9/24/2012 8:03 PM ET|
Why gold and platinum are buys
In a slow economy, commodities are particularly sensitive to supply. And what's happening in South African mines could mean short supplies of gold and platinum.
Image: Striking workers gather outside the Marikana platinum mine in Rustenburg, South Africa, earlier this month.
When the global economy is booming, all that investors in commodity stocks seem to pay attention to is news about rising demand. China increases its imports of iron ore, and shares of Vale (VALE), BHP Billiton (BHP) and Rio Tinto (RIO) climb. Housing sales rise in the United States, and the shares of copper miners such as Freeport-McMoRan Copper & Gold (FCX) and timber producers such as Weyerhaeuser (WY) go up with them.
Of course, there are doubts about growth even during a boom, but investors don't do much listening to the pessimists.
When global economic growth falters, as it has now, stories about demand have a harder time winning investor mind-share. When it comes to moving stocks, stories about excess or tight supply carry more weight.
Want an example from our supply-conscious times? On Tuesday, Sept. 18, crude prices and oil stocks fell on a surge in inventories as crude oil stockpiles rose by 8.5 million barrels to 367.6 million barrels. That blew through analyst projections of a 500,000-barrel increase. On the day, the price of a barrel of U.S. benchmark West Texas Intermediate fell 3.47% to $91.98. ExxonMobil (XOM) closed down 1.18%; Pioneer Natural Resources (PXD) dropped 1.45%; and Total (TOT) retreated by 0.88%.
It's not that investors don't want to hear stories about rising demand for commodities and rising commodity prices. It's just that good news about demand has a hard time getting a hearing because we're focused on supply.
And that suggests a strategy for investing in commodities and commodity stocks during a period like this, when the news is dominated by stories about supply. And that strategy leads me to gold and platinum right now. Here's why.
Watch the supply side
The strategy is simple: Invest in commodities only where supply is tight, falling or in danger of disruption. The best supply-side investment, if you can find it, is in a commodity sector where prices have been hammered by worries about rising supply but where supply disruption is just around the corner.
If you think those are tough to find, you're right. It takes a lot of digging to ferret out a situation like that. But I think I've found one.
Fortunately (for investors, not for workers in the industry), we're looking at an extended supply disruption scenario in the South African mining sector. I'm going to tell you about that today and suggest a few stocks that could run up on this disruption.
What leads me to South Africa
So let's get down to specifics. I've put together a summary of the Wall Street consensus on supply for some basic commodities.
- Commodities where Wall Street is forecasting that supply will exceed demand -- which isn't good for prices, of course. There's no shortage of aluminum, nickel, zinc or thermal coal (coal for power plants) in 2013, according to Morgan Stanley. And 2013 will be the third straight year with a glut of lead, says Barclays Capital. The International Energy Agency forecasts record oil demand in 2013, but it also says that inventories are comfortable.
- Commodities where Wall Street sees the potential for shortfalls in supply, which is good for prices. Gold production won't keep up with demand, thanks to the turmoil in South Africa's mining sector. In 2013, copper supply won't meet demand for a fourth consecutive year, says Morgan Stanley. Corn and soybean supplies are low, because drought in critical production areas promises to cut harvests and stockpiles are already at historically low levels.
The biggest short-term gains from a supply-side commodities strategy come when a commodity thought to be in supply excess turns out to be in scarcity. That requires a serious supply disruption.
And that's what we've seen recently in South Africa's platinum sector.
Strike and shutdown
The strike and mine shutdown -- and the threat of other mine shutdowns -- completely reversed assumptions about the short-term supply-and-demand situation for platinum. The assumption had been that falling demand from automakers that use platinum in catalytic converters would see supply outstrip demand. That sent platinum prices tumbling, but then the strike generated big revisions in the supply-and-demand picture.
Suddenly, platinum prices soared, rising about 20%. Platinum miners without exposure to South Africa rose even faster. Shares of Stillwater Mining (SWC), the sole major producer of platinum in the United States, went from $9.49 on Aug. 10 to $13.91 on Sept. 14, a gain of 47%. Shares of North American Palladium (PAL), a Canadian company that is the only other major producer in North America, went from $1.50 to $2.15 a share, a 43% gain, in the same period.
The price of platinum fell on Wednesday and Thursday, Sept. 19 and 20, on news that the strike had been settled with a pay raise of between 11% and 22%. That might lead you to conclude that you've missed out on this supply-side chance.
But you'd be wrong. The disruption in South Africa's mining industry is much too serious to be settled by the end of one strike.
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Good advise and good picks. Wouldn't bet the farm on any of it, but diversifying with a bias to hard assets , dividend payers, energy producers looks good to me.
Just keep chipping away, and make sure the pantry is stocked, the generator works, and Smith and Wesson , Ruger and Remington are your neighbors.
Some people think that gold is a bubble like real estate or stocks were but I disagree on 2 counts.
One, most ordinary people still have no desire to get into gold, there is no huge bandwagon of ordinary people like there was in the bubbles.
Two, constant monetary easing, increasing government debt and interest rates being low now. Inflation will kick in, partly driven by supply-driven oil price increases and partly by government debt and money printing.
Don`t buy gold unless you`re a Archie Bunker.The Dow is poised to go up bigtime
when they fix the fiscal cliff.
"... where many people feel that the economic gains since the end of apartheid have gone to a small, politically connected elite"
Of course it has. You didn't think economic gains would be shared evenly, did you? A rising tide lifts all boats, snicker, snicker. Why have political connections if it doesn't benefit you? Vote for whoever you like, it won't matter.
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