JP Morgan (NYSE:JPM) just took delivery of 226 fifty ounce physical bars for its "house" account, and 310 more for its alleged "customers", for a total delivery of 26,800 troy ounces, or about $40 million worth of platinum. I put quotes around the "customer" designation because many of them may actually be alter-egos for the bank, offspring hedge funds and other financial entities that are the result of an official reduction of the proprietary trading desk. For detailed numbers about this and all the other metal deliveries at COMEX and NYMEX, which are discussed in this article, click here.
The exact amount the bank is acquiring on its own account is not entirely clear. What is clear is that it is buying a lot of physical platinum, and so are a lot of people related to it. JP Morgan Chase is widely believed to be the bank most closely connected to the Federal Reserve, charged with carrying out Fed policy in the financial markets. The fact that it is buying a lot of physical platinum at a time when the price is falling, and when the PPLT trust, of which it is a custodian, is slightly reduced in size, says even more. If JP Morgan is buying physical platinum, you can be fairly certain that the Fed is not nearly finished printing money, as many people think.
What makes this month very interesting is that JP Morgan is only one of several primary dealers of the Federal Reserve which is buying large quantities of physical platinum. Other primary dealer banks are also buying and taking delivery. For example, even though one of Jefferies-Bache's (formerly Prudential-Bache) customers was the "big platinum short" this month, and delivered 41,300 ounces, Jefferies-Bache itself bought 3,550 ounces, or over $5 million worth of the stuff for its house account. Jefferies just bought the former Prudential-Bache commodities division, and it is the newest "up and coming" member of the Federal Reserve's cabal of primary dealers, and is well known as a savvy Wall Street player. The Merrill Lynch division of Bank of America (NYSE:BAC) took delivery of 4,350 ounces, worth about $6.5 million for its house account. Deutsche Bank (NYSE:DB) took delivery of 750 more ounces this month, after already taking 11,650 ounces in July.
According to the current Wall Street group-think, we are seeing "the end of the bull market in precious metals". We are inside a "risk-off" period where "industrial metals" like platinum, are not supposed to do well. So, why are the savviest primary dealers of the Federal Reserve buying platinum? Why put so much money at risk by actually buying the physical bars, rather than the leveraged derivatives? What do they know that the group-think doesn't? Is QE3 a lot closer than most people think? Or, do big bank executives simply know what this author also knows. Platinum is a deeply underpriced asset, and market forces will eventually force prices back up, regardless of quantitative easing, although more QE will force them up much more ferociously.
Rarely has the disconnect between the fantasy futures markets and the real world been so large. According to the "official" group-think among speculators, we are in the beginning of a bull market for the U.S. dollar. Yet, the whole concept of people "running to the dollar as a safe haven" is ridiculous. The ups and downs of the stock market and the US dollar have nothing to do with sentiment for or against the U.S. currency except in the most marginal way. Markets are fueled by money flows, part of which arise out of legacy debt service needs. These needs are being offset by the temporary and permanent injection of printed currencies into the financial markets. It is all about liquidity, not sentiment for or against a particular currency, or some absurd concept of "risk-on" or "risk-off".
The current group-think also asserts that "fear of Euro breakup" is going to cause consumers to hold off from making major purchases. But, that's not what's happening. A big reduction in demand for cars is not likely in a world of near-zero interest rates flush with Federal Reserve Notes, British Pounds, Japanese Yen and Euros. On the contrary, pent up demand for cars and a lot of other large ticket items is manifesting itself. Car sales are exploding in much of the world, including the western industrialized nations. The sale of diesel cars in particular, which use eight times as much platinum as gasoline cars, are exploding even faster. Physical demand for platinum is up, not down.
In spite of the real world, within the New York and London banking world, and the derivative markets controlled by banks and hedge funds, paper-platinum is not very popular. The spot price that is created there has placed the metal on fire sale.
Disappointing September car sales in Europe were, at first, used as the justification for the bearishness. The European market produces a preponderance of diesel vehicles, so a downturn there is thought to be deeply negative for the platinum market. In Spain, for example, diesel powered cars account for about 55% of the total passenger car market. Media stories are declaring that Spain has suffered one of Europe's "biggest" month to month declines in passenger vehicle sales in September. But those stories are misleading. The monthly numbers are not adjusted for normal month to month sales variations.
When looked at year over year, total Spanish sales actually declined by 1.3% from September 2010. In the reality world, that is a very tiny amount. But in the world of fantasy futures, driven by the business media, this has been played into a great "catastrophe" that portends doom for the Eurozone, and demand-destruction in the platinum market. When the numbers are carefully calculated, the reality is that Spanish car sales declined by about 397 diesel models and 357 gasoline models. It is a total decline of about 754 cars, comparing September 2010 to September 2011.
A sales catastrophe was also declared for France, even though sales are up for the year. According to the group think, September's 1.4% French car sales decline is another indicator of doom. In reality, however, the total decline in France was by about 1,000 cars, year over year. Sales of foreign made vehicles, which were the only ones readily available, were sharply up. If we look behind the headline news, we learn that production of French made cars was hit by a shortage of parts. Peugeot didn't have enough screws because of errors made by Agrati, an Italian supplier. This snafu resulted in some production lines being shut down and others slowed. Renault was recovering from a supply-chain disruption in earlier months. In fact, a spokesman for the CCFA (the French car manufacturer's association), explained that the drop in sales was solely due to supply problems, not demand.
But the headlines were also screaming about the alleged fact that "Italian car sales are down by 5.7%", month over month. Month to month sales figures are very variable, and of little use in analyzing the overall market situation. Regrettably, with respect to Italian sales, this author cannot find reliable year over year numbers. But, accurate numbers are available for Russia. The Russian car market is booming. Car sales, during the first half of 2011, are up 56% year over year. Russia has just become the second largest car market in Europe, after Germany, surpassing France for the first time. In the first six months of 2011, Volkswagen sales in Russia literally doubled! September, 2011 sales are booming. Russia will become the largest car market in Europe by 2013, according to most industry analysts. Ford Motor Company (NYSE:F) expects overall Russian car sales to be "2.6-2.7 million" 2011, which is above the Association of European Businesses (AEB) forecast of 2.45 million.
According to Ford, the Russian market does not have any jitters (about the Euro). Demand remains strong..." In 2011, Russian auto production will increase by about 800,000 vehicles, year over year. That will vastly outweigh any possible year over year (or even the 5.7% month over month decline) in Italy. Assuming that all the newly built Russian cars end up being gasoline powered (which will not be the case, especially since the sharpest sales increase is by clean diesel manufacturer, Volkswagen), at 1 gram of platinum per car, this translates to a platinum demand increase of about 1 metric ton for Russia alone.
Which brings us to Germany, which is another diesel heavy, high platinum usage (vs. palladium) car market. German car sales were up 10.8% for the 9 month period Jan. to Sept. 2011, and up 8.1% in September in particular. Sales were strongest in the larger vehicle and commercial vehicle segments, in which diesel engines (and platinum usage) is the heaviest. A total of 280,800 new cars were registered in Germany, which is 22,744 more than registered in September 2010. About half of them were diesel models, and with larger engines than normal because larger cars were sold.
If we assume that each of these large diesel car and trucks used about 10 grams of platinum, the one month sales increase in Germany ALONE consumed almost 1/4 of a metric ton of platinum. That may not sound like a lot, but remember, it is one month's sales increase ONLY. Many tons of platinum were required for the rest of the vehicles produced in September. Such tonnages might not mean much if we were talking about silver, or even gold. But, we are talking about platinum. The total mining supply is less than 180 tons per year. Every ton and fraction of a ton counts...a lot.
In America, car sales were also booming, especially the sales of German manufacturers who build diesel powered vehicles that happen to use the most platinum. Volkswagen's September sales, totaled 27,036 units, which is a 35.6 percent increase over prior year sales. Of those, high-mileage, clean diesel TDI models accounted for 22.7%. Diesel sales by Audi are up by even more. Volkswagen's American "clean diesel" sales alone increased by about 2,185 cars, which more than offsets all of the diesel vehicle sales losses in Europe. Overall, US auto sales rose almost 10 percent in September,with General Motors Co (NYSE:GM) rising 20 percent, Ford Motor Co (F) up 9%, and Chrysler group up 27 percent, respectively.
In China, although the rate of growth has moderated, passenger-car sales rose by 3.3 percent in August from a year earlier. GM did much better, with China sales increasing by 13.4%. Furthermore, Chinese sales are about to turn sharply upward again. Sales should strongly increase, over the next few months, because the Chinese government has passed a new rural Chinese "cash for clunkers" law. Rural Chinese can trade in older cars for newer ones, and get up to $2,900 from the government if they do so.
China is flush will trillions of dollars worth of foreign exchange assets. It can easily bail out all of its banks if it chooses, as well as all of its local governments who are up to their ears in debt. It can pump up its economy, without going into debt, at any time it wishes. It can stimulate any level of consumer demand it seeks, and have plenty of cash left over. Those who predict a "hard landing" for China are wrong. Chinese auto sales will start increasing by 30-40% per year again as soon as the Chinese government decides that the current monetary tightening episode has traveled far enough.
In India, sharp interest rate increases previously caused a period of falling car sales. That has now reversed. After a four-month slump, Indian car sales picked up in September with the beginning of the festive season and new launches, especially diesel variants. Carmakers in India believe diesel car sales will increase from the present 30 per cent to as much as 50 per cent in the next three to four years. Diesel powered cars use 8 times as much platinum as gasoline powered ones. Although India does not have the huge foreign reserves of China, it can restore 30-40% car sales growth very easily. All it needs to do is stop or slow down the big interest rate increases that have been coming from its central bank. The Indian government will do exactly that as soon as the lower growth rates become too burdensome to influential politicians who want to be reelected. That shouldn't take too much longer.
Meanwhile, Japanese car production is picking up. The Wall Street Journal reported that sales of new cars, trucks and buses in Japan itself, in September, grew by 1.7% from a year earlier to 313,790 vehicles, rising for the first time in 13 months. The Japan Automobile Manufacturers Association is forecasting a 17.4% year-on-year jump in Japan’s auto sales—including mini vehicles—in the September-March period, as car makers are beginning to boost output volumes to make up for delayed production. That compares with a 25.6% drop in sales to 1.25 million vehicles in the six months ended September, during which platinum prices reached over $1,900 per troy ounce.
Beyond autos, the recent drop in platinum prices below gold prices has stimulated intense physical demand from jewelers and physical metals investors. As this author reported in a prior article, jewelers in the USA and elsewhere were reporting that the increased price of gold was "selling platinum", even when the premium for platinum over gold was still $100-200. Now that it is almost $200 per ounce cheaper, you can imagine how many women are choosing platinum.
Peter Thomas, Chief of PFG Precious Metals, the retail metals arm of the well-known futures brokerage, PFG Best, reports that he cannot even find 50 ounce platinum bars, and is sold out of all platinum ingot inventory. Based upon this, there is a strong likelihood that Chinese investors and jewelers are heavily buying now. At some point, empty shelves will need to be restocked, and that means stress upon remaining supplies which, in turn, means higher prices.
As illustrated, in a previous article, a very slight shift in jewelry preferences, even so little as a shift from the use of white gold to platinum in wedding bands would create enough extra demand to absorb a complete collapse of all auto production. This would happen even if it happened amidst a 25% drop in net gold jewelry demand. But, reality rarely enters into the short term price movements at NYMEX futures exchange, or its OTC counterpart in London either on the upside or the downside. Even though futures markets participants are prime determinants of the so-called "spot" price, which is the "official" price, they are out-of-touch with supply and demand.
To illustrate the out-of-touch nature of futures markets, reports are coming from India that European bullion bankers delayed deliveries and declined new orders for physical gold, even as gold futures in New York were declining. "Spot" prices have become exercises in imaginary "price discovery" between bullion banks and speculators, based upon rumor, panic, group-think, and which party is most skilled at manipulating. In spite of that, amazingly, the rest of the market still accepts their price determinations as "official", at least in the short run.
Whether we are talking about platinum, gold, silver, palladium or any other commodity traded on futures markets, smart investors, who are well capitalized compared to the amount they buy, and who are able to see through the extreme foolishness, can buy more cheaply and sell far more expensively than they otherwise would be able to.
People tend to be sheep-like, and want to follow shepherds. Their shepherds often lead them off a cliff. Successful investors make their own decisions. The market is open to manipulation because it is opaque, but sometimes you can see through the curtain and discover what is behind it. There is a reason the Fed's primary dealers are buying platinum. All the fundamentals are more positive than they were when the metal was selling for hundreds of dollars more.
It is now possible to buy at dramatically lower prices. Group-thinkers can trade down the price of paper metal as much as they want because short sellers are not required to have real platinum to back up their contracts. But, paper cannot be used as an auto catalyst, nor will anyone accept a paper ring as the setting for a diamond. In the long run, prices will respond to real world supply and demand. The Federal Reserve's primary dealers know this, and that is why they are buying.
Speculators have been selling for four reasons, none of which involve fundamentals. First, it is momentarily popular to sell supposedly "industrial" metals, just as it was momentarily popular to buy them a short time ago. Second, because NYMEX recently imposed a 28% increase in margin requirements, and some speculators are being involuntarily booted from the market. Third, because someone has launched trading bots, designed to reduce prices by triggering stop-loss orders on all precious metals, including platinum. Fourth, and finally, to cover margin calls arising out of speculative losses on investments in the paper fantasy futures/forwards markets.
For those who are not caught in leveraged trades, this is a time to BUY, not sell. You might end up buying at a price that is higher than it is tomorrow or the next day. It doesn't matter. It is impossible to catch the exact bottom of a downturn. Central banks are doing this, but they are printing money like wild, whether they call it "quantitative easing" or "liquidity injection". In spite of the 5% inflation rate that its own government statisticians have calculated, the Bank of England, for example, decided to add another $130 billion worth of money printing (a/k/a quantitative easing). The Fed, which always follows whatever the BofE does, with a time lag of a month to a few months, is sure to follow.
Meanwhile, although the ECB claims it does not do QE, at the last meeting, it laid out plans to buy about $60 billion in bonds in so-called "open market operations". It will also reopen the unlimited "liquidity" tenders which previously supplied about 1/2 trillion funny-money Euros worth of low-interest loans to European banks. This week, France said it wants the ESFS Euro bailout fund to be a bank. If so, it could engage in collateralized borrowing from the ECB. A massive wave of multi-trillion dollar quantitative easing could be the result, in spite of treaty restrictions on the ECB's ability to monetize government debt.
The ESFS will be able to buy Spanish, Italian, Portuguese, etc. bonds, and use them as collateral for loans from the ECB. It could then use the cash to buy more bonds. It could do the same thing, over and over again, subject only to a .5% haircut on any government bond collateral rated A- or above. That means, it will be able to monetize up to 20 times its capitalization, or up to about 9 trillion euros in Italian or Spanish debt. Increased use in jewelry and automobiles is already putting pressure on real world platinum supplies. Investment demand, arising out of quantitative easing in Europe and more QE in America and Britain will spur investment buying, and cause tight supplies to become even tighter, resulting in substantial price appreciation.
There are several methods by which you can take a long term view, and diversify into platinum. You can buy the metal in the form of coins or ingots, if you can still find them, at jewelry and coin shops. But, as noted by Mr. Thomas of PFG, because of physical supply problems, this is becoming increasingly difficult, near the "spot" price. If it is difficult to find physical platinum, you can buy either your initial investment, or enter additional investments, in the form of a commodity ETF (NYSEARCA:PPLT).
The vault custodian for PPLT, like many other metal ETFs, is JP Morgan Chase. That fact puts off people who accuse that bank of manipulating the gold and silver markets, but PPLT is a convenient way to own a position in platinum, especially if it used as a supplemental trading position, rather than a core position. Some people say that JPM doesn't have enough gold to fulfill its potential obligations. But, it is clearly taking delivery of a huge amount of platinum, and the PPLT trust is much smaller than SLV and/or GLD.
You can also buy shares in platinum mining companies like Lonmin (OTCPK:LNMIY) and Anglo-American (OTCPK:AAUKY). The risk of all stocks include management overcompensation and bad decision-making. In the case of platinum, the risks also include political expropriation both in South Africa, where it has been threatened for years, and in Zimbabwe, where it is actually being carried out. If you can afford 50 troy ounces or more, and you intend to invest for the long term, you can buy and demand delivery of one or more futures contracts (PL), and upon maturity, you will get one large platinum bar. You can take the bar and store it in a safe place of your choosing, including a number of exchange-approved managed vault facilities.
Disclosure: I am long PPLT.