Of Wars and Strategic Metals

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Includes: GLD, OMG, PAL, PCP, SLV, SWC
by: Mark Anthony

Originally posted August 26

The 29th Olympics Games has concluded nicely in Beijing, and so ended the One Dream of One Harmonic World. The War of Georgia broke out on the very eve of the Olympics Opening. The fireworks we watched were so brilliantly streaming! And the rockets' red glare, the bombs bursting in air, gave proof through the night that our planet was still not peaceful.

One only needs to look at the map to see the location of the strategically important BTC pipeline, to immediately realize that the Georgia conflict is in no way a regional conflict. It is a global crisis in all aspect. This, people, is the prelude of World War Three. Bush said a nuclear Iran would mean World War Three. Iran also warned that an attack against it would mean World War Three. So then, World War Three must be the inevitable thing to happen.

One little noticed news item caught my attention and convinced me that our government is indeed making strategic preparation for a possible global war. It's recent announcements by the Defense National Stockpile Center. It's public information. On August 7th, DNSC suspended sales of six materials from the stockpile inventory, one of them being platinum. On August 12th, DNSC issued a notice to order beryllium. And then on August 25th, DNSC issued solicitation to purchase pretty large amount of titanium. On the same day, DNSC also solicites purchase of the cobalt metal. Those are official public announcements.

In a previous article, I argued that platinum group metals [PGMs] are better safe haven investments than gold and silver, and one reason is that platinum is a critical war material. Big nations attempting to prepare for a global conflict of long duration MUST be hoarding platinum, palladium and rhodium. It is shocking that US government suddenly suspended the sale in the middle of the year. This never happened before in the 20+ years since the end of the Cold War! The hoarding of titanium is even more worrysome, as titanium is an aerospace metal. No wonder that the stock of Titanium Metals Corp. (TIE) suddenly surged up 5.99% on August 25. The cobalt play OM Group (OMG), which I recommended before, also surged up alone as well, as does cobalt price.

I am not a warmonger. I am a peace lover. But facing the reality of global resource depletions including Peak Oil, I think a global resource war is all but inevitable in the very near future. I just hope it doesn't go nuclear. I am happy to see our government is trying to stock up on critical strategic materials like platinum and titanium. At least our leaders are sane enough to want to fight a conventional war, not a nuclear war. Strategic stockpiles are not needed to fight a nuclear war. Push a few buttons and it's all over and there will be no survivors.

Also, while I believe a global conflict is ultimately inevitable and that our government is already quietly preparing for it, as probably are other nations, I do think global war is NOT imminent yet, definitely not in the next few months. The reason is very simple: We are NOT materially prepared to fight a global war, neither are Russia or Iran or any other countries. This hopefully should allow individuals time to shift one's financial assets to safe haven investments, and physically and mentally prepare for the difficult times to come. But a global resource war can NOT be avoided ultimately. So keep that in mind.

Mexico, the third largest oil supplier to the USA, sees its oil production plummet, due in large part to the rapid depletion of Cantarell Field. It is expected that by 2010, Mexico will cease to be a net oil exporter. That's only two years away! Do our leaders not realize what a daunting energy future we are facing? Of course they know.

Investors need to keep an eye on what's happening in the conflicts in the Middle East. As our main stream media is nothing but propaganda and brain wash tools, I recommend daily readings of DEPKAfile, Russia Today, Middle East Times, Rense and Guardian, and always read everything with a grain of salt since every one is inevitably biased.

It's disheartening to see that with global crisis looming, everything valuable is selling off and everything with zero intrinsic value is rallying. Everything is sold off: oil, natural gas, gold, silver, platinum, palladium, rhodium, even cobalt, even my favorite tellurium. Meanwhile US dollar saw its strongest rally in more than three decades! The world is turned upside down.

I say foolish traders! The first fundamental principle of the market place is that fools are always the vast majority in the marketplace.  Most people would prefer to just follow the mob, a proven method of losing your money fast and painlessly. The mob mentality makes it that much easier for the big boys to manipulate the whole market any way they want.

Recent commodity sell off, suspiciously synchronized in time, gives one assurance that it has nothing to do with any change in supply/demand fundamentals, but merely reflect a fluctuation in trader sentiments. It's nothing but inherit market volatility when too much money is chasing profit in markets that are just too small relative to the amount of money involved. Rhodium price fell from $10,000 per ounce to the low of $3,850 per ounce, a fall of 61% in just a month, but then it bounces back to $6200 per ounce, a rally of 61% up in just four trade days! Such volatility is unprecedented in the recorded history of any commodity trading. Does anyone buying or selling rhodium really know the precise global supply and demand numbers of rhodium? You might want to read an interesting comment of Jack Lifton on rhodium.

James Conrad recently discussed the disconnect between paper and physical metals in the precious metals market. I highly recommend his article (and a follow up). I agree there is a disconnect between the paper contract market and the physical metals market. I have a slightly different opinion on whether there is an actual shortage of the physical metals.

I think one needs to look at precious metal lease rates (interest rates) and compare the four precious metals to see which one is in real shortage and which one is not. Gold and silver lease rates are so low they are effectively leased almost for free. But platinum one year lease rate is as high as 5.22%, while that of palladium is 3.38%. More strikingly, if you note the date on the lease rate chart , gold, silver and palladium are all recent, but the last update date on palladium lease rate still remains on July 24, 08 . Does that mean that not a single ounce of palladium has been leased out for one whole month?! Isn't a high lease rate and a lack of lease activity an indication of physical shortage?

Another interesting development in the platinum and palladium market is that the ETF Securities platinum and palladium fund saw a massive drop of physical metal holdings in recent weeks. Some analysts interpret the physical metal holdings drop as an indication of waning investment interest. But I noticed that the daily trading volumes of the shares are way too low to account for the volume of recent physical metals redemptions. If it was investment funds unloading their holdings, they would just sell the shares in open market and be done with it. Someone directly tendered the shares and demanded redemption of physical metal, instead of selling the shares! I suspect that those are industrial users who purchased the ETF shares in the past, and who now tenders the shares to redeem into physical metals, as a quick way of quietly acquiring the physical metal, without driving up the spot price. If my speculation is right, this is a good indication there is now shortage of the physical platinum metal in the marketplace.

The massive redemption of the ETF Securities PGM metal funds is a great contrast from the massive increase of holdings in the iShares Silver Trust (NYSEARCA:SLV) and SPDR Gold Shares (NYSEARCA:GLD).

During times of crisis and uncertainty, people invest in precious metals to preserve fortune because physical metals have intrinsic values and they can be hold and can be easily stored and transported. I do not like gold because gold has little industry usage and is purely driven by investor sentiments. Gold is sold from one gold investor to another gold investor so you are attempting to profit from your fellow gold investor, which doesn't sound right. Metals with important industrial usages are much better value storage. I hoard physical tellurium and I do not need to sell it to another investor; certain industry users, like First Solar (NASDAQ:FSLR) will one day pay a hefty price to me when they can't acquire the material elsewhere due to a global shortage.

But tellurium is not for everyone due to its lack of market liquidity and its mild toxicity. Silver is better than gold as silver is an important industrial metal. Unfortunately the mine production of silver, as a base metal byproduct, is ramping up, while some of its traditional industry application is diminishing. Silver is now in structural surplus and so just like gold, silver price now is driven by investment sentiment, not by the supply and demand.

I recommended cobalt instead of silver and I recommended the OMG stock. But the best precious metals are platinum and palladium. Platinum is way  better than gold, while palladium is better than platinum due to current price disparity. Unfortunately, physical palladium coins and bars are now extremely hard to find. If you like the PGM metals, consider buying the stocks of Stillwater Mining (NYSE:SWC) and North American Palladium (NYSEMKT:PAL). They are the ONLY primary PGM metals mining companies outside South Africa and Russia. Russia, being the dominant palladium producer, can cut back export and boost the palladium price at any time, in their own interests. South Africa continues to struggle with a national electricity crisis which greatly impacts the output of its PGM mining industry. How do you figure ESKOM, South Africa's national electricity company, is paying about US$10 per ton for coal while the rest of the world is paying $150 to $200 per ton for coal? They are forced to use discard coal! How long can they continue to burn trash until a catastrophic system breakdown happens? The CFO of ESKOM has just resigned, another bad sign things are not going well in that country.

I would also recommend buying U.S. OIL FUND ETF (NYSEARCA:USO) and US Natural Gas Fund ETF (NYSEARCA:UNG). I think this market is rigged to the extreme. Hurricane Gustav blows through and forces the shutdown of oil platforms, and oil and gas dropped 7% overnight? Maybe we should have more category 3 hurricanes so that we can all enjoy cheaper oil and gas. The marketplace has become a giant casino. The only way to fight this casino and win is to stick with the fundamentals and stick with logic and common sense and do not run with the mobs.

Disclosure: The author hold large long positions in SWC and PAL.


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