Investing in a Resource-Constrained World (Part III)

Wow! What a turbulent marketplace lately! I took some hits lately in my holdings of North American Palladium (PAL) and Stillwater Mining (SWC), my favorite precious metal palladium mining stocks. But nothing compares with the shocking collapse of Bear Stearns (BSC), which falls from $60+ to only $2 a share bought by JP Morgan (JPM), in just two days. I have sympathy in people who lost big money in BSC. Maybe Lehman Brothers (LEH) is next victim? Maybe WaMu (WM)? CitiBank? Maybe even the invincible Merrill Lynch (MER) and Goldman Sachs (GS) could also fall. There is so much panic and chaos in the financial market.

Recently, Gene Epstein published a cover story on Barrons declaring a commodity bubble is bursting. Has commodity topped? Do we see a commodity bubble bursting? I must point out that Mr. Epstein is completely wrong! I am NOT disputing any of the numbers or facts he cited, but he completely mis-interpreted the facts, and even reversed some causal relationships.

Prices of commodity is determined by the supply/demand balance. If supply exceeds demand, price goes down, but if demand exceeds supply, price goes up. When there is a shortage, the price will keep moving up until eventually the supply/demand reaches equilibrium again, often times due to higher price stimulates increased supply and suppresses demand. But there could also be cases where higher price actually stimulates demand and suppresses supply!!! I will talk about that later. Depending on how price elastic or inelastic the supply and demand is, equilibrium price could be achieved quickly, or the price could be pushed to an extremely high levels, like rhodium. Price appreciation alone does NOT tell you whether something is over-priced or under-priced, supply and demand data does. Please repeat the previous sentence one more time.

Unfortunately, in his long article, Mr. Epstein mentioned not a single word, and cited not a single number regarding the supply/demand relationship. What audacity allowed him to claim there is a bubble, when he can't even tell us how many barrels of oil the world produces a day and how many barrels it needs! All he ever did was show us some price data. Now repeat my previous highlighted sentence one more time.

Mr. Epstein talked about speculative hot money chasing a relatively narrow commodity market, and he believed that's the reason we currently have a commodity bubble and it is bursting. He got the causal relationship completely reversed! The commodity bull market is NOT caused by investments by speculators. It's the opposite, the commodity bull is the reason that attracts investors to put their money in it. Anything that is bullish or hot of course naturally attracts investor money and speculators. If that alone makes it a bubble, then a lot of things are bubble: You buy bonds and the bond market must be a bubble, you deposit your money in a bank and it must be a bubble. You go to Wal-Mart (WMT) shopping and Wal-Mart must be a bubble, too. Actually Wal-Mart must be the largest economical bubble to be popped imminently, judged by how every one visits Wal-Mart daily and spend their money there. How ridiculous!

Can there be a commodity bubble? Of course. Can speculative investments cause a commodity bubble? Of course. A bubble is formed when the price is high enough to correct the natural demand/supply imbalance, but artificial demand by speculative bidders keep pushing price much higher from the level supply/demand already balanced. We are far from even reaching the supply/demand equilibrium yet for any of the commodities, let alone forming a bubble yet.

But Mr. Epstein did get one thing right, that is, even though only a very small number of funds are chasing the commodity market, the amount of money involved is already a huge amount compared with the size of the commodity market. That is absolutely right. But it is not the reason we have a commodity bubble here. Instead it is the reason for the extreme volatility we see in the marketplace. We see silver price jumps up and down two dollars a day, an unprecedented volatility. That's exactly because too much speculative money is chasing too narrow a physical silver market. Try to squeeze 100 people into a 25-square-foot room. They MUST fight fiercely. When a huge amount of money is concentrated in a narrow market, exceptional volatility must be the result, but it doesn't change the fundamentals: Volatility will wash out some of the speculators, which is one way the system achieves some sort of balance.

So what do the supply and demand fundamentals say about current commodity market? Two things decide that commodity shortage will be a long term phenomenon. First, governments of the world are printing exponentially increasing amounts of fiat currency to flood the market. Fiat money is one thing that is definitely NOT in short supply. Their purchasing power are dropping rapidly nowadays. When purchasing power of fiat money drops, instead of suppressing demand on commodities, it actually stimulates stronger demand. For money discussions I urge you to visit Gold Is Money and JSMINESET.

Here is an example. I learned last week the price of rice is going up rapidly in international markets. Does the higher price make me pause to think about how I should eat less rice? No! I rushed to the nearest COSTCO (COST) and picked up TEN bags of the 50-pound rice, at a price which is still cheap; I used up all the cash in my wallet, or I would have bought more. I am concerned that when the news of rice shortage spreads, there will be panic buying and the shelves will be empty in no time. I do not intend to cause a panic, and I am not speculating on rice to make profit. I am just hoarding some for my own consumption. But here is a good example of how raising price actually stimulates my purchase demand. Not only higher price stimulates demand, it also suppresses supply. Vietnam, India, Cambodia all decided to cut back or totally shut down their rice export, reducing supply to the international market. Is this a bubble? No, there is a real global shortage.

China has too much of US dollars in its foreign exchange reserve, but not enough of anything else. It doesn't have a significant strategic oil reserve. It doesn't have any strategic base and precious metal reserves of any significant size. If import oil is interrupted, China could be crippled in less than 15 days. If there is a major conflict in the future, China could not last more than a few months if its outside source of metals, and other critical commodities were cut off. China desperately needs to spend out its huge reserve of dollars before it becomes worthless, and stock up some strategic reserves of anything and everything that it could buy. And who is to say Japan, Korea, India, Brazil are not on the same boat? Facing an uncertain future of a looming world crisis, every nation on earth desperately needs to hoard up something and everything to secure its own future. And individual persons are doing the same hoarding and preparation, too. This factor alone will mean we will have a very very long commodity bull cycle.

The second thing that decides that we will have a long commodity bull cycle is the fact we live in a resource-constrained world. The earth has a limited size, with limited natural resources on its accessible surface. Have you heard about Peak Oil? King Bubbert's Curve? It's a flawless mathematical derivative that says when a limited, non-renewable natural resource is being produced, the annual production rate reaches a peak when about half of the resource is depleted, production enters a permanent declining phase once we go past the half depletion peak, regardless of any technology progress or improved efforts to produce more.

I believe the current commodity boom cycle is different from all previous ones. Previous commodity bull cycles are just a part of economic natural cycles of boom and burst. But for the first time in history, the current commodity boom cycle is closely related to the peaking and depletion of many critical natural resources we have become addicted to. That includes oil, natural gas, coal, precious metals and base metals. We have only nine years' worth of proven reserve of natural gas, the global oil production has just peaked, global silver production has long peaked, and we only have 13 years worth of production left. Copper has probably peaked already and there is 27 years left. (Check out these natural resource stocks: NGAS, CHK, SWN, JRCC, PCU, FCX, TGB, PAAS, CDE, SSRI, MGN, just to name a few)

Once a none-renewable natural resource has peaked, the annual production enters a permanent, ever-declining phase, despite best efforts of technology to boost production. So supply will be limited and will be ever declining. Higher price will have virtually no effect in boosting supply. Therefore there is only one way left to bring equilibrium back: suppression of demand, otherwise known as demand destruction.

Has commodity cycle peaked? The answer is another question: Has supply/demand been brought back into equilibrium? The answer to that is, Has demand destruction occurred? I do not see demand destruction occurring in anything yet at all.

Demand destruction in food items would be a massive occurrance of famine and malnutrition globally; demand destruction in oil would be that people give up their SUVs and ride a bike 20 miles to go to work every day; demand destruction in copper, zinc and steel would be we see the Fed issuing plastic pennies, and auto makers promote plastic lightbody vehicles; demand destruction in platinum and palladium would be that people get married with plain silver engagement rings, with no diamond; demand destruction in tellurium would be FSLR shut business down. I do not see any of the demand destruction happening yet. People complain about higher prices but they just pay more to get the same thing.

On engagement rings, I believe true love does NOT take a compromise. Read this story:

For some people, however, no compromise is acceptable. Take Noah Cuttler, 29, of the District. He met his true love ... about a year and a half ago ... and Cuttler decided two months ago he was ready to pop the question.... He knew platinum was the metal of choice, ... Finally, he pulled out his credit card and charged $1,000 for a platinum band from his dealer and several thousand dollars more for a 1.3-carat diamond. He plans to propose after she reads this article.

". . . it's supposed to be for a lifetime," he said.

Mr. Cuttler must have proposed to his love by now and I wish the best outcome for this couple. He is surely not the only one who falls in love. Across the ocean, millions of young Chinese couples have planned to get married in China's Wedding Year 2008, a year with special significance to the Chinese, not only because the number 2008 starts with a 2, meaning "The couple" or "both of us" and ends with a lucky number 8, signifying "fortune", and the year 2008 is the Gold Ox year in Chinese zodiac, but also because it's the year of Olympics in China, which is scheduled to start on 8/8/2008, triple fortune, I guess. Estimates in China are that 2 or 3 times more people will get married in 2008 than an average year. My estimate is there will be 35 million or more weddings held, about 5% of the population or more.

Getting married is a commitment of lifetime and the Chinese do NOT take any compromise. A platinum diamond ring is a must have in a wedding preparation nowadays, among other things. People with less affordability may settle for a palladium diamond ring, but will not compromise for anything less. A typical Chinese couple would pour resources from parents and friends, on top of their lifetime savings, just to make a lavish wedding happen, because they are judged by people on how lavish a wedding they could afford to carry out. A compromise on a platinum or palladium diamond ring is just unthinkable due to the social peer pressure.

If only half of the 35 million newly wed Chinese couples buy a platinum or paladium diamond wedding band, each containing half ounce of the metals, that would be a demand of 9 million ounces just in the Chinese jewelry sector. The whole world produces only 7 million ounces of each of the two PGM metals a year from mines. The prices of PGM metals have got to shot through the roof.

Thus I encourage people to take advantage of recent price dip, and buy stocks of the only two primary palladium mining companies in the world, PAL and SWC. I have explained the two earth shattering events in the PGM metals market. The fundamentals have not changed a bit at all. South Africa is now on mandatory electric power rolling blackouts and it is entering the winter season, which makes matter worse. The Russia stockpile sale still has not shown up in the Custom of Switzerland. The recent downfall of the PGM metals, which coincidented with the knock down of gold and silver, is nothing but inherit volatility when too many speculators jumped on board. Once the excessive is shaken out, which I think is about finished by now, the PGM metals should continue the rally up in no time.

Disclosure: The author owns stocks of PAL and SWC, and hoards physical tellurium, gold and silver.

Comments

[Georealist]

Is this a 12th grade econ project??
Alphas has given 3..read 3!...parts to this unformulated rambling? A couple of paragraphs could have easily handled whatever substance exists. Imagine how many trees would be needed if every Chinese family used only one! roll of toilet paper every month....Weyerhauser would be $500 a share and climbing.
Anyway..I'm sure mommy enjoyed the picture with the cowboy hat.

[paultaut]

A Bubble is not a bubble until after the fact.

Copper supplies worldwide are roughly 3 1/2 days....Is this a Bubble? Other commodities suffer from similar constraints with oil just barely meeting demand.

So, say in 6-12 months, when the US recovery starts, will that be considered a new Bull market in Commodities or a resumption of the so-called "Bubble"? This is common sense not some sort of headline grab idea.

Another thing to consider is that we are only talking about exchange traded commodities. These are up about 250% on average. None exchange traded commodities are up some 500-600%.

PS There are something like 50 TRILLION worth of Credit Default Swaps waiting to be settled worldwide.
These involve the Developed Countries primarily. Do you want to hold hard assets? Really?

[Mark Anthony]

Paul:

Good point. Some correction. I think the global financial derivatives stands at 500 trillion dollars, not 50 trillion. They don't call the derivatives a bubble, and would call hard assets like commodity a bubble?

The current commodity bull cycle is far far far from reaching it's peak yet. It's too early to even begin to speculate where the peak will be. Eventually it may develope into a bubble, but we are at least 10 years away from that yet!

[Jack Satan]

Mark - I think you fell off the deep end on this one...

50% of chinese couples will buy a platinum engagement ring?!?

The median income in URBAN china is less than $900 per person, and rural china makes up more than 50% of the population (don't ask what their incomes are...) www.ers.usda.gov/publi... the wealthiest 4.5% of chinese only make on average $2641 per year and that 'average' is heavily skewed upward by a handful of billionaires... the median of that upper 4.5% is likely less than $2000... of that $2000 they spend around 30% on food (can you eat platinum?) leaving around $1400 a year to survive on... so how many of these people are going to spend $1000 on half an ounce of platinum??? - BTW DeBeers (in an effort to INCREASE sales) has marketed the concept that people should spend 2-3 months salary on their ring... that doesn't leave you with all that many chinese wearing platinum does it?

So you know for the future (and don't make a fool out of yourself again) there are many products out there that would be very successful... if only every chinaman bought it - or at least 50% of them... oh, one other thing - 50% of engagements in the US do not have platinum rings either...

[Jack Satan]

Do you even know what a credit defalut swap is? Or how derivative nominal values are come up with? quick primer on exchange traded futures... Eurodollars futures are among the safest assets in the world - they are classified as derivatives - they are essentially cash sitting in a US bank... the risk in ownership is interest rate movement. There is currently approximately $20 Trillion worth of open interest in Eurodollars. To purchase all of it would require a bond of $1.5 billion... sounds risky? The nominal value of those Eurodollars is meaningless - they are valued at $1 million a piece just so that there would not be rounding issues. You couldn't lose $20 Trillion in Eurobonds if there were a nuclear war... it's fundamentally imposible... oh, and they are mostly hedged and offset... the nominal value of financial derivatives has as much relationship to the risk associated with it as you social security number's relationship to your telephone number... it just doesn't.

[GlobalWarmingExaminer]

If you are looking at price charts for Copper, Oil, Grains, Coal etc., you should look at a chart in Euros instead of Dollars. You won't see as big big a spike. This bubble is more of the world catching up with the terrible US balance to payments. Since the world can't recycle their dollars into sub-prime mortgages anymore, the value of the dollar is plunging, driving up the value of real assets in dollar terms. (Note that production costs in dollar terms are also rising.)

The US needs to gets its act together:
Stop taxing manufacturers (Health Care Costs/Tax)
Corporate Tax
Implement a consumption tax so they can tax imports

[Mark Anthony]

Jack Satan:

About the income of the Chinese. First your numbers are probably 10 years too old. A typical college graduated urban resident's monthly income is about 10K YMB Yuan, divide by 7 and that's US$1.4K a month. If your monthly salary is only 5K RMB Yuan, that's considered very very poor. That's about US$700 per month, or US$8400 a year, and that's considered poor in China nowadays.

Second, the Chinese are incredible savers. You can't believe the amount of money they save over the years, if you consider their income level. A young man typically save for 5 or 10 years, and then further borrow some from friends and family, to be able to put together a good wedding and all that.

The cost of a platinum diamond ring, is absolutely nothing comparing with the rest of the cost of a typical wedding proceedings in China nowadays.

I don't know where you get the $900 per year median income number. That's barely US$2.50 a day, or RMB 17.50 yuan a day. 17.5 yuan barely buys you anything at all in China nowadays. A bus ticket will cost you 4 or 5 yuan already. Your numbers are just so wrong and so outdated. Sorry!

[dieuwer]

I hold my position that the only true and present bubble is in US Treasuries. Supply and demand have driven the price and thus the interest rates on these debt obligations to such levels that the fundamentals, i.e. current inflation do not warrant such prices/rates.
Even by the FEDs hedonic CPI measures, currently at about 4%, a US Treasury yielding 3% is a nonsensical investment. But we still see "flight to quality". Interesting to note is that whereas a lot of people talk about bubbles in commodities and such, noone is talking about a bubble in treasuries. Well baby, this one is ready to burst!

[slider]

Mark

I bought 70 more head of cattle today. Farmers are planting their pasture land into wheat in Northern Minnesota and assume they are going to get rich planting wheat and soybeans.
I have the cattle but no hat.

[johngonole]

Paultaut - So what your point? Are you pro commodities or anti commodities. Its really hard to tell what you position is. Your comments aren't put together very well

[maher]

Good article Mark Anthony.
That's OK as long as idiots like Epstein are around, we know that the mega bull commodity cycle will continue. We would NOT want everyone to think that all is bullish, since THAT would be bearish.

And Oh, one more thing: It is quiet "realist"ic to say that Geo, you're also a red neck idiot!

[iman]

You make a good case for future supply and demand, but you barely hinted at the collapse of the dollar. That is the main reason oil, gold, copper, agriculture are all going up. The dollar is going down due to out of control inflation. You cant buy as much on a global market with a weak currency.

Please don't respond that inflation is only at 3 or 4 percent, thats a bunch of spin we are at double digits at least. The US doesnt even add food and energy in its inflaton numbers, how convienent.

[Jack Satan]

Mark - you are really starting to sound naive... the data I provided includes a link to a USDA report which backs up my figures... it's dated January 2007. As for the average Chinese being a college educated urban dweller - come on you're kidding right? www.nsf.gov/statistics... - Less than 5% of chinese get college degrees... significantly more than half of the chinese population live on rural farms... But there is a bright side to things if we believe in your rosy picture of China... if the average income in china really were $1,400 per month, the income allocated GDP (X 1.3 Billion) would be only about $22.2 Trillion... about twice the total GDP of the USA - even more impressive is that since China is a socialist country, significantly more than half of its economy (read GDP) is government related, and so does not get computed in average "income" - which would make China's real GDP at least $45-50 Trillion... which would be really cool since the GWP (Gross WORLD Product) is only around $53 Trillion... So, either we should expect a significant shift in the standard estimate of the whole worlds economy, or maybe the rest of world (including the USA) has an economy of only 1/20 of China... Definitely, you have me convinced...

[Jack Satan]

iman - inflation numbers are available at bls.gov - not only do they include food and energy, but they also include:

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, service meals and snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

... and yes, when you include ALL expenditures (including funeral expenses), inflation for the last 12 months has been 4% (the last 3 month trend has been only 3.1%), which includes a 9% jump in transportation costs, and a whopping 18.9% jump in energy costs... not including food and energy would bring the inflation number down to 2.1%

[Mark Anthony]

Jack:

Every one knows the US Government's inflation statistics is a total joke and no self respected economist take it seriously. So let's not discuss it.

As for the typical Chinese family income. Let me tell you one fact: The real estate price in Beijing and Shanghai are higher than that of New York, in terms of US dollars per square feet. How did the Chinese manage such high real estate price? Many Chinese actually paid CASH for their homes. I don't know where they got the money. But they have the money.

You probably assumed that 90% of Chinese sleep on the streets, didn't you?

Bureaucratic statistics can never be trusted.

[TERN]

Mark, you said "It (China) doesn't have any strategic base and precious metal reserves of any significant size."
Correction: China has very significant gold deposits and will soon overtake South Africa as the world's biggest producer.
Care to speculate how China could leverage this position?

[Jack Satan]

good luck finding a "self respected" economist who doesn't take the BLS CPI-U and CPI-W statistics seriously... here's an interesting point for those that believe in the efficient market - there are dozens of highly respected economist each month that are paid bucco cash for their expertise at estimating what the "Bureaucratic Statistics" will be for each given month, each month, if the "experts" underestimate CPI the market plummets, and if they overestimate it the market surges... ever wonder why the market would care about something that "no self respected economist would take seriously"?

You really need to listen to yourself... do 90% of Chinese sleep on the streets? No. But more than 55% live in rural backwaters 47% of Chinese work as farmers, and agriculture makes up only 11% of China's GDP... wonder why they would pay cash for a shack on farm? Would YOU lend money for a house that can be picked up and walked away with?

[User 173560]

Thanks for the write-up as well as all of the explanations, it was a little unorthodox but otherwise good.

However, I'm not entirely certain you've done your homework regarding SWC. Had you done so you would realize that SWC has contracts out for all of their mined PGM's with Ford and GM, and the ceiling price in the contracts has already been hit. These contracts aren't set to expire until 2010 and 2012, unless of course GM or Ford were to exit the contracts (declare bankruptcy etc.). All of this can be found on pg's 50-60 of the most recent 10k.

All is not entirely lost though, they do have a PGM recycling program that they use and this has proven to be indispensible to their bottom line. This is not under contract, so it rises with the market prices; however the increased demand for skilled mining has offset most of the profits that this project produces!

I think the ceiling prices they've locked themselves into has kept the stock price supressed as it keeps their income down during this commodity uptrend, and unless I were to see a large increase in the amount of recycled PGM's I think you'd be better elsewhere (without ceilings). Furthermore, I think the slowing of the auto market is eventually going to trickle back into SWC since the insurance they have against failure, is also a deadweight during a boom.

[Mark Anthony]

User 173560:

I surely have done my homework. Many times over. I have more than 95% of my 401K account in the PAL and SWC stocks. I wouldn't do that if I have not done my homework. You need to read my previous Seeking Alpha articles to get a full picture. But even that, my articles could not possibly cover all details. It's prudent that each investors need to do his/her due diligence study, using my articles and links as start points.

PAL's PGM production is unhedged and can enjoy full price appreciation. SWC's production is hedged, but it is not as bad as you would think.

SWC's palladium hedge floor price has already been exceeded, so it gets no benefit from floor price protection. But the palladium ceiling is at $900-ish, so we are still far from hitting the palladium ceiling yet. The platinum hedge has a much lower ceiling at $850, which has been hit by market price long ago. But ONLY 14% of the platinum mine production is capped to the $850 ceiling. The other 86% is not.

None of the recycling metals are subjected to price hedges.

SWC was hurt most on its platinum forward sale, which are contracts of fixed quantity and fixed price. But the forward platinum sale is winding down quickly. There is still 9K ounces in Q1,08, and another 6K in Q2, 08, and then there is no more. The winding down of platinum forward sale would help to show a quarterly result improvement in the next two quarters.

[maher]

Mark, Thanks for your insights on PAL and SWC.
It looks like PAL has woken up on the upside again as I write this due to Paladium futures up leg today.

Jack Satan, Isn't it time you got back to 'Hell': Isn't that where Satan lives?

[User 173560]

Mark,

Thank you for taking time to personally address my comment on your posting.

I started where you told me and went through some of your previous postes and compared the point of entry (I'm assuming you entered at the time of posting). I was basing my comments on the date of this article Apr. 2, 2008.

Onto my point though, palladium's potential for a autocatalyst is only as strong as the demand for autos. While there certainly has been a rise in the price of palladium, I think that is due to it being pegged to platinum. Palladium has a weird price position, that is to say as a commodity and precious metal it is rarer than gold, yet the price does not reflect this. Merely it's price is a function of being a PGM, and only increased demand for platinum will have an effect on the palladium market.

Platinum has both the precious metal quality (rarity) and the industrial applications (better catalyst and electronegativity) that drive the price. lets assume for a second that the two were to decouple and palladium rises while platinum falls. Eventually industrialists/recycle... would pick up the price slack because the recycling process is similar. Recycling platinum would offer more bang for the buck over palladium.

Back to the auto industry, it's in clear decline and using the traditional measures (new and existing home sales, durable goods and auto reports), the consumer isn't buying. I don't see auto's being an exception to this anytime soon. Overseas autos are another area I'm not as familiar with, but from my few overseas travels I would think more infastructure has to be developed to use this as a viable argument.

I honestly and earnestly believe the price of palladium is rising because it trails to platinum like it's pegged and nothing else. Platinum rose as a result of gold rising which was a result of dollar depreciation. Show me some statistics that warrant a trebbling of the price and I'll believe you.

www.stillwaterpalladiu...

Only 6% goes to jewelry, so unless there was a 1000% increase in the jewelry demand I'm having difficulty computing =) or a tripling in the demand for autos with a decrease in the demand for platinum.

As an aside, if you're going to put 95% of your 401k in two companies, BE CAREFUL. Look what happened to those homeowners who sunk all of their equity (or not) into one asset, you don't want that to be you.

Best,
J

[Mark Anthony]

User 173560:

Palladium is a very unique metal that even many metals analysts do not quite understand. The things that strike me really forced me to spend time to dig out information and find out what's so unusual about this metal. I urge you to read one of my previous articles to understand them:
seekingalpha.com/artic...

Platinum and palladium are sister metals with very similar chemical characteristcs. In many cases they are inter-changeable. It's not true that these two metals track gold. Gold is a monetary metal will few industry usage. PGM metals are industrial metals. Platinum shot to its recent peak in 2000/2001 when gold price was at the bottom. There is something magical in 2003 that palladium turned around and staged a very impressive rally till today, despite of virtually every metal analysts predicted a bearish outlook of palladium at that time. You need to wonder why and my article tried to answer that. Read it.

Your data of 6% jewelry usage is pretty old. Latest data, if you believe SWC, is more than 25% of palladium now goes into jewelry usage, and growing rapidly. The Chinese Wedding Year 2008 will have a very positive impact. Western style weddings are now very fashionable in China.

[StateOfConfusion]

What China needs is a community property law, like we have in many (U.S.) states. That would create demand destruction when the men figure out that marriage is mostly a farce to supply women with money. Of course most men here have not yet figured that out either.

[Silver-Bullet]

dieuwer hit the nail right on the head. The US$ is the biggest bubble out there. If there is a bubble in commodity, show me the increased production in the pipeline. If there is a bubble in oil, show me the new oil fields with capacity over the ones discovered 50 years ago.

I'm loading up on commodities and precious metals with the worthless $US. When history repeats itself, all fiat currencies will come to an end. The US$ and the Euro are the 2 biggest fiat currencies on this planet. The bigger they are, the harder they fall.

[Marol]

If we hit a worldwide depreasion -- which I'm half-expecting -- that will include deflation. What then happens to the price of commodities, platinum, gold, energy, grain, etc.? Of course they will be relatively less of losers, but don't they lose too?

Maybe this question is too late, but there may be other informed readers.

In case there are more readers -- I learn a lot by reading both sides, esp from informed folks w clear opinions. I also appreciate seeing the sources for facts and opinions. It all helps me to decide (rightly or wrongly!)

I DO NOT appreciate it when people put others down. People are giving their best here, and if others know better, say why -- from a confident, reasonable person, that's enough!

[Marol]

Re cost of living: It's taken seriously, sure, but it also greatly understates. For example, the cost of core food -- that which the poor must buy and can't do better than -- is going up really fast (as it did in the 70s). I mean beans, rice, cheese, eggs, milk, pasta, soon bread. Probably cat food (which people do eat). Energy -- that includes heat and electricity. Even in good times, some American elderly die from lack of heat. Those with NO discretionary money stop being good consumers.

Also: Over the years, "cost of living," as well as the definition of "unemployed" keep changing, so it doesn't look so bad. As for M3? No longer available. Hmm.

Finally, Mark -- you're not just betting on two metals, you're also betting on ONLY TWO SPECIFIC COMPANIES. Suppose something happens? It only takes one rotten account or practice, one angry employee, one unanticipated side effect or natural disaster, one mine mess (For example, think of LDK, think -- ? I've forgotten, Canadian mine under water). (Disclosure: I'm long SWC and adding, was long LDK, was considering the third.) Even if the value is there, the investors will be scared.

There are other companies as well, and other commodities! You're on a tightrope w no safety net -- PLEASE BE VERY CAREFUL!