Is Palladium's Rise Bullish for Platinum? and Gold?

April 9, 1998

No matter how much cats fight, there always seems to be plenty of kittens.
Abraham Lincoln

In old Scottish seaports women of the night wore skirts called "cutty sarks." Dictionaries now define a cutty sark as a "short shirt," or "hussy," but back then it had a special meaning fast. That is what inspired the captain to name the world's fastest clipper ship with its figurehead of a woman in a scanty wrap the "Cutty Sark."

Palladium is the cutty sark of the precious-metals complex, yet it has gone almost entirely unnoticed by the financial press. Granted, it is a relatively abstruse metal, but to us it is one of the four precious metals that tend to move together, by the Dines Wolfpack Theory.* Acting as if it had been imbibing Cutty Sark scotch whiskey, palladium is now at the highest levels in eighteen years, which also has special significance to us, because 1980 was when the four precious metals made a Major Top Formation. The fact that palladium is challenging its all-time highs (see chart right, bottom) makes us wonder whether the other precious metals would follow suit. We're pretty sure that at least platinum will follow palladium because they are used interchangeably, depending on relative prices, in automotive catalytic converters. (Therefore buy platinum futures?) Indeed, Japanese auto manufacturers (and short sellers) are in a growing panic about the shortage because cars don't get built without the metals. Russia shipped neither metal in the first half of last year, and has shipped none so far this year, arousing fears that Russia might be running out of supplies. So the interesting question arises as to whether this is simply an industrial shortage, or whether these two metals are presciently telling us that silver is next. And then gold.

* Dinesism #10 (DIWPAT). For a full discussion of 33 Dinesisms see Mass Psychology book, page 325, available from amazon.com

As we study the three white precious metals carefully, nobody else seems to have noticed that they have begun moving in rather precise unison. For example, all three made a peak on February 5th and then pulled back. Now that palladium is "on fire," and since palladium and platinum are interchangeably used, it is inconceivable that platinum will not rise to follow it. But the situation does lead to what we call an "Anomaly" in the Mass Psychology book (page 165) when a change in the commodities futures markets has not yet had time to reflect itself in the stock market, giving us a brief moment to buy the stock.

Our stock of choice is still Stillwater Mining because it owns a magnificent platinum/palladium reef, in Montana. Remarkably, Stillwater has yet to rise commensurately with platinum and palladium, apparently because the stock is not very well known yet. You are first.

We find it entirely remarkable that palladium is enjoying the biggest rise of any commodity, yet is not noticed. We find it even more remarkable that crude oil prices have dropped so low that gasoline here is cheaper than bottled water! This is out of whack with reality and something has to give. Indeed, "things" generally are cheap, natural resources from base metals to food commodities, such that production cutbacks have begun. Which, in the past, have usually been the precursors of commodities bull markets. With palladium having hit $290 in Asia this week, (practically the same price as gold!), something violent seems to be brewing under the surface. Especially since many silver and gold-mining shares are beginning to level off, and even rise.

When Warren Buffett bought one-quarter of this year's world silver production, silver soared above $7 and we began to look for "choppy, lateral motion," which has begun. Silver should remain around the $6 level for a while, to absorb selling by profit-taking amateurs that is so typical of the early phases of new Major bull markets. Indeed, Bunker Buffett pointedly played down his silver position this week, duly noted by the press, our guess because he would like prices to come down so that he could buy more. Downside risk is probably small here, and this Breakout Pullback in the silver-mining stocks would be an excellent time to complete your buying of Pan American Silver and Silver Standard.

Gold has "decoupled" from the other three precious metals because of the fear that central bankers will sell. Do you know how to tell when a central banker's father passes away?* Nonetheless, there are "W" Bottom Formations all over the golds, so something bullish might be brewing.

* The lights dims.

In conclusion, one of The Dines Letter's biggest "discoveries" ever might well have been Stillwater Mining (SWC), completely unknown on Wall Street here at 22, a "Buy" before The Herd awakens to it.

  1. Even though all the platinum mined to date in the world would fit into one large shipping container, more than 20% of all manufactured goods contain platinum or require its use in the production process. Demand is rising, supplies are limited. While platinum use has risen by 50% in Europe, Japan, and North America in the past decade, its use has risen by over 300% in the rest of the world, most notably in China and other emerging markets in Asia. Over 95% of the world's platinum is mined in South Africa and Russia both of which are susceptible to disruption caused by strikes, transportation bottlenecks, capital shortages, and technical breakdowns associated with antiquated machinery and infrastructure. It takes ten tons of ore to produce a single ounce of the metal, a complex process that requires capital, expensive machinery, and a highly-skilled work force. Bringing a new mine into operation takes from five to ten years. In short, there is little doubt that platinum will continue to increase in value. What is not certain is whether the proposed depository will provide a commercially viable link between the deep pockets of foreign investors and the highly refined product of a big hole in the ground in south-central Montana. The Stillwater Complex in the Beartooth Plateau contains a considerable number of "platiniferous orebodies" imbedded in some of the oldest rock on the planet. The Complex includes an extensive mineralized zone known as the J-M Reef which has been traced on the surface for approximately 28 miles and which extends over one mile to unknown depths. The Stillwater Mining Company currently owns or has the rights to nearly 1000 claims covering substantially all of the presently identified ore-bearing zone. Stillwater Mining Company is the only US producer of these strategic metals and the only significant primary source of platinum group metals (PGMs) outside South Africa. Stillwater's vast ore body in southern Montana is the richest known depository of PGMs in the world, and contains sufficient reserves to make Stillwater one of the largest precious metals companies in North America on a reserve basis. The Stillwater mine sold 55,000 oz of platinum in 1995. Milling and concentrating facilities at Nye are undergoing expansion. A base metals smelter is being constructed at Columbus. Annual platinum production is expected to exceed 125,000 oz beginning in 1998. A second mine is planned at East Boulder, which could double or even quadruple production in the future. Platinum is similar to gold in that it is widely regarded as a store of value. The available supply of platinum is far less than gold, however there is at least 20 times more gold than platinum mined each year, and there is far more gold than platinum in the commercial and strategic stockpiles of the world. Nearly half of all the platinum produced today is used in catalytic converters for automobiles. The metal is irreplaceable in some petrochemical processes as well as in assorted defense and high technology applications, including space shuttle components. It is also used in catheters, pacemakers, mass spectrometers, dental equipment, surgical instruments, and certain anti-cancer drugs. Platinum is also what's known as a prestige jewelry metal, and jewelry accounts for nearly 40% of commercial demand. Platinum jewelry is especially popular in Japan, which accounts for 85% of the market. Besides their use in the fabrication of automotive catalysts in the US, Japan, and Europe, platinum-based fuel cells may power cars when zero-emission standards come on line. Platinum is a key ingredient in pollution-preventiontechnologies in dry cleaning, power plants, oil refineries, and assorted factory operations. There is also a growing market for recycled platinum recovered from abandoned cars and machinery. Palladium is a vital constituent of hydrogen peroxide, which is now being used in lieu of chlorine in a number of industrial processes. There are no known substitutes for platinum and palladium. Stephen Maly, Research Analyst, Montana Legislative Services Division, Montana July Interim Newsletter
     
  2. Pan American (PAASF-NASDAQ), our silver recommendation of choice, has just announced its 1997 results, which we found more than satisfactory in these difficult times of lower silver, copper and lead prices. Nonetheless, their total silver costs dropped nicely to $3.79 per ounce from $4.68 last year and $5.01 in 1995, so that when silver prices resume their Uptrend, profits should burst forth. Pan American is completing its bankable feasibility on reopening its Russian Dukat Mine in 2001 at an annual production rate of 15-million ounces of silver and 30,000 ounces of gold, which would make Pan American the second-largest silver producer in the world. Meanwhile, Pan American should complete its acquisition of La Colorada this month and development work lead to reopening this Mexican mine in 2000 at a production rate of 3-million ounces of silver annually. Silver exploration is also ongoing in Peru and Bolivia. Finally, Silver Standard (SSO.V) has retreated into its Base Formation, after the Warren Buffett rise, and buying plans should be completed Near these levels.
     

PREVIOUSLY RECOMMENDED FOLLOW-UP: AMAZON.COM (AMZN)

AMZN calls itself the "Earth's Biggest Bookstore," offering 2.5-million titles, easy search-and-browse features, e-mail services, personalized shopping services, web-based credit-card payment and direct shipping to customers. AMZN's unlimited online shelfspace offers a huge selection via an efficient search-and-retrieval interface as well as streamlined ordering. More importantly, AMZN completely bypasses the entire book-publishing Establishment, redefining it and creating an entirely new communications medium. The era of selling primarily big, best-selling authors will be brusquely shouldered aside by obscure and backlisted books, especially from smaller publishing houses that did not have comparable capital for publicity and marketing, and so were shunned by retailers unwilling to stock them. We believe that AMZN will play a defining role in the Internet, and we rank it with our favorite, America Online.

If we are right about the Internet being what we call "the greatest invention since the wheel," then Seattle-based Amazon.com will be one of the world's biggest retailers, and how much is that worth? Almost all commentators harp on the fact that the company is not earning a profit, which we find shortsighted in appraising a company as young and revolutionary as this, and which we compare to Microsoft, Intel, Dell, and America Online in their earliest stages. Amazon's 1996 sales of $15.7 million soared 838% in fiscal 1997, to $147.8 million, so there must be phenomenal profits ahead, and nobody in the world could at this point mathematically predict precisely what they will be. However we can estimate that AMZN probably has over 75% of the Internet's book sales, a virtual monopoly in an industry grossing around $85 billion in book sales annually.

Demonstrating its soaring brand awareness among book buyers, last December AMZN ranked 22nd in terms of online consumer reach for all web sites among household users. Their over 1.5-million cumulative customer accounts that have made a purchase means AMZN has their e-mail and home addresses, plus credit-card information, an immeasurably valuable marketing asset for the future (brand-expanding into music sales, for example). Barnes & Noble tried to copy Amazon.com but is a distant second, because on the Internet being first counts for a lot. German media conglomerate Bertelsmann is constructing a virtual mall to sell books in many languages through its extensive network in Europe and the US, so we expect AMZN to acquire European distribution sites in England or Germany as a counterthrust.

AMZN's innovative Gift Center to expedite giftgiving includes thousands of recommendations and gift ideas for children by age range, including gift certificates that could be delivered by e-mail. More importantly, an increasing number of Internet sites are developing premier or exclusive relationships with Amazon.com as their bookseller, including America Online, At Home, Yahoo, Excite, GeoCities, Netscape and the Prodigy Shopping Network.

The chart of Amazon shows an uninhibited Uptrend, but because earnings in this marketing revolution are still distant it could experience volatility. So consider buying half the position immediately and pray that it drops so that purchase programs could be completed at lower levels. Originally recommended at 57-1/4 on 9 Feb 98, TDL buyers already have a 49% profit as of 18 Mar 98 (an annualized profit of 392%) and are advised to "let your profits run."

A gold nugget can be worth three to four times the value of the gold it contains because they are so rare.