I didn’t think I was poor growing up because everyone around us lived in the same apartments and drove the same cars, etc.  That was what it was like growing up in the enlisted areas of military bases in the 1950s.  It caused me no offense when I asked my parents if we could go to Disneyland and they answered, “No, son.  We can’t afford it.”  This seemed then, as now, a perfectly logical rejoinder to me.  So I went outside and played sports and we had a barbecue at the neighbors’ house that Sunday.  Disneyland, no.  Sports and BBQs, yes.  I certainly didn’t feel deprived.

When I got older and we lived on the local economy, the disparity in wealth and toys was more visible.  Some of the rich kids drove 1964 GTOs, some of us drove ’57 Ford Fairlanes we paid $345 for.  The trade-off was, they got the shallow girls, we got to learn a lot more about mechanical stuff!  I didn’t resent them for having something I didn’t; I just resolved to do well in life so if I wanted a ’64 GTO I could buy one.

We seem to have forgotten the lessons our Depression-era parents or grandparents (OK, for most readers, great-grandparents) taught us: “We can’t afford it” is an OK thing to say.  There is no shame in it, particularly in a nation and culture in constant flux, where mobility is a constant and upward mobility a constant desire. 

I note this because I just saw the latest USA Today Gallup Poll that found nearly 5 of every 8 Americans “opposing” the question, “Would you favor or oppose a law in your state taking away some collective bargaining rights of most public unions?”  That wasn’t the shocker.  Even though collective bargaining in recent years has broken down over such “job” issues as which colors are most soothing for a worker’s break area and dictating what the proper temperature will be for school classrooms, Americans still have this notion that fair play means unions should hold the power to force concessions from “management.”

Of course, unions in the private sector need and, in most cases, have that sort of “equivalency” power.  They use it to ensure safe working conditions, health care coverage, and many other workplace essentials as well as, let’s face it, to grant seniority to those who have been paying union dues the longest and to get the most salary and benefits they can.  All of which makes sense for them and, ultimately, for the private sector.  After all, the natural check-and-balance that makes the Hegelian dialectic work in this environment is that the workers know better than to push too hard, lest the company fail and they all end up out on the streets because of their own greed.  So they get as much as they can within reason.

Regrettably, the same dynamics do not apply in the public sector.  “Management” – in this case the politicians whom the taxpayers elect – have had no incentive to push back against any public sector union demand.  All it would do is cost them votes and create saboteurs within the system.  How would it look to have “your” employees carrying signs for your opponent in the next campaign?  Besides, it’s all tax (“shareholder”) money, not “management’s”, so why not just give the public sector unions what they want and keep peace in the family?

But even if public sector unions were like private sector unions, and even if it were an honest negotiation between the two parties, the American public still seems incapable of saying, “We can’t afford it.”  For, as the poll went on to show, even though our government entities are broke – in many cases hard-broke – 71% of those polled oppose increasing sales taxes, income taxes or any other taxes to be able to balance the budget.  53% oppose reducing pay or benefits for government workers.  And 48% oppose eliminating or even reducing any state government programs, funded or unfunded.  (With 47% in favor and 5% “Don’t Know.”)  PS – I can understand the decision not to take part in a poll; I regularly turn them away.  But once you’ve signed up for the thing, how can you “not know” whether you oppose or favor the concept of eliminating or not eliminating the annual “Pull a Weed Day” parade?

The point is, would 71% of Americans, in their personal lives, decide they can keep spending more than they make every year?  Would 53% say it’s OK for management to take an outsized piece of the corporate pie even as their own real purchasing power is declining?  Would 48% willingly give an extra 10 or 20 bucks to the door-to-door solicitor who pleads to keep the “Pull a Weed Day” parade going?  If we can’t afford such incongruities in our everyday lives, why then are we willing to accept them in our collective and community lives? 

As Mr. Dickens observed so wryly and so long ago,

“Annual income twenty pounds, annual expenditure nineteen six, result happiness.

Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

The annual income of our federal – and most states’ – budget is twenty pounds.  Their annual expenditure is as much as forty pounds.  Stop the madness!!  Repeat after me, “We can’t afford it.”

What to do at the individual level to correct this horrid non sequitur? Like you, I think tax rates are quite high enough, thank you, but I don’t mind paying more in taxes.  So my plan is to make the smartest investments I can in the best companies I can find and raise the amount of my annual profits so I make an even larger contribution, via my taxes, to the fiscal health of my state and my country.  If you and I do our part to increase the amount of money paid in taxes in this manner, we have every right to expect government to trim its spending, cut dumb programs that we can’t afford, and rein in the ridiculously high pensions and benefits some local, state or federal workers enjoy (usually heavily slanted in favor of those at the top and those who’ve stayed the longest, but I repeat myself.)

It could happen. It’s not likely, but it could happen!

Rather than discuss specific securities or sector recommendations, may I instead leave you with this “macro” investment suggestion: try to buy good value at low prices; that would be the investing corollary to the above -- “We can afford this because it represents good value.”  And say, “We can’t afford it” when it doesn’t represent good value.  It’s the same, whether in politics, economics, or investing.   
If we can’t afford it, we shouldn’t be doing it.  If you would like our take on what is affordable today in the investment world, you are welcome to review our previous articles for your own due diligence… 

This is the final review of the Top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My criteria to be a “classic”? Brilliant and original investing insights and accessible writing that still speaks to us today. To be considered a “classic,” the book must have stood the test of time. These 10 qualify; they were published as far back as 169 years (and as recently as 43 years) ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since... (Of course, if you want to buy my more recent book as well, who am I to discourage you?!!!)

In chronological order of their original publication, here are the preceding 9 reviews:

Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)

The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)

Reminiscences of a Stock Operator, by Edwin LeFevre (1923)

Security Analysis, by Graham & Dodd (1934)

The Battle for Investment Survival, by Gerald M. Loeb (1935)

Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)

The Intelligent Investor, by Benjamin Graham (1949)

The Art of Contrary Thinking, by Humphrey Bancroft Neill (1954)

Common Stocks and Uncommon Profits, by Philip Fisher (1958)

And now #10, written in 1967 by ‘Adam Smith’, the pseudonym used by Jerry Goodman, a successful novelist, screenwriter, non-fiction writer and (hence the pseudonym when writing about Wall Street and stock markets) the former editor of the financial monthly Institutional Investor.

I began this series with Charles Mackay’s  1841 Extraordinary Popular Delusions and the Madness of Crowds.  It is only fitting to end with The Money Game.  Both books, though written 126 years apart, offer timeless insights into how investors (including, in the latter book, allegedly “professional” investors) provide substantive food for thought on how investors make and lose money in the markets. 

Mr. Goodman delves a bit more deeply into fundamental  and technical analysis, accounting practices, behavioral finance, random walk theories and such than Mr. Mackay did, but in the final analysis the game is about the players, not the rules or the features of the board.  Some players are serious solely about leaving with a greater net worth than they came with; but others are motivated by a desire to win, or to beat others (not always the same thing), or to get the adrenalin flowing, or to avoid bigger decisions, or for a myriad of other reasons.  Understanding this makes the vagaries and vicissitudes of the market easier to accept, if not to understand.  As he says most succinctly in his first Irregular Rule: “If you don’t know who you are, this [the market] is an expensive place to find out.”  But the most important Irregular Rule, still dealing with people, albeit in this case the people you want to see running the companies whose stocks you own, is “…find smart people, because if you can do that, you can forget a lot of the other rules.”  (Predating Warren Buffett by some number of years…)

In the second paragraph of the very first page of the book, Goodman tells you what it’s all going to be about: “This is a book about image and reality and identity and anxiety and money.”  When he says “image,” he refers to what government or a corporation or Wall Street tells you is true.  When he says “reality,” he refers to what is really true. As he pens a bit further on, echoing Mackay, as well as great investors before and since, “Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes…”

After devoting Part I of the book primarily to market and investor psychology, he turns in Part Two to “Systems,” be they academic roads to finding the perfect and occasionally efficient frontier or the technicians’ zeal to be right, even if they are not rich.  One may say every day that prices can be predicted from the past moves, while the other says (this week) that there is no way to beat the market, so you may as well simply buy an index fund.  Which is the best system?  Neither – and none, including today’s quants’ belief in the infallibility of computers, algorithms and programmed trading.   Goodman shows that all “systems” depend on analyzing something that has happened before to predict what will happen next.  This may well work in academic papers or in an algorithm, but you cannot reduce the whims of 50 million souls to an algorithm.  And you never will.

In Part III, the author deflates any notion that the “professionals” have any special relationship with the Clue Bird that is unknown to the average investor.  True they have more information – but they have no better information.  And they are as subject to the emotions of their Everyman counterpart when faced with making the tough decisions.

If some of these conclusions seem obvious, it is not because they were once obvious, but rather because authors like Jerry Goodman made such a convincing case that we finally began to take them as truisms.  The delightful discovery here is that he does it with great wit, great verve, and great humor.  Good writing about a great subject or great writing about a good subject, the result is the same: a great read.

Think not that this book is dated, any more than  a mere 159 years makes Extraordinary Popular Delusions and the Madness of Crowds dated.  Whether it is the Go-Go Sixties of Goodman’s day, the dot-com New Economy Nineties, or the Real Estate Will Never Decline 2000s, those in the game rely more than they know on their passions, hopes, and dreams.  Just change the names of the companies or the sectors and you’d never know which of these periods, or some other, you were in.  Reading The Money Game will give you that perspective – and maybe even a shot of inner peace for context!

Disclosure: No positions mentioned. These books are about lifetime knowledge, not flash-in-the-pan trading.

Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

If you agree with the estimable Mr. Twain, then a combination of:

Investor sentiment near all-time highs,

The paucity of analysts forecasting anything but rosy times in 2011,

An unusual lack of volatility, and

Complacency on the part of investors to the point of not even bothering to check prices, then…

This recent report from Citi’s research department on the prospects for 2011 makes for a chilling potential “rhyme” with some ugly past markets.

The table below comes from Citi, though I first saw it reproduced in an article at a website called lateralthinking.biz, to whom I give full credit.  Quoting from the Citi analysts:

"Over the course of this year we have constantly referred to what are the only three market overlays we think fit with the current price action in the stock market.  Our favorite for some time has been the spooky chart of 1929-1939, which we have been watching since 2003. A very close second- but fast becoming a potential number 1 choice has been the overlay of 1966-1976. And a relatively distant third has been the chart of the 1906-1909 period.

 

"It is these charts that have led us… to surmise that 2011 will not be a good year for the stock market.” 

Here is the chart to which they refer:

Citi’s analysts continue:

"Bottom line: Our favorite overlays suggest for the DJIA:

The market peak may be posted as early as the opening days of January, 2011 (possibly even January 3 as per the other three examples) with a down January in the region of 5%.

 

We will see an intra-year bear market next year (a decline of more than 20%).

 

We will close the year down double-digit percentages (approx. 16%).

"What will that catalyst be?  Likely one of two things:

 "The bond market falling sharply as it did in 1977, sending yields higher and fuelling inflation, or supply fears, or both.

 "Europe imploding. While this could stress our positive view on the dollar, fixed income, and commodities, this dynamic still supports our bearish equity view."
 

I don’t share their view that we must rhyme with the “spooky chart of 1929-1939,” but I share their concerns that most investors and almost every single analyst predicting 2011 are collectively whistling past the graveyard. 

I believe the level of complacency right now is typical of lemmings following each other saying bemusedly, “Hey, where’s everybody going?  And shouldn’t I be a part of it?” 

Like Citi's analysts, I believe we will experience a pullback some time beginning in the first quarter.  This will come as a disappointment to our clients and subscribers, as well as most Seeking Alpha readers, because we are, all of us, tired of this nonsense!  We’re ready for a market we can invest in and leave our funds in without having to watch it like a hawk or trade in and out of.

We’re close, I believe – but not quite there yet.  This kind of complacency demands at least one more shakeout.  But where I part company with Citi’s scenario is 2011 after a lesser shakeout has run its course.  Even if they are correct and the market were to plunge 20% -- a scary ride for those 100% invested – I think it will recover along with the US and global economy.  Ireland, Greece, and US home sales get all the headlines right now, but other nations and other sectors of the US economy are both undergoing upward revisions, increased sales, lower costs, higher quality, etc. These are the inevitable results of economic recessions.  Stock markets?  Their machinations are considerably harder to predict!

If Citi is correct, what would 2011 look like?  You don’t have to imagine it.  My friend and competitor Sy Harding at streetsmartreport.com has drawn the following chart of the years 1938-1940, which history shows does bear an uncanny resemblance to 2009 to 2010 and which Citi believes will likely play out in 2011 in the same way it did in 1940.  Here is Sy’s chart: (In Citi’s view 1937=2008, 1938=2009, 1939=2010, and 1940=2011…)

Does this look 
a lot like 2009?             2010 ?                2011 ???

If history were to rhyme “exactly” you should expect a Dow that drops to 9000 or so by mid-2011, then a partial recovery that leaves the markets still down for the year. 

My own expectation is not so dire, but I am, wearily and reluctantly, and for all the reasons I mentioned above, once more raising cash for our own and our clients’ portfolios.  That way, whether I am correct or Citi is correct, we will have the cash to be a buyer when the shakeout, whatever its amplitude and duration, occurs.  Unlike Citi's analysts, I believe that 2011 will most likely finish higher, not lower, for the year.  Even more importantly, I recognize that we are still not yet back in that precious stage where we can afford to be complacent buy-and-hold investors.

Like many of you, I look forward to a return to the days when my clients don’t wonder why I am “trading” so much.  I hate to trade; I love to buy quality and hold it.  But I will do what I must to protect our clients’ assets in what I imagine will be a difficult time.  Then I will be able to buy, hold and spend at least part of my days on more important pursuits like writing books, skiing, SCUBA diving and hiking.  But not until then…

Disclosure: Much as we hate to, the level of complacency and general outlook for the short term force us to once more raise our cash positions.  We go into 2011 with more than 50% in cash.  If/as the market does decline, either to Citi’s doomsday level or my more sanguine one, “the man with cash is King.”

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

“The core CPI rose in line with economists’ projections at just 0.1% this month, excluding volatile food and energy prices,” is a typical headline these days.  Only an economist making $3 million a year on Wall Street, who never shops for food and always has his driver keep the tank filled up, or a government bureaucrat who gets regular raises and "bonuses" courtesy of unwitting taxpayers, could imagine excluding food and energy from the family budget.  The latest numbers released show that, on an annualized basis, food prices rose more than 6% and energy costs were up closer to 10% .  Let’s say our typical reader is married with an income of $100,000 – flat to maybe up 3% in salary this month.  And food is up 6%.  Fuel 10%.  Cotton for clothing roaring ahead.  Rental costs rising.  And don’t even hope to see the same college tuition next year as this year.

If you don’t share the sanguine outlook of these Wall Streeters and other ne’er-do-wells, you may want to invest on the side of those who believe higher food and energy prices are not a temporary aberration but, rather, likely to be a reality for at least the foreseeable future.   One way to do so is via the coal, natural gas, and oil companies we regularly recommend on these pages.

Another way is via the poorly-monikered   AB Svensk Ekportkredit (Swedish Export Credit Corporation) ELEMENTS Linked to the Rogers International Commodity Index -- Agriculture Total Return Structured ProGRAM (or some such.) The symbol is RJA.

Careful!  The stock could move more than a point by the time you can spit it out as a buy or sell order.  Hence, I just call it, a la Voldemort, “the stock whose name shall not be spoken” – RJA for short.

Here’s what this mouthful really consists of... 10 years ago, the iconoclastic Jim Rogers created three basic commodities indexes under the rubric of “RICI” — the Rogers International Commodity Index: one for Energy, one for Metals, and one for Agriculture.  He then created three portfolios which featured the actual products most important to each of these.  The one I am discussing today, RICI-Agriculture is an index of 20 agricultural commodities  consumed around the world.  It is based upon international, rather than purely US, consumption.  I believe there is a strong, and mistaken, belief among institutions that food prices are (a) less significant and (b) only up as a momentary blip.  For that reason, you can still buy RJA at the same price I bought it for some clients a couple months back. 

The same is true for the DEUTSCHE BANK AGRICULTURAL DOUBLE LONG ETN (DAG,) for which the same investment case applies.  This ETN was priced originally at 26, plunged over the past couple years (what didn’t?) to single digits and is now up to about half what it was worth at its IPO.


While high prices for wheat, corn, soybeans, dairy, et al, may not (hopefully will not) be a permanent fixture, unlike the mutual funds and pension funds chasing ADOBE and CISCO here,  I see them as a permanent fixture at least for the next couple years. 


Please remember that an ETN, or Exchange-Traded Note, differs from an ETF in that it does not invest in the actual stocks of (in this case) agricultural companies but, rather, issues interest-paying bonds and uses some portion of the principal received to buy commodities futures.  In this sense, it is potentially riskier than an ETF, but in the current environment where banks are chastened and chained, I believe the issuer, DEUTSCHE BANK, will be prudent in controlling the risk. 

Population pressure and food subsidies in nations in Asia, Africa, the Mideast and Latin America, where the populations are restive and poor -- especially where the populations are restive and poor and the countries run by populists like Hugo Chavez in Venezuela or demented tyrants like Robert Mugabe in Zimbabwe – augur for continued increases in the prices of basic foodstuffs.   These two vehicles give you the opportunity to ride along, unaffected by a single company’s successes or failures…

Disclosure: We and/or those clients for whom it is appropriate are currently long RJA and DAG.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

This chart includes two of our favorite sectors, Energy and Metals & Mining.  I believe both show a shift in the nature of what the developing world craves.  So we sell fewer T-shirts (Retail,) MS Office packages (Software) and ad space (Services) rigtht now.  But they will grow apace as the developing world buys more resources with which to build and transport.  And that's what energy and mining are all about.


The economy is changing.  And that's OK.  Moving labor and capital from less robust industries into more lifts all boats.  We continue to stress the energy and mining firms, too numerous to list, that we have recommended for your due diligence in previous articles.  (OK, here's a partial list: XOM, ECA, CVE, SDRL, WFT, TOT, PAL, PLG, SWC, and SLW!)

The platinum group metals (PGMs) are six metallic elements clustered together in the periodic table: platinum, palladium, rhodium, osmium, iridium, and ruthenium. They have similar physical and chemical properties and, for the most part, tend to occur together in the same mineral deposits.  Every one of the PGMs have superb catalytic properties. They are highly resistant to wear and tarnish, resistant to chemical attack, and are stable at high temperatures and in electrical applications.  In a word, they are highly desirable for use in a number of industries.

I want to concentrate on palladium as the “dessert” I am most interested in while digesting our gold and silver gains, simply because it has the most established track record for industrial applications I see as essential to development of the world’s economies.  But a few words in passing about platinum are in order, since few of us have seen or worked with palladium but many of us own or have seen platinum (“white gold”) in jewelry.  (This is changing, however, with Stillwater Mining (SWC) and a number of wholesale and retail jewelers working together to market palladium jewelry.)
 

“There are enough platinum group element deposits in the Bushveld Complex in South Africa to supply world demands for many decades or even a century using current mining techniques. Demonstrated reserves and resources published by mining companies make detailed calculations up to a maximum of about twenty years ahead, but there is abundant and adequate geological evidence that these deposits continue far beyond where mining companies have proven according to rigorous international reporting codes.  For each 1 km of depth into the Earth in the Bushveld Complex there is in the order of 350 million oz of platinum. For comparison, annual production of platinum from the Bushveld Complex currently is only around 5 million oz.”

The problem isn’t the size of the reserves.  The problem is what it takes in effort, energy, and costs in dollars or rand to get the stuff.  Platinum is never easy to process; it takes about 10 tons of ore from the ground to refine just one ounce of the metal.  As a result, world platinum production typically totals about 1% of the amount of silver produced annually, and less than 10% of the amount of gold.  Maybe half that platinum, in small quantities, finds its way into catalytic converters to transform toxic emissions from internal combustion engines into more benign by-products. Most of the rest, ex stockpiling, gets used in jewelry.  Impala Platinum Holdings (IMPUY) and Anglo Platinum Limited (AGPPY) are two relatively pure plays in platinum.

While nearly half of platinum product goes to jewelry and another quarter to automotive catalytic converters, half of palladium finished product goes to catalytic converters and another quarter to electronics and dental applications.  Assuming these trends continue, I’d rather be in palladium.  The world’s appetite for automobiles for transportation, electronics (cell phones, laptops , LCD TVs, iPods, DVD players, etc.) to make their lives easier, and dental applications as more people worldwide seek a higher level of dental and medical care, all augur for greater growth in this area.  The jewelry industry’s push to market more palladium jewelry (another 14% of usage) is merely the icing on this white cake.

Illustrating the potential for increased usage of palladium for the automotive market are these two charts, courtesy of ETF Sources:

While the growth in China looks impressive (and will likely be matched in India, Brazil and other emerging markets), we need to realize just how low the actual market penetration is -- yet already the numbers are staggering!

With growth in the likelihood of automobile production this fast-growing, and the likely use of increased palladium growing apace, where might the world find enough palladium to fill this need in a timely manner?


I refer you to Stillwater’s website, which  shows the current production geographically, reaching the (self-serving) conclusion that sources beyond North America – where Stillwater is the Big Kahuna – are politically less stable or secure:

 Whether you agree or disagree with SWC's political assessment (I happen to agree,) one point is unimpeachable: the source for palladium titled “Russia inventory liquidation” is about to dry up and blow away.  I outlined the demand situation above, with increased auto, electronic, dental and jewelry usage.  The supply situation is about to be affected hugely, with some 12-15% of the supply abruptly declining.  Here’s why:  Russia’s Norilsk Nickel (NILSY) is currently the largest palladium producer in the world, producing about 2.5 million ounces of palladium annually.  But two factors argue against a continuation of this dominance.

First, Norilsk's palladium production isn't enough to meet rapidly growing demand even now, so Russia fills the deficit from Russian palladium stockpiles, built up over the years.  These stockpiles are known to have been falling as have the amounts sold on the export market.  The most likely reason is that the stockpiles are nearing depletion and the government has chosen to keep what remains for strategic reasons rather than allow Norilsk to act as agent for their sales.  If this is so, then global demand will be more dependent on mine production.

Second, because it is incredibly polluting, Norilsk is under heavy pressure to stop using its highly-polluting high-temperature-required smeltering processes to separate the more stable palladium (and platinum) from its nickel ore operations.  Since the nickel is less valuable per ounce but incredibly more valuable because of the sheer tonnage available, if Norilsk bows to pressure from the government and citizens living near their properties to change from the high-temperature process that allows for the separation of PMGs from the nickel to a chemical leaching process that does not allow for the removal of “impurities” from the nickel in a cost-effective manner, that source of PMGs will be gone, as well.

If both these events occur, which seems likely, then it will be a double-whammy to the supply side of the supply / demand equation.  Between the two, we’re talking about a 30-40% dent in supplies at a time when demand is rising globally.

Palladium isn't cheap.  The price of both platinum and palladium have moved up in concert with other precious metals over the last couple years:

Regrettably, this long-term chart, while showing the Decline of Everything in 2008, and the recovery of PMs and the PMGs in 2009-2010, doesn’t show the most recent data.  Palladium still enjoys a pricing advantage, but of slightly less than 2:1 rather than the 3:1 differential in the February 2010 chart above – as seen in today’s price, courtesy of Mineweb.com:

Investing in palladium

We have three favorite ways to play an increase in palladium demand / decrease in supply.  We also note that there are venues we use only for our most conservative clients, like purchasing shares of the Physical Palladium Shares ETF (PALL).   Investors using this venue will benefit from any increase in the price of the metal itself.  Other ETFs and ETNs dealing with the Platinum Group Metals include the ETFS Physical Platinum Shares (PPLT), the iPath DJ-UBS Platinum ETN (PGM), the UBS E-TRACS Long Platinum ETN (PTM) and First Trust ISE Global Platinum (PLTM).

But for most clients, and ourselves, we are buying instead three favored firms that provide operating efficiencies  that result in additional leverage to the price of the physical metal.

Stillwater Mining does it all – and does it right here in the USA.  It mines for, extracts, processes, refines and markets PGMs, especially palladium from two primary properties in Montana,  and also recycles used catalytic converters.  In addition, just this month, SWC acquired Marathon PGM Corp., an exploration firm with newly-proven reserves in the Thunder Bay region of Ontario.

North American Palladium (PAL) is a Canadian PGM producer whose primary asset is the Lac des Iles palladium mine in northwestern Ontario, but also has promising reserves at the Sleeping Giant gold mine in northwestern Quebec, and several exploration properties in the Abitibi region of Quebec.  Like SWC, however, PAL trades on US exchanges.

The smallest and most speculative of our favorites is Platinum Group Metals Ltd. (PLG), which is still an exploration and development company.  Its primary properties are well-located, however, just north of the famous Bushveld Complex in South Africa and in the same regions that SWC and PAL are currently successfully working in Ontario, specifically contiguous to PAL’s Lac Des Iles project.

Let me leave you with two final points.  One is best shown in the following Johnson Matthey graphic, showing in picture form the reasons why I believe palladium is the more attractive of the two primary PMGs:

And lastly, this.  While it may be “pie in the sky” right now, the synergies from the following empirically verifiable reality may one day provide palladium from what many would think the most unlikely of sources.  Significant quantities of the three light platinum group metals — Ruthenium, Rhodium and Palladium — are formed as fission by-products in nuclear reactors.  With tightening supplies and increasing demand, reactor-produced palladium is emerging as an alternative source of the metal. Wouldn’t the irony be supreme if the energy source many have vehemently derided and rejected, atomic power, turned out to be the answer to yet another of our most vexing environmental pollution issues?

That’s just one more reason why I have suggested both yellow cake and white cake for dessert…

 
Author's Disclosure: We and/or those clients for whom it is appropriate are currently long PALL, SWC, PAL and/or PLG.

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