Going Platinum

Taking a break from the more popular metals, our natural resources guru, John Myers, explores the investment potential of today’s engagement ring metal-of-choice: platinum.

What element is scarcer than gold, a better conductor than silver and denser than lead? The answer is platinum – the strategic metal for industries, armies…and astute investors.

Why am I so positive this strategic metal is the next hot sector for gains? Let me lay out the opportunity I see for you with investing in platinum today.

Platinum is one of six metals that make up the platinum group of metals (PGMs). The other five are: palladium, iridium, rhodium, ruthenium and osmium. Certainly, the last four are relatively obscure. Even palladium is not widely known.

All six of the PGMs have unique properties, and their value continues to expand in this age of industrial revival and high technology. But of the six metals, platinum has the greatest economic importance of the PGMs and is found in the largest quantities.

Platinum Production: A 25-Cubic-Foot Room

The characteristics and uses of platinum are varied. First of all, it is very rare. All the platinum man has ever mined, for example, would fit into a 25-cubic-foot room. Only about 133 tons of platinum is mined annually, compared to about 1,782 tons of gold. When you consider that it takes 10 tons of ore and a five-month process to produce a single ounce of platinum, you’ll begin to understand why this metal is so "precious."

Couple with this the fact that platinum is also very profitable. During periods of strong demand or inflationary worries, for example, platinum has earned spectacular profits for owners of the physical metal or stockholders of companies that explore and mine it. When the Midas metal peaked at $850 per ounce in 1980, platinum’s price broke above $1,000.

Platinum is found in a bevy of products ranging from the B-1 stealth bomber to the fountain pen. For some, PGMs are a lifesaving element, used in cancer-killing drugs, pacemakers and magnetic nuclear resonance imaging. One in four goods manufactured today either contains PGMs, or PGMs have played a key role in their manufacture.

Because of its special properties, platinum produces Space-Age materials, used by certain industries and the military. For instance, platinum is used by defense contractors in everything from artillery to aerospace. And in an age where silicon is more important than gunpowder, the Pentagon understands the vital need for PGMs. For example, both platinum and palladium are integral components in ceramic capacitors used in satellite imagery and computer weaponry.

As new applications are found, demand for platinum grows. Platinum’s use is growing in fiber optics and medicine (platinum in certain compounds can inhibit the growth of cancerous cells).

Platinum’s use in jewelry has been surging over the past decade and today represents 38% of overall platinum demand. An equal percentage of platinum demand comes from the automobile industry, which uses the white metal to vastly reduce carbon emissions and greenhouse gases in catalytic converters.

As the developing world continues to buy and build more cars with catalytic converters, the demand for this strategic metal will only increase. But whether the world can smoothly meet future demand remains to be seen.

Platinum Production: Demand up 60%

The critical global usage of platinum is for car emission control, fuel cells, catalysts, telecommunications technology and cancer treatments. Over the past decade, demand for platinum increased by 60%.

Reacting to the run-up in platinum prices, mining consortiums have invested billions to increase production. So far, the results are rather mixed. Supplies of platinum from South Africa reached a record high of 4.45 million ounces in 2002 (the latest year on record), an increase of 8.5% over 2001. Both the expansion of existing operations and growing production from developing mines contributed to the rise.

But we’re skeptical that South Africa will continue to see its platinum production grow. We think it is more likely that South African platinum mine growth will soon reach a zenith, and then enter into the type of decline experienced by South African gold producers.

Meanwhile, Russian platinum production is in steep decline. In 2002, output fell to 980,000 ounces, down from 1.3 million ounces in 2001.

Fortunately, North American production has risen significantly. In 2002, platinum production rose 10% to 395,000 ounces. Whether or not U.S. and Canadian platinum production will continue to grow depends on the success or failure of open-pit mining.

Platinum Production: Bushveld

The fact of the matter, though, is that global supply of platinum is dominated by production from South Africa, which accounts for 80% of new mine production. And fully two-thirds of the world’s new production comes from a single property in South Africa – the Bushveld Igneous Complex.

My geology professor called structures like Bushveld geologic aberrations. It’s 20 times larger than the world’s next largest deposit. No other animal, mineral or vegetable is as concentrated with PGMs as Bushveld.

But what is of immediate concern is that it is next to impossible to increase Bushveld’s output – a troubling fact for a property that delivers two-thirds of the world’s platinum, for which annual demand is increasing at double-digit rates.

The lifting of ore from the deep crevice at Bushveld is limited by deep shaft transport. In fact, as mining moves into ever-deeper layers, capacity at the property falls. The bottom line is that new shafts will have to be added – a long and expensive proposition. And that means the dominant supplier of platinum to the world is on a curve of diminishing returns.

Because platinum is such a thin market, even a temporary interruption in its production would have an explosive impact. But even without a crisis, the commodity markets have seen the price of platinum explode, with the white metal doubling in price since 2001.

The bull market in platinum is driven by the inability of new supplies to keep up with growing global demand. Over each of the past four years, supplies of platinum have fallen short of demand. With inventories falling, the price has risen to a 24-year high, and the outlook remains extremely bullish.

Platinum Production: Open-Pit Mining

Since the price of platinum is now over $800 per ounce, and the general assumption is that the long-established deep mines will be unable to meet growing demands, innovative mine executives are shifting some of their focus to large-scale open-pit operations. The same shift occurred in gold-mine operations in the 1980s, as South African deep mines became less productive.

With platinum so rare and prices so high, a few producers have been able to turn a profit with open-pit mining. Whether or not they will quickly exhaust their reserves, or slowly become unprofitable, remains to be seen. But if they have even a fraction of the success that some gold companies have had, shareholders of companies involved in this type of platinum mining will collect windfall profits.

The growing boom in China, as well as India, Russia and other developing countries will create massive demand for platinum. Long-term, that will spawn a bull market for the metal.

As mentioned earlier, the price of platinum is currently at a 24-year-high. After establishing a new high at $772 per ounce in November, platinum prices surged to another record high above $920 per ounce in early March. Prices have now risen by about 110% since their low in 2001.

But despite strong fundamentals, there is some risk that platinum’s high prices will hurt demand in the jewelry industry, which accounted for 42% of demand in 2002 – where there is some evidence that indicates the expense of platinum is one of its major attractions!

Also, with somewhat stronger U.S. economic figures and the dollar’s weakness accelerating, it seems likely that the Fed will start to make noise about raising interest rates. When this happens, platinum prices are likely to come under pressure.

Demand from the auto catalyst manufacturers, which accounts for some 40% of platinum demand, is also likely to suffer, albeit to a lesser extent. Tighter government legislation and growing demand for diesel cars will make demand for platinum less price elastic…and it is likely to lose some market share to palladium, especially as the latter is some $600 per ounce cheaper than platinum.

Technically, then, platinum looks vulnerable to a correction in the near term. However, with the fundamentals set to remain tight, any decent pullback in platinum prices should be a good buying opportunity.

The bottom line is that platinum appears to have entered into a long-term up-cycle…but would-be platinum investors should be careful how they ride the trend.

Regards,

John Myers,
for The Daily Reckoning
April 1, 2004

P.S. Although the profit opportunity in platinum is clear, it’s easy to overlook…simply because there aren’t a lot of ways to invest in platinum. Decent platinum options are hard to find, and there are few companies that exclusively deal in it.

If you’d like to learn more about platinum investing, however, you may be interested in my real-time trading service, Resource Trader Alert.

Editor’s note: John Myers – son of the great goldbug C.V. Myers – is the editor of Outstanding Investments, a monthly advisory on commodities and other hard assets. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits – including oil, gas, energy and gold. This essay was adapted from an article in the March edition of:

Outstanding Investments

April Fool’s Day, 2004.

This is the day people admit what they’ve been all year long.

Perhaps Alan "Bubbles" Greenspan…Zembei "Mr. Dollar" Mizoguchi…and all the world’s most prominent central bankers will wake up this morning, look themselves in the mirror and say to themselves: ah, what fools we have been!

The U.S. economy appears to thrive by consuming what it cannot afford. The Asian economies appear to thrive by selling to Americans what they cannot pay for. And almost everyone everywhere appears to like the foolishness so much, they ask only that it continue.

And why not? Americans are happy to spend money they haven’t got; their economy depends on it. And Asians are happy exporting products to them; their economies depend on it, too. Who wants to change? Who wants to enter the long, dark passage to a new economic order? No one. So it goes on – based on lies, fraud and foolishness.

But the present situation is ruinous for everyone, as near as we can tell. Each year sends Americans deeper into the hole…and makes them less competitive on world markets. Meanwhile, Asian economies add to their productive capacity based on demand that really isn’t there. If Americans spent only what they could afford, buying would suddenly go down…and cobwebs would form on Asian assembly lines. China, with its hundreds of millions of barely-employed people, would probably erupt into war, revolution…or some other form of upheaval.

The whole thing will blow up in our faces. But when? How? "There is a lot of ruin in a nation," Keynes pointed out. But how much?

"The problem is debt," said Robert Catto at our Roundtable discussion on Tuesday. "Somehow, debt levels have to go down."

But couldn’t debt levels go down gradually, asked another fund manager? We know the present situation is unsustainable…but couldn’t there be a ‘soft landing’? Couldn’t the transition to a more balanced and healthy world economy be accomplished without anyone slashing his wrists?

We considered the question. Certainly, we’d like to believe it. But imagine a man with $100 to spend every week. He believes things will always get better, so he mortgages his house and uses credit cards in order to enjoy some of tomorrow’s good things today. He spends $110 a week…and the economy booms. Multiplied by millions of fellows just like him, the spending power of the entire nation seems to have been magnified by 10%.

After a year, however, he owes 5 times his weekly disposable income. No one will lend him more. Instead, his creditors are demanding repayment. Can he gradually reduce his debt without pain?

Alas, no. In order to reduce his debt, he must spend less than $100 a week. His living standard must go down 10%…at least. And even if he cut back by a single dollar – his living standard must go down. Plus, the economy has come to rely on him spending $110 every week. If he spends less than that, sales go down…which sends a shock wave through the entire system. Business profits fall. People are laid off. The effect is amplified…because then incomes fall, too. Pretty soon, the man no longer earns $100, but $95 or $85. He has to cut back his spending even more, just to keep his head above water.

Sir John Templeton was quoted last week saying that in the coming downturn, 20% of people with mortgages are likely to lose their homes. At the margin, the two-income, no-savings household cannot afford even a slight cut in income or credit. They will lose their house. And who will buy it? And what price?

But that is enough gloomy ramble for one day. Here’s the news from Wall Street:

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Eric Fry, from the financial capital of the world…

– The "dead cats" have been bouncing all over Wall Street for the last few trading sessions, but they didn’t bounce quite high enough to lift the Dow or the Nasdaq into the black for the first quarter of 2004.

– The Dow fell 1% during the first three months of the year, while the Nasdaq dropped half a percent. Bucking the downtrend, the S&P 500 gained 1.3% – its fourth straight quarterly gain. In yesterday’s action, the Dow eased 24 points to 10,357, while the Nasdaq slipped 6 points below the precious 2,000-mark to 1,994.

– Investors like us, who are inclined to look on the bright side of things, should remember that the Dow gained 42% from its trough in March 2003 to the recent peak in February. The Nasdaq Composite, meanwhile, soared 68% in the same period, and has slipped only 7.5% from its 52-week high of 2,154 reached at the end of January.

– If only more investors had been willing to pay foolish prices for stocks, the market might have performed better during the opening months of 2004. But even the most cavalier of investors must contend – occasionally – with disconcerting facts. One such fact emerged yesterday, when the Chicago Purchasing Manager’s Index fell to 57.6% in March, far below the 61.4% reading in February.

– Troubling fact #2: Orders for U.S.-made factory goods rose a surprisingly weak 0.3% in February, well shy of Wall Street expectations for a 1.7% increase. Troubling fact #3: OPEC affirmed its plan to cut crude production quotas by 1 million barrels a day, prompting the White House to whine that the malevolent oil cartel is trying to hurt the U.S. economy. (Hmmm…maybe we should invade OPEC). And finally…our favorite troubling fact of all: The dollar may be losing its footing once again.

– During the New York trading session yesterday, the dollar tumbled 1.1% against the euro to $1.23 and 1.5% against the yen to 104.22. While the dollar swooned, the Daily Reckoning’s favorite precious metal jumped $5.50 to $428.30 an ounce.

– The dollar selling started overnight in Japan, where the yen surged to a new four-year high. The greenback’s slide gained momentum in New York after a rumor crossed the newswires that Federal Reserve Chairman Alan Greenspan had suffered a heart attack. The Fed promptly denied the rumor, but the dollar failed to recover.

– Although Greenspan did not suffer a heart attack, he may have suffered a mild panic attack after reading the latest public opinion polls. According to an NBC News/Wall Street Journal poll, only 45% of Americans give Greenspan a "very positive" or "somewhat positive" rating, down from 54% in a similar poll six months earlier. It’s the first time in this decade that Greenspan’s favorable ratings have dropped below 50%. The portion of respondents professing a somewhat or very negative view of Greenspan rose from 10% to 14%.

– The foreign exchange market conducts a real-time public opinion poll, and Greenspan’s reputation isn’t faring well in that venue, either. To judge from the dollar’s steep slide, a growing number of foreign investors are adopting a "somewhat negative" view of Mr. Greenspan and his monetary policies.

– Therefore, if the Japanese central bank does in fact discontinue its "artificial" dollar buying, the greenback may fall farther and faster than the Monetary Maestro intends. The dollar, like the stock market, does not lack for reasons to decline in value. In previous editions of the Daily Reckoning, we’ve mentioned the three main reasons for the dollar’s weakness. They are: debt, debt and debt. America’s gaping trade imbalance, in particular, is a more depressing influence than a kvetching spouse. Unfortunately, the dollar cannot drown out its troubles, simply by turning up the volume on the TV, or by skipping down to the local bar…

– "There is surely something odd about the world’s greatest power being the world’s greatest debtor," former Treasury Secretary Lawrence Summers said last week during an address to Washington’s International Institute of Economics. "There is surely a question that must be asked when, in order to finance prevailing levels of consumption, prevailing levels of investment, it is necessary for the United States to be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries.

– "Maybe it’ll turn out that we can rely on an emerging China and Japan to support low interest rates in the United States indefinitely, and that that’s a good planning assumption," said Summers. "[But] it seems to me to be a dangerous mistake to be making in this country and…it’s hard for me to understand why there isn’t a broader sense of concern."

– Hmmm…we suspect that "concern" is a market-driven phenomenon. "Concern," if not "panic," may manifest itself at $2.00 per euro…or perhaps at Dow 5,000.

– But let’s end today’s financial discussion on a lighter note. Late yesterday afternoon, a small bit of positive economic news crossed your New York editor’s desk. However, he cannot vouch for its accuracy:

– "Unemployment rate among hot young women holding at zero percent," read the headline from Recoilmag.com, a Website previously unknown to your editor. "Economic analysts were abuzz Monday following the release of February’s Labor Department figures, which showed the unemployment rate for hot young women in the U.S. holding steady at zero percent for the 302nd month in a row."

– Apparently, America isn’t exporting ALL of its jobs.

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Bill Bonner, back in London…

*** The Chicago Manufacturing Index dropped. Oh no…sell! Wait, OPEC is cutting production. Oh no…buy! No, sell! The dollar fell again against the euro. It fell even more against the yen. Buy yen? Sell dollars? Gas is at an 18-year high. Sell! Buy! Drop dead! We don’t know.

And tomorrow come the employment numbers. All over Wall Street, people are sitting on the edge of their chairs. If it is low…sell! No, buy!

News has taken over. People react to it like a chicken reacts to a sharp knife. They run this way and that. And yet, they think the news is critically important. You can’t be too rich, too thin…or have too much news, they think.

We’re not sure. Does a quarterly report from a business tell you more than an annual one? If so, why not a monthly report? A daily report? An hourly report? How about a report every second of every blooming day? Would you know more? Or less?

Or could news be like democracy, credit and homemade alcohol? A little is invigorating…but too take too much, and you go blind.

*** A little note from a London colleague, Simon Nixon:

"We spent the weekend in Split on Croatia’s beautiful
Dalmatian coast. We were taking part in a conference to discuss ways to strengthen democracy in the Balkans.

"From our fellow delegates, we learned there are more than 200 political parties in Albania, Bulgaria and Romania and an equally preposterous number in Serbia, Macedonia, Bosnia and Croatia.

"We wondered if it was possible to have too much democracy. What is the question, we asked ourselves, to which the answer is more politicians?"

*** The cover story on London’s Times is the one you might expect: dead Americans hanging from a bridge in Fallujah.

But in the modern delusional mind, democracy is considered the treatment for all social ills. Even this act of barbarity is thought to be caused by a lack of it. Colin Powell responds: "The Iraqi people will be free. They will have a democracy."

We don’t know how he knows these things. But it looked to us as though the Iraqis had too much freedom already. If they had the right to vote…we wonder what appalling thing they might come up with.