Image: Striking workers gather outside the Marikana platinum mine in Rustenburg; South Africa, earlier this month. © Getty Images

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.

image: Jim Jubak

Jim Jubak

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

A six-week strike that began on Aug. 10 shut down production at the Marikana mine owned by Lonmin (LNMIY) and ended only after violence took 46 lives.

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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The deeper worry

That strike was part of a struggle for control of the mining industry between rival unions linked to competing factions of the ruling African National Congress that are themselves contesting control of the party and the national government. All of this is taking place in an atmosphere of worker anger over conditions and pay at the mines (and in the wider society, where many people feel that the economic gains since the end of apartheid have gone to a small, politically connected elite). And mining companies are also worried about the potential for nationalization of the mining sector.

Anglo American (AAUKY), the world's largest platinum producer, and Aquarius Platinum (AQPTY) have been able to reopen mines after recent strikes, thanks to a heavy police presence, but I think both are susceptible to future strikes.

Most of these actions have been wildcat strikes not sanctioned by the National Union of Mineworkers, long the dominant union in the industry (and with strong ties to the current leadership of the African National Congress government). Instead, dissatisfied workers have turned to the rival and more militant Association of Mineworkers and Construction Union, saying that the National Union of Mineworkers has become too close to the big mining companies and that its leaders have lined their own pockets while neglecting members' needs.

A case in point is that of Cyril Ramaphosa, once head of the National Union of Mineworkers but now a multimillionaire businessman, who, union members are well aware, bid 19.5 million rand ($2.3 million) for a prize buffalo earlier this year. (The average black South African made 26,000 rand a year in 2010, the last time national incomes were surveyed. That's worth about $3,140 at current exchange rates.)

Moreover, the union-versus-union struggle is wrapped up in a fight for leadership in the African National Congress. Many leaders of the National Union of Mineworkers -- Ramaphosa, for example -- are also leaders of the party, and the union supplies solid support for the government of President Jacob Zuma. The Zuma government was rightly rocked when, after the police killed 34 strikers at Marikana, the national prosecutor ordered the arrest of 259 miners and charged them with the murder of their fellow workers under an apartheid-era law. (The charges were later dropped.)

On the other side is Julius Malema, once the head of the more radical African National Congress Youth League, but recently cast out of the party. He has called for Zuma's resignation and for workers to make the mines ungovernable.

Gold as well as platinum

And as you might expect, this economic and political battle isn't limited to platinum mines. A wildcat strike has hit AngloGold Ashanti (AU), the world's third-largest gold producer by sales, at its Kopanang mine. (Kopanang was responsible for about 4% of AngloGold Ashanti's gold production in the first half of the year.) And 15,000 workers at Gold Fields (GFI) have been on strike for six weeks.

The 11% to 22% wage hike at Lonmin alone would have been enough to rock South African platinum mining companies, since about half of the sector had been losing money at pre-strike platinum prices and with pre-strike costs. Wages account for about 50% of costs in the sector.

But longer term, platinum- and gold-mining companies face tough decisions on whether to make new investments in South Africa. If costs are rising and operating conditions are, to put it mildly, unpredictable, how does a CEO calculate a rate of return or justify capital spending? Some companies, including Lonmin, had begun cutting capital budgets even before the Marikana strike.

Lonmin also faces the need for a major refinancing of as much as $500 million to $1.5 million, according to Investec. Think that's going to be easy? Analysts at Investec have set a target price for Lonmin with a range of $0 to $22.58 a share. The shares closed at $9.65 on Sept. 21 in London.

Still time to buy?

So, yes, I think there's a good chance of further supply disruptions at South African platinum producers. Under the circumstances, the pullback at Stillwater Mining as the strike moved toward settlement -- shares were down 13.3% from Sept. 14 to Sept. 21 -- creates a good opportunity to buy into an ongoing supply disruption. As of the Sept. 21 close at $12.06, the stock has already retraced 41.6% of its gain from the price on Aug. 10 of $9.49. A 38.2% retracement, technical analysis say, is often a good level for a buy after a gain and sell-off. If you want to be especially conservative, you might wait for a 50% retracement of the gain (to $11.69). I think the current price is a reasonable entry point, and I'm adding the shares to my Jubak's Picks portfolio today.

The supply-side story for gold is potentially as strong. South Africa isn't nearly the gold producer it was as recently as 1970, when it produced 79% of the world's gold. Since then, South African gold production has been in decline, and production from countries such as China has been on the rise. By 2010, South Africa accounted for just 7% of global gold production.

But South African production is still a major factor in the global industry, especially when you consider that gold, unlike platinum, isn't facing a supply overhang. In fact, before the strikes in South Africa, the consensus saw gold supply with only a slight surplus over demand. In the second quarter, according to the World Gold Council, gold demand fell by 7% from the second quarter of 2011. But gold supply from new production declined by 6%. And that kept supply -- at 1,059 metric tons -- roughly in line with demand at 990 metric tons.

Most forecasts for rising gold prices have been based on projections of increased demand for gold; the assumption is that central bank stimulus from the Federal Reserve and the European Central Bank will make gold more attractive as a hedge against inflation and a declining dollar. Deutsche Bank raised its forecast price for gold to $2,000 an ounce in the first half of 2013 in the days just after Sept. 13, when the Federal Reserve announced its third round of quantitative easing. Bank of America raised its forecast to $2,400 an ounce by 2014 at about the same time. Gold closed at $1,778 an ounce on Sept. 21, making the gains to those two targets 12.5% (by the end of 2012) and 35% (by 2014).

However, I think both targets, and especially the near-term target for the end of 2012, are likely to prove conservative if the South African industry is in as much turmoil as I think it is. On that possibility, I'd be buying shares of gold miners without exposure to South Africa. My two favorites are Goldcorp (GG) and Yamana Gold (AUY), both members of my Jubak's Picks portfolio. If you're looking for an additional play (or just a new one), I'd recommend Agnico-Eagle Mines (AEM).

There are two other supply-disruption scenarios to keep an eye on as we get into the end of November and into December. One involves crude oil and a possible attack on Iran, and the other involves cooking oil -- palm oil in particular - and possible drought in Argentina and Brazil.

But those are commodities for another day.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

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At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Freeport-McMoRan Copper & Gold, Goldcorp and Yamana Gold as of the end of June. Find a full list of the stocks in the fund as of the end of June, here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

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