Commodity Roundup: What To Be Bullish On Now
In recent weeks, we have seen the worst sell-off of commodities in the history of commodity trading. The magnitude and viciousness of the sell-offs made many traders wonder whether a slowing global economy could mean commodities are no longer bullish fundamentally.
These commodities sell-offs are precisely synchronized , which subject them to suspicion of market manipulation and government intervention. Grains, precious metals, base metals all move up together one hour, then all fall off a cliff the next hour.
As vicious and relentless as recent sell-offs have been, there has been absolutely no fundamental change in the multi-year commodities boom and dollar bearishness. It is all just inherent market volatility which naturally exists for any commodity in short supply.
The volatility is due to the presence of too many market participants chasing too narrow a market. The narrower the market, the tighter the supply. The greater the amount of people involved in a particular sector, the more extreme the volatility we will see in that market place. Gold is less volatile than silver because the silver market is much narrower than gold. Palladium has been more volatile than platinum or silver because the palladium market is even narrower.
It is a known fact that when supplies are abundant, prices tend to be very stable over a long period of time, and when supplies are tight, prices tend to shoot up rapidly, then drop viciously, only to bounce back and shoot up even more. Rhodium and cobalt prices are very good recent examples. As you might remember, I recommended cobalt as a better silver and pitched OM Group (OMG) as a cobalt play.
Why must tight supply be associated with extreme volatility and abundant supply lead to flat prices? Because when the supply is abundant, there will be abundant inventory at every segment of the supply chain, buffering any price shock and smoothing out any price fluctuation. Producers will be able to plan in advance and adjust production to meet the level of demand, based on price movement and their inventory levels.
But in a tight supply situation, inventories are depleted, which often leads to panic buying and hoarding by end users, and thus skyrocketing prices. Then the buyers think the price is too high and hold off on further purchases. Sellers suddenly find their buyers have disappeared, so they slash prices to attract new buyers, which actually drives all buyers further away as they wait for even better deals.
Speculators who were attracted by the tight supply further add fuel to the volatility by joining the bids on the rally side and participating in the panic selling as prices go down. Eventually prices fall to an extreme bottom, rewarding savvy investors who had patiently made purchases during all the selling near the bottom.
At this point, industrial users who have depleted their hoarded inventory figure the price has bottomed out. They start to buy, and suddenly find there is no supply because savvy investors have snapped up all the available supplies. And so, the panic buying begins again bringing on another round of strong rallies and vicious sell-offs.
BHP Billiton (BHP)'s recent cobalt sales history is a textbook example, as buyers on August 22, 2008 suddenly all jumped in together after waiting on the sidelines for months. I watched the $24/pound price tag that day and wished I'd had enough cash to buy, but the minimum order was two metric tons.
I wondered if during recent platinum and palladium price free fall, there might have been a few big savvy investors quietly loading up on all the actuall metal being sold off. I know Jim Rogers likes palladium. I know George Kaiser loves palladium as a long term investment. He's owned almost a majority stake in North American Palladium (PAL) for years, and recently increased his stakes.
Metals analysts such as Jefferey Christian of CPM Group are very bullish on PGM metals. I know Norilsk Nickel (NILSY.PK), the world's dominant palladium producer, pushed for direct negotiation between President Bush and President Putin to reach the deal to acquire a majority stake in Stillwater Mining (SWC) in 2003. Their strategic goal for global domination of the palladium market is clear.
The case for a palladium super bull cycle is so indisputable, SWC's presentation at 1:30pm on Sep. 9 presents very concrete data and facts as to why the PGM market fundamentals remain bullish. Latest news of South Africa's -32.8% PGM production shortfall should make the bullish case even stronger.There have to be some big players who are interested in the metals and would love to buy at lower prices.
So I am not too worried about the recent price plummet. Someone somewhere must be planning to corner the palladium market in order to reap huge profits. The supply is so tight, the global palladium market so narrow, anyone with a decently high net worth could corner the market for profit as the reward/risk ratio is just so irresistable.
Of course, when it comes to cornering markets, the most successful case is De Beers, which for over a century has successfully cornered the global diamond market. Not only did they monopolize the global diamond market, they also created a gigantic consumer market for diamonds. They purchase virtually all of the world's raw diamond production and hold it in inventory, then release the supply to the market in carefully controlled quantities, creating artificial shortages to raise prices.
But De Beers has recently been under threat from a privately held company called Apollo Diamond, which produces artificially grown diamonds that could be sold in greater quantities and at far lower prices then De Beers' offerings. Apollo Diamond's technology has the potential to take De Beers' well known motto, ''A Diamond is Forever,'" and transform it into 'A Diamond is for Everyone."
Not wanting to ruin the market price and their huge profit potential, Apollo Diamond has been very cautious, releasing a limited amount of its lab grown diamonds to test the waters, at a price not much cheaper than the natural ones.
The Apollo Diamond technology, based on Chemical Vapor Deposition [CVD], is nothing new and nothing proprietary. The only secret is the right combination of gas compositions, temperature and pressure, which the company discovered through trial and error.
Since Apollo Diamond has already demonstrated that it can be done, anyone with a decent amount of money can put together a team of CVD experts and figure out the correct recipe on their own, thereby breaking Apollo Diamond's short lived technology monopoly on growing jewelry grade, clear-colored diamonds. The huge profit potential will bring in competition, bring down prices and ratchet up availability.
All this will do wonders for platinum and palladium, since one cannot wear a loose diamond without a setting. And the setting needs to be something precious and long lasting. Gold's yellowish color does not enhance the beauty of a crystal clear diamond. And white gold is unappealing because it's not pure. Therefore, for many cultures as well as individuals, the only acceptable, pure, white precious metals that do not tarnish are platinum and palladium.
Current developments in the jewelery arena mean that demand for platinum and palladium will outstrip current global supply , as annual global platinum and palladium production requires about 0.035 grams of each of the metals for each person on earth. One diamond ring probably will require about 5 grams of the metals.
As the US dollar is being desperately pumped up, and precious metals as well as all other commodities are in free fall, many wonder if we're facing a deflational future or an inflational one. I think the diamond provides the correct answer. While speculation knocks down precious metal prices, it hasn't gotten to diamond prices. Read the Diamond Registry for the big picture. I recommend reading The "Diamond Lining" To All the Clouds:
This is the business that has survived numerous recessions because it is a business based on love, and love endures, and even grows stronger, through hard times. People will always fall in love, and get engaged and married — and when they do, they will mark those events with diamonds.
No wonder China's diamond imports have tripled in a year and are still growing rapidly. No wonder global diamond prices have increased 30% from a year ago and are still growing rapidly. There is no such thing as a price correction in diamonds, there is no paper diamond trading on COMEX, and diamonds are purchased not by hedge funds but by the general populace, who look to diamonds not just as a symbol for love, but also as an investment and a way of preserving wealth in this inflational environment. Tiffany & Co.'s (TIF) rapid sales growth reflects that reality, as does this report from Harry Winston Inc. (HWD).
Shame on the talking heads who spread the myth that higher platinum and palladium prices suppressed the jewelry demand. Have they looked at the booming diamond demand? A typical platinum diamond ring costs any where from $2000 to $5000 or higher, with 90% of the cost in the diamond.
The metal cost is a mere fraction, $200, even at $1500 per ounce for platinum. If it's palladium, the metal cost of $400/oz palladium is only $65 per ring, compared with the $2000-$5000 price tag for the whole diamond ring. If the Chinese are buying three times more diamonds at 30% higher diamond prices, then people can afford 300% higher platinum prices when buying a platinum diamond wedding ring for the commitment of a lifetime.
So I believe platinum, and particularly palladium, are the best physical assets to buy at the currently ridiculous low prices which are now below mining costs. Stocks of the only primary palladium producers in the world, SWC and PAL, are now the best stocks to buy.
And, amid the looming hurricane Ike threats, I think now is an excellent time to buy oil and natural gas players. I recommend buying (USO) and (UNG). I also recommend buying (NGAS) and (CHK). I bought them for myself, but as always I encourage people to do their own due diligence. The price of natural gas has fallen to below the production cost of some of the producers, so it is a solid bottom. Any time a commodity falls through the production cost, it is pretty much a bottom.
Likewise, as silver and gold prices drop to below many producers' production costs, it is now near bottom, thus time to buy some of the most heavily punished gold and silver players. My favorites are (PAAS), (HL) and (SIL). Of course I bought them recently. And there are many others. I also like (CDE) and (SSRI). But I cannot buy them all. People should should also look into (SLV) and (GLD). You've got to like the physical metal ETFs before you can like the mining companies.
On the coal sector, (ACI), (PCX), (BTU) and (JRCC) all have seen an even worse bloodshed than precious metal mining companies. I called on JRCC at $4, and I called profit taking on JRCC one day before it peaked at $62.83 - and I was right.
I predicted low $20-ish JRCC and I now see there's even further downside, as the coal sector really has not seen a serious correction yet, which it must. So wait till JRCC falls through $20, before you consider whether it should be a buy. Ultimately it could reach $100 one day. But for now, precious metals, especially platinum and palladium are where you want to be, not coal.
Disclosure: The author is heavily invested in SWC and PAL but also holds long positions in a number of beaten down commodity stocks, including UNG, USO, NGAS, CHK, HL, PAAS, SIL.
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This article has 16 comments:
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Umm, yeah
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135 Comments
Sep 11 03:27 PM-
ManAboutDallas
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29 Comments
Sep 11 03:36 PM-
Cesato
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60 Comments
Sep 11 05:15 PM-
Mark Anthony
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310 Comments
My Website
Sep 11 07:02 PMstockology.blogspot.co...
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NOWHEREMAN
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1499 Comments
Sep 12 08:58 AMYou have a long list, most can be summed up in one stock: AAUK.
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Beabaggage
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72 Comments
Sep 12 09:26 AMread PAL Annual Report, good little company for sure. Also own SWC, ZINC,CDE, NXG. Love these little safe country gems.
NXG just added MORE reserves in AUS, blah blah blah.
Just a lot of shorting going on now, Gold is STILL around 750, Copper $3.15 or so. Indian and Chinese will add to their personal holdings as consumers who know the Dollar is becoming worthless with all the bailouts. BUY!
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Econ 101
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56 Comments
Sep 12 11:33 AMCesato, I hope you are right and gold stays in the 650 to 750 range for a few months. I have money (well, dollars, they are sort of like money) locked up that I want to turn into gold.
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User 30121
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341 Comments
Sep 12 01:04 PM-
gigem77
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99 Comments
Sep 13 03:26 PM-
Neustria
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1 Comment
Sep 14 05:25 AM**********************...
You don't see the turnaround in th US dollar as a fundamental change???? Dollar bearishess is now dollar bullishness, and that changes everything for commodities.
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jse17
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53 Comments
Sep 14 10:36 AMSpot on and no question, Gary is one of my favorite dead comedians!
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WEBISKING
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173 Comments
My Website
Sep 14 11:34 AM-
Reinko
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346 Comments
Sep 14 04:17 PMNow we only observe a correction on that detail.
Ok ok gold and silver markets are taken down so severe that the relation with supply and demand is broken down completely.
The good thing is: Now we know that it are the futures that drive the market (read: there is still too much money into the system).
So the next time Treasury clown Paulson states the opposite we can start throwing rocks at him...
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maelstrom
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76 Comments
Sep 14 07:43 PM-
Scribbles
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1 Comment
Sep 15 03:01 PMFundamentals are still fundamentals and the dollar's recent strength is only a bump on the long slide down, and commodities are bound to rise as the dollar falls. Palladium and Palladium stocks are at a low right now, and my data shows PAL as being largely oversold. Foreign Markets will be in a much better position than the US markets by comparison and should keep up demand.
N.American Palladium just announced a new CEO, so I believe timid investors will keep the price low for a few more days, during which time, I 'll be loading up shares while they are still cheap.
I'm also going to be looking back into oil again in coming months as the price comes back down, I'm thinking by next summer we could be definitely seeing another run at a new high.
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Tech Spot
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1 Comment
Sep 16 11:30 AMwww.wired.com/wired/ar...