I like round numbers because they are easier to count. For example, on 14 July 2009 I recommended buying platinum at $1,118 and today it trades at $1,618. I like an unrealized gain of $500 per ounce, or 23.1%, in 6 months. But is platinum overvalued and how can we tell whether we should buy more, hold or sell?
VALUE CALCULATION
Commodities are produced because they add value to society. Wheat is to eat, oil is for fuel, steel is for building and platinum is mainly for catalytic converters in automobiles. Why is gold produced? There are plenty of tons of it in aboveground stockpiles, decades based on annual consumption, so why burrow miles into the earth to bury it in a vault?
The value gold adds to society is in its ability to assist us in performing mental calculations of value. When using gold as the numeraire a much more accurate assessment can be made when allocating capital. The third round of this gold upleg is just starting.
TECHNICAL ANALYSIS
In July 2009 the platinum to gold ratio was below 1.2 and currently it is around 1.41. The extrinsic value of platinum has risen about 17.5%, when priced in FRN$ about 45% and when compared to the earlier upleg in April platinum is looking pretty expensive. But as Professor Jastram explained in The Golden Constant all commodities tend to return to orbit around gold. So where is platinum’s natural orbit?
The natural orbit for platinum is around 1.8 to 2.1 ounces of gold per ounce of platinum. But this is just a cursory technical analysis. To be sure of one’s assertion an analysis of the fundamentals under the Austrian school of economics is also important to undertake.
FUNDAMENTAL ANALYSIS
Platinum is an extremely rare but widely used precious metal. For example, the annual worldwide platinum mining production is valued at about $7.8B compared to about 75M ounces of annual gold production or the FDIC’s$0 of reserves and a $500B line of credit with the Treasury to cover $4,831B of insured deposits. In other words, platinum is a lot rarer than gold and gold is a lot rarer than little colored coupons.
According to the USGS 2006 Minerals Yearbook of the 239 tonnes of refined platinum sold in 2006, 130 tonnes were used for automobile emissions control devices, 49 tonnes were used for jewelry, 13.3 tonnes were used in electronics, and 11.2 tonnes were used by the chemical industry as a catalyst. The remaining 35.5 tonnes produced were used in various other minor applications, such as platinum jewelry, platinum rings, electrodes, anticancer drugs, oxygen sensors, spark plugs and turbine engines. Platinum uses, like uses of silver, are multitudinous.
The giant wealth destruction team headed by the Vampire Squid In Chief Obama thinks that destroying perfectly functioning automobiles, with perfectly functioning catalytic converters, is a recipe for economic prosperity. Additionally, billions of dollars of federal funds are being directed towards the Green Economy. What do new cars and the green economy need? Lots and lots of platinum.
And we all know the giant wealth destruction machine known as government always buys at a good price. As their little colored coupons continue evaporating in The Great Credit Contraction holders of capital will continue scrambling for tangible assets. But evaporating platinum takes a lot of effort because its melting point is 1,768.3 °C or 3,214.9 °F compared to gold’s 1,947.52 °F, silver’s 1,763.2 °F and it is important to remember that paper ignites at 451°F.
Because of the rising demand for platinum from both public and private parties, the shortage of alternatives for little colored coupons, platinum’s excellent monetary attributes and the ability to easily function as currency through innovations like GoldMoney therefore the future looks bright for the silvery-white metallic element. The same principles for buying gold or silver safely apply when considering how to buy platinum.
PLATINUM PRODUCTION
Platinum producers are extremely rare. There have been chronic problems with open cast deep underground platinum mining in South Africa. There is Angloplat (AMSJ.J) which produced 2.5M ounces in 2007, Impala Platinum (IMPUY.PK) which produced 1.9M ounces for year ending 30 June 2008 and is up about 50% since I recommended platinum, Lonmin and Norilsk Nickel (GMKN.MM). Stillwater Mining Company (SWC) is the only one domestic United States platinum producer, are majority owned by the Russian Norilsk and up about 137% from when I recommended platinum in July.
With commodity producers there tends to be a leveraged effect on earnings relative to the commodity price. Consequently, a significant rise in platinum without hedging will tend to exponentially affect their bottom line either positively or negatively.
CONCLUSION
Platinum has had a tremendous run over the past 6 months and I am pleased with the performance. Platinum is not nearly the incredible value today as it was then and the 50dma and 200dma are not at strategic entry points. Nevertheless, it is a prime substitute for little colored coupons, goes into the cash portion of the balance sheet, is easily purchased with low margins, is extremely rare relative to the other precious metals, has bright demand prospects and still appears to be undervalued relative to gold by about .4-.7 ounces of gold per ounce of platinum.
So I recommend doing what I have done since being bitten by the platinum bug: accumulating fully paid for physical metal on a consistent regular basis. While I have not exchanged my gold or silver for platinum, largely because of tax considerations, I have shunted most of my gold and silver demand into allocated physical platinum. After all, platinum, like gold and silver, can never become worthless.
DISCLOSURE: Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or in the Angloplat, Impala Platinum (IMPJ.J), Lonmin and Norilsk Nickel (GMKN.MM) or Stillwater Mining Company (SWC).
As you know, U.S. retail spending drives nearly three quarters of the U.S. GDP. A close look at retail trending shows a rebound that was good news for holiday retailers. They went into this year’s season with much better control over their inventories and a more calculated approach to their operations than in the later part of 2008 — back then it appeared that the economy was heading south fast and any calculations for guidance that they had done previously was far helpful.
U.S. Retail Sales Y/Y – 3 Month Moving Average
Chart Source Data: U.S. Department of Commerce
Besides the overall trend (which continues Northward) many specifically strong sectors point to a revival of the consumer. Health and personal care store sales were +5.1% year over year. Clothing and accessory, sporting goods, hobby, book and music all were similarly strong at +5.0%.
As we’ve pointed out previously electronic marketers and online mail order houses continue their march upward. The continue to be the growth leader at +10.3%.
The net effect was to raise three-month moving average for total retail sales to +1.9% year over year, the first positive percentage change in 16 months. This is a huge improvement compared to the low for this reading of -10.4% reported in January 2008.
Frederic Mishkin says not all bubbles are a threat to the economy (link):
“Nonetheless, if a bubble poses a sufficient danger to the economy as credit boom bubbles do, there might be a case for monetary policy to step in. However, there are also strong arguments against doing so, which is why there are active debates in academia and central banks about whether monetary policy should be used to restrain asset-price bubbles.
But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy…”
If you want to understand Democrat fantasies in the absence of financial constraint or common sense, read Reed Hundt’s book, “In China’s Shadow.” Reed Hundt is a permanent member of the American politcal class, a Yalie, a partner in a high-powered law firm, head of Bill Clinton’s FCC, and a member of Barack Obama’s transition team.
Free money is Reed Hundt’s great idea.
Here’s how it works. Muggins, that is you & me, the hard-pressed American taxpayer, should buy everyone from Nome to Tierra del Fuego a pension, healthcare, and education. By these means, the United States will win in the economic competition with China that furnishes the title of his book and a small fraction of its other content.
No, it’s not a joke! He is being serious — if you’re an American with a job, you should spread the wealth around the hemisphere.
The leftist cabal currently in power and the pointy-headed intellectuals who influence them really think this way.
The New York Federal Reserve’s Empire State manufacturing survey report released on Friday indicates accelerating December-to-January growth in the New York region. The general business conditions index rose signficantly from 4.2 in December to 15.92. (any reading above zero indicates month-to-month growth; the larger the number, the faster the growth).
The new manufacturing orders index also shows accelerated improvement, jumping to 20.48 vs. December’s 2.77. Manufacturing shipments, which follow new orders, rose more than 12.5 points to 21.
Tim Ghriskey, CIO of Solaris Asset Managment observes, “These were significant increases across the board in the N.Y. region and expectations about economic activity remain very positive here in New York.”
You may remember that earlier last year Alcoa highlighted a great sucking sound lurking just below the N.Y. Empire Index.
In my last post I presented evidence that people in countries with relatively high growth rates tend to perceive that their lives are improving. This is one of the reasons why I reject the view that economic growth makes people unhappy and that so called ‘unhappy growth’ can explain the reluctance of some governments to undertake economic reforms.
This raises questions about the effects of economic reforms on perceived changes in the quality of life. Do people in countries undergoing economic reforms tend to perceive that their lives were better prior to the reforms? My initial thought was that this would depend on the success of the reforms in raising economic growth rates.
I have now attempted to test this view empirically. In the analysis the perceived improvement in quality of life over the last five years is calculated as the difference between the rating of life today and life 5 years ago using data from the Gallup World Poll. Regression analysis has been used to explain variation in perceived improvement in life for 104 countries in terms of economic growth rate over the five years to 2007, improvement in governance over the same period (the average change in the 6 World Bank governance indicators), change in regulatory quality (the World Bank governance indicator most closely related to reforms that increase economic freedom) and a variable reflecting the extent to which assessments that people in different countries make of their lives tend to differ from the ratings that would be expected on the basis of income levels.
The regression explains about 40 per cent of the variation in perceived improvement in life among the 104 countries. The results show: • Economic growth has a positive effect on perceived change in quality of life. • Improvements in governance have a positive effect • Improvement in regulatory quality have a negative effect on perceived change in quality of life. (These results pass the standard statistical test relating to standard errors of estimates. Anyone who wants to see the results is welcome to contact me by email.)
It is important for the negative impact of change in regulatory quality to be seen in context. Economic reforms are generally undertaken in the hope that they will result in improvements in quality of life through higher economic growth. The chart below shows that countries which undertook regulatory reforms generally had relatively high economic growth rates. There was only one country undertaking regulatory reforms which had a negative economic growth rate.
The green diamonds in the chart denote the 10 countries in which people had the greatest perceived improvement in their quality of life. The red diamonds denote the countries with the greatest perceived decline in quality of life. The green diamonds are generally associated with higher economic growth rates than the red diamonds.
The evidence seems to support my intuitions – which are probably similar to the intuitions of most other economists interested in public policy – about the painfulness of economic reforms. Reforms often involve removal of regulatory barriers that protect the incomes of some groups at the expense of the broader community. The people who experience these income losses tend to resist reforms and to perceive that their lives were better before they were undertaken. When reforms are successful in promoting economic growth, however, these perceived losses tend to be outweighed by the benefits to those who gain from the reforms. Ad hoc attempts to promote reform of particular regulations are likely to be less successful than reform programs that are sufficiently broad and persistent to enable a high proportion of the population to perceive that their lives have improved.
1. Theinterest rate is a price – the price of credit like the price of any good. In a free market the price would be set like the price of any good at the intersection of the supply of funds (our savings), and demand for funds (businesses’ and individuals’ investing wants). Instead, we have an interest rate that is arbitrarily picked by a handful of economists from the Federal Reserve Banks. To repeat, one committee centrally plans the cost of credit, of which interest rates on all debt are directly or indirectly based.
2. The Federal Reserve has the monopoly power to print or inflate the money supply, thus artificially lowering the cost of money (the aforementioned interest rate). This means that they can (and always do) devalue the money in your pocket as every dollar printed decreases the value of all dollars to come before them. Inflating the money supply may not lead to an increase in prices if an equal or greater amount of goods is produced, but the purchasing power of the dollar will still be reduced because without printing money, your dollars would have been able to buy more goods. Alternatively, if more dollars are printed than goods are produced, prices will increase though not necessarily uniformly across all goods. Inflation may not manifest itself in explicitly higher prices but merely impede prices from falling for certain goods as they would were the money supply to remain constant.
3. When you deposit money in a regular checking account, the bank doesn’t hold onto this money. Banks only keep a small percentage of the money you deposit on hand in their reserves, lending the majority of the money you (or the Fed for that matter) deposit to others who lend it to still others and so on, in the process substantially increasing the money supply. This is known as fractional reserve banking. If everyone in America or even a decent percentage of Americans tried to take their money out of the bank on a given day, millions would be unable to access their cash. Effectively, even with FDIC Insurance, all of the banks are insolvent as they do not hold anywhere near 100% of the money you deposit in their vaults. The hypothetical that the Fed could potentially print up money for the FDIC to distribute is beyond the scope of this post.
4. The government’s debt is merely an insidious tax like inflation. Government debt can only be paid down by taxing the people. This tax can occur through direct confiscation by government, or indirectly when holders of our government’s debt demand a higher rate of interest, which in turn signals to markets that our economy is not generating sufficient revenues to pay down the debt, which leads to a perception of economic weakness and thus an increased cost of borrowing for everyone in the economy. If the government prints money to pay down debt (which in and of itself should cause our creditors to flood the markets with our debt and thus raise interest rates on everyone), this will represent a tax on the people as well.
5. Deflation, or a decrease in the money supply is the only antidote to inflation. If the money supply is decreased, each dollar in your pocket becomes worth more. The concomitant fall in prices will correct the artificial initial rise in prices from government printing of money. In the process, since decreasing the money supply increases the cost of money, unsustainable enterprises with heavy debt loads will be put out of business, cleansing the economy by freeing up unproductive resources. Where debtors benefit from an increase in the money supply because they can pay down their borrowings with cheaper dollars, creditors will benefit from a decrease in the money supply because they are paid back with more valuable dollars, which is one of the reasons why government prefers to inflate as it can lessen its own debt load and that of its constituents. Deflation in prices while a symptom of deflation of the money supply is also the natural result of increases in productivity, as goods produced more cheaply in greater quantities (in the absence of money printing) will lead to falling prices which benefits consumers. The so-called “paradox of thrift” that the MSM uses to vilify deflation in prices is wrongheaded, as people will spend on all sorts of products knowing that over time they will fall in price, as we have witnessed with numerous electronics over the years. Even during a depression, when asset prices fall to certain levels there will necessarily be buyers, presumably those who saved prior to the downturn. And if people are paying off their debt and/or saving in a time of falling prices in lieu of spending, this will be good for the economy because deleveraging corrects the excesses of the boom and increasing the pool of real savings lowers the interest rate and allows businesses and individuals to borrow funds for investment at a lower cost, legitimately stimulating the economy.
6. The last point mentioned above is imperative. Growth in an economy occurs when real savings increase. This is true whether in a booming market or a depression. In fact, saving is the only way out of a depression. Saving creates a pool of funds for banks to lend to businesses so they can expand their capital, increase expenditures on R& and generally take the entrepreneurial risks necessary for innovation and growth. Americans have long consumed far more than we have produced, leaving us as massive net debtors to the rest of the world. The only way to get out of debt and expand our economy is to save. One cannot solve a problem of too much money and credit with more money and credit. This however is what our government is trying to do by continuing to run the printing presses, trying to inflate our way out of debt.
7. Government cannot create wealth. All it can do is take money from some people and redistribute it to others. Every dollar the government uses must be taken from the private economy. Printing money to pay for things as we noted merely devalues your dollars, effectively taxing you. Government financing through debt represents a claim on your wealth, a tax which as noted may be paid directly or indirectly. Thus, while federal, state and local taxes may appear on a historical basis relatively low, the tax rate is deceptively masked by excluding government bilking through inflation and debt. In addition, all government enterprises ultimately fail because government is not subject to the profit and loss mechanism of the market and thus does not respond to the demands of consumers, amongst other reasons. In the process of failing, government wastes resources that could be better put to use by private individuals. Government is a wealth killer, not a wealth creator.
8. The purchasing of all sorts of less than creditworthy assets from the big banks by the Federal Reserve allows the government to pump money into the financial system, and allows the banks to foist assets it doesn’t want onto the back of the taxpayer. When we combine these asset purchases with the rest of the wasteful deficit spending on government jobs and reckless bailouts of the financial institutions and auto companies, our appraisal of the situation is as follows: while the little guy delevers, the government counteracts this necessary private balance sheet cleansing by levering up its own balance sheet at the expense of the taxpayer, for the benefit of the financiers and the unions.
9. The real estate problem in our economy centers on the fact that people owe more money on their mortgages than they are able to pay down. The only fix to this problem is for people to either generate more income to service their mortgages, or default. Any intervention to keep people in homes they can’t afford will merely perpetuate market imbalances, propping up the value of real estate and preventing qualified buyers from purchasing homes at fair prices. There will be no true recovery in the mortgage-backed securities market until the forces of supply and demand sort out this mess (a mess which will be made worse as there are continued resets in mortgage rates over the coming years). The same goes for any of the other assets whose values were bid up to unjustified levels because of easy money and credit.
10. Our economic crisis at the most basic level occurred because too much money and credit were pumped into the economy, given that again the interest rate was set artificially low not by supply and demand in the market but by government fiat. The recession signals that we must fix the distortions and malinvestments resulting from the centrally planned interest rate. The healthy path to recovery is to allow prices to fall (aided by debt repayment), liquidate failed enterprises (reallocating of land, labor and capital to more productive and profitable lines of business) and encourage saving to increase the pool of loanable funds for economic expansion. Any actions to the contrary (i.e. more or less all government policies being implemented or bandied about) will merely prolong the pain.
Note that this is by no means a comprehensive study of the above subjects, but rather a cursory look at essentials that the American public must grasp before we can ever expect to return to prosperity.
Intel posted a fourth-quarter net income of $2.3 billion, up 875% over its report last year at this time. Record revenues came in at $10.6 billion, up 28% year over year. Further the company yet again boosted its revenue guidance saying it expects first quarter revenue of $9.30 billion to $10.10 billion. The consensus estimate had been for revenue of $9.26 billion for the quarter ending March 31, 2010.
The impressive swing in net income was about 10 times greater than the $234 million (4 cents per share) that the firm reported last year on January 15.
We’ve continued to watch in amazement as Intel seemed completely unphased by the economic downturn of 2008 and 2009:
2. April 2009: Intel declares, “We believe PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns.” In the first-quarter, the firm’s profit far exceeded analyst views.
3. July 2009: Still swimming upstream, Intel posts its largest quarterly sequential increase in sales since 1988, further boosts its guidance for Q3 in the face of naysayers calling for lackluster Q3 growth.
Notebook computers led PC shipments to the strongest quarter in more than a year said research firm IDC on Wednesday. Shipments in the U.S. were up 24% from a year earlier and World-wide PC shipments increased 15% from Q4 of 2008.
IDC saw pent-up demand for new computers in a reviving U.S. economy along with year over year comparisons with a much weaker quarter as the recession deepened in late 2008.
“The U.S. market exploded,” said IDC analyst David Daoud
You’ll remember it was Intel that predicted in June last year that 2009 Q4 growth would be anything but lackluster.
Gary Becker (link) and Richard Posner (link) discuss the economic perspective in the empowerment of women and the weigh costs and benefits of public policy aimed at the empowerment of women.
In July 2009 the platinum to gold ratio was below 1.2 and currently it is around 1.41. The extrinsic value of platinum has risen about 17.5%, when priced in FRN$ about 45% and when compared to the earlier upleg in April platinum is looking pretty expensive. But as Professor Jastram explained in The Golden Constant all commodities tend to return to orbit around gold. So where is platinum’s natural orbit?
The natural orbit for platinum is around 1.8 to 2.1 ounces of gold per ounce of platinum. But this is just a cursory technical analysis. To be sure of one’s assertion an analysis of the fundamentals under the Austrian school of economics is also important to undertake.
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