|
Platinum
Breakfast Reveals Change
Tuesday,
November 13th, at 8:00am, Johnson Matthey hosted their interim platinum
group metals update for the press and industry representatives. A
new perspective was in sharp contrast to the briefing that was given
approximately six months ago and reflects changes in the overall global
economy. Understand that platinum group metals provide unique
insight into several cornerstone industries including automotive,
trucking, petroleum, chemicals, dentistry, and electronics.
Johnson Matthey’s (“JM”) platinum group metal (“PGM”) outlook
provides a distilled look at these economic indicators.
Needless
to say, the recession is upon the world. If PGM demand is any
indication, we can expect to see a decline in everything from chip
manufacturing to auto and truck catalytic converters. Palladium
demand fell by approximately 24% based upon its unprecedented price
spike to nearly $1,100 per ounce. Were it not for the New York
Mercantile Exchange’s lack of vision, I would have gladly participated
in palladium’s ups and downs that were forecast in my book, The New
Precious Metals Market (McGraw Hill). However, the exchange’s
misplaced effort to prevent a squeeze focused upon raising margins
beyond the means of mortal investors. The result was an effective
foreclosure upon any reasonable liquidity. Instead of capitalizing
upon opportunity to expand market interest, the exchange quashed
investor enthusiasm.
After
a concise presentation, Johnson Matthey estimated a platinum price range
from $400 to $500 an ounce over the next six months with palladium
languishing between $260 and $380. With January platinum currently
trading at $427 and palladium at $317, there was nothing particularly
earth shattering about their prediction. However, the generally
bleak economic conditions implied by industry overviews immediately
plunged both metals while attendees were enjoying breakfast.
Unfortunately, the FORECAST is weekly and not able to take advantage of
these knee-jerk reactions.
The
platinum/palladium spread I recommended for those with the margin paid
an extraordinary profit. Platinum did not halt at my predicted $60
premium, but widened the gap to more than $100. According to JM,
demand for palladium swooned as prices soared. Auto manufacturers
have moved, or are in the process of moving back to platinum loadings
for catalytic converters. Further emphasis upon platinum over
palladium will come from new emission requirements for heavy trucks that
were formerly exempt from cleaning up their act. Since diesel
hydrocarbons are more responsive to heavily platinum-loaded converters,
platinum demand fundamentals are favored over palladium… for
now. Regardless of JM’s assessment, palladium appears to be
forming a powerful technical floor.
The
apparent “triangle” forming after the July/August plunge represents
mixed signals. A bust below $305 would point to a $260 test…
right in line with JM’s forecast. We see lower highs and a floor
that implies the $310 support is ready to be challenged.
Platinum
offers a less pronounced picture. With a consolidation trading
range, the contrast suggests the spread could continue to widen if
palladium busts $305. Platinum fundamentals are boosted by
developments in fuel cell deployments as well as new heavy truck
emission requirements.
The
Economic Implications
PGM
fundamentals clearly show deteriorating world economic conditions
ranging from consumer confidence to electronics. For example,
dental alloy demand is down in general. This reflects consumer
postponement of non-critical dental maintenance. In particular,
numbers have declined in Japan and Germany where procedures are
supported by government programs. It may seem small and
inconsequential, but any willingness to forego health related procedures
might be correlated to resistance to other discretionary spending.
Most notably, we could see economies in food, home durable goods,
clothing, entertainment, and travel.
Consider
that JM identified a major decline in palladium use in capacitor
manufacturing (MLCs) for devices like cell phones, computers, pagers,
and portable devices. This backlog results from sluggish consumer
and business demand coupled with enormous inventory accumulations during
the previous electronics boom. Combined, these two situations tell
us there is a long wait before electronics perk up.
In
turn, we can expect Japan to experience continuing difficulty as
communications and digital devices slump into the foreseeable future.
Declining automotive demand adds to prospects for a more prolonged
recession. Even with some bright spots for PGMs, the economic
snapshot is discouraging.
Some
optimism has surfaced in equities, as low interest rates and continuing
stimulation remain Uncle Sam’s anti recession strategy. Indeed,
the DOW Industrials have made an impressive bounce toward 9900/10000
resistance. Everyone is expecting the DOW to breach 10,000 to
reestablish good cheer on Wall Street and Main Street. In effect,
investors seem convinced that lower rates and more stimulation is going
to work.
I
have always stated that it is not good to step in front of a freight
train. The DOW chart looks like a train and is gathering
reasonable momentum regardless of the insight gleaned from the PGM
forecasts.
Assuming
prices break through to 10,000, we are likely to encounter a
wait-‘n-see trading range similar to the summer consolidation.
Of course, an event like the capture of Osama bin Laden could propel
stocks in momentary enthusiasm. I would be skeptical of any rally
before second quarter, 2002.
Euro
Currency Fails to Rally
With
90 days left before the official release of Euro bills and coins, we
have seen European participants talking up a “smooth transition.”
I, too, expected better reception for the new currency, but too much
conversation coupled with U.S. progress in the War Against Terrorism put
renewed pressure on the Euro while revitalizing the Greenback.
The
Dollar allegedly rallied when the American Airlines crash was determined
to be an accident rather than another terrorist act. This
supposedly led traders to conclude the situation was improving or
improved. This gives an idea of how tenuous currency
interpretation is for the moment!
We
were stopped out of our short U.S. Dollar Index and I am inclined to
step aside until a more definitive technical picture emerges. With
the airplane gap looming within range, there is no prudent position
unless we are wiling to risk over 100 points.
Although
there is an obvious up trend, notice the wide “wedge” formation
clarified by the resistance line at 11650. If prices fill the gap,
I will return to my premise that the Dollar will weaken relative to the
Euro, but not necessarily the Yen. I would like to see the Dollar
stall long enough to bring the 20-day and 40-day averages closer.
The failure for the Greenback to hold over 11650 gnaws at me because I
would like to sell into this rally. Do I want to stand in front of
a freight train?
Grains
After
enjoying short side profits, I made an attempt to harness the long side
of soybeans for a rally to 4.59 resistance. The gap is being
filled and today’s action challenges the 40-day moving average.
Fundamentals do not justify a more significant rally for now.
Essentially, the harvest is made and we cannot expect any supply
surprises. Although exports are more encouraging, domestic animal
production is stalled and our economic downturn could inspire
contractions in poultry, pigs, and cattle.
In
addition, corn remains cheap with a less positive technical picture.
While I believe corn has tracked soybeans to some extent, I feel corn
will be a drag on beans through the December delivery. This is why
I set an upside objective. Consider the trading range from April
through July. Fundamentals imply this range will become the
reference through the winter.
Energy
From
a longer perspective, I have been saying that OPEC’s grip on energy
was loosening. In fact, my prediction for OPEC’s eventual
collapse was made when the Soviet Union was reconstituted as the
Commonwealth of Independent States. Unquestionably, Russia’s
refusal to play into an OPEC production cut has sent a clear message
that volume will be the key to higher revenues… not price.
I
won’t claim that I was comfortable last week as December crude spiked
to 22.50, touching the 40-day average. However, this is a
“big” play that needed considerable room. Even now, I am sure
there will be more OPEC spikes. However, a general admission that
there is simply too much non-OPEC production has been made by at least
two OPEC members.
The
wedge formation was actually violated by the rally. When prices
refused to move beyond the 40-day average, we were technically saved!
The question is whether certain OPEC members like Saudi Arabia will
simply throw in the towel and turn on the pumps. As mentioned in
previous SPECIAL REPORTS, a price war similar to 1985/86 may be brewing!
Softs
We
moved into March cocoa on Friday’s gap open. Unfortunately, that
set the stage for raising our stop to entry. Before we could enjoy
the rally, the stop was touched. It is not a frequent event, but
it happens. I suspected the Softs were poised for recovery as
coffee finally chased the last speculators away with multi-decade lows.
Sugar was the first to show signs of strength.
While
I am frustrated by the circumstances, there is plenty of potential
remaining in this complex. Sometimes, it pays to chase
opportunity… even if required risks and exposure are higher.
Email:
Phil@commodex.com
|
