-->Going Platinum

The Daily Reckoning

London, England

Thursday, 1 April 2004, April Fool's Day


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*** A day of tomfoolery... or truth-telling? The foolishness
continues...

*** Always look on the bright side! But don't forget these
troubling facts... and what's this? Greenspan's"heart
attack" stirs the markets...

*** News has taken over. Sell! No, buy! And other
confusions...

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April Fool's Day, 2004.

This is the day people admit what they've been all year
long.

Perhaps Alan"Bubbles" Greenspan... Zembei"Mr. Dollar"
Mizoguchi... and all the world's most prominent central
bankers will wake up this morning, look themselves in the
mirror and say to themselves: ah, what fools we have been!

The U.S. economy appears to thrive by consuming what it
cannot afford. The Asian economies appear to thrive by
selling to Americans what they cannot pay for. And almost
everyone everywhere appears to like the foolishness so
much, they ask only that it continue.

And why not? Americans are happy to spend money they
haven't got; their economy depends on it. And Asians are
happy exporting products to them; their economies depend on
it, too. Who wants to change? Who wants to enter the long,
dark passage to a new economic order? No one. So it goes on
- based on lies, fraud and foolishness.

But the present situation is ruinous for everyone, as near
as we can tell. Each year sends Americans deeper into the
hole... and makes them less competitive on world markets.
Meanwhile, Asian economies add to their productive capacity
based on demand that really isn't there. If Americans spent
only what they could afford, buying would suddenly go
down... and cobwebs would form on Asian assembly lines.
China, with its hundreds of millions of barely-employed
people, would probably erupt into war, revolution... or some
other form of upheaval.

The whole thing will blow up in our faces. But when? How?
"There is a lot of ruin in a nation," Keynes pointed out.
But how much?

"The problem is debt," said Robert Catto at our Roundtable
discussion on Tuesday."Somehow, debt levels have to go
down."

But couldn't debt levels go down gradually, asked another
fund manager? We know the present situation is
unsustainable... but couldn't there be a 'soft landing'?
Couldn't the transition to a more balanced and healthy
world economy be accomplished without anyone slashing his
wrists?

We considered the question. Certainly, we'd like to believe
it. But imagine a man with $100 to spend every week. He
believes things will always get better, so he mortgages his
house and uses credit cards in order to enjoy some of
tomorrow's good things today. He spends $110 a week... and
the economy booms. Multiplied by millions of fellows just
like him, the spending power of the entire nation seems to
have been magnified by 10%.

After a year, however, he owes 5 times his weekly
disposable income. No one will lend him more. Instead, his
creditors are demanding repayment. Can he gradually reduce
his debt without pain?

Alas, no. In order to reduce his debt, he must spend less
than $100 a week. His living standard must go down 10%... at
least. And even if he cut back by a single dollar - his
living standard must go down. Plus, the economy has come to
rely on him spending $110 every week. If he spends less
than that, sales go down... which sends a shock wave through
the entire system. Business profits fall. People are laid
off. The effect is amplified... because then incomes fall,
too. Pretty soon, the man no longer earns $100, but $95 or
$85. He has to cut back his spending even more, just to
keep his head above water.

Sir John Templeton was quoted last week saying that in the
coming downturn, 20% of people with mortgages are likely to
lose their homes. At the margin, the two-income, no-savings
household cannot afford even a slight cut in income or
credit. They will lose their house. And who will buy it?
And what price?

But that is enough gloomy ramble for one day. Here's the
news from Wall Street:

------------

Eric Fry, from the financial capital of the world...

- The"dead cats" have been bouncing all over Wall Street
for the last few trading sessions, but they didn't bounce
quite high enough to lift the Dow or the Nasdaq into the
black for the first quarter of 2004.

- The Dow fell 1% during the first three months of the
year, while the Nasdaq dropped half a percent. Bucking the
downtrend, the S&P 500 gained 1.3% - its fourth straight
quarterly gain. In yesterday's action, the Dow eased 24
points to 10,357, while the Nasdaq slipped 6 points below
the precious 2,000-mark to 1,994.

- Investors like us, who are inclined to look on the bright
side of things, should remember that the Dow gained 42%
from its trough in March 2003 to the recent peak in
February. The Nasdaq Composite, meanwhile, soared 68% in
the same period, and has slipped only 7.5% from its 52-week
high of 2,154 reached at the end of January.

- If only more investors had been willing to pay foolish
prices for stocks, the market might have performed better
during the opening months of 2004. But even the most
cavalier of investors must contend - occasionally - with
disconcerting facts. One such fact emerged yesterday, when
the Chicago Purchasing Manager's Index fell to 57.6% in
March, far below the 61.4% reading in February.

- Troubling fact #2: Orders for U.S.-made factory goods
rose a surprisingly weak 0.3% in February, well shy of Wall
Street expectations for a 1.7% increase. Troubling fact #3:
OPEC affirmed its plan to cut crude production quotas by 1
million barrels a day, prompting the White House to whine
that the malevolent oil cartel is trying to hurt the U.S.
economy. (Hmmm... maybe we should invade OPEC). And
finally... our favorite troubling fact of all: The dollar
may be losing its footing once again.

- During the New York trading session yesterday, the dollar
tumbled 1.1% against the euro to $1.23 and 1.5% against the
yen to 104.22. While the dollar swooned, the Daily
Reckoning's favorite precious metal jumped $5.50 to $428.30
an ounce.

- The dollar selling started overnight in Japan, where the
yen surged to a new four-year high. The greenback's slide
gained momentum in New York after a rumor crossed the
newswires that Federal Reserve Chairman Alan Greenspan had
suffered a heart attack. The Fed promptly denied the rumor,
but the dollar failed to recover.

- Although Greenspan did not suffer a heart attack, he may
have suffered a mild panic attack after reading the latest
public opinion polls. According to an NBC News/Wall Street
Journal poll, only 45% of Americans give Greenspan a"very
positive" or"somewhat positive" rating, down from 54% in a
similar poll six months earlier. It's the first time in
this decade that Greenspan's favorable ratings have dropped
below 50%. The portion of respondents professing a somewhat
or very negative view of Greenspan rose from 10% to 14%.

- The foreign exchange market conducts a real-time public
opinion poll, and Greenspan's reputation isn't faring well
in that venue, either. To judge from the dollar's steep
slide, a growing number of foreign investors are adopting a
"somewhat negative" view of Mr. Greenspan and his monetary
policies.

- Therefore, if the Japanese central bank does in fact
discontinue its"artificial" dollar buying, the greenback
may fall farther and faster than the Monetary Maestro
intends. The dollar, like the stock market, does not lack
for reasons to decline in value. In previous editions of
the Daily Reckoning, we've mentioned the three main reasons
for the dollar's weakness. They are: debt, debt and debt.
America's gaping trade imbalance, in particular, is a more
depressing influence than a kvetching spouse.
Unfortunately, the dollar cannot drown out its troubles,
simply by turning up the volume on the TV, or by skipping
down to the local bar...

-"There is surely something odd about the world's greatest
power being the world's greatest debtor," former Treasury
Secretary Lawrence Summers said last week during an address
to Washington's International Institute of Economics.
"There is surely a question that must be asked when, in
order to finance prevailing levels of consumption,
prevailing levels of investment, it is necessary for the
United States to be as dependent as it is on the
discretionary acts of what are inevitably political
entities in other countries.

-"Maybe it'll turn out that we can rely on an emerging
China and Japan to support low interest rates in the United
States indefinitely, and that that's a good planning
assumption," said Summers."[But] it seems to me to be a
dangerous mistake to be making in this country and... it's
hard for me to understand why there isn't a broader sense
of concern."

- Hmmm... we suspect that"concern" is a market-driven
phenomenon."Concern," if not"panic," may manifest itself
at $2.00 per euro... or perhaps at Dow 5,000.

- But let's end today's financial discussion on a lighter
note. Late yesterday afternoon, a small bit of positive
economic news crossed your New York editor's desk. However,
he cannot vouch for its accuracy:

-"Unemployment rate among hot young women holding at zero
percent," read the headline from Recoilmag.com, a Website
previously unknown to your editor."Economic analysts were
abuzz Monday following the release of February's Labor
Department figures, which showed the unemployment rate for
hot young women in the U.S. holding steady at zero percent
for the 302nd month in a row."

- Apparently, America isn't exporting ALL of its jobs.

------------

Bill Bonner, back in London...

*** The Chicago Manufacturing Index dropped. Oh no... sell!
Wait, OPEC is cutting production. Oh no... buy! No, sell!
The dollar fell again against the euro. It fell even more
against the yen. Buy yen? Sell dollars? Gas is at an 18-
year high. Sell! Buy! Drop dead! We don't know.

And tomorrow come the employment numbers. All over Wall
Street, people are sitting on the edge of their chairs. If
it is low... sell! No, buy!

News has taken over. People react to it like a chicken
reacts to a sharp knife. They run this way and that. And
yet, they think the news is critically important. You can't
be too rich, too thin... or have too much news, they think.

We're not sure. Does a quarterly report from a business
tell you more than an annual one? If so, why not a monthly
report? A daily report? An hourly report? How about a
report every second of every blooming day? Would you know
more? Or less?

Or could news be like democracy, credit and homemade
alcohol? A little is invigorating... but too take too much,
and you go blind.

*** A little note from a London colleague, Simon Nixon:

"We spent the weekend in Split on Croatia's beautiful
Dalmatian coast. We were taking part in a conference to
discuss ways to strengthen democracy in the Balkans.

"From our fellow delegates, we learned there are more than
200 political parties in Albania, Bulgaria and Romania and
an equally preposterous number in Serbia, Macedonia, Bosnia
and Croatia.

"We wondered if it was possible to have too much democracy.
What is the question, we asked ourselves, to which the
answer is more politicians?"

*** The cover story on London's Times is the one you might
expect: dead Americans hanging from a bridge in Fallujah.

But in the modern delusional mind, democracy is considered
the treatment for all social ills. Even this act of
barbarity is thought to be caused by a lack of it. Colin
Powell responds:"The Iraqi people will be free. They will
have a democracy."

We don't know how he knows these things. But it looked to
us as though the Iraqis had too much freedom already. If
they had the right to vote... we wonder what appalling thing
they might come up with.

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The Daily Reckoning PRESENTS: Taking a break from the more
popular metals, our natural resources guru, John Myers,
explores the investment potential of today's engagement
ring metal-of-choice: platinum.


GOING PLATINUM
by John Myers

What element is scarcer than gold, a better conductor than
silver and denser than lead? The answer is platinum - the
strategic metal for industries, armies... and astute
investors.

Why am I so positive this strategic metal is the next hot
sector for gains? Let me lay out the opportunity I see for
you with investing in platinum today.

Platinum is one of six metals that make up the platinum
group of metals (PGMs). The other five are: palladium,
iridium, rhodium, ruthenium and osmium. Certainly, the last
four are relatively obscure. Even palladium is not widely
known.

All six of the PGMs have unique properties, and their value
continues to expand in this age of industrial revival and
high technology. But of the six metals, platinum has the
greatest economic importance of the PGMs and is found in
the largest quantities.

The characteristics and uses of platinum are varied. First
of all, it is very rare. All the platinum man has ever
mined, for example, would fit into a 25-cubic-foot room.
Only about 133 tons of platinum is mined annually, compared
to about 1,782 tons of gold. When you consider that it
takes 10 tons of ore and a five-month process to produce a
single ounce of platinum, you'll begin to understand why
this metal is so"precious."

Couple with this the fact that platinum is also very
profitable. During periods of strong demand or inflationary
worries, for example, platinum has earned spectacular
profits for owners of the physical metal or stockholders of
companies that explore and mine it. When the Midas metal
peaked at $850 per ounce in 1980, platinum's price broke
above $1,000.

Platinum is found in a bevy of products ranging from the B-
1 stealth bomber to the fountain pen. For some, PGMs are a
lifesaving element, used in cancer-killing drugs,
pacemakers and magnetic nuclear resonance imaging. One in
four goods manufactured today either contains PGMs, or PGMs
have played a key role in their manufacture.

Because of its special properties, platinum produces Space-
Age materials, used by certain industries and the military.
For instance, platinum is used by defense contractors in
everything from artillery to aerospace. And in an age where
silicon is more important than gunpowder, the Pentagon
understands the vital need for PGMs. For example, both
platinum and palladium are integral components in ceramic
capacitors used in satellite imagery and computer weaponry.

As new applications are found, demand for platinum grows.
Platinum's use is growing in fiber optics and medicine
(platinum in certain compounds can inhibit the growth of
cancerous cells).

Platinum's use in jewelry has been surging over the past
decade and today represents 38% of overall platinum demand.
An equal percentage of platinum demand comes from the
automobile industry, which uses the white metal to vastly
reduce carbon emissions and greenhouse gases in catalytic
converters.

As the developing world continues to buy and build more
cars with catalytic converters, the demand for this
strategic metal will only increase. But whether the world
can smoothly meet future demand remains to be seen.

The critical global usage of platinum is for car emission
control, fuel cells, catalysts, telecommunications
technology and cancer treatments. Over the past decade,
demand for platinum increased by 60%.

Reacting to the run-up in platinum prices, mining
consortiums have invested billions to increase production.
So far, the results are rather mixed. Supplies of platinum
from South Africa reached a record high of 4.45 million
ounces in 2002 (the latest year on record), an increase of
8.5% over 2001. Both the expansion of existing operations
and growing production from developing mines contributed to
the rise.

But we're skeptical that South Africa will continue to see
its platinum production grow. We think it is more likely
that South African platinum mine growth will soon reach a
zenith, and then enter into the type of decline experienced
by South African gold producers.

Meanwhile, Russian platinum production is in steep decline.
In 2002, output fell to 980,000 ounces, down from 1.3
million ounces in 2001.

Fortunately, North American production has risen
significantly. In 2002, platinum production rose 10% to
395,000 ounces. Whether or not U.S. and Canadian platinum
production will continue to grow depends on the success or
failure of open-pit mining.

The fact of the matter, though, is that global supply of
platinum is dominated by production from South Africa,
which accounts for 80% of new mine production. And fully
two-thirds of the world's new production comes from a
single property in South Africa - the Bushveld Igneous
Complex.

My geology professor called structures like Bushveld
geologic aberrations. It's 20 times larger than the world's
next largest deposit. No other animal, mineral or vegetable
is as concentrated with PGMs as Bushveld.

But what is of immediate concern is that it is next to
impossible to increase Bushveld's output - a troubling fact
for a property that delivers two-thirds of the world's
platinum, for which annual demand is increasing at double-
digit rates.

The lifting of ore from the deep crevice at Bushveld is
limited by deep shaft transport. In fact, as mining moves
into ever-deeper layers, capacity at the property falls.
The bottom line is that new shafts will have to be added -
a long and expensive proposition. And that means the
dominant supplier of platinum to the world is on a curve of
diminishing returns.

Because platinum is such a thin market, even a temporary
interruption in its production would have an explosive
impact. But even without a crisis, the commodity markets
have seen the price of platinum explode, with the white
metal doubling in price since 2001.

The bull market in platinum is driven by the inability of
new supplies to keep up with growing global demand. Over
each of the past four years, supplies of platinum have
fallen short of demand. With inventories falling, the price
has risen to a 24-year high, and the outlook remains
extremely bullish.

Since the price of platinum is now over $800 per ounce, and
the general assumption is that the long-established deep
mines will be unable to meet growing demands, innovative
mine executives are shifting some of their focus to large-
scale open-pit operations. The same shift occurred in gold-
mine operations in the 1980s, as South African deep mines
became less productive.

With platinum so rare and prices so high, a few producers
have been able to turn a profit with open-pit mining.
Whether or not they will quickly exhaust their reserves, or
slowly become unprofitable, remains to be seen. But if they
have even a fraction of the success that some gold
companies have had, shareholders of companies involved in
this type of platinum mining will collect windfall profits.

The growing boom in China, as well as India, Russia and
other developing countries will create massive demand for
platinum. Long-term, that will spawn a bull market for the
metal.

As mentioned earlier, the price of platinum is currently at
a 24-year-high. After establishing a new high at $772 per
ounce in November, platinum prices surged to another record
high above $920 per ounce in early March. Prices have now
risen by about 110% since their low in 2001.

But despite strong fundamentals, there is some risk that
platinum's high prices will hurt demand in the jewelry
industry, which accounted for 42% of demand in 2002 - where
there is some evidence that indicates the expense of
platinum is one of its major attractions!

Also, with somewhat stronger U.S. economic figures and the
dollar's weakness accelerating, it seems likely that the
Fed will start to make noise about raising interest rates.
When this happens, platinum prices are likely to come under
pressure.

Demand from the auto catalyst manufacturers, which accounts
for some 40% of platinum demand, is also likely to suffer,
albeit to a lesser extent. Tighter government legislation
and growing demand for diesel cars will make demand for
platinum less price elastic... and it is likely to lose some
market share to palladium, especially as the latter is some
$600 per ounce cheaper than platinum.

Technically, then, platinum looks vulnerable to a
correction in the near term. However, with the fundamentals
set to remain tight, any decent pullback in platinum prices
should be a good buying opportunity.

The bottom line is that platinum appears to have entered
into a long-term up-cycle... but would-be platinum investors
should be careful how they ride the trend.


Regards,

John Myers,
for The Daily Reckoning