Metals

Platinum Maple Leaf Coin

Platinum Maple Leaf Coin

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What’s Moving In Metals?

Well, it looks like the industrial metals to me. Yeah, the precious metals are moving too, but it’s the specialty industrial metals that have the most “juice”.

Palladium vs Gold, Silver, Platinum, Copper, Tin, Lead, Aluminum etc.

Palladium vs Gold, Silver, Platinum, Copper, Tin, Lead, Aluminum etc.

ETFs with physical metal holdings:

GLD  - Gold
SLV  - Silver
PPLT - Platinum ( PTM is an ETN or note, using contracts)
PALL - Palladium

ETNs using contracts (futures, options) not physical metal:

JJU  - Aluminum
JJN  - Nickel 
JJC  - Copper
JJT  - Tin
DBB - Base Metals basket
LD  - Lead

We saw last week that the Platinum Group Metals Miners had a large gain. Looking at this chart we can see that it came from the Palladium part of the metals they mine. Physical platinum is not moving much. But the nickel and palladium used in many catalysts (and for nickel, used in stainless steel) are both moving nicely. Also Tin is rising. (Even lead has had a recent start of a rise.)

The PALL and PPLT funds are fairly new. They buy physical metal, like the GLD and SLV, and store it. The “ETN”s are exchange traded notes that use futures and options contracts, so they can have “contango” and “backwardation” issues as the present or spot price gets out of line with the futures prices. They also can have ‘wasting asset’ issues as the time value of an option degrades as it approaches liquidation. So “notes” are best as short term trade vehicles, not as long term investments.

What we can glean

OK, looking at the chart, we see the much ballyhooed Gold is not nearly as fast a clime as the metals with some industrial use, especially the ones in more limited supply ( like tin and palladium). Nickel, in particular, had a large spike just a while back, and is now rising after a drop. Over the 8 months that PALL has been in existence, Silver has outperformed copper, but in the last 3 months both have moved up nicely (even Lead has started a rise, with a large demand for lead-acid batteries for electric bikes in China.) Tin has had a nice steady rise over the 8 months and without the spike / drop of Nickel. DBB is a base metals basket and, not surprisingly, is running about the middle of the base metals. Between Lead and Copper and more or less tracking Aluminum.

What all this says to me is that demand for metals is rising, especially in the harder to find industrial metals. Miners in the Palladium, Nickel, and Tin areas are likely to be posting better profits in quarters ahead. Also, for a currency hedge, using Palladium along with Silver and Gold has some good points…

There are a bunch of minor miners that have more of these less talked about metals, but it will take some work to find who mines what. The major integrated miners, like BHP, VALE and RTP have them, but they tend to be swamped by the other things mined by the giants.

That the prices on the industrial metals are rising also says that someone somewhere is buying and that their economy is growing. I’d make that China, Brazil, Indonesia, India, …

Also, Palladium will be a nice alternative to the crowded Gold trade. Being both an industrial and a precious metal, it will rise with both monetary and industrial demand.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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11 Responses to Metals

  1. P.G. Sharrow says:

    Do you think the increase is due to utilization, lower production or hedge? I haven’t seen an increase in manufacturing to justify much of an increase. pg

  2. E.M.Smith says:

    China has now surpassed the USA in total cars per year. All those cars need cat converters and fuel made with catalysts….

    Yeah, you don’t see them. But look at the pictures of Chinese cities full of bikes 20 years ago, and traffic jams of cars now.

    Same thing starting to happen in India too.

    If you look at this 5 year graph, you will see that while silver has risen over time (from very low levels on an historic basis) both copper and platinum have take a dip in the depression / sell off and are just recovering to historic levels. If you go back even further, you find copper has been higher during business peaks.

    http://bigcharts.marketwatch.com/charts/big.chart?symb=slv&compidx=aaaaa%3A0&comp=ptm+jjc&ma=0&maval=25&uf=0&lf=2&lf2=4&lf3=1024&type=4&size=3&state=15&sid=2305869&style=320&time=12&freq=1&nosettings=1&rand=4476&mocktick=1

    IMHO, the prices are presently driven mostly by Chinese demand, US currency and European currency worries (for gold and silver especially) and only some via hedge funds (mostly in gold).

    But that hedge fund buy into gold is exactly why I’m looking at palladium and / or metals like copper and tin. Less hedge fund issues, more real demand. As China builds out cities and fills them with TV sets and cars, they need a LOT of copper and tin solder for wiring things. And lead for batteries. (China is reputed to be looking to start it’s own Lead Futures market as they now dominate lead demand…. all those electric bikes that are a ‘hit’ there now). So then think how much MORE lead and copper will be in econo-box cars in China…

  3. tckev says:

    Palladium for catalysts and useful alloys see –

    http://www.stillwaterpalladium.com/uses.html

    and here’s the coming one…
    Expensive but super reliable batteries.

    http://www.palladiumenergy.com/
    based in, err…, Brazil, China, and US.

    PS…
    Hope the BRIC countries are not doing a Nelson Bunker Hunt and his brother on the markets. (In 1970’s they were the controllers in an investment vehicle trying to control the silver market).

  4. Bruce says:

    Be careful with nickel as the small Chinese operators can return to making low Ni pig iron very quickly. At present they apparently have been making low grade steel, but that market seems to be swinging down as Ni swings up a bit.

    Low Ni pig iron mainly comes from direct blast furnace smelting of limonite ore, which is cheap to import.

    (I had a nice story from my bicycle shop guy, seems the big Chinese bike makers switched out of 300 series stainless at the peak of the Ni market, and now wheel spokes are rusting all over the place a few years later (200 series is cheap but isn’t really stainless, IMO). They then switched back when the customer complaints started to bite.)

    Also watch out for the exotics, as the REE market is completely artificial, as is the coltan market (there’s lots around, but primary hard rock sources are expensive).

    The problem also with Pt and Pd is if the prices get too high the Chinese car makers will just switch to something less efficient and the Chinese government will quietly let them. Then the prices will drop because the supply/demand balance can be swung on only a few tonnes worth of demand.

  5. E.M.Smith says:

    @Bruce: I’ve seen that problem again and again with Chinese manufactured goods. The “spec” on the materials seems to be “What’s cheapest today?”. Not a good way to engineer products…

    What is “REE” and “coltan”? Jargon from somewhere, but what? Rare Earth Elements? Columbite–tantalite as in this article or the wiki?

    http://www.economypoint.org/c/coltan.html

    http://en.wikipedia.org/wiki/Coltan

    I expect Pt and Pd longer term to have trouble from the mineral catalysts like zeolites and the lesser catalyst metals. But they have an inherent value and a jewelry value. It’s also hard to counterfeit the most dense metal in the universe ;-0 and yes, I know that other platinum group metals are about the same density, but no cheaper…

    At any rate, the advantage of a chart driven trade system is that as prices reflect such changes, you trade out automatically.

    At any rate, the rare earths and similar odd metals are not very common as investment vehicles. I tend to stick with ETFs ETNs and major mining companies. The flash in the pan guys (8-0 are gone too fast…

  6. Bruce says:

    Chiefio, yes REE is short for rare earth elements, and coltan for niobium-tantalum concentrates.

    The Olympic Dam Cu-U-Au mine is a good example of the economics of REE – that mine at current capacity lets around 100,000 t/a of REE go through to the tailings dam because it is not economic to recover. If they did recover the REE the price would collapse. Oly Dam is expected to be expanded from current 10 Mt/a to 40 Mt/a ore throughput as the company invests. The orebody is about 8 Bt at around 1% REE for almost a million tonnes of contained REE.

    The big problem with REE is they are very difficult to process. The method used is a complex fractional solvent extraction. It favours lots of cheap educated labour, which China has but no one else. So they have an artificial lock on production as long as the economics prevent western companies reestablishing process plants.

    I mention these because REE are a bit flavour of the month in the investment press.

    Your strategy with major companies sounds fine to me. OTOH my own strategy having worked in the mining industry for over 20 years is this: I invest in bank shares…

  7. RuhRoh says:

    Hey Gold (and other glittery-metal)bugs;

    What is the lowest overhead way to purchase the physical glittering metals? i.e. no sales tax, and minimal overhead?

    I’m thinking the bags of old US silver coins will have utility by small denomination and intrinsic credibility.
    I did have some before (garsh, so heavy), but wish I had some now.
    TIA

  8. E.M.Smith says:

    Don’t do it in California. We’ve decided to put a sales tax of 9% on any sale up to something like $1000. Then you get the 4% to 8% or so ‘load’ the dealer packs on (and they hit you for another 8% to 10% when you want to sell it…)

    The most cost efficient way is probably find someone wanting to raise some cash and do a private transaction. You need to know how to test density and what the ‘ring’ of the real metal sounds like on a counter, though…

    At one time the US issues were not subject to ‘sales tax’ as they were legitimate US currency; but our State may well have “fixed” that by now…

    My best guess would be “online” somewhere like EBay from a reputable dealer; but it’s been a while since I bought any. (For emergency ‘barter’ things like soap and spices are better while for inflation protection just denominating your checking account in Swiss Francs or Japanese Yen is better. And the Swiss banks at least, used to let you do that. The checks were issued with out the preprinted “dollars” on the line and you filled in the currency you wanted to spend when you wrote the check. Don’t know if they still do that, but its nice…) For a metal trade using GLD is a faster trade with less overhead.

  9. RuhRoh says:

    Hey Cheif;

    What’s your take on this thinly-sourced anecdote?

    Yikes…
    In the past it was easier to write off the wild stories, but I have less ability to apply ‘rational world model’ arguments anymore…

    RR

  10. E.M.Smith says:

    IMHO, the story may well have some credibility, but is being presented in an overblown hyped way. EVERY futures market has a lot more contracts than actual delivery. Most of the volume traded is by, well, traders, and they don’t want physical delivery. When I buy a chunk of USO or JJG I don’t really want a ton of oil or 20 tons of grain dumped on my lawn at the end of the month.

    So there are great pains taken by most of the participants to avoid contract expiration / physical delivery.

    For the exchange, they need to keep enough inventory on hand to settle up the imbalances, but any more than that is just wasted. It’s really a very simple and ordinary ‘inventory management’ problem. They look at outstanding “buy” and “sell” orders and need to hold the difference for ‘settlement’ (and the difference could just as easily be ‘need dollars for gold’ as it would be ‘need gold for dollars’…)

    So if they had a shortage / inventory mismatch once in a dozen years, I’m not all that surprised.

    OK, some added ‘finesse’:

    We’re in a bull market for gold. More folks want to buy it than want to sell it. Some large players probably can’t get a ‘fill’ at the size and price they want.

    The gold miners usually ‘hedge’ their mining operation / position by selling futures contracts. So they can say “I’m going to mine 1000 tons of gold at a cost of $400 an ounce but want to lock in my profit, so I’m going to buy a futures contract. That way if I wake up and the market has crashed, I’m still profitable and can still pay the miners working and the lease on equipment and that contracted delivery of fuel and …”

    But the miners have taken off their hedges. (They usually do that when prices have been running up; often at exactly the wrong time just before it tanks… but not always ;-)

    So the exchange has a shortage of contracts where the holder actually does expect to make physical delivery on expiration.

    OK, easy to read this mix.

    Some fairly bright and rich guy who’s not getting a fill at a decent price on gold buys at a metals dealer (as his inventory is dropping fast) sees a condition in the futures market called ‘backwardation’ (where the price in the future is lower than the price now; normally it’s in ‘contango’ where present price is lower than future price as someone needs to store the inventory until delivery) and says: “Gee, I can buy 100 tons for future delivery in 2 months cheaper than I can buy it today, OK, I’m buying a futures contract.” AND that is their major purpose. For large jewelers of circuit board makers or whatever to lock in THEIR prices so they can plan hiring and workloads and know they will make a profit without a sudden price HIKE killing them.

    But the miners are out of the market right now…

    So Mr. Rich buys his futures contract, but unlike most traders has no intention of buying an offsetting contract at close or selling back the contract just before expiration and pocketing the gain. He wants delivery.

    And the exchange discovers that the ‘for delivery’ contracts are imbalanced. So they get to pony up from their reserves and if THEY issued a naked contract, they go to the miners and buy more physical metal at ‘spot’ prices. (And lose some on their silly decision to sell a futures contract naked…)

    They’ll learn to hold a higher inventory or not issue ‘long futures contracts’ without offsetting ‘short futures contracts’ in hand.

    They can, quite simply, stop selling the whales the contracts and close the market until there is a balance. So now these guys get all worked up because there was a ‘data dark’? It’s what I’d expect if there was an imbalance.

    So sometimes it goes the other way, too. Central Banks were dumping gold like crazy a decade or two ago and drove it down to about $250 / ounce (and I bought a few ounces). Then the “issue” was folks building up ‘excess inventory’ of gold at the exchanges.

    I don’t see a big issue here, other than that a gold bubble is forming and that causes some market dislocations. Not as bad yet as when the Hunt Bros. tried to corner silver and drove it up to $50+/oz (about $400 / oz in todays dollars I think). Then got caught and bankrupted…

    Why am I not so worried? Because at $1200 / ounce a whole load of non-economic gold mines are economical to operate and a whole lot of marginal production will come on line to fill that demand. Not today, or tomorrow, but over a year or two.

    “This too shall pass”…

    So you can ‘clip’ the market maker once or twice like that (as they want to keep a liquid market) but eventually they will just refuse to sell the future “call” until they have an offsetting future “put” in hand.

    Nothing really nefarious about any of it.

    Sure, the market maker could collapse. Highly unlikely, but possible. Some times “professional” traders do stupid things. The local city government lost something like $50 Million when a guy who was supposed to be ‘hedging’ to reduce risks started ‘trading’ to make money and lost his bets. They added risk, made money, added more risk, then lost more money, then started a spiral decent into hell as they tried ever more risk to ‘get back to even’. Same thing could happen at the exchange, but I doubt it. Most places have pretty good risk management desks to catch such rogue traders before they sink the company.

    So if I were upper management at that company, and we came up a few tons short one expiration, and had to scramble:

    1) The risk management desk would be having weekly meeting with me to present our risk exposure and mitigation steps. Turning daily if I didn’t like what I saw.

    2) An automatic hold would be placed on execution of any order of over, oh, 10 tons that was not from a clearly usual customer (jewler, miner, etc.) but was from a trade desk; until there was an offsetting order in hand.

    3) An automatic hold would be placed on all sales of “calls” if “puts” were out of balance by 20 tons, and held until the balance was restored.

    4) My sales guy would be visiting the miners to set up some “put” contracts (at whatever price it took) to balance the market at that new price without my inventory being at risk. basically, you cut a deal that they will sell a “put” at 10% over spot for 20 tons on any given day. Now if the “raider” dumps an ‘at market’ order, he gets filled, but at a 10% premium and not from my inventory… HIS volume drives the price up as he is disrupting the market.

    And I’m sure I could think of more if I had another 10 minutes on it. Which means the market maker is getting a whole lot more such things lined up.

    But it does make for good FUD news shows. (Fear, Uncertainty, and Doubt)…

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