PGMs = Potentially Great Movers

Investing in African Mining Indaba 2012 Online Review

Amid further, but by now routine, delays and more negotiations among its political leaders, the situation in Greece showed no concrete signs of coming to a conclusion just yet, despite the optimism manifest in certain currency, equity and commodity markets on Tuesday. To wit, the euro traded near $1.329 (a two-month high) while European stocks posted gains despite some unsettling economic metrics coming out of Germany.

Gold and crude oil enjoyed a very good trading session on Tuesday as speculators threw money at both markets with an amount of generosity that was clearly lacking on, say, last Friday. This morning, however, the going got a bit tougher after the euro exhibited a bit of “fade” in the wake of a reluctant-to-dole-out-money kind of statement coming from the ECB.

A package intended to untie the complicated knots that Greece is tangled in has been on the working tables in Athens since July but the past five days have really been cliff-hanger ones when it comes to the country securing its second round of bailout funds and/or its prospects of remaining in the eurozone altogether. Whether Greece secures the money or heads into bankruptcy does not alter the fact that its denizens face inevitable hardships ahead, complete with wage and pension cuts as well as even more joblessness.

Greek labor unions staged another walkout yesterday and indicated that their members are not keen on more austerity measures being imposed upon them and that the bailout is being rammed down their throats by foreign creditors. Greek Finance Minister Venizelos calls the unfolding saga a “dramatic and acute dilemma.” However, it is clear that despite dramatic statements being made by politicians who are up of election/reelection come April, the real power in the situation resides in the hands of the so-called “troika” of the IMF, the ECB, and the European Commission at this juncture.

Gold prices meandered on either side of the "unchanged" marker this morning and orbited around the $1,745 area as the US dollar did not appear to pierce the 78.50 level on the trade-weighted index following yesterday’s euro-centric optimism-induced sell-off it was subjected to. At least one school of thought sees a potential sell signal in the recent advances made by the yellow metal, while another such school envisions more volatility as the defining feature of bullion in coming months. Crude oil, on the other hand, made further progress to the upside, gaining another $1.25% this morning. Developments in Iran and Nigeria continue to bolster black gold and the lower dollar did not hurt it either.

Speaking of the greenback, the “Arab Street” has been turning towards it in droves following the spreading malaise that has ensued in the wake of the “Arab Spring.” Folks in Egypt, Libya, Tunisia, Iraq, and Syria have been seeking shelter in the American currency have watched their own colorful banknotes taking a hit in value and they have thus sought out the relative safety of the buck in unprecedented numbers. Bloomberg News reports that, for example, “In Syria, where an uprising against President Bashar al- Assad’s rule is still raging, demand for dollars is so high that Mudher Salih, the deputy central bank governor of neighboring Iraq, said Jan. 10 that traders were buying dollars in his country to sell them illegally next door.”

Silver climbed by 19 cents to the $34.34 mark on the bid-side but appeared confined in the $34 to $34.50 channel for the time being. Platinum gained $3 to rise to the $1,650 level and palladium moved up by $1 to the $709 per ounce figure. The former has now halved its previous near-$200 discount to gold in a matter of not too many trading sessions. There are a couple of fresh news items on the subject of the noble metals that merit our attention: they come from Norilsk, Lonmin, and South Africa. Read on:

The world’s top palladium producer, Norilsk Nickel said on Tuesday that “PGMs have investment potential comparable or even greater than gold.” Platinum has moved 16% higher thus far this year, while palladium has advanced by 24% from its October lows. Existing platinum above-ground supplies might last no more than seven months if production of the metal were to be halted. A Norilsk official puts the price of palladium at $2,100 in five years’ time, while he also sees a 50% gain (to $2,500) as possible in platinum. Gold would have to touch $5,100 to mirror the kind of performance that Norilsk envisions in palladium.

Another PGM producer, Lonmin, told attendees at the Investing in Africa Mining Indaba conference in Cape Town that the risk of platinum supply disruptions is growing. The firm’s CEO, Ian Farmer pointed to “government safety stoppages, labor management difficulties, skills shortages, transformation and equity ownership challenges, rising community expectations, resource nationalism and high electricity prices” – all of which are making operating in South Africa increasingly difficult.

Also down in South Africa, labor strife continues to cast a fairly dark shadow on the output in the PGM space. As recently reported here, Impala Platinum (the planet’s second largest platinum producer) fired more than 17,000 workers during what the firm has called an “illegal strike.” And then, there remains the subject of the possible nationalization of that country’s mines; a thorny- and as yet unresolved- issue and one that will not come to be addressed without contentiousness.

While we are on contentious subjects, we might as well tackle a couple of fairly old but frequent ones. The heated debates on whether or not gold is an effective inflation hedge and on whether the Fed is or is not doing its job continue to rage on, and they continue to show sharply divided camps. This morning, we bring you a couple of stories from the less…”conventional” side of these issues. For the sake of balance (and a bit of myth-busting), you know...

A just-published by Credit Suisse study by Messrs. Marsh, Dimson, and Staunton of the London Business School argues that owing to its price volatility, gold has not been able to play an effective role in protection against inflation. The study is not referring to the past nine months of volatility in bullion prices; it covers 112 years of market history. Since 1900, the real return on gold has been 1.1% (in sterling) as compared to the 5.4% annualized return offered by global equities.

Do note that the LBS study does point out thatGold is the only asset that does not have its real value reduced by inflation” and that “it has a potentialrole in the portfolio of a risk-averse investor concerned about inflation.” However, one would be well-advised not to look at the precious metal for “return” in the sense that “this asset does not provide an income flow and has generated low real returns over the long term. Gold can fail to provide a positive real return over extended periods."

Gold is many things to many people, but ignoring such math as shown above can prove unwise. Perhaps the individual investor’s focus should remain on the fact that when gold is added to a portfolio of conventional assets (and in a not too over-weighted percentage) the overall performance of that basket of assets is slightly enhanced, whilst its overall risk profile is slightly decreased. Gold is a good diversifier, and a good tail-risk mitigator. As for being a ‘panacea’ for what ails the world, or certain other miraculous things, well, surely studies such as the above will keep coming.

As for the Fed, while certain would-be US Presidents currently in the heat of the election campaign would like to incarcerate Ben Bernanke and slap him with a charge of “treason” (punishable by execution), the numbers that Mr. Bernanke’s Fed has been able to recently draw on the US economic chalk board (again, those pesky numbers and math) are proving them “dead” wrong.

Inflation supposedly now demolishing America and your wallet? The imminent death of fiat currencies and the entire political system?

Perhaps you’ve been parsing too many shadowy statistics: “More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4% for the 12 months ending in December, near the central bank’s 2% target.”

US unemployment at 10% or 20% by now, and the US economy shrinking into oblivion? Perhaps you have been the recipient of the wrong news (-letters, that is): “The unemployment rate fell to 8.3% in January, the lowest since February 2009, according to a Labor Department report last week. Payrolls rose by 243,000, exceeding the most optimistic forecast in a Bloomberg News survey. The US economy is forecast to grow at a 2.3% rate this year, up from 1.7% in 2011, according to a Bloomberg News survey of 70 economists last month.” 

Not exactly the “rap sheet” for which one is sent “up the river.” Certainly not when, even in the wake of such figures, the Fed Chairman remains of the opinion (spoken just yesterday) that the US job market, while progressing along, is relatively far from being given a clean bill of health.

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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