"The
Original Palladium Bug" (TOIP):
The Emerging Palladium Bull Market
by James Dines, editor
The Dines Letter
Slang
expressions are often considered to be recent additions to speech,
but this has not always been the case; as an example, for over
300 years, one's sweetheart has been called a flame. The
usage developed because French poets often needed a term to rhyme
with âme, their word for "love." One of
the few words that could be used in that fashion was flamme.
Dozens of 16th-century love poems included couplets, one line
of which ended in âme and the other in flamme.
Sophisticates across the English Channel prided themselves on
their ability to quote "French verse," so the constant
association of âme with flamme led them to
begin using the latter term to stand for the object of one's
love. At least as early as 1650 friends refrained from calling
the volunteer fire brigade when a young man became excited about
a flame.
And palladium remains TDL's steady
"flame." But it is no longer a secret reserved for
TDLrs, as the word is definitely getting out. Barron's wrote
an article on the metal a few weeks ago, and this week a major
discussion was carried in The Wall Street Journal on the
front page, lead column. Proving that the cat is finally getting
out of the bag, Morgan Stanley subsequently recommended Stillwater
and drove it up 10 points on accelerating volume. Yet, we find
it amazing that mining experts still expect palladium prices
to drop, perhaps because they are conditioned by the traditional
cyclicality of commodities, or maybe they actually believe Russian
teasing about "imminent" release of supplies, and so
they are not as bullish as are we. But our Research Department
has concluded that the Russians have deliberately set up a cartel,
and no matter how much palladium is produced or released elsewhere
in the world, they will sell sufficiently less of it such that
prices will continue to rise. This has been our key perception
to profit so far.
Another reason palladium has escaped
the attention of The Herd is that palladium has not had a bull
market since it began trading on the Nymex in 1968. Not knowing
what a palladium bull market looks like, it is difficult to believe,
but actually true, that its stunning 198% rise since May 1999
has attracted virtually no buying from big hedge funds and speculatorsyet
we expect them to pour in as we approach the highs and we begin
to cash in our profits.
The chart of palladium indicates
to us that the metal is still in its roaring Uptrend, and we
continue to stick our necks out calling for higher prices even
from these breathtakingly-elevated heights. How high? That depends
on how much palladium Russia's governmental agencies still possess
in reserves. But if they are actually running out, if the Russians
are secretly scraping the bottom of their barrel and have not
much more to sell, then palladium prices could have a rise that
will be described later as "frightening." That is because
automobile manufacturers cannot build a car without palladium,
they simply must have it, it is a relatively small amount of
money per vehicle and cost could be passed on to the purchaser.
But Japanese manufacturers, pioneers of the "just-in-time"
method of maintaining inventories at extremely low levels, are
the most vulnerable of all and are in a panic about obtaining
palladiumat any price.
Russia's palladium exports fell to 5-million ounces last year, from 5.8 million in 1998, while world demand reached a record 8.03-million ounces. The difference has been made up from Russia's reserves at the Central Bank of Russia, and Gokhran. It is a strict state secret as to how much in fact they really have left, but when they are finally sold out there's no telling how high palladium prices might rise. The Central Bank of Russia is believed to have around four years' worth of palladium at present levels of demand, but with automotive sales in Russia and China soaring, it seems that there will be ever-more palladium needed.
Platinum Group Metals (PGMs) have already surpassed coal as South Africa's second-largest earner of foreign exchange, and might soon actually exceed gold in importance. South Africa supplies most of the world's platinum and is the second-largest palladium producer, after Russia. This provides an unexpected windfall for South Africa and is so bullish for their markets. Our recent recommendation of Anglo-American Platinum (AAPTY) (Amplats), the world's largest platinum producer, is based on the fact that they will be a primary beneficiary of the bull market in PGMs.
Our Order of Battle relies on the Mass Psychology of the newly awakened seeking to buy palladium shares, because they will go for blue-chip Stillwater first and foremost based on its solid reserve position and favorable location in Montana. Our recommendation to buy Stillwater Mining (SWC) (Our top palladium pick) as it dropped as low as 34 in our Interim Warning Bulletin of 24 Feb 00, was a lucky shot, much like our IWB recommendation to buy it "below 20" last summer. We then recommended North American Palladium (PDL.TSE), another producer, suitable for Canadians seeking home-grown investments. Both of these producers are in powerful Uptrends, and we would be in no hurry to take profits yet.
After these stocks begin to be exploited, and been driven to prices much higher than nearly anyone would now believe, there should develop the usual "area play" among exploration companies, which are more speculative because they simply hunt for palladium deposits and are not yet to the stage where they could actually produce any. Exploration plays are extremely difficult to work with because one never knows when a drill hole will hit pay dirt, so the preferred approach is to buy a "basket" of them and perhaps we will have more on that in an upcoming TDL. Meanwhile, however, one junior exploration company has caught our eye, with no less than five interesting palladium prospects, and an important gold "kicker," that has developed an impressive Uptrend, Freewest Resources (FWR.M), which are adding to Supervised List #5. Keep in mind our guesstimated scenario expecting Stillwater to become extremely popular, followed by North American Palladium, and then spreading to a number of exploration playsany of which might strike it rich and produce bonanza profits.
Apparently unaware of TDL's bullishness, some big Japanese speculators believed Russia's promises to deliver palladium and sold it short, hoping to profit when the shipments arrived and triggered a plunge in prices. Of course, when the shipments failed to arrive last month, their hysterical short covering drove palladium's price to as high as $835 on 22 Feb 00. The Tokyo Commodities Exchange banned new trading and took other measures to bail out the desperate short sellers, but this is only a foretaste of the wild bull moves that we sense ahead. As the New York Mercantile Exchange announced its fourth increase in palladium margins, the deposits required from traders, most speculators have probably been forced to sell and have been pushed out of the market. Which means that there is one less thing that could be done to suppress palladium prices, and sets the stage for a buying panic by automotive companies that simply must have it.
But, let's get something straight. With the exception of Stillwater, whose production is scheduled to rise dramatically this year, the other companies will produce the metal in the future and the world needs palladium now, so that even a palladium discovery today would not cause palladium prices to plunge. The Russians would simply provide less to the market and maintain upward pressure. We've never seen a setup like this before, and it is important for TDLrs to climb aboard as early as when we first turned bullish on the Internet six years ago. Understandably, palladium is TDL's flame. In the language of flowers, the yellow rose means friendship, the red rose means love, and the orchid means business!
Editor's Note: James Dines is editor of The Dines Letter, P.O. Box 22, Belvedere, CA 94920, 1 year, 20 issues, $195, 6 months, $115. Also available by e-mail. Put simply, subscribers that followed The Dines Letter's Internet recommendations made a "killing" in 1999. Subscribe today and James Dines will send Bull & Bear readers his 40th anniversary Annual Forecast Issue. This blockbuster newsletter of 56-pages is being widely discussed. You will also get the latest list of The Dines Letter's recommended Internet stocks. Write to above address or call 1-800-84-LUCKY.
