buy at the futures markets, you can roll over your investment each 3 months, but that involves paying a very heavy administrative fee for paper platinum that may never exist. Or, you can take delivery, as JP Morgan Chase bank has chosen to do on its own behalf or that of its clients.

You can invest in the stock of a number of different companies that mine platinum, including Stillwater Mining (SWC) as well as the ordinary shares (or ADRs if you are American) of Lonmin (LNMIY.PK), Anglo-American (AAUKY.PK), North American Palladium (PAL) and others...

Platinum is currently a considerably better buy than gold, with more upside potential, because the first thing that investors turn to is gold in unstable times. Most investors do not understand that platinum will be in deep shortage by 2015, even if the American economy does very poorly, and most do not yet appreciate the deep link between gold and platinum prices in the longer term. For more information on how to invest in platinum, see articles here, here, and here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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