Tuesday, October 14, 2008

A Reader Inquires About the Nippy and Platinum

a Trend & Value reader living in Japan (though he's from the States) emailed me a couple days ago:

Hey Lucas
I took your advice and read "Reminiscences of a stock operator" and subscribed to Joel's newsletter. Thanks. I've started an oanda demo account...to practice...but I should get moving to the real thing.
I'd be interested in what you see for the "Nippy" going forward from here, especially over the next few months. Japan cannot be happy with the yen so strong. As I said, I work in the koi business, a non-essential export, and the yen's strength vs the Euro and others causes concern for whole industry, probably for all exporters and the Politicians. The people I work around see the strong yen as a bad thing....bad for business but better for when they go to the gas station(they dont think about that part of the equation).
Seeing the Aussie drop vs. the yen last week I wonder where all the Japanese gains from the carry trades go. So far, not Japanese or US stocks. Maybe Robot R&D or sexy cartoon production companies...Japanese things. Maybe not-so friendly deals with Russia or who knows who/what.
I appreciate the Guns and Roses addition as I did with the Dr.Dre a few weeks ago.

I wrote back to him briefly and said I'd respond on the blog, if that was okay with him. that prompted another short note from him that'll I'll include here because I think it's interesting:
Hey
Thanks, no problem putting it on the blog. A strong yen is the last thing Japan wants, yet...where are Japanese-yen earners or Japanese banks going to jump to now. Brazil or something else high yeild seems possible but I really dont know enough about all this stuff. Thing is, without your blog, Otto's blog, and Gary's blog, I probably wouldnt be thinking about any of this stuff.
I was looking at the Platinum:Gold ratio yesterday and wondering if thats something that was ever "important" or taken into account by customers when you were in the metals business. To the uninformed like myself, high Platinum should mean bling-bling in rap videos or high usage expectations(in cars). Low Platinum might mean the opposite. Compared to Gold, though Platinum is way off where it was from the begining of 2006 to Jan 2008....but the future. Interesting to see if that ratio stays around there or goes even lower.
Thanks for keeping the blog going strong

as a metals broker, I never sold a single ounce of platinum (or palladium for that matter). on the occasions that someone would call requesting it I'd just say, 'no, no, you don't want that. platinum's too expensive. buy some gold.' 'but platinum's going up,' the client would respond. 'so what? a lot of things are going up, that's why you should buy some gold.' and so, more often that not (a lot more) they'd get off the phone without having bought anything, platinum or gold.

but now platinum's not too much more expensive than gold. consider though that there have been a few times when platinum was actually cheaper than gold. the early 80s and the early 90s come to mind. recessionary periods, both of them. and that makes sense, because as you indicated platinum has some reasons to be sensitive to GDP. speaking of Bling, here's a ridiculous video I found on youtube:



(no, there's no reason to watch the whole thing, it doesn't get better.)

I have no more insight than you do whether the ratio will bottom here or go even lower. the chart is kind of interesting though:



from what I understand, platinum costs somewhat more to mine than gold. and neither product is making a ton of money for miners these days. take a look at the collapse in the share price of Stillwater Mining (SWC) a platinum and palladium producer:



this company for years had a large portion of their platinum production hedged. and the price kept going up up up. and so they didn't make any money. then, this summer, their hedging obligations expired and they publicly swore they'd wouldn't hedge again. and sure as shit the price promptly drops 1100 bucks.

in any case, SWC seems to be right on the bubble now in terms of the viability of keeping their mines operating with prices where they are. (if you want a professional analysis of SWC's - or any other company's - fundamentals I highly recommend Otto's NOBS service.)

so my guess is that if PGMs (platinum group metals) drop too much lower then a fair number of mines will shut down. but then the wild card becomes how much of the crap do the Russians have squirreled away? and how anxious are they to get rid of it?

remember those charts of soybeans and wheat I put up earlier? platinum's also come back down to its former long-term resistance level.



so in summary, I would guess that while platinum could go lower (whether priced in gold or dollars) I doubt it will go tremendously lower. most of the damage is done. with History accelerating as it is, we can be pretty confident that some new, improved bling bling movement will come about before all too long. buying a little platinum now isn't going to hurt anybody.

my goodness... this post is so big already and I haven't even got to talking about the Nippy yet. I'll have to write a separate post. soon, I promise.