Safe Haven Investments: Imminent Danger and Opportunities – Seeking Alpha

By Marc Anthony

When people see danger in the market, their natural response is to liquidate everything and move everything into cash in order to ride out the storms. The conventional wisdom is “Cash is King.” However, conventional wisdom doesn’t work anymore, as this is unconventional time. If you are fully loaded in cash or U.S. Treasury Bonds, this news, first noted by Karl Denninger, should completely shock you out of your shell:

According to an October 19 article in Investment News, $2.29 Trillion Dollars US Treasury Bonds Failed To Deliver.

Note that it is $2.29 TRILLION, with a T for Trillion! I never heard that one could short U.S. Treasury Bonds, let alone naked shorting of U.S. T-Bonds! The T-Bonds are considered some of the safest investments, with the full faith and credit of the U.S. government guaranteeing the principal, and you get an interest payment. So shorting U.S. T-Bonds is virtually guaranteed to lose money, as you will have to pay back the principal plus the interest. You do NOT short U.S. T-Bonds, let alone naked shorting, let alone as much as $2.29 Trillion.

That is UNLESS you are a really BIG player and you clearly see imminent danger of the collapse of the U.S. T-Bonds, and of the U.S. dollar, itself. I have previously written that Warren Buffet saw extreme danger in U.S. Treasury Bonds, and as a result,  was completely out of the bonds and fully into the equities market. Of course, people should respect and follow this person’s wisdom. However, small potatoes like Warren Buffet could not have naked shorted $2.3 Trillion U.S. T-Bonds. Someone much bigger, and who knows this market better, did it. I will not speculate, but read Karl Benninger’s comment, in order to gain some insight into the matter.

Money created out of thin air is NOT King! The current Kings are precious metals. Never mind the fact that the dollar staged a shocking rally and precious metals plummeted. The dollar rally is nothing but a bubble, while current precious metal prices, especially platinum and palladium, is nothing but absurdity. Physical commodities MUST be priced above their production cost, or the supply will simply dry out, as no one can continue produce metals at a loss. So, if I am sitting on my precious metals, I am pretty much guaranteed that they will soon appreciate in terms of real purchasing power. On the other hand, if you are sitting on trillion of dollars of the fiat currency, and the currency falls, the only guarantee you will have is they will continue to fall further down, until eventually, they reach zero.

The general market always manages to fool most people most of time, and causes more people to lose more money in unexpected way. It only rewards the select few who have the wisdom and the determination to stick to their wisdom. The current global crisis necessarily means an astronomical amount of fortune must be totally wiped out. What could be a better, cleaner and quicker way of wiping out trillions of dollars of fortune instantly, then to first herd the sheep into holding nothing but cash, and then having the currency suddenly collapse? Of course, the U.S. dollar rallies big time if every one is herded into buying dollars. A bubble is something pumped up to a valuation much higher than where it should be.

Fiat money is completely at odds with the economy basics of supply and demand. For anything physical, equilibrium can be reached as the price impact positively on supply and negatively on demand. Higher price encourages more production while low price suppresses the supply. When the price falls below cost, supply dries up as no one can continue to produce and sell something at loss. On the demand side, the price has exactly the opposite effect. High price suppresses demand while low price encourages consumption.

Fiat money acts in exactly the opposite way. The less valuable a currency becomes, the more is being produced out of thin air. The cheaper the currency becomes, the less people desire to own and keep them, and the faster people want to get rid of them. When people want to get rid of their paper money as fast as possible, it speed up the velocity of money, and cause the value of the currency to plummet even more, forcing the government to print more money. The vicious cycle continues until the currency is totally destroyed. Throughout civilized history of mankind, every single experiment of fiat currency has failed. There are no exceptions.

In Chinese, the word CRISIS contains two characters, DANGER and OPPORTUNITY. We are in extreme danger but also with extremely good investment opportunities. The opportunities are made even better because every one runs away from them and run towards a gigantic death trap with a sign “Cash Is King.” Remember one thing; safe havens must be small, with narrow spaces that accommodate only a few refugees.

It reminds me of the Bible story of Noah’s Ark. People ridiculed Noah as he was building his ark, thought it had never rained a single drop for a year, how could the flood come? The flood did come as Noah expected. Had these people listened to Noah and seek refuge in his Ark, would it make a difference? No! The Noah’s Ark was still only big enough to contain just one pair of each kind of animals. It wouldn’t be a Noah’s Ark if it was made any bigger. Likewise, today’s financial safe haven wouldn’t be a safe haven, but a death trap if it was big enough to allow every one in!

Although we do not see a drop of rain yet, trillion dollars of wealth will soon be flushed away by the coming financial flood of hyperinflation. Have you built your Noah’s Ark yet? There is definitely NOT enough material to build a big enough Noah’s Ark to save every one.

I can’t understand it! There are tons of investment opportunities in commodities right now. You can buy a few metric tons of nickel or copper or cobalt or a number of other things. You know they are priced far below their production cost right now. Therefore, it is absolutely a guarantee they must appreciate to at least the fair price of their cost. Can you find any better investment, with such absolute certainty of making double, triple and quadruple the money in the next few months, regardless of the demand? How could people be so blind and not see the opportunities? They all rush to cash and T-Bonds waiting to be slaughtered, and they actually thought it was safe to be with the biggest group of mobs?

Nickel is now less than 1/6 its May 2007 price. Hello?

ENOUGH IS ENOUGH! When enough is enough, the eruption is fierce!

On Monday, the third largest nickel producer in Russia, Ufaleynickel, which is responsible for slightly less than 1% of global supply, announced that it was shutting down production, because the price of nickel is just too low. The company needs to see at least $26,000 per metric ton in order to break even.

Instantly nickel shot up to touch $5.00 a pound, from Friday’s $4.00. That’s a 25% rally in just one day, and probably the biggest one-day rally of any commodity in history. Removing 1% of the global supply doesn’t really change supply/demand that much. However, the price was suppressed too much so the bounce had to be fierce. Had you bought nickel at $4, you have made 25% profit in just a day. People are still rushing to buy U.S. T-Bonds to earn 3% annual interest while waiting to be slaughtered in the looming implosion of the bonds market.

Do you want to make a 10-fold return in two months, and maybe two weeks? Then, buy some palladium metal – any palladium metal you can find. Once the Russian Checkmate plays out, the price of Palladium could go from $170 per ounce to $1700 per ounce in no time,

The Russian Checkmate event will be if Norilsk Nickel (NILSY.PK) shuts down production. It is the No. 1 nickel producer in Russia. The number 3 producer has already shut down production. Would No. 1 be far away? If Norilsk shuts down, and 45% of global palladium supply is gone, I can’t even start to predict where palladium price could go up to, with 45% of supply removed instantly. In 2000/2001, one false rumor from Russia was enough to send palladium up to $1100. It would be fun to watch the effect of 45% of palladium supply removed.

Of course, you can get better leveraged gain investing in the palladium stock Stillwater Mining (SWC) and North American Palladium (PAL).

Will Norilsk shut down? It is facing a severe liquidity squeeze. In first half of 2008, Norilsk group reported a profit of $2.682B, at 32% profit margin. If you look up metal prices as of Oct. 24, 2008, and re-run the numbers, the company would have to write down -$4.594B of sales revenue for the whole group, or $3.634B for the main Norilsk Mine, resulting in heavy losses. The cash drain will be nearly $2B per half year.

The Norilsk group had $4.8B cash as of end of June 2008. The main Norilsk mine probably had $4B in cash. The company spent $2B in a recent stock buyback, a senseless decision that Mr. Mikhail Prokhorov denounced as “capable of putting the company on the verge of bankruptcy.” Operation loss since June probably costs them another $1B. The company has a debt payment of $400M due in November. Does it have any cash left? Can it continue to operate the mine at heavy loss? Why would the company continue to operate with heavy losses until bankruptcy?

The bullish case for palladium cannot be disputed if you understand just how bad Norilsk Nickel‘s shape is today.

Monday’s news of Ufaleynickel shut down mentioned OM Group ( and reminded me that OMG is the best cobalt play, because it dominates the chemical sector involving cobalt. I consider cobalt as a better metal to buy than silver, with the potential of 10-fold appreciation in a short period of time. Check out news on Minor Metals. If the speculation of Katanga Mining shut down plays out, cobalt price should fly soon. You can buy cobalt from BHP Billiton (BHP)..

There are so many beaten down silver and gold mining shares now. All are very good buys: Pan American Silver Corp. (PAAS), Silver Standard Resources Inc. (SSRI), Apex Silver Mines Inc. (SIL), Hecla Mining Co. (HL), Newmont Mining Corp. (NEM), Yamana Gold Inc. (AUY), Northern Dynasty Minerals (NAK), Ivanhoe Mines (IVN), and NovaGold Resources Inc. (NG). There are so many to name. Even Southern Copper (PCU), my very first commodity play, is now back below where I first bought in late 2005. These days, anything in mining is good. I would not touch Silver Wheaton (SLW) though, because of counter party risks. Also, forget about any coal player now. I continue to call for selling James River Coal Company (JRCC), Arch Coal Inc. (ACI), Alpha Natural Resources Inc.  (ANR), Peabody Energy Corp. (BTU), or CONSOL Energy Inc. (CNX), at any rally.OMG) 

The U.S. coal market is a local market and is now bearish. Watch Dry Ships’ (DRYS) share movement, as it is an important indicator of the health of the global economy. I might even consider buying some DRYS stock as the valuation has become so attractive. However, I first need to get a conformation that cross-ocean shipping activity is recovering.

I will keep a portion of my portfolio in iShares Silver Trust (SLV). I will not buy gold or SPDR Gold Shares (GLD). I believe gold is adequately priced at current level. The money spent on gold is better spent on something else. Even buying a ton of nickel or copper is better than gold.

However, the best of all is still palladium, and the only two pure palladium plays, SWC and PAL. We are witnessing a singularity event unfolding in the palladium market, as Norilsk Nickel will inevitably shut down, to protect its own best interest. What is singularity? A singularity is the kind of extremes like what you get when you try to divide a number by zero!

Full Disclosures: The author is heavily invested in SWC, PAL, has considerable stake in OMG and SLV, and will continue to buy some select silver shares including SSRI, HL, PAAS and SIL. I am also looking for opportunity to buy DRYS soon.