Precious metals and oil (DBO) seem to have reversed higher last week on the military coup in Egypt. Bernanke is scheduled to speak and the markets may already be pricing in some dovish statement to alleviate fears of tapering which could cause some short covering and bargain hunting. Prices of platinum (PTM) and palladium (PALL) continue to outperform other metals such as gold (GLD), silver (SLV) and copper (JJC) over the past 9 months. For many months, I have been warning my readers about the growing risks to platinum and palladium supply as labor strikes intensify in South Africa.
Palladium is the only metal that is higher over the past year. Palladium is up over 14% over the past year while platinum, copper, gold then silver are still in negative territory. Palladium and platinum are showing great relative strength in this precious metals correction. I forecasted this since the end of October 2012.
Some of the largest platinum and palladium producers in South Africa are suffering from the labor disputes and violence. South Africa accounts for close to three quarters of the world's platinum supply.
I do not believe that long-term solutions will be worked out there between the unions and the mining companies. Some of the miners have settled but it comes with increasing costs to miners who are already barely marginable.
The risks to disruptions in production are just too great for new capital going into South Africa mines. Once production is disrupted and the deep underground mines are closed it is very difficult and costly to restart.
The geopolitical instability from South Africa may have a significant impact on the supply demand equation for Platinum Group Metals. These metals are crucial to reduce noxious emissions from vehicles as they are used in catalytic converter to lower tailpipe emissions.
No suitable economic replacements for PGMs have been found. Vehicle sales are increasing worldwide especially from emerging economies.
Emission standards are being implemented in emerging economies. Demand for PGMs is skyrocketing as we are seeing a rebound in the North American, Japanese and Chinese automobile sector. Supply is extremely tight from South Africa.
Major strategic consumers could be actively searching for safe and secure supplies of platinum and palladium.
Keep a close eye on top platinum/palladium projects in North America. One small junior PGM miner in North America just completed close to a $6 million financing which shows strong support for the caliber of the company's platinum and palladium assets in the Yukon and Ontario.
Investors should look for platinum and palladium projects in safe jurisdictions as the fundamentals are extremely strong with rising demand and declining supply from South Africa, which produces over three quarters of current supply.
This supply demand imbalance should impact the price over the long term. This correction in the mining sector (GDX) is one of the strongest declines in history and is similar to the 2001 thirty-year low in the mining sector. At that time similar to now, major miners (SIL) were shutting down mines and cutting back. Although it looks negative for the short term, these are the sort of moves that are characteristic of a major bottom. Mines take time to build and expand. There are major lag times that create shortfalls should prices move higher.
The mothballing of projects may be setting the stage for the next major super-cycle in commodities as supply is constrained. The pain that we are seeing in the sector now is setting the stage for the next boom and may be an excellent opportunity for top junior miners developing top notch assets.
Although this is a painful correction, many expect this downturn to lead to higher valuations down the road and increased merger and acquisition activity. Investors should focus on high quality assets with strong management teams and shareholder support that is advancing PGM development.
The supply of PGMs comes mostly from unstable mining jurisdictions. High quality projects in safe jurisdictions could become increasingly valuable as there is a need for a safe and secure supply of these critical platinum and palladium metals.