Most investors have a tough time standing apart from the crowd. That's why Jeb Handwerger says, "To be successful in the market, 99% of the people have to think you're wrong." While most investors are chasing overvalued equities, the smart money is acquiring assets that will benefit from the next uptick in inflationary pressures. In this interview with The Metals Report, Jeb Handwerger, editor of Gold Stock Trades, explains which investments will benefit most from the coming "risk-on" trade.
The Metals Report: Recently, you've been writing about the beginning of a new inflationary cycle and an uptick in inflation. How does the new inflationary environment differ from where we've been since the financial crisis?
Jeb Handwerger: For several months, there has been a surprising rebound in the Chinese and Asian markets as evidenced by strong demand and associated price increases in iron ore, copper, industrial metals, uranium, the heavy rare earth elements (HREEs) and platinum. For a long time, investors predicted a hard landing in China—and they have been wrong. As a result, we're seeing a very powerful "risk-on" rally. Investor expectations over the past couple of years have been for deflation and the associated "risk-off" trade. The situation is beginning to flip and inflation expectations are beginning to creep back into investors' minds. The early investors and the smart money are making "risk-on" trades as equities hit new highs and as investors flee currencies.
The numbers show that the Chinese economy is rebounding strongly. Banks are lending, and investments for commodities are increasing. After almost two years of economic contraction in China, I believe the Chinese economy decisively turned upward as of year-end 2012. For approximately the last two years, metals prices consolidated while the bond and the equity markets rallied. Notably, the bond market rallied before the equity market. Times when bonds and equities outperform commodities are usually predictive of inflation. Eventually, profits should flow from equities to commodities in the traditional inflationary business cycle. It is only a matter of time before capital hits the commodity and junior mining markets.
I believe the strongest evidence that an inflationary rally has started is the outperformance of industrial metals, as well as precious metals that have an industrial component, such as platinum and silver. Copper is beginning to outperform gold. For the past two years, as markets were risk-off, gold outperformed. However, from 2000 to 2008 before the credit crisis, the industrial metals and the miners outperformed the risk-off assets. We're beginning to see a rotation from a deflationary cycle to an inflationary cycle. All the money that's been pumped into the system by central banks worldwide and this competitive currency devaluation in order to boost anemic economies may be unleashing the beginnings of a long-term inflationary rally.
TMR: Do you think platinum will outperform gold in an inflationary environment?
JH: Investors who understand the long-term inflationary cycle should diversify across the metals, but now is a good time to be overweight in the precious metals that have an industrial component, such as platinum. The supply-demand fundamentals are better for platinum than for gold. Three-quarters of platinum supply comes from South Africa, and the strikes and labor disputes there are widely covered. North American platinum group metals (PGMs) miners are an alternative to South African miners. The most prominent miners in North America include Stillwater Mining Co. (SWC:NYSE), North American Palladium Ltd. (PDL:TSX; PAL:NYSE) and a developer, Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE), which has the Wellgreen project in the Yukon. Prophecy is interesting because a new management team has come aboard with mine-building and financing experience to take this project to the next level. The company could be a supplier of PGMs to the North American market.
On the demand side, we are seeing auto sales as the largest driver of incremental platinum usage. Auto sales in China are at record levels, with China surpassing the U.S. as the largest consumer of automobiles and General Motors selling more cars in China than it's selling in the U.S. All this new automobile production requires substantial PGMs. It is interesting to note that automotive sector troubles pushed the platinum price down during the GM bankruptcy. The large reduction in U.S. auto sales caused a big drop in platinum demand.
The last consideration for platinum over gold is the historically low relative valuation. Not that many years ago, platinum was almost 2.5 times more expensive than gold. Since then, it has dropped below parity. That is rare and has only been seen a few times in the past 30 years. Whenever that has occurred, it's been an excellent buying opportunity for platinum. Considering that platinum production is much smaller than gold production, this represents an excellent buying opportunity.