Gold Digger

gold and platinumThe economy has taken some major hits this week and shows no signs of retreat the next few. Everything from inflated quarterly reports to the apparent suicide of Freddie Mac’s CFO to the decline of existing home sales all points to a still struggling market. The much anticipated stress test of the financial system (read FF’s “Bears Win One for the Gipper” article, it’s spot on about the stress test) will be another show case of injecting hope and putting on a brave face. The faltering dollar will continue to weaken as the government hands out green to everyone and Pres. Obama’s attack on credit card companies, though beneficial in the long run, may further limit lending in the near future.

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All signs point toward a bear’s dream, but opportunities may not be so obvious. The market’s red/green swinging recently tells me investors are active, but are hesitant. One thing we are confident about is the economy is not turning around next week, the feeling that we may have been bottoming out or even on the rebound has been put to rest.

An interesting sector that has recently become attractive is precious metals. Gold plays well when the US dollar weakens and is trading over $900, which is common territory but as inflation kicks in, gold will rise. Currently, there is a 500-tonne shortfall of the metal according to experts. Financial institutions are no longer leasing gold from central banks, which in turn has slowed supply. As gold bar supplies become limited the demand will increase. With investors turning to gold itself instead of gold futures, gold may be stagnant for the short term but ultimately rising.

gold chart
Platinum is another goldmine. Currently trading at about $1180, platinum is off by a thousand this same time last year. Gross surplus of platinum tripled over 260,000 ounces in 2008 following a rapid decline in vehicle production which accounts for more than 50% of the precious metals use in catalytic converters. Floods and power issues in South Africa, where production fell by 7%, resulted in strong investor trading that shot platinum to all time high of $2376 in March of last year. platinum chart
The independent precious metal group GFMS reported that platinum will bottom out in 2009 at about $900. That range makes sense since palladium, a cheaper copy of platinum, has been a substitute for catalytic converters and jewelry in late 2008 running into 2009. While palladium saw a jump, auto catalyst scrap also saw a jump as auto makers searched once again for a cheaper substitute; giving platinum another reason for major decline.

So the $2300 days are over for now. The sizable reduction in overall demand of platinum should bring on some great opportunities. One thing to keep an eye out though is the Asian market. Individual Japanese investors have been known to take advantage of platinum prices, but the sharp decline in automobiles and with the increase of palladium, I believe platinum will hit that $900 mark or drop even further. Click here to open a Zecco Trading account.

-Chad Carlson

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