The Best Safe-Haven Investments, and Some Potential Threats 39 comments
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Make no mistake about it, we are in the midst of an unprecedent crisis. Everyone is watching Fannie Mae (FNM) and Freddie Mac (FRE). Everyone knows what a collapse of these two mortgage giants could mean, and what a high cost a government bailout would be. I encourage you to watch what Jim Rogers had to say about the crisis. I also encourage you to read Jim Sinclair's daily commentary to understand what's going on.
People, wake up! This is a worse crisis than even the Great Depression. I don't see anyone in our government capable of handling it. The best you can do is try to protect yourself. You must put away a certain portion of your financial asset into something that is directly under your own control and protection. I mean physical assets that you hold to your hands!
Don't put your money in a bank. As what happened at IndyMac Bank (IMB) shows, banks are extremely vulnerable to bank runs. If you wait until a bank run occurs to withdraw your money, it is too late. FDIC does insure bank savings up to $100K. But FDIC does not have an unlimited amount of funds to insure every one against loss, nor do they insure against lost purchase power of your $100K. I do NOT intend to cause bank runs. I do NOT want to see a total collapse of our financial systems. But I think that if enough people have their money in their hands, instead of in the banks, then people will have much greater confidence in their financial security, and there will be much less panic. I don't want to see people panic. The way to prevent panic is to remove reasons for panic. If bank runs are inevitable, I would rather see a slow and gradual bank run, where people withdraw maybe a couple hundred dollar a day. It's a way much better than 10,000 people all rushing to the same bank at once and grilling under the sun for 6 hours in the queue.
So here is my second point: After you get your money out of a bank, do NOT put it under your pillow. Cash stashed away under a pillow is useless and doesn't protect you, because our dollar is losing purchase power at a rapid pace. So instead you should spend your cash to buy things. Your purchases will put the money right back into the circulation of the monetary system and hopefully provides some stimulation to the economy. Hopefully by spending your cash away, the vendor who receives your cash payment will deposit it into the same bank, who will then stash it into the same ATM machine, so you or someone else can withdraw another couple hundred dollars the next day. That improves the liquidity of the system, doesn't it?
So what do you buy with your money? You need to buy useful things that can preserve value both in good times and in bad times. Buy dry food items that can be preserved for long time. Buy toilet paper, a lot of it! I am half joking and half serious with toilet paper here. You need to buy toilet paper as well as any daily use items, paper towels, detergents, whathaveyou, non-perishables that can last 5 years, 10 years or longer, because price of everything is going up fast. Why do you invest in something else that appreciates slower in dollar terms, and you have to pay capital gain tax, and then at the end of day you could only buy less of the things at much higher prices? You might as well just buy a whole closetful of those useful and non-perishable daily items, which probably appreciate in dollar terms faster than any other investments. And you don't need to pay any tax on the appreciation either. Hopefully through your big grocery purchases, you help to inject a little bit vitality into our economy by helping the workers who make the toilet paper or the detergents to keep their jobs.
You also need to buy things that take up less space, are less useful to you, but preserve and increase value over time. Of course everyone will immediately think about precious metals and when it comes to precious metals, you immediately think about gold. Most people probably think gold is the best safe haven investment. But I actually believe gold is the worst of all inflation hedgies. In the past 8 years the performance of gold lacks behind many physical commodities. That's a fact. People who bought gold near the 1980 high still haven't recoped their losses. The most famous gold bug sold all his gold exactly one day after gold peaked in 1980. Don't bet on selling exactly at the peak unless you have that kind of timing capability. Most people really should bet on being a sucker who always get the timing wrong.
I am NOT a gold bear. I honestly believe that gold will reach the $1650 per ounce target Mr. Jim Sinclair predicted, and probably get there faster than his prediction. But that alone is not a good enough reason to invest in gold. Because you probably are losing instead of gaining in purchase power. A one-ounce gold coin probably buys more rolls of toilet paper today, than it does in the future when it reaches $1650. What makes gold special than other metals just because it is labeled as monetary metal? Copper is monetary metal, too! So is silver! So is nickel! Do you know that the first batch of immigrants spent a whole summer searching for gold and the local Indians, who considered gold as decoration rather than money, figured that the white men must eat gold as food. Most of the first group of immigrants died when the winter came and their gold could not buy them food. An interesting historical lesson.
Natually, from a long-term point of view, a commodity's value is often determined by the cost of producing it. If it is very profitable to produce, it encourages more mining and production, bringing supply up and price down, and if it is unprofitable to produce, the mines will shut down, reducing supply and bring price up again. There are only two exceptions. One exception is if the production of the commodity is inheritantly limited by the availability of natural resources. Production cannot be boosted even at high prices, for example oil, or platinum group metals. Another exception is when there is already a huge stockpile above ground, enough to provide many years of supply, then annual production no longer matters. Examples of the second exception include both gold and silver.
Gold is the most abundant of all commodities, in all of humanity's history. Abundant in terms relative to annual physical consumption. Gold has very little industry usage. Most of gold is used to make jewelries or gold coins. Old jewelries and coins are routinely recycled and refined into pure gold, feed back into the supply chain. If all of the world's gold mines are shut down for a few hundred years, I don't see a problem at all. The existing global gold stockpile can supply the world's need for a few hundred years before a shortage develops. Gold price may raise a bit but then wearing gold jewelry may go out of fashion which brings down demand.
The world has enough gold stockpile to last a few hundred years! Try to imagine a world that has enough copper stockpile to last a few hundred year, or a world that has enough corn stockpile to feed the population a few hundred years! What would that do to the commodity price? The bottom could fall off! But gold is an exception. The whole world's gold mines can all shut down for a few years and it will not boost gold price much. Likewise, if the number of producing gold mines doubles, it will not dent the gold price much either. Gold's price level is largely affected by investment sentiments, not supply and demand. But investment sentiments can go either way. People never hesitate to sell their gold whenever they find something that's more attractive an investment than gold. Only when they can't find anything better to buy, will they return to the perceived safety of gold to try to preserve fortune. But do we really have nothing better to buy than gold today?
Of course there are better precious metals to buy. Namely the platinum group metals, platinum and palladium. They are way better than gold. South African mines shut down for 5 days in January and it sent platinum price and palladium price spiraling up for a month before the correction. You can clearly identify when the shut down happened by looking at the price charts. The same event also shut down all the gold mines in South Africa but you won't be able to tell it from the gold price chart. What does it tell you? The PGM metal supply is so tight that a 5 days disruption is enough to cause panic. The same can not be said about gold.
Regardless of how you think about the PGM metals supply/demand fundamentals, there is a very solid bottom of PGM metal prices for which you have assured protection and assured hedge against inflation. The bottom is the price level at which the current PGM mining companies can ensure at least a moderate profit margin, even with increasing cost of energy and mining equipments. You cannot say that for gold or silver mines.
The reason is very simple: if the PGM price falls below the profitable level, one or more of the major PGM metal producers will be forced to reduce production or even shut down, as you cannot operate an unprofitable business for long. When that happen it will tilt the dedicated supply/demand into shortage and send the metal prices spiraling up, until the mines can profitably re-open again. I've talked before about the price-inelastic nature of PGM metals supply. But I think I must make a correction: It's a one-way street, higher price is unlikely to boost production. But lower price would be rather quick in cutting down supply when PGM producers become un-profitable.
A few years ago, when palladium price was at the bottom, Stillwater Mining Company (SWC), one of my two favorite palladium mining companies, was able to sign palladium price hedging contracts with major auto makers, and was promised palladium floor price much higher than the going market price at that time. Because the industry users could not afford to let SWC go out of business, and therefore depriving them an important supplier of the palladium metal! It was a shame that we allowed the Russians to grab a majority stake in this strategically important national treasure of ours, sold out at dirt cheap price.
Judging from recently quarterly reports of Stillwater Mining Company and North American Palladium (PAL), both of which only recently turned modestly profitable in Q1 2008, the current platinum and palladium prices are probably not very high from the solid profitability bottom. The industry cannot afford to drive any of the world's PGM producers out of business because they can not afford to lose any portion of the tight global supply of the PGM metals. This ensures that the price of platinum and palladium WILL continue to grow, commensurate with the raise of energy, raw material and salary cost. You can't have a better inflation hedge than that!
I was once heavily invested in SLV, the iShares Silver Trust, although I could never get really interested in GLD, the SPDR Gold Shares. That was before I spent extensive amounts of time really trying to understand the market of palladium and platinum. On the internet there had been lots of speculation whether SLV was backed by by real physical silver, until eventually Barclays (BCS) released a long list of silver bar serial numbers, ending the speculation. I think in a stable market condition, it would be OK to invest in either the GLD and SLV ETF funds. But at a time when you can't even feel safe leaving your money in a bank, why would you feel safe leaving your share of gold and silver to be watched by Barclays? You'd better take delivery of real physical gold and silver metals in your own hands. Not to mention palladium and platinum, even better.
It is ridiculous that the share price of SWC and PAL have been suppressed to such a rock-bottom price. I do not know why. You have hundreds of gold mining companies to buy, hundreds of silver mining companies to buy. When it comes to PGMs, there are really not many choices. When it comes to primary palladium producers, there are only these two hidden gems. If I had enough money and was able to acquire a majority stake of both companies, here is what I would do to realize the true value of these two gems. I think I would temporary shut the businesses down for 6 months, pay the workers regular salaries and extra bonuses to vacation around the world. Let the industry and investment community panic about the supply disruption and let the metal prices run up. Then people will realize the value of PGM metals, and then they will recognize the true value of SWC and PAL. I think that's how free economy works. You don't operate any business unless it is quite profitable, or will be quite profitable soon.
Finally I want to comment on a recent news piece by Nikkei. Clearly this news release by Nikkei has spreaded around the whole internet in just two days and it caused quite a bit of turbulance in the platinum price. The news said that Nisshinbo Industries Inc., a Japanese chemical product company, has developed a new fuel cell technology that is platinum-free. If that is truth, of course that will remove a big chunk of the expected future demand of PGM metals from the fuel cell sector. But how credible is that news story?
I frankly believe it is either a careless rumor, or a deliberate rumor, for several reasons. One is, so far Nikkei seems to be the only source of this story. If this story was truth, this would be a very important technology breakthrough, a Nobel Prize-worthy disruptive new technology. Hundreds of research institutes spend decades trying to find a non-PGM based fuel cell solution and the search has been fruitless, and this company no one heard about suddenly announce they did what no one has accomplished?
The Nisshinbo Industries Inc. company itself would have to issue a formal press release and call in a press conference to announce such a breakthrough. There is no such mention on the company's web site. Even if the company did not choose to release a press release itself, but rather through third party media, logically it would choose to release the news through a technology, industry or academic publication. Why would it choose to leak the news to Nikkei, a financial news media? It would be totally unethical to skip normal publication channels for technology matters, and choose instead to utilize a financial news media to announce a technology breakthrough, because MBA folks in the financial sector would NOT have the expertise to be able to scrutinize matters related to the intimate details of technology.
Nisshinbo is a chemical company involved in a broad spectrum of products. They do not specialize in fuel cell developments. They do not make whole fuel cells. They do make components for fuel cell batteries, a component called fuel cell separator plates, or bipolar plates. They do indeed have a carbon nano-technology in making those bipolar plates. But those bipolar plates are NOT where the PGM metal catalyst sits. Nor does Nisshinbo make the catalyst for fuel cells. I never heard anyone using carbon as a catalyst! I searched the whole Nisshinbo web site, and found dozens of mentions of "fuel cell", but not a single occurance of the word "platinum". I searched for any possible patent they could have filed, and could only find one patent related to the carbon-based bipolar plates. So I really don't know where this "carbon-based platinum-free fuel cell" thing come from. I am in the process of contacting Nisshinbo and seek a clarification. If anyone reading this has contact with Nisshinbo, please forward my article to them and seek their comment and clarification.
Rumors spread fast. But truth spread slow. On a side note, I wrote in the past about tellurium and how First Solar (FSLR) critically depends on this rare element. My articles have fallen on deaf ears so far. One news piece yesterday really caught my attention because I think it is extremely interesting that a seemingly empty shell company would attempt to purchase a critical source of FSLR's tellurium! I don't want to spread rumors. I have my own speculation but I will not say it out here. Let people read the news themselves and speculate on their own. Suffice to say that I think I really need to short FSLR before its coming earnings release. I still have not heard any thing from FSLR. I hope they can give me a good reason not to short them.
Disclosure: The author is heavily invested in SWC and PAL, and hoards precious and rare metals. I currently do not have any short position in FSLR but am considering shorting it soon.
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This article has 39 comments:
Gold has proven to be a reliable store of wealth for ages. "A fine mens suit hundreds of years ago will cost about the same in gold as it does today".
Moreover, during the 30's, prices of goods dropped relative to gold. Thus your purchasing power increased.
Secondly, during the Weimar hyperinflation, the internal prices of the Weimar republic dropped relative to gold. Again, the purchasing power of gold within the Weimar republic increased.
Your argument that "you cannot eat gold" is true. But neither can you eat platinum, palladiium, copper, etc.
If it get's really bad and the world enters a depression, no one needs metals to build cars, homes, infrastrucure, because demand will be ZERO. Might was well hold a few ounces of gold...
Why not mention the "secondary" Palladium producer and SWC owner, Norilsk Nickel?
The title is misleading
goldismoney.info/forum...
mr anthony - any comment on PTM, the platinum etn? why not buy it instead of the pgm stocks?
Why not mention the "secondary" Palladium producer and SWC owner, Norilsk Nickel?"
Or the primary platinum producers like Anglo Plats and LonMin?
Mitsui Mining new autocatalyst uses silver, not platinum
Wed Apr 23 07:47:18 UTC 2008
TOKYO, April 23 (Reuters)
- Mitsui Mining and Smelting Co Ltd said on
Wednesday it has developed a new catalyst for diesel engine cars that replaces the use of platinum with silver, a less conventional but much cheaper metal.
"Silver will totally replace platinum in this new autocatalyst that we've developed," a company spokesman said.
By substituting platinum with silver, the cost of precious metals in the production of autocatalysts, which clean car exhaust fumes, would be cut by more than 90 percent, the company said.
www.edrsilver.com/i/pd...
I have noticed the news story on the so called silver catalyst converter the first day it came out, and immediate did a lot of research on it and identified and contacted a US researcher doing the silver catalyst converter research. I must say that such research attempt has been going for for several decades so it's nothing new.
I raised the question that silver reacts with sulphur and the exhaust gas from vehicles are full of sulphur dioxide, air pollutant that causes acid rains. So how could silver work?
The researcher admitted that indeed silver reacts with sulphur. Their solution is use two silver based devices. The first one try to capture as much sulphur content as possible, and it gets saturated in time so it needs frequent replacement or replenishment. The second silver based component acts as the actual catalyst converter, in an environment with relatively less sulphur.
Such a solution will never become practical on road vehicles. Imagine you need to serve your car and replace your catalyst converter every two weeks, versus the PGM catalyst converter that works care-free for years. As a matter of fact, two days after the initial silver catalyst converter report, Mitsui issued a statement clarify that the invention was intended for construction and farm machines, NOT for road vehicles. And it will not become commercially available until year 2012, if ever. Construction and farm machiens are relatively fix and do not move around a lot. So frequent replacement of the component might be easier. But I do not see the point of cost saving if it is so troublesome.
Please also read Platinum Today's response on the silver catalyst converter claim:
www.platinum.matthey.c...
I hope that answers your question.
Thanks for your response! I really appreciate your research. You are one of 3 analysts that I bookmarked and read regularly. Keep up the good work!
I don't know why some are so hostile to your writing. Why don't they make detailed counter arguments? The we can learn something from their opposition. Perhaps they don't like the black cowboy hat? LOL
While I am at it, I remember you mentioning cobalt as another inflation hedge metal. I am aware of only two cobalt miners and am wondering whether you have any opinion on them. Geovic Mining (GMC.TO) is starting up very large cobalt mine complex in Cameroon and Fortune Mineral (FT.TO) has a cobalt/ lead/ gold mine in Canada. FT also have a coal deposit. Do you follow these companies? Like most junior miners, they are very out of favor right now.
2). Gold cannot be evaluated as another commodity. Gold is the most fundamental form of MONEY, a status it has gained from thousands of years of history.
Since gold is a form of money, its relative scarcity needs to be judged by comparing the quantity of gold to the quantity of paper and electronic currency.
However, that doesn't do you any good unless Palladium prices are high enough for mining it to be profitable. Since Stillwater was roughly breaking even, I believe, back when Palladium was in the 300's, I assume they should be able to make a good profit at current prices.
However, to me the big question mark is demand. In the near term, the developing world is building more cars, which should increase demand for Palladium. However, I would think within 5-10 years we will have viable all-electric vehicles, and then demand for PGM's could go down a good bit.
Another wild card, however, is to what extent the industry is able to get Palladium more popular as a metal for jewelry. That could open up a lot of additional demand.
But some metals I think are worth looking at investing in are Lithium and Vanadium. You can invest in North America's biggest Lithium deposit by buying Western Uranium, or Western Lithium, the latter of which was spun off by Western Uranium and started trading last week. Western Uranium still retains about a 30% interest in Western Lithium, so you can get exposure to Lithium by buying it as well. As to Vanadium, I learned of a stock a few days ago that seems to me the best way to invest in Vanadium, but it is tiny and illiquid and I am still buying so I won't mention it at this time.
Most of you probably know why Lithium is of interest, Lithium batteries are by far the front-runner for use in electric vehicles.
Vanadium is of interest in the alternative energy world because of its use in "flow batteries", batteries whose fluids are stored in external tanks, thus potentially allowing the creation of batteries with very large energy storage capacity at lower cost than you could achieve doing the same thing with conventional batteries.
There are people who also believe Vanadium demand will go up a lot in its use in high-performance steel as developing economies like China switch to greater use of such high-end infrastructure products.
If you pick up most recent books on alternative energy, you will find them analyze the "hydrogen economy" and conclude that it is inferior to other alternatives.
1). low energy efficiency from the production to consumption end of the process
2). hydrogen is a lousy energy carrier (extremely expensive to store and ship, and in my view that is liable to remain true in the future)
I have been a long term skeptic of 'hydrogen economy' myself. Thanks for sharing your research.
Thanks for your insights. I appreciate it when someone speaks the truth about what's going on instead of flat out ignorance. To all the people who think the article is too long and think he is crazy, go back to watching TV...everything is fine. For Mark and the rest of us that have woken up, where do you suggest we keep our money? I know the dollar is losing value by the day, but I currently own stock in SWC, PAL, and a few Canadian royalty trusts. I was just curious to see which brokers (Scottrade, Zecco, etc.) you would prefer if any. Thanks for all you do.
Eskom carried out a "controlled shutdown" of Unit 2 at the Koeberg nuclear power station on Monday night because of a technical fault in the electricity generating side.
Check out this article.
www.int.iol.co.za/inde...
The second was a link to a July 26 article from SABC news stating that the Koeberg Nuclear power station had now had to shut down the other reactor following detection of a suspected fault in the cooling system. No estimated time was giving for repair and restoration of service on this unit.
What this boils down to is that Eskom is on the razor edge of rolling power outages with just about any event being enouph to trigger it.
www.business-standard....
Another point - I am too young to say that this crisis is worse than Great Depression - this, unfortunately, we'll be able to say when the current crisis is over (but then it will be another worthless and academical knowledge).
So, please, maybe it is a better way to allocate your hard-earned money looking at the charts than being surprised that something one owns goes in "wrong" direction.......otherw... it is a way to go bankrupt.