Month: November 2012

By MoneyMorning.com.au

Bah humbug!

Now I enjoy Christmas as much as the next bloke.

But isn’t it a bit early for the shops to have all their Christmas stuff out already?

And do we really have to listen to Christmas jingles for the next five weeks?!

Of course this also means you can expect the annual end-of-year market reflection – and the big market forecasts for 2013.

Most of this will be entertaining…but totally delusional. The cold fact is that no one has any idea what will happen next year.

Last century, the famous American author, Peter Drucker, explained the limitations of market forecasting better than anyone I’ve heard since:

‘Trying to predict the future is like trying to drive down a country road at night, with no lights…while looking out the back window.’

But we’re simple mammals, with instincts honed by evolution to take risks.

And we just can’t help ‘having a crack’ at predicting the future…

After all this is the reason the global gambling industry is half a trillion dollars in size. Though of course it’s multiples bigger than that if you include investment markets as gambling!

And the reason our risk taking instincts have brought us this far as a species, is that risk taking can pay off.

A perennial market trend in the resource sector that can see this risk pay off, is betting on the ‘hot commodity’ for the following year.

Each year there is a ‘hot commodity‘ that tends to emerge at the start of the year. By picking it early, investors can make huge gains over the following twelve months as all stocks in that sector have a manic run up.

This year it was graphite.

As is the way with hot commodities, the fundamentals were already in place for the commodity. The idea just needed to cross over and reach critical mass amongst investors.

Then suddenly… *BANG* – graphite stocks took off in late January, and rallied hard for four months.

Graphite stocks like Lincoln (LML), Archer (AXE), Talga (TLG), and Syrah (SYR) gained 102%, 163%, 306%, and 660% respectively in just months.

Graphite Stocks Gained up to 660% in Under Five Months

Click here to enlarge

The trick of course was to predict this in advance, and profit from this whole rally. It also means picking the best in the pack to get the best performance.

Now I’ll admit I was a few months later than I would have liked in tipping the graphite story to Diggers and Drillers readers. Though we tipped the ‘best-in-class’ – and have seen this trade almost triple in just six months.

This is of course high risk investing, and is definitely not for everyone!

With all the market volatility in the markets today and risks on all sides – punting on small caps is a ‘hard way to make an easy living’.

Unless you’re OK with insomnia, you might prefer to keep you cash in dividend payers and term deposits (or if you want better capital growth, gold). Finding the best way to earn passively while avoiding risk is a project my colleague and mate Nick Hubble has worked on for three years. You can find out what he’s come up with here…

A functional portfolio has some funds allocated to less risky assets, but also some with risk too. Personally I have about half precious metals, and half small cap resources stocks.

Hot Commodities to Watch in 2013

So what’s my bet for the hot commodity of 2013? I’ll explain in a moment. First, a recap of previous ‘hot commodities’…

In 2011 it was potash.

In 2010 is was rare earths.

And in 2009 it was lithium.

In each case there was a trigger factor that pushed the simmering fundamentals to boiling point, triggering a mania phase in the stocks exposed to that commodity.

For example, BHP made a bid for the world’s biggest potash company, and the Chinese reduced exports quotas for rare earths to set the cascade off.

These type of events are unpredictable, so we just have to keep our ears to the ground (or let google alerts do the work for us).

A good starting point to research candidates for next years’ ‘hot commodity’ is in the Royal Geological Society’s risk list.

I’ll keep my final conclusions for Diggers and Drillers readers. But I can give you some insight into my thinking. For a start, my short list would firstly include anything relying on South African mining production. Its mining sector is badly hamstrung by union activity, violence and protests that look set to fester.

So as the leading source of the metals, platinum group metals are right up there on the list. My pal, Dan Denning of The Denning Report, was an early mover on this trade, as he was with Aussie shale gas.

South Africa is also a big producer of vanadium, and a dominant producer of manganese, and fluorine. So I’ll keep a watch on those too.

For hot commodities, the market loves to run with something really exotic sounding, and fluorine would fit the bill. It’s a $2-3 billion market used for fluorocarbons to go into coolants, brakes, and non-stick surfaces.

Another one on the risk list that fits the bill is tungsten. Supply of tungsten is dominated by China, and it looks like another ‘Rare Earths’ type story in the making. A flick of the switch from them to restrain exports, and every stock with a sniff of tungsten will take off.

Tungsten is used for drill bits, and military applications such as bullets. The price has moved with conflicts in the past, so an escalation of violence in the Middle East could be a trigger factor here.

Antimony and Molybdenum are also possible hot commodities. Though for my money, they’re less likely until they change their names to something catchier. Branding is everything, and ‘Tungsten’ sounds much better!

But in the end, this trade is just that: a trade. It comes with a list of risks as long as your arm.

But as anyone who bought Syrah Resources in January will tell you, a 1500% gain may justify a certain amount of risk, and time invested in researching the next year’s hot commodity…

Dr Alex Cowie
Editor, Diggers & Drillers

From the Port Phillip Publishing Library

Special Report:
Retire Rich, Happy and Free From Money Worries

Daily Reckoning:
Why Outsourcing Your Retirement Pension is a Really Bad Idea

Money Morning:
Platinum and Palladium: Two Contrarian Bets in a Risky Market

Pursuit of Happiness:
Buying a House? If I Could Give You One Piece of Advice…

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks

Picking the Hot Commodity Stocks of 2013

By MoneyMorning.com.au

One of the big stories of 2012 so far has been China’s slowdown.

Up until this year, China bulls argued that growth would never slow below 8% a year, because the party wouldn’t let it.

Yet the growth target was officially lowered to 7.5% earlier this year, as it became clear the Chinese economy was slowing. And with demand weak across the globe and the Chinese banking system carrying huge bad debts, it could get far worse.

So you might be inclined to feel a bit sorry for Xi Jinping. He’s the new leader of the Chinese Communist Party. He takes over from the previous president, Hu Jintao, just as the Chinese economy faces perhaps its biggest challenges yet.

The bad news is that what China really needs is some radical reform. Unfortunately, it’s not likely to get it under Xi. And that could be grim for the global economy too.

Why China’s Economy Needs Change

Economic reforms in 1979 kicked off China’s boom as the country was able to use its vast supply of cheap labour to grow rapidly. But in recent years, rising wages and soaring transport costs have reduced its cost advantage. Meanwhile, the large numbers of state-run firms are unable to compete with Western rivals on quality.

What’s the solution? More reform would help. A World Bank report suggested earlier this year that the state should stop directly running companies. Over time, subsidies should be reduced, and some firms sold off. Given that the report was prepared with the help of a major Chinese think tank, it looked as though this change might be endorsed.

And some of the most conservative politicians have fallen out of favour. Bo Xilai, who wanted a return to the Mao era, saw his career implode over corruption allegations.

There have even been rumours that the Chinese leadership was planning for China to move much closer to Singapore’s political and economic system. While the Communist Party would still retain power through indirect controls, the hope was that greater openness would cut corruption, while private enterprise would be encouraged.

Why Change Isn’t Coming Anytime Soon to the Chinese Economy

However, these hopes may have been premature. Outgoing leader Hu will still have a large amount of influence, even after the transition is complete in March. So it matters that Hu, in his last speech, put the emphasis on stability, not reform: ‘We must unswervingly follow the path of socialism with Chinese characteristics’. He even suggested that control over the press should be increased.

‘The Party leaders have decided that China’s political system will remain Communist, centralised, disciplined from the top-down and un-Western,’ says John McCreary of KGS Nightwatch. Anyone expecting reform has ‘misread badly the Communist leadership’.

For one thing, Xi played a key role in shaping China’s response to the financial crisis. That involved printing money to spend on infrastructure and subsidies for state firms. So Xi is hardly a big fan of the market economy.

He won’t have a free hand in any case. He will have to get agreement from the Politburo Standing Committee for most major decisions. The most influential of these leaders are opposed to radical change, or have vested interests in keeping the state at the heart of the Chinese economy.

Why What Happens in China Matters to You

China is the second-biggest economy in the world. With the developed world still fragile, many people are pinning their hopes on China to drive growth in future.

But reform is needed if China is to move towards being a consumer-led economy. It can’t keep relying on pumping money into infrastructure, or selling cheap goods overseas. That model is exhausted.

Yet its new leaders don’t look likely to deliver China the kind of change that it needs. That increases the chances of an outright crash. And even if it doesn’t, growth could continue to be disappointing.

A slower-growing Chinese economy will need fewer raw materials. This is bad news for industrial metals producers and commodity intensive countries such as Australia.

Matthew Partridge
Contributing Writer, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek

From the Archives…

Retirees and the Fed Face Off
16-11-2012 – Kris Sayce

Attention Investors: This Market is Worse Than it Looks
15-11-2012 – Kris Sayce

Avoid the Slaughter: Watch This Key Stock Market Pointer
14-11-2012 – Murray Dawes

Why Lithium is Another ‘Rare’ Element on China’s Radar
13-11-2012 – Dr. Alex Cowie

Who Says Gold Doesn’t Pay ‘Interest’?
12-11-2012 – Dr. Alex Cowie

Why the New Chinese Leadership is Bad News for the Global Economy

AUDUSD bounces from 1.0287, suggesting that consolidation of the downtrend from 1.0480 is underway. Key resistance is located at the upper line of the price channel on 4-hour chart, as long as the trend line resistance holds, the downtrend could be expected to resume, and another fall towards 1.0200 is still possible. However, a clear break above the channel resistance will indicate that the downtrend from 1.0480 has completed at 1.0287 already, then the following upward movement could bring price back to test 1.0480 resistance.

Forex Technical Analysis

By Central Bank News

    Shadow banking, the huge but unregulated frontier of the financial world, will soon be subject to bank-like supervision as global policymakers start to hammer out rules that reduce the chances of future crises yet still allow new creative financing models to emerge.
    The Financial Stability Board (FSB), which monitors and coordinates global financial regulation, has proposed an ambitious policy framework and recommendations that it believes are needed to “mitigate the potential systemic risks associated with shadow banking,” and expects to issue final proposals in September 2013 following industry comment.
    The term shadow banking describes the murky world of hedge funds, money market funds and investment vehicles that are often used by major banks to carry out sophisticated financial transactions.
    As these shadow legal entities do not take customer deposits, they don’t need banking licenses and are not subject to supervision.
    The 2008 global financial crises exposed the threat from shadow banking to financial stability, not just because of its vast size but because it was completely interwoven with the supervised banking system; a regulated banking system relied on unregulated entities with a razor-thin capital base.
    Global political leaders, meeting as the Group of 20, decided that the risks from shadow banking – about half the size of the normal banking system – posed too great a threat and asked the FSB to come up with policy recommendations.

    But while the risks are now obvious, it is also clear to regulators that shadow banking provides benefits. Shadow entities, for example, help channel funds from pension funds that have money to invest to those in need of funds, such as a private company.
    The challenge for the FSB, along with the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), has been to devise rules that limit the risks yet retain the benefits and don’t stymie future financial innovation.
    “The objective of the FSB’s work is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks,” the FSB said.
     The FSB’s policy recommendations come at a time when shadow banking is set to expand even more as tougher Basel III banking rules are being phased in, providing added incentive for banks to shift activities into non-regulated space.
    While off-balance sheet financial entities and various forms of securitization have been around for centuries, the current form of shadow banking first took off in the last decades as banks exploited regulatory gaps and used regulatory arbitrage to minimize cost.
   For every new rule imposed by banking supervisors, mathematical wiz-kids at investment banks quickly figured out how to circumvent the rules, a challenge the FSB was well aware of.
    “The FSB therefore believes that oversight and regulation for shadow banking must incorporate a system of “embedded vigilance” through on-going review and be capable of evolving in response to market changes,” it said.
    In addition to its policy recommendations, the FSB has created a process for monitoring the shadow banking system “so that any rapidly growing new activities that pose bank-like risks can be identified early and, where needed, those risks addressed.”
    By focusing on function and activity, rather than form or names, supervisors will in the future be able to include new legal structures or innovations that create “shadow banking risks.”
    Trying to understand the true size and reach of the shadow banking system, the FSB expanded its mapping system from the previous 2011 exercise to include 25 jurisdictions, including the entire euro area, compared with 11 jurisdictions, bringing the coverage to 86 percent of global Gross Domestic Product and 90 percent of global financial system assets.
    At a time when the traditional banking system has been shrinking, the shadow banking system has expanded by a further $5-6 trillion to $67 trillion by the end of 2011 from the previous study, the equivalent of 111 percent of the aggregate GDP of covered jurisdictions.
    The initial surge in the size of the shadow banking system took place from 2002 to 2007 when it exploded from $26 trillion to $62 trillion, when the global financial crises temporarily halted its growth.
    The mapping system showed that the United States has the largest shadow system with assets of $23 trillion, followed by the euro area’s $22 trillion and the UK’s $9 trillion.  While the U.S. share of the global system eased to 35 percent from 44 percent in 2005, the share of the UK and euro area has risen.
   Jurisdictions where shadow banking are the largest relative to GDP are Hong Kong (520 percent), Singapore (260 percent) and Switzerland (210 percent) – major international financial centres that host foreign-owned institutions.
   Among the policy tools that supervisors should be given to limit the potential damage of shadow entities, FSB recommends limits on assets concentration and leverage, capital cushions to cover potential losses, segregation of client monies from other assets, and redemption fees that would make it costly for investors to bail out during financial unrest.
    Money market funds, which provide short-term deposit funds to the banking system, suffered runs during the global financial crises that only stopped after intervention by the U.S. Treasury. Endorsing IOSCO’s findings, the FSB recommended a series of recommendations, including that money market funds should hold enough liquid assets to avoid fire sales.
    Click to read the FSB’s policy framework and recommendations.
   
    www.CentralBankNews.info

In the end more than they wanted freedom, they wanted security. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for was freedom from responsibility, then Athens ceased to be free.

– English historian Edward Gibbon

Dow down 58 yesterday. No panic. Just hesitation… and worry.

A TV news report this morning said that Congress had only 18 days to solve the “fiscal cliff” issue. Seems like plenty of time.

But it’s no big deal anyway. If we fall off the cliff, the feds will have to jettison a bit of their projected spending increases.

It still leaves them in spending growth mode. It still leaves the zombies with about half nation’s energy, resources and money. The other half is barely able to carry the load – especially since there are so many zombies getting in their way.

Yesterday, we noted that 22 million people had been added to the food stamp and disabled list since President Obama took first office.

At the rate the zombies are multiplying there will not be a single normal person left in the U.S. by 2052. We’ll all be riding in government-provided wheelchairs… and living on food stamps.

Cutting to the Chase

And who will pay for it?

That’s the thing about zombies: They need living flesh. In the coming Zombie Armageddon the last productive citizens will be hunted down and torn to pieces. Then what?

We don’t know. Our guess is that the entire corrupt system of robbing Peter to pay zombies will blow up long before we get to Zombie Armageddon. But we could be wrong.

And since we want to see how this all turns out, we have a proposal: Let’s “cut to the chase,” as they say in Hollywood.

At no additional cost, the feds could turn the whole population into zombies right away. Currently, the Fed is paying holders of agency mortgage-backed bonds – the money center banks – $40 billion per month. Instead of giving it to the fat-cat zombies, why not spread it around to the skinny-cat zombies?

Milton Friedman once spoke of dropping money from helicopters as the ultimate way to beat a debt trap. Why not do it? Just drop the money right into households all across the country.

Of course, we’re speaking metaphorically. There aren’t enough helicopters to pull off a trick like that.

Instead, the Fed could just give the $40 billion to the Social Security Administration. They’re good at handing out other people’s money. They could easily arrange for every family to get about $500 a month just from the Fed’s new cash. It wouldn’t cost Washington a penny, because the Fed creates its money out of thin air.

The Great QE Dud

This way the feds would avoid the blockage in the banking system. As it is, the Fed gives the banks the money. They use it to buy financial assets – notably more U.S. government bonds.

The rich get richer. The poor stay poor.

Only a little of the money ends up in consumers’ hands. So, as far as increasing demand and therefore jobs – which is the stated policy objective – QE3 and all the QEs that preceded it have been duds.

Giving the money directly to consumers, on the other hand, would produce an immediate increase in demand.

Heck, with $500 more a month you can lease a new car. You can upgrade your apartment… or go out to dinner four or five times. You can buy 50 bottles of decent Chilean wine… or 50 packs of cigarettes.

Since most of the money would go to low- and middle-income families it would almost all be spent. With a modest 1.5x multiplier, you could expect that the economy would get a jolt of about $60 billion in extra spending per month.

Since consumer spending is part of the GDP, no matter how stupid and counterproductive it is, this would boost the GDP by $720 billion per year.

Whoa! Now you’re cooking with gas. That’s an increase to GDP of about 5% – bringing the total rate of increase to about 7% per year.

Our plan has a big political advantage too. It gives money directly to the people rather than to the greedy SOBs in the 1%. It creates millions of new jobs. And it reduces the U.S. budget deficit, since the feds will collect taxes on all that additional activity.

And it puts all Americans on more or less even footing. We’ll all be zombies! And we’ll all go broke more or less at the same time as the helicopter money brings our system of fraudulent finance to grief much sooner.

Disclaimer

By Central Bank News

www.CentralBankNews.info

Our culture is terminally ill. After last week’s election, it is too late to save us.

It’s the little things that destroy nations. Let’s take the great Roman Empire as an example. Historians point to a variety of reasons for its demise.

Some folks simply say all great societies eventually mature and die. Others blame the failure on greed. Or an overzealous government. But one small group of researchers points its finger at lead. They say Rome fell because it was poisoned.

The theory has been widely discredited, but like any good conspiracy, there are still plenty of folks who blame the heavy metal. They say lead pipes, tainted pottery, lead-based sweeteners and even heavy doses of lead in popular types of wine slowly handicapped the grand society.

With each new day… Rome got dumber and dumber. Each generation was sicker than the last.

I like the folks who continue to hang on to the theory even though it is based on few facts. They understand it’s the little things that bring us down. They get the idea that great declines don’t start or end in a single day or even a decade. It takes generations to annihilate a great society.

Like I’ve written many times before… the American culture is sick. And just as with Rome’s problem with lead, the vast majority of us are ignorant to the threat around us.

Our problem is very natural. We value today more than we value tomorrow.

Few folks understand that the world’s most potent force – the power of compounding – transcends the borders of the financial world. Compounding doesn’t just turn our pennies into dollars. It turns our lies into prison terms. It transforms experimentation into addiction. And it turns laziness into failure.

Valuing today more than tomorrow is why we cheat on our spouses. It’s why we go into debt to buy a house we can’t afford. It’s why we speed down the highway when we’re in a hurry to buy a coffee.

But mostly… it is why America has failed.

Last week’s election is a great example. It proves the theory – we’ve reached the cultural tipping point.

On Tuesday, 50.6% of the nation voted for today, while 47.8% of the country voted for tomorrow.

It’s clear an Obama vote was a vote that makes today feel better. It was about giving money to the poor, striking at the rich, rescuing broken companies, and eating a hamburger today that we’ll pay for tomorrow.

A Romney vote, on the other hand, was a vote for tomorrow. If he won the office, today wouldn’t feel so nice. Fewer folks would get handouts. Companies would fail. The rich might even get richer… and the poor would get poorer. But eventually, the Romney voters knew, today would become tomorrow.

That’s what this whole fiscal cliff is about. Tomorrow is knocking at our door… and it is pissed. It wants what it’s owed. But our leaders can only think of today. After all, that’s what we just told them to do – all 50.6% of us.

Bill’s synopsis of the mess is right. Washington will turn this cliff into a waterslide. There will be a lot of screaming and yelling, but in the end we’ll all get soaked.

The problem is we’ll never dry off.

Most folks believe we’ll get soaked with a jump in taxes and a cut in government spending next year. That’s true. January is going to hurt. Wall Street has a lot of shuffling to do.

But the real pain will come later… when the power of compounding comes to get us. Just like each dose of lead made the Romans sicker, each time we push today’s problems into tomorrow, the danger increases exponentially.

Our elected leaders will find a way to push this mess under the rug. After all, all of the deadlines they face are self-imposed. This mess is entirely a political endeavor.

But that will change. Eventually the power of compounding will knock us to our knees.

It is coming. We can’t stop it. Our culture is sick and the majority of us refuse to take the medicine we need.

Disclaimer

By MoneyMorning.com.au

Did you hear the news?

In case you missed it, the beginning of this week was awash with stories of America’s energy comeback.

‘U.S. Redraws World Oil Map’ – Wall Street Journal
‘U.S. Oil Output to Overtake Saudi Arabia’s by 2020′ – Bloomberg
‘U.S. to become biggest Oil Producer – IEA’ – CNNMoney

What’s with the newfound energy discussion and the IEA’s new report? And are there any new ways to profit? Let’s take a look…

Here are a few snippets from this week’s release of the IEA’s World Energy Outlook 2012:

• The global energy map ‘is being redrawn by the resurgence in oil and gas production in the United States’
• ‘The recent rebound in US oil and gas production, driven by upstream technologies that are unlocking light tight oil and shale gas resources, is spurring economic activity – with less expensive gas and electricity prices giving industry a competitive edge – and steadily changing the role of North America in global energy trade.’
• ‘By around 2020, the United States is projected to become the largest global oil producer’ [Overtaking Saudi Arabia]
• ‘North America becomes a net oil exporter around 2030.’ [Note: it says ‘North America’, not the United States]
• ‘United States, which currently imports around 20% of its total energy needs, becomes all but self-sufficient in net terms.’
• ‘Unconventional gas accounts for nearly half of the increase in global gas production to 2035, with most of the increase coming from China, the United States and Australia.’

The Key Things to Know About America’s Energy Comeback

There’re plenty of interesting tidbits that came from this week’s report. Let’s break it down…

For starters, it’s clear that America’s energy comeback is for real. Goldman Sachs came out with the first groundbreaking report on this idea back in September…of 2011.

Back then, they said that the U.S. would surpass Russia and Saudi as the No. #1 oil producer in the world. Also back then, the news was a great shock.

On that front, the IEA report didn’t bring much to the table, more than just reaffirming that this resource boom is for real. As the kids would say, the IEA was ‘tardy to the party’ – heck, even OPEC made recent note of America’s great shale story.

Today, I figure it’s only right if we say: Welcome to the conversation IEA!

But the IEA report did make a few points that I’d like to clear up now, too.

As you may have seen this week, there’s been a lot of ‘energy independence’ talk flying around. One of the key points the report made was that the U.S. is set to become energy independent. Great news, right?

To be clear, the IEA isn’t saying [America is] going to be ‘oil independent’. Instead, the report uses an amalgam of energy: nat gas, oil, coal, nuclear.

And sure, when you look at it that way the U.S. is darn close to being energy independent as it stands – a bountiful stock of coal, uranium, nat gas and even oil! Indeed, there’s no new news there.

Also, the report boldly stated that North America will become a next oil exporter. Remember, this is North America, not the United States. Again we’ve known for some time that the U.S. and Canada are the two up-and-comers in the unconventional oil game.

So, that’s what you need to know. The IEA report reaffirms our stance on America’s energy renaissance. More oil and gas are going to be flowing through the pipes in the coming years – all at the same time the rest of the world will be demanding even more oil and gas.

To say the least, it’s good to be an investor in America’s energy future – especially in the next 3-5 years.

Matt Insley
Contributing Editor, Money Morning

Publisher’s Note: This is an edited article that originally appeared in Daily Resource Hunter

From the Archives…

APRA Spins Another Yarn On Australian Banks
9-11-2012 – Kris Sayce

The Secret Return to the Gold Standard
8-11-2012 – William Patalon

Forget the US Election, This Stock Market Event is the One to Watch For
7-10-2012 – Murray Dawes

The Greeks Giving Economists Nightmares
6-10-2012 – Bill Bonner

Super Fund Results: Whoopdeedoo
5-10-2012 – Nick Hubble

The Real Story on America’s Energy Comeback

By MoneyMorning.com.au

In a world where central banks regularly enter the market to weaken their currency, it’s easy to forget that a currency can fall for old fashioned reasons like trade deficits, foreign liabilities and bad sentiment.

That goes some way to explaining why the South African rand is falling at the moment. But that’s only part of a wider story that resource investors should be watching. It’s the task of today’s Money Weekend to find out if all this might lead to a profit opportunity…

Aussie Mining Not the Only One Under Stress

South Africa is in the news for all the wrong reasons. You might be aware of the huge and tragically violent strikes that have hit the mining industry since August of this year. They began in the platinum industry.

One of the big miners in South Africa, Anglo American Platinum Limited (LON: AAL) fired 12,000 workers, then reinstated them! But none of them have returned to work yet.

The unrest has spread to the gold miners and, according to the Washington Post this week, now also to agriculture.

Natural resources like gold, diamonds and platinum are the main exports of the country. But the strikes have cut the output of the mines. Naturally, South Africa’s exports have dropped.

Bloomberg reported on Thursday, ‘South Africa’s mining production slumped the most in five months in September amid the worst labor unrest since apartheid.’

All this is bad news on the trade front, and it’s showing up in the currency. See for yourself…

The South African Rand Falling Against the US Dollar

A falling currency and rising bond yields will put pressure on the South African government if foreign investors are spooked out in a big way.

Unfortunately, none of the problems in the country look like going away anytime soon, as political activism picks up to nationalise the mines. All this has added a hefty layer of political risk to a country that already had plenty of it.

The Forgotten Precious Metals

South Africa’s troubles have put two precious metals right in the spotlight for supply problems.

You might be thinking we mean gold and silver. After all, South Africa is the fifth largest gold producer on the planet.

But we’re actually talking about two other precious metals – platinum and palladium. The market can source its gold elsewhere if need be. The US and Australia are two options. But there’s not so much flexibility when it comes to platinum and palladium.

Take this report from BusinessWeek on Tuesday. ‘Platinum and palladium will return to the biggest shortages in at least a decade this year as strikes and safety stoppages in South Africa and falling sales from Russia cut supplies.’

South Africa accounts for about 80% of platinum supply and about 40% of palladium. That’s a big share of the market. As a pair, both commodities are heavily dominated by just two countries. The other is Russia.

And you could hardly call Russia one of the most stable countries on earth either.

You don’t hear as much about platinum and palladium as you do about gold and silver. They’re traditionally grouped with the four other metals ruthenium, rhodium, osmium and iridium to form the Platinum Group Metals.

Few people realise it, but platinum is actually more valuable than gold. According to the CRB Commodity Yearbook, ‘Platinum is one of the world’s rarest metals with new mine production totaling only about 5 million troy ounces a year. All the platinum mined to date would fit in the average sized living room.’

Platinum and palladium are hard to find in large volumes and difficult to mine.

Both of them have jewellery demand, industry demand and investment demand. But the stats are different for both. For example, 51% of platinum demand is from the jewellery industry, compared to only 4% for palladium. But the auto industry plays a big role for both, with 21% of demand for platinum and 63% of palladium. Both are used in catalytic converters.

And if our mate Dan Denning, editor of The Denning Report, is correct, the vehicle industry is one of the key factors for higher prices as emerging markets drive demand for cars and trucks.

If South African production doesn’t get back to normal, then odds are both platinum and palladium prices are going higher in 2013. Don’t forget the Fed’s money printing will no doubt continue to spark investment demand, too.

Contrarian Bets in a Risky Market

But the price action in the metals won’t benefit platinum and palladium stocks based in South Africa immediately.

The higher metals prices are probably bearish for the producers in the short-term because the price is being driven by the supply bottleneck. You can’t sell what you can’t mine.

On the other hand, the rising prices of the metals may attract investment flows to the PGM ETFs. And for investors, the bearish sentiment in the producers is exactly the invitation you need, with lower share prices, to consider taking a position.

But the supply deficit in the Platinum Group Metals is just one side of the equation. The other is demand. When you balance them, 2013 looks like a good bet for higher prices in the PGM group.

It’s a contrarian play because South Africa is probably scaring the bejesus out of most investors. But Dan Denning was on the ground in South Africa last month and his view is that sentiment in South Africa is ripe for a turnaround.

And therein lies the opportunity. As he wrote in his report for subscribers, ‘This point of maximum pessimism is also when you find investments at their cheapest.’

Dan tipped a stock to capitalise on this idea in last month’s The Denning Report.

If you don’t mind a speculative punt, with all the bad news happening in South Africa right now priced in, it’s a great time to bet on these overlooked precious metals.

Callum Newman
Co-Editor, Scoops Lane

The Most Important Story This Week

The Aussie stock market took a hit this week. On Wednesday it followed the US market down. The ASX tends to move in step with the US. That means one of the key indexes in America, the S&P 500, is a key signal to watch. Murray Dawes, Port Phillip Publishing’s in-house trader, analysed it this week. Forget about the fiscal cliff, you need to watch the ’200 day abyss’ to see where Aussie stock are heading. Murray says why in Avoid the Slaughter: Watch This Key Stock Market Pointer

Highlights in Money Morning This Week…

Kris Sayce on Retirees and the Fed Face Off: ‘After 40 years of expanding credit like nobody’s business, and four years of printing money and bailing out zombie banks like it was going out of fashion, the US Federal Reserve has worked out why it’s plan to boost the economy isn’t working.’

Murray Dawes on Avoid the Slaughter: Watch This Key Stock Market Pointer: ‘Markets did continue to fall from there, and now they are quite literally resting on the precipice of the 200 day moving average. Everyone is banging on about the ‘fiscal cliff’, but are they aware they are now staring at the ’200 day abyss’? I doubt it.’

Dr. Alex Cowie on Why Lithium is Another ‘Rare’ Element on China’s Radar: ‘What have iPhones, laptop computers, electric toothbrushes, and power-tools all got in common? They’re all powered by a ‘magical’ element that’s on the British Geological Survey’s Risk List of strategic minerals.’

William Patalon on Obama Wins: Why the Case For Higher Gold Prices Got Even Stronger: ‘The case for higher gold prices got even stronger. Let me give you seven reasons that gold prices are destined to head much higher in the next several years. Let’s call it the Obama ‘baker’s half-dozen’ case for gold.’

Platinum and Palladium: Two Contrarian Bets in a Risky Market

Do you need a kidney? A new watch? Or a house? So print it! It sounds like science fiction, but the technology is closer than you think.

Right now, the sale of personal 3D printers is exploding. It is now possible to get your very own machine for less than 1,300 dollars. But desktop 3D printers are only the beginning. 3D printing holds potential for an entire revolution of the way we manufacture our products.

Get your own 3D printer:
MakerBot – MakerBot Replicator 2 ($ 2,199)
3D Systems – Cube 3D Printer ($ 1,299)

Journalist: Rasmus Soele Nielsen
Editing: Jesper Jacobsen
Photo: Jesper Ravn

New York:
Journalist: Carina Moeller Jensen
Photo: Thomas Hass

Video by en.jyskebank.tv