Safe Haven Investments: Imminent Danger and Opportunities!

When people see danger in the market, their animal instinct response is to liquidate everything and go fully in cash to ride out the storms. The conventional wisdom is "Cash is King". But conventional wisdom doesn't work anymore, as this is unconventional time. If you are fully loaded in cash or US Treasury Bonds, this news first noted by Karl Denninger should completely shock you out of your shell:

$2.29 Trillion Dollars US Treasury Bonds Failed To Deliver!

Note it is $2.29 TRILLION, with a T for Trillion! I never heard one can short US Treasury Bonds, let alone naked shorting US T-Bonds! The T-Bonds are considered some of the safest investments, with the full faith and credit of the US government guaranteeing the principal, and you get an interest payment. So shorting US T-Bonds is virtually guaranteed to lose money. You will have to payback the principal plus the interest. You do NOT short the US T-Bonds, let alone naked shorting, let alone as much as $2.29 Trillion.

That is UNLESS you are a really BIG player and you clearly see imminent danger of the collapse of the US T-Bonds, and of the US dollar itself. I wrote before that Warren Buffet saw extreme danger in the US Treasury Bonds and he was completely out of the bonds and fully into the equities market now. Of course people should respect and follow this guy's wisdom. But small potatoes like Warren Buffet could not have naked shorted $2.3 Trillion US T-Bonds. Some one much bigger and knows better did it. I will not speculate. Please read Karl Benninger's comment.

Money created out of thin air is NOT King! The Kings now are precious metals. Never mind the fact that the dollar staged a shocking rally and precious metals plummeted. The dollar rally is nothing but a bubble, while current precious metal prices, especially platinum and palladium, is nothing but absurdity. Physical commodities MUST be priced above their production cost, or the supply will simply dry out, as no one can continue produce metals at a loss. So if I am sitting on my precious metals, I pretty much have the guarantee that they will soon appreciate in real purchase power term. On the other hand, if you are sitting on trillion of dollars of the fiat currency, and the currency falls, the only guarantee you will have is they will continue to fall further down, until eventually they reach zero.

The general market always manages to fool most people most of time, and causes more people to lose more money in unexpected way, and rewards only the selected few who has the wisdom and who has the determination to stick to their wisdom. The current global crisis necessarily means an astronomical amount of fortune must be totally wiped out. What could be a better, cleaner and quicker way of wiping out trillions of dollars of fortune instantly, than to first herd the sheeples into holding nothing but cash, and then the currency suddenly collapses? Of course the US dollar rallies big time if every one is herded into buying dollars. A bubble is something pumped up to a valuation much higher than where it should be.

Fiat money is completely at odd with the economy basics of supply and demand. For anything physical, equilibrium can be reached as the price impact positively on supply and negatively on demand. Higher price encourages more production while low price suppresses the supply. When the price falls below cost, supply dries up as no one can continue to produce and sell something at loss. On the demand side, the price has exactly the opposite effect. High price suppresses demand while low price encourages consumption.

Fiat money acts in exactly the opposite way. The less valuable a currency becomes, the more is being produced out of thin air. The cheaper the currency becomes, the less people desire to own and keep them, and the faster people want to get rid of them. When people want to get rid of their paper money as fast as possible, it speed up the velocity of money, and cause the value of the currency to plummet even more, forcing the government to print more money. The vicious cycle continues until the currency is totally destroyed. Throughout civilized history of mankind, every single experiment of fiat currency has failed. No exceptions.

In Chinese the word CRISIS contains two characters, DANGER and OPPORTUNITY. We are in extreme danger but also with extremely good investment opportunities. The opportunities are made even better because every one runs away from them and run towards a gigantic death trap with a sign "Cash Is King". Remember one thing, safe havens must be small, with narrow spaces that accomodate only a few refugees.

It reminds me of the Bible story of Noah's Ark. People ridiculed Noah as he was building his ark, thought it had never rained a single drop for a year, how could the flood come? The flood did come as Noah expected. Had these people listened to Noah and seek refuge in his Ark, would it make a difference? No! The Noah's Ark was still only big enough to contain just one pair of each kind of animals. It wouldn't be a Noah's Ark if it was made any bigger. Likewise, today's financial safe haven wouldn't be a safe haven, but a death trap if it was big enough to allow every one in!

Although we do not see a drop of rain yet, trillion dollars of wealth will soon be flushed away by the coming financial flood of hyperinflation. Have you built your Noah's Ark yet? There is definitely NOT enough material to build a big enough Noah's Ark to save every one.

I can't understand it! There are tons of investment opportunities in commodities right now. You can buy a few metric tons of nickel or copper or cobalt or a number of other things. You know they are priced far below their production cost right now. So it is absolutely a guarantee they must appreciate to at least the fair price of their cost. Can you find any better investment, with such absolute certainty of making double, triple and quadruple the money in the next few months, regardless of the demand? How could people be so blind and not seeing the opportunities? They all rush to cash and T-Bonds waiting to be slaughtered, and they actually thought it was safe to be with the biggest group of mobs?

Nickel is now less than 1/6 its price of May, 2007? Hello?!

ENOUGH IS ENOUGH! When enough is enough, the eruption is fierce!

On Monday, third largest nickel producer in Russia, Ufaleynickel, responsible for slightly less than 1% of global supply, announced that they are shutting down production, as the nickel price is simply too low. They need to see at least $26,000 per metric ton to break even.

Instantly nickel shot up to touch $5.00 a pound, from Friday's $4.00. That's a one day rally of 25%. It's probably the biggest one day rally of any commodity in history. Removing 1% of global supply doesn't really change supply/demand that much. But the price was suppressed too much so the bounce had to be fierce. Had you bought nickel at $4, you have made 25% profit in just a day. And yet people rush away to buy US T-Bonds to earn 3% annual interest while waiting to be slaughtered in the looming implosion of the bonds market?

Want to make a 10 fold return in two months, and maybe two weeks? Go buy some palladium metal. Any palladium metal you can find. Palladium price can go from $170 per ounce to $1700 per ounce in no time, once the Russian Checkmate plays out.

The Russian Checkmate event will be Norilsk Nickel (NILSY.PK) shut down production. They are the No. 1 nickel producer in Russia. No. 3 has shut down already. Would No. 1 be far away? Norilsk shut down, and 45% of global palladium supply is gone. I can't even start to predict where palladium price could go up to, with 45% of supply removed instantly. In 2000/2001, one false rumor from Russia was enough to send palladium up to $1100. It would be fun to watch the effect of 45% of palladium supply removed.

Of course, you can get better leveraged gain investing in the palladium stock Stillwater Mining (SWC) and North American Palladium (PAL).

Will Norilsk shut down? They are facing a severe liquidity squeeze. In first half of 2008, Norilsk group reported a profit of $2.682B, at 32% profit margin. If you look up metal prices as of Oct. 24, 08, and re-run the numbers, they would have to write down -$4.594B of sales revenue for the whole group, or $3.634B for the main Norilsk Mine, resulting in heavy losses. The cash drain will be nearly $2B per half year.

Norilsk group had $4.8B cash as of end of June, 08. The main Norilsk mine probably had $4B in cash. They spent $2B in a recent stock buyback, a senseless decision which Mr. Mikhail Prokhorov denounced as "capable of putting the company on the verge of bankruptcy". Operation loss since June probably costs them another $1B. They have a debt payment of $400M due in November. Do they have any cash left? Can they continue to operate the mine at heavy loss? Why would they continue to operate with heavy loss until bankruptcy?

The bullish case for palladium can not be disputed if you understand how bad a shape Norilsk Nickel is in today.

Yesterday's news of Ufaleynickel shut down mentioned OM Group (OMG) and reminded me that OMG is the best cobalt play, because it dominates the chemical sector involving cobalt. I consider cobalt as a better metal to buy than silver, with the potential of 10 fold appreciation in a short period of time. Check out news on Minor Metals. If the speculation of Katanga Mining shut down plays out, cobalt price should fly soon. You can buy cobalt from BHP Billiton (BHP).

There are so many beaten down silver and gold mining shares now. All are very good buys: PAAS, SSRI, SIL, HL, NEM, AUY, NAK, IVN, NG. There are so many to name. Even Southern Copper (PCU), my very first commodity play, is now back below where I first bought in late 2005. Anything in mining is good nowadays. I would not touch Silver Wheaton (SLW)though, because of counter party risks. Also forget about any coal player now. I continue to call for selling JRCC, ACI, ANR, BTU, CNX, at any rally. The US coal market is a local market and is now bearish. Again watch Dry Ships (DRYS) share movement as it is an important indicator of the health of the global economy. I might even consider buying some DRYS as the valuation has become so attractive. But I first need to get a conformation that cross ocean shipping activity is recovering.

I will keep a portion of my portfolio in iShares Silver Trust (SLV). I will not buy gold or SPDR Gold Shares (GLD). I believe gold is adequately priced at current level. The money spent on gold is better spent on something else. Even buying a ton of nickel or copper is better than gold.

But the best of all is still palladium, and the only two pure palladium plays, SWC and PAL. We are witnessing a singularity event unfolding in the palladium market as Norilsk Nickel will inevitably shut down, to protect its own best interest. What is singularity? A singularity is the kind of extremes like what you get when you try to divide a number by zero!

Full Disclosures: The author is heavily invested in SWC, PAL, has considerable stake in OMG and SLV, and will continue to buy some select silver shares including SSRI, HL, PAAS and SIL. I am also looking for opportunity to buy DRYS soon.

Is Norilsk Really Selling Its SWC Stake?

My article on Oct. 22, 2008 discussed the breaking news that Norilsk Nickel (NILSY.PK) is open to offers to buy its majority stake in Stillwater Mining (SWC), America's only PGM mine. The share price of SWC plummeted 25% on yesterday while the news spreads, as investors probably fear that Norilsk dumping its shares could depress the share price.

However, upon further research, I am growing more and more suspicious about the credibility of the news story. It could well be a false rumor after all. I still do not have a definite confirmation or denial of the authenticity of the original news story, but I will discuss why I now suspect the story could be a false rumor.

1. SWC is Norilsk Nickel's very important strategic asset. They have not sold a single share. They would never sell, unless Norilsk is extremely desperate for some cash and they can't get a loan from a bank. I believe they still have credit lines to pull. If they need to sell asset, there are plenty of other less important overseas assets to sell, for much more cash, before they would sell SWC for a meager US$230M. Not long ago, Norilsk was still spending billions of dollars in a stock buyback trying to support its share price. It seems unlikely its cash liquidity drained so fast.

2. Source of the news story is suspicious. The news story was first carried by The Moscow Times and immediately mentioned on Yahoo by a misterious cjlu4585, at 21-Oct-08 09:18 pm EDT, which is 04:18am Oct. 22, 08 Moscow Time. The original news story was dated Oct. 22. How would the story be published so early during the day, at 4:18am, and promptly catched?

3. Anonymity of the original citation. CJLU4585 used a curious URL to refer to the original article. When you go there, there is no mention of author near the title of the story:
However, notice the number 600 in the URL link? Replace it with other numbers, like 599 or 601, it still link to the same story, but with the author name shows up. Only when you use 600 does the author name NOT show up. Very strange.

4. No confirmation. The hometown newspaper of SWC also carried the story from Moscow Times but said that SWC was never informed by any one from Norilsk. Every one got this news from the original Moscow Times piece. There is no press release from Norilsk and no direct confirmation from any official in any of the companies involved. No other media confirmed the information independent from Moscow Times.

5. The writting of the original news story was non-professional and contained many obvious errors. It refered to Mr. Oleg Lobanov as Chief Financial Officer (CFO). That's a term commonly used in western corporations, but not in Norilsk. Mr. Lobanov's official title is Deputy General Director for Economy and Finance, very different from a CFO.

The story said Mr. Lobanov made the comment during a conference of finance executives. It did not say what conference it was and where it was held. Why would Moscow Times be the only media invited, as no other media carried the story? Why would Norilsk reveal it through such a casual comment by Mr. Lobanov, instead of in a more formal way? Why no party involved was informed about it?

The cited percentage, 55.4% stake in SWC, was incorrect. It's more like 53.5%. Would Mr. Lobanov get the percentage wrong?

The story twice mentioned the South African company "Empala Palladium". A very strange name. It should be Impala Platinum (IMPUY.PK). Mr. Lobanov, an industrial insider, would never make such a mistake. The rumor maker probably did not get the name right. Since the name was referenced twice, it was not a typo. Further the author said he/she called "Empala Palladium" and left a phone message which was not returned. If he/she called the correct phone number, he/she would not have gotten the company's name so wrong.

In all, until we get further confirmation from Norilsk or Stillwater, I am now highly suspicious of the originality of the original story, and persuade readers to do their due diligence to find out the truth. It can not be ruled out that some one deliberately spread the rumor in a deliberate effort to manipulate SWC share price. If this is confirmed to be a rumor, I shall take actions to report criminal act of involved parties to the SEC and other authorities.

I am a value-based investor and strive to get all my information and facts correct and tell readers what I truely believe is correct information. I am always fully responsible for everything I say. If I inadvertedly helped spread a rumor, my appologize to all who might have been mislead. I still do not know whether the orignal story is true or false and will provide update as soon as I find out from related parties.

P.S. The author is heavily invested in SWC and PAL, the world's only primary palladium producers. The author does not currently own shares in Norilsk Nickel.

Safe Haven Investments: Survival of the Fittest

Important update [Oct. 23, 08]: The story of Norilsk selling SWC stake might NOT be true. Please my latest comment on my suspicion and do your own due diligence.

This is part 4 of my series articles discussing the true valuation of physical assets, paper assets and currencies, vital knowledge needed to survive the unfolding global financial crisis. This is a sequel to part1, part 2, part 3. Read previous articles if you have not.

I wanted to discuss the valuation of US dollar; why it rallied so strongly; why we will see a sudden and abrupt reversal of the dollar rally; and why such a reversal will come imminently. I wanted to spend more time giving it more thoughts. But some big breaking news happened yesterday, forcing me to discuss the new developments immediately.

In previous articles, I emphasized that physical commodities can serve as reliable safe haven assets because their intrinsic values are decided by the marginal production cost. When something is sold BELOW production cost, the low price can not last long as no business can operate at loss indefinitely. SUPPLY DESTRUCTION will happen, tilting the supply/demand relationship to a shortage. Price will then be restored to profitable level to allow producers to resume profitable operation. Therefore when you see a commodity traded far below its production cost, it is the best investment you can buy. You can just sit back and wait for it to appreciate soon, in inflation adjusted term, knowing for certain that the price just has to recover regardless of the demand side.

Looks like the supply destruction is indeed happening at neck-breaking pace, in all commodity sectors, and many analysts have noticed the phenomena and openly discussed the idea of supply destruction. As I am a precious metal investor with particular interest in palladium, two news happened yesterday caught my attention and made me very happy, as things that I predicted are happening far sooner than I expected. The news involves two of my favorite stocks, North American Palladium (PAL) and Stillwater Mining (SWC).

PAL announced today that they are temporarily suspending the production at the Lac Des Illes mine, and suspending metal sales due to current low metal prices. I am pleasantly surprised that the new CEO, Mr. Bigger, could act so quickly. I openly called for PAL to suspend operation due to current low palladium price. It's not an easy decision to let 350 hard working mining workers go, through no fault of their own, but the company must preserve precious mineral reserves and liquid assets, and ultimately it is also good for the workers themselves.

I believe that PAL, as the only palladium producer who sells to the spot market, has enough leverage power on its own to turn the palladium market around, and major stake holder George Kaiser also has a capacity on his own to move palladium price. Now PAL is not selling, who will sell in the palladium spot market? Who has the metal to sell? Are they going to sell paper palladium now? The market must realize that it must pay a fair price to get the physical metal. Unfair prices can only buy you paper, as producers simply can not operate at heavy loss to produce metals like a charity organization.

But the next piece of news shocked me so much that I jumped up, could not believe what I just read!!! Russia's Norilsk Nickel (NILSY.PK), the world's largest nickel and palladium producer, 55.4% stake holder of America's Stillwater Mining (SWC), is now offering to sell their SWC stake!

This is incredible! This says the Russian Checkmate in palladium, which I discussed before, is playing out right today, right in front of our eyes. This is incredibly bullish for the price of palladium. Let me explain.

Norilsk Nickel produces 45% of the world's palladium. In 2004, they acquired a majority stake in SWC, America's ONLY mine of palladium and platinum, two strategic metals of critical importance to the security and survival of the United States, through quite some political maneuvers that involved direct negotiations between President Bush and President Putin. Norilsk's strategic acquisition obviously was aimed at achieving a 50% dominance of global palladium supply in order to assert monopoly power. Norilsk never sold a single share of SWC. Such a strategic asset is never to be sold for some cheap money.

Not for sale, UNLESS Norilsk is in a desperate need of cash urgently. Norilsk is huge, producing 20% of the world's nickel, 45% of palladium and 12% of platinum. Last year, Norilsk was on a buying spree, spent US$6.3B in CASH to acquire a small nickel player, LionOre, among other purchases. And today Norilsk needs to sell its strategic SWC stake for maybe a meager $230M cash for lunch money?

They are in a terrible liquidity squeeze if they are so desperate they need $230M in cash now. Current low nickel price really hurts them. My estimate is they probably lose $1B to $2B per quarter. So $230M is probably good to last them another 2 or 3 weeks. I see that shutting down the Norilsk Mine, is an inevitable decision they are forced to make urgently, regardless what they say publicly. They either shut down, or go broken then shut down. Not to mention Norilsk Mine is an environmental catastrophe that needs urgent cleanup.

That would be fantastic news to SWC and PAL, the only primary palladium producers in the world. Shutting down Norilsk would remove 45% of the world's palladium supply. When it comes to PGM metals, look at rhodium! A mere 4% shortage was enough to drive rhodium price from $300 to $10000 per ounce!!! What will a 45% shortage do to palladium? Would the Russians boost palladium price so they can get a better deal on SWC?

It is outrageous Norilsk is suggesting another foreign buyers to take over its SWC stake. It was heart breaking to see our precious national treasure sold out to the Russians, by our president. Do we want to sell SWC to a foreign country again? If an American billionaire investor reads this, please consider seizing this opportunity to buy up the SWC stake, not just because of patriotism, but because of the huge profit opportunity. The nation needs our treasure back! Senator McCain: You can demonstrate you are not Bush No. 2. You can take SWC back from the hands of the Russians.

South Africa is another catastrophe waiting to happen, benefiting the two North America based producers. Current platinum and rhodium price is simply too low for any South African PGM mine to make ends meet, not to mention the on going electricity crisis in the country and ongoing limit of only 90% power supply to the mining industry. SA's PGM industry has entered a Survival Dimension, facing a choice of either cut production to boost metal prices, or a certainty of bleeding to death. Many analysts and shareholders have openly called for production cutback. PAL has already made the right move; South Africa should move soon to cut.

That, of course, is a great incentive for investors to buy and hoard physical palladium and platinum. The investment buying will boost prices so buying begets more buying. History has proven in 1980 that when people need to buy safe haven assets during financial crises, they buy every precious metal, not just gold and silver. When there is strong investment buying, weak industry demand becomes irrelevant.

I am not totally dismissing the factor of industry demand of PGM metals, especially in the auto sector. But the weaker auto sale has been exaggerated. Owning a car is a necessity, not a luxury. How you can walk 30 miles to work or 10 miles to shop? Tight family budget may postpone buying a new car for a while, but only till the old car breaks. You may turn down a customer's request for a car loan but you can not remove the need for a car. Gasoline consumption in the USA hardly reduced, year over year. From the fundamental point of view of the mobility needs, suppression of auto demand is only temporary, not permanent.

More over, history has shown when the industry demand of PGM metals weaken, the extra supply has always been absorbed by jewelry demand as the metals become more affordable.

Out of all precious metals, gold is the least I like. I have not purchased any GLD so far. The current gold price is still well above profitability of most gold mines. Humanity has been digging this almost useless yellow metal for thousands of years till today. There's too much gold sitting there just to collect dusts. If we do need more gold, maybe we can all quit our day time job and go to the beaches panning for gold, like the folks at Jamestown.

Silver is a different story. 70% of silver today is produced as a by-product from base metal mining. Even for the 30% silver that's produced as main product, base metal by-products are also important part of the revenue. The whole silver industry is suffering not only from current low silver price, but also low base metal prices as well. Production cut is expected, reducing supply, at a time when physical silver investment products are in high demand. I believe physical silver price will go up much more than gold. I own SLV and recently increased my SLV stake on the dip to the low $9 area. The silver industry has continuously announced news of mine shut downs recently. Even mentor of the most famous silver bug, Israel Friedman, has openly called for CDE to suspend silver sales.

Silver mining companies are different stories. I have purchased a few silver stocks like SIL, PAAS, SSRI, HL, CDE. But after carefully examine them one by one, I find that all of them are hurt from low base metal prices, not just low silver price. None of they are pure silver play. So instead of providing a leveraged gain over silver, these mining companies provided a leveraged loss over silver. If I am already invested in silver itself, why do I need to buy any silver mining share? I wish there are pure silver players around.

Silver Wheaton (SLW) claims to be a pure silver play. I bought SLW a couple of years ago before I knew better. But once I figured out SLW's business model I never touched it again. It's a holdings company basing its value purely on some contracts. Basically they borrow a ton of money from banks to pay to the mining companies in exchange for the mining companies to sell the by-product silver to SLW for only $3.90 per ounce. SLW will pocket the difference. Sounds good? But I don't see how physical fortune can be made in playing paper contracts, instead of digging real mines. Now the danger of SLW, a danger not unlike sub-prime loans, has been exposed: What prevents these contracted mining companies from shutting down their un-profitable base metal operations, hence cut off SLW's silver supply?

In current turbulent commodity market, the mining world is a world of survival of the fittest. Who has the richest mineral reserves, the most cash and the least debt, will survive and prosper. The long term bullish cycle of commodities will continue, as Jim Rogers pointed out, due to the damage of producers thanks to the credit crunch. A whole bunch of unfit commodity producers will probably be eliminated. But the survivors will get to enjoy the next wave of commodities rally, which I believe is not too far away, despite of a weakening global economy, because the damage to supply is much worse than the damage to demand.

The fundamental bullishness of commodities attribute in large part to the fundamental bearishness of the world's fiat currencies, notably the US dollar, but not just the US dollar.

The dollar staged the strongest rally in recent years, just as the global credit crisis deepens, and the Fed is printing money like crazy to inject huge liquidity into the market. Every bit of liquidity the Fed injects simply disappeared once it's absorbed by the market. It totally defies logic and stunned many market observers. Is it manipulation? Conspiracy theory is always an easy answer. But we must look for the real reason behind the logic-defying dollar rally, to make correct investment decision.

The real reason is that the global credit crunch creates such panic that most people retreat to the basic instinct of "Cash Is King". Liquidity is being hoarded away, instead of circulating in the market. The velocity of money approaches zero, making the dollar seem more valuable relative to surplus goods squeezed out of supply chains. This is a temporary aberration and can NOT be allowed to last. When the velocity of money approaches zero, so does the velocity of goods movement. If goods are not moving, then the society will collapse. The money printing will get both money and goods to move again. Once that happens, the dollars will suddenly flood the market while the supply of goods will dry up, leading to the sudden collapse of the US dollar.

Let me use an analogy. We are riding on a car rushing up a high cliff overseeing the ocean underneath. You will panic and your intuitive response is buckle up your safety belt to strip yourself in. You think you are safe in your safety belt. Well at impact point, you go from no liquidity to hitting an ocean of liquidity in a split second. There is absolutely no time for you to untie your safety belt before you are drowned. The safety belt is the US treasury bonds. Warren Buffet recently sees danger in treasury bonds and he is all out spending cash to load up equities. Follow the Oracle of Omaha as he is the one with market wisdom!

Full Disclosure: The author is fully invested in SWC, PAL, and OMG. I am also loaded in SLV and traded in and out in a few selected silver stocks like SSRI, HL, PAAS and SIL.
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