Currency Suicide: Japan Experiencing The Ugly Effects Of Its Own Policy

Exactly a year ago, Japan announced its monstrous monetary stimulus, beating even Helicopter Bernanke who had just started its fourth round of QE. The Japanese government was fed up with deflation and decided to stimulate their economy with massive liquidity (QE).The Nikkei index started an historic rally with a gain of 50% in less than half a year (see barchart on the chart below). The value of the Yen dropped like a stone (see black line on the chart below). The aim of a weaker Yen was to stimulate exports. So it should have been a win-win-win situation, at least on paper.

Japanese yen vs NIKKEI 2013 money currency

We are lied to told every day again that weak currencies are a good thing as they stimulate export and increase the economic output (rising GDP). While that could be true, there are a lot of conditions and consequences that are associated with it. One condition, for instance, is that all other countries should keep the value of their currency flat, which is obviously not the case in Currency War III.

Patrick Barron explains how mainstream economists believe that currency devaluation exports unemployment to its trading partners, apart from enhancing sales from exports. “They call for their own countries to engage in reciprocal measures. Recently Martin Wolfe (Financial Times in London) and Paul Krugman (New York Times in the US) both accuse their countries’ trading partners of engaging in this “beggar-thy-neighbor” policy and recommend that England and the US respectively enter this so-called “currency war” with full monetary ammunition to further weaken the pound and the dollar.” This is no currency war, this is currency suicide.

One of the consequences of Japan’s intended currency debasement is now starting to show its ugly head. The cheaper Yen may be intended to stimulate exports but it simultaneously makes imports more expensive.

From Japan Times:

Japan is likely to post a record trade deficit in fiscal 2013 because the weaker yen and soaring demand for energy have driven up the cost of importing fossil fuels, according to a projection by a trade business group.

The deficit is expected to expand to ¥12.1 trillion during the year through next March, much worse than the ¥8.18 trillion in fiscal 2012 and the largest since comparable data became available in fiscal 1979, the Japan Foreign Trade Council Inc. said Thursday.

The economy will log a trade deficit for the third straight year, according to the organization, which is composed of companies involved in international trade activities.

Exports in fiscal 2013 are forecast to rise 9.8 percent from the previous year to ¥70.18 trillion, sustained by the yen’s fall, while imports are expected to climb 14.1 percent to ¥82.28 trillion, JFTC said.

A sliding yen usually supports exports by making Japanese products cheaper abroad and boosts the value of overseas revenues in yen terms, but it also increases import prices. Japan depends on imports for more than 90 percent of its energy needs.

Unfortunately, the economy is not as simple as central planners pretend it to be, at least not in the 21st century. The globally interconnected world, the huge volumes of derivatives (currently tenfold the global GDP), the increasingly complex financial world, the “easy money” policies from competing regions … all play an almost unpredictable role. We have not seen to date a model from the academicians at the central banks taking those variables into account.

Speculative effect

The consequence in the real world of the weaker Yen is not only limited to more expensive imports. Another ugly effect is that the speculative effect kicks in, accelerating the “unintended consequences.” As the Yen got back into is declining trend, hedge funds took notice of this and are now betting on a continuing decline. As Zerohedgenotes: “While ‘economists’ are less convinced that the JPY will weaken further, and even the Japanese officials somewhat jawboning the currency’s stability now, futures traders have pushed ‘net shorts’ (i.e. bets against the JPY) to their highest since July 2007. Between the possibility of a Fed taper (stronger USD) and fading economic gains (more BoJ QQE), it would appear that Japan’s $70bn per month buying program is not going to shrink anytime soon. While the world has grown accustomed in recent months to ‘hating’ gold – despite the ECB and BoJ rumors of more money-printing and an inevitable un-taper by the Fed – for now, the ‘dislike’ of the JPY has exploded.” Precious metals investors have learned in 2013 that a price crash is likely when hedge funds go aggressively short.

japanese yen vs gold short positions november 2013 money currency


The message we are trying to bring across is not that a crash is inevitable and imminent. We point out that it is likely to happen and that these are consequences of interventions.

The sentiment indicators provide a confirmation of the ultra weak Yen. As the latest Sentimentrader report shows, the Yen carries the most negative sentiment of the major currencies.

currencies sentiment november 2013 money currency

Precious metals sentiment is not much better, but that is not surprising, at least not in the worst year for the metals since four decades.

metals sentiment november 2013 money currency

Key takeaways

What is the key take-away from this evolution? We see several conclusions and learnings in the bigger scheme of things, so this does not concern traders but only investors:

  1. Currency wars are here to stay. As Rickards has noted, currency wars are like real wars; there is not a continuing war all the time but there are different battles over time. Prepare for more to come, even more importantly, expect much worse in the current decade.
  2. Do not rely on the narrative of governments. They have their own interest and they will only tell you half the truth. Currency devaluations have a very damaging effect. They are simply one of the many monetary tools of central banks hoping to solve a structural problem. Our structural problems are so big that a normalization of economic conditions will come with a lot of pain and “unintended” consequences.
  3. Gold’s key benefit, i.e. the ultimate monetary insurance policy, remains intact. The currency war seems under control. As the sentiment figures show, the dollar is still the best of all bad currencies. When the dollar starts sliding, gold owners will have the best protection. It could still take several years before that happens, as the strength of the petrodollar hegemony should not be underestimated. It is better to be prepared in advance.

Be prepared. The fundamental outlook is NOT one of an economic recovery.

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Ron Paul vs Paul Krugman: Who Is The True Prophet, Who Is The False?

Isn’t it strange? We are living in the 21st century, a period of time in which people buy land on the moon, humanity has dozens of satellites providing GPS services and real time traffic information, internet brings people and information as close as one click, science and technology are making historic break throughs … but economists cannot agree on the real cause of the latest financial crash (2008).

Generally speaking, there are two schools of thoughts when it comes to diagnosing the 2008 crash. One is based on free market principles and is detailed in Austrian economics. The other is based on central planning and is centered around Keynes (hence, Keynesian economics).

As noted by Barrons, journalist Jeremy Hammond had the ingenious idea of contrasting the Austrian, free-market school of economics with the Keynesian, pro-government school on the recent financial crisis through a close examination of the words of two commentators: former Congressman Ron Paul, schooled in the Austrian perspective, versus the Nobel Prize–winning Keynesian and New York Times columnist Paul Krugman. You might think a mere politician would be no match for a Nobel laureate, but in this case, think again. As forecaster, diagnostician, and prescriber, Ron Paul offers rich insights, while Krugman, true to his Keynesian perspective, gets things wrong at virtually every turn.

Hammond’s book “Ron Paul vs. Paul Krugman: Austrian vs. Keynesian Economics in the Financial Crisis“ reviews the records of Ron Paul and Paul Krugman on the question of the housing bubble. Who correctly predicted it? Who has offered the more reasonable explanation as to its cause? Who has offered the more sensible response to the bursting of the housing bubble and the financial crisis its precipitated? Most importantly, whose admonitions should we now be regarding as we move into the future? In short, who is the true prophet, and who the false?

To illustrate the objective analysis of the book, we show one of the many quotes that the author has used. This example is a quote from Paul Krugman a couple of days before the NASDAQ implosion:

In February 2000, Krugman hailed the “booming” economy and “extraordinary prosperity” the country was experiencing. As the bubble neared its peak, he commented on the view that “the whole stock market, not just the Dow, is inflated by a speculative bubble.” He said that he was “sympathetic but not entirely convinced” of this view. “I’m not sure that the current value of the NASDAQ is justified, but I’m not sure that it isn’t.” Thus, on the eve of it bursting, Krugman was still not convinced of the existence of the bubble Ron Paul had already been warning about for years.

Another illustrative example is a quote from Ron Paul after the NASDAQ crash who more or less predicts the next financial crisis based on the Fed’s monetary policy:

In October 2000, Ron Paul observed that with the ongoing financial crisis, politicians and economists were “talking about a symptom and not the cause. The cause is the Federal Reserve. The problem is that the Federal Reserve has been granted authority that is unconstitutional to go and counterfeit money, and until we recognize that and deal with that, we will continue to have financial problems.” He repeated, “we have already seen signs of economic troubles ahead” because the Fed had planned to continue its monetary inflation in answer to the financial crisis. “Without savings, true capital investment cannot be maintained,” he said. “Creation of credit out of thin air by the Fed was the original problem, so it surely can’t be the solution.”


Don’t Be Beguiled Into Thinking Owning Gold Is A Waste Of Time

Gold prices fell the most in more than two months last week mainly due to renewed speculation over the timing of the US Federal Reserve’s (FED) tapering of its monetary stimulus programme.

After breaking below certain key support levels, the price of spot gold ended the week with a 3.5% drop to end the week at $1243.70 per ounce. After dropping below $1300 an ounce, the selling accelerated on Thursday taking gold through the support level at $1,250, which many analysts saw as important for the market to hold. While prices have managed to hold above $1240 an ounce, traders are eying this level as a break below could signal more technical selling with some analysts even suggesting a dip to the $1,220s as possible as bearish technical charts and little positive news is available to offset the price-negative sentiment in gold.

Interestingly, gold trading on Comex was interrupted twice last Wednesday, according to Nanex, which provides exchange data and summarizes high frequency trading activity.

Nanex reported that about 1,500 gold futures contracts traded in one second at 6:26:40 a.m. Eastern time on Wednesday, triggering a $10 drop in prices and a 20 second trading halt.

Damon Leavell, a spokesman for the exchange said trading was halted for about 20 seconds at 6:26:41 a.m., New York time. The December contract fell about $11 in less than a minute before trading was suspended.

Then, immediately after the release of the Fed minutes, came another burst of selling which led to gold futures being suspended for another 20 seconds. The second bout of concentrated selling is believed to have been even more than 1,500 contracts. Each contract is worth 100 ounces so 1,500 contracts is worth nearly $200 million.

Shortly after 1 am Eastern Standard time on Monday, someone tried to dump 1500 gold contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), sent the price down $10 instantaneously and tripped the exchange’s circuit breakers and halted the market’s trading for 20 seconds (once again). This is now the fourth time this has happened in the past 3 months, and this time on no news whatsoever.

It is becoming increasingly obvious that someone out there is trying to suppress the price of gold and this is happening far too often to be a mere coincidence. The market was halted on similar drops on April 20, 2013, September 12, 2013, October 11, 2013 and November 20, 2013.11.26

This repeated action suggests that someone out there is determined to undermine the confidence of potential gold investors.

Since the end of October, traders have dominated the gold market, betting on the possibility that the Fed will soon reduce bond purchases even though Janet Yellen said last week that she would continue with the bank’s ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.

While the tapering of the Feds stimulus is mere conjecture, it has nevertheless created a bearish sentiment amongst traders who have used the futures market of Comex to sell massive amounts of gold contracts causing prices to fall by around $100 an ounce in the last three weeks.

As far as I am concerned, this frequent irregular action is part of a strategy of central bankers and Western politicians to beguile individuals into investing in equities and bonds or simply get further into debt. The major central banks, the US Fed, ECB, BoJ, and BoE are all engaged in monetary expansionary programmes renamed quantitative easing. In simple terms, they are printing more and more money. At the same time they have dropped interest rates to almost zero. So, individuals who have saved are getting nothing on their savings while at the same time the purchasing power of their money is becoming less each month.  It is a dilemma for pensioners because the money they are receiving in interest payments is not enough to get by. And, for those hard working individuals who like to save, having money in a deposit account is hardly a proposition. So, in order to find a higher return, they are being persuaded to invest in equities.

While investing in equities is not a bad thing at all, the current scenario is anything but healthy. Prices of global equities are being artificially propped up by the policies of these central banks and have nothing to do with stellar economic growth.

As the prices of stocks continue to rise, individuals are being persuaded to buy these to keep prices moving upwards. Alternatively, they are being induced to use the low levels of interest to buy homes and cars and thus get themselves further indebted to banks.

In the UK total personal debt has reached record highs – 1.4 trillion pounds.

According to a report by the Centre for Social Justice (CSJ) an average household debt of 54,000 pounds is now almost twice the level of a decade ago. Indebted households in the poorest 10% of the country have average debts more than four times their annual income.

According to the report, entitled ‘Maxed Out’, over 130,000 people declare bankruptcy or some other form of insolvency each year in the UK. More than 8 million households have no savings at all, affecting about 50 percent of low-income households. Consumer debt has trebled since 1993, reaching nearly 160 billion pounds in 2013.

“Years of increased borrowing, rising living costs and struggling to save has forced many families into a debt trap that is proving very difficult to escape,” director of the CSJ, Christian Guy, explained, warning that problem debt can have a “corrosive impact on people and families,” affecting their mental health, relationships and wellbeing.

An estimated 1.1 million people over 50 years old are in problem debt.

The study, led by former Labour Party politician and Pensions Minister Chris Pond, said that problem debt carries a major human cost.

“With falling real incomes and increasing costs of basic essentials, many – especially the most vulnerable – are sliding further into problem debt. The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.”

With the rising costs of domestic energy and other major household bills, more households might be pushed into problem debt, the study warns. In 2012 an estimated 1.85 million households were three months in arrears on at least one household bill or payment.

“The 25 percent increase in the cost of living over the past five years combined with job insecurity and low savings mean that many households have been pushed over the edge,”
 the study says.

“Those on a low income are not victims of a housing bubble or an international banking crash, but of a financial system that is rigged against them.”

While, banks and governments can borrow at low interest rates, risk free because if they fail, they will get bailed out, savers are being penalised and duped into thinking that they must invest their money into equities, bonds or homes.

This is a bubble about to burst. It may not be now, but it may be next year or even the year after. However, once it does burst, these people will lose fortunes.

Whether you believe that gold prices are manipulated, or not, is your decision. But, let me remind you that most of the most highly respected and well–known banks in the world have all been found guilty of manipulating Libor, energy, and currencies. They were also found guilty of lying to their own clients about buying useless mortgage back securities and other assets. And, while these banks have had to pay billions in fines for their actions, not one single banker or government official has been prosecuted.

When it comes to gold, Bloomberg recently reported that the U.K. Financial Conduct Authority is reviewing gold benchmarks as part of its wider probe of how global rates are set. Evidently, the FCA review is preliminary and hasn’t risen to the level of a formal investigation.

One of the key benchmarks is the London gold fixing, a measure of the spot price for physical gold that is set twice daily by five banks. Regulators around the world are examining alleged abuses of a number of financial benchmarks by companies that play a central role in setting them. Inquiries were triggered after it emerged the London interbank offered rate, or Libor, the benchmark interest rate for more than $360 trillion of securities worldwide, was being manipulated.

The London fix, the benchmark rate used by mining companies, jewellers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc., Deutsche Bank, Bank of Nova Scotia, HSBC Holdings Plc., and Societe General.

Even though prices may change immediately after the fix, it has been a tradition that dates back to 1919.

The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public.

The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome.

According to the London Bullion Market Association, London is the largest centre for gold trading in the world. Around $33 billion changed hands there each day in 2012, exceeding the $29 billion of futures traded on Comex, data compiled by Bloomberg show.

The FCA review is preliminary and not a formal investigation, another person said. The people wouldn’t say what’s being looked at or if regulators suspect wrongdoing. Regulators are looking into how benchmarks are set and governed across the financial system after five firms including Barclays and Royal Bank of Scotland Group Plc were fined a combined $3.7 billion for rigging the London interbank offered rate, or Libor.

Investigators from Switzerland to Hong Kong are probing currency markets after Bloomberg News reported in June that traders communicated with each other and timed trades to influence foreign-exchange benchmarks and maximize profits.

If gold prices continue to slide, it is essential that you are not beguiled into thinking that you own a barbaric relic. There is enormous value to owning gold. And while it may not be apparent now, things are bound to change in the very near future. The Chinese have already figured this out and that is why they are buying as much gold as possible.

They are also making currency deals with many of their counter parties so that they do not have to trade through dollars. Recently, China announced that they will be invoicing their oil imports in renminbi in yet another major step to avoid using the US dollar as the world’s reserve currency. This means that China will have bilateral trading arrangements with Russia and the other major countries, such as Iran, that provide energy to China.

And, as Western central banks, and their agent bullion banks persist in suppressing the price of gold with their paper contracts, Asian countries will continue to take the physical gold.

Don’t be fooled. Continue to add gold to your investment portfolios.

Technical picture

gold price 25 november 2013 investing

The recent fall in gold prices has broken various support levels, indicating a possibility of further downside action and sideways consolidation. 


About the authorDavid Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.  For more information go to


Gold Scents

Something may have changed today in the gold market. For one I think gold probably formed a minor daily cycle bottom today. But what I’m really talking about is the complete recovery from another middle of the night attack. For most of the last year these late night attacks have worked wonders for sending gold crashing through technical levels and triggering stops. Today however it simply didn’t work for the first time.

It’s been my opinion for months now that the forces behind these take downs were trying to push gold back down to the 2008 C-wave top at $1030. At which point I expected they would flip sides and go long for the bubble phase of the bull market. After watching gold fight off the manipulation today I’m starting to wonder if gold has been pushed as far as it’s going to go.

At some point all artificial markets finally say “enough is enough” and the fundamentals regain control and take the market back in the direction it was meant to go. Usually more aggressively than would have happened naturally. We saw this in spades in 2008/09.

If gold is finally ready to break free of the year long manipulation then we may have printed a final bottom today. The next couple of days should tell the tale. If gold can rally $40-$50 tomorrow or Wednesday, and the miners 5% – 10% on heavy volume that would in my opinion be a strong signal that today was more than just a minor daily cycle low. If gold can deliver a powerful follow through surge off of this reversal then we may just have a final intermediate bottom, and maybe, just maybe, the bubble phase of the bull market is ready to begin.

I told my subscribers this afternoon, miners have the potential to form a 2b reversal (a technical signal that sometimes spots an exact bottom or top of a trend). One could take a long position at the open tomorrow and put a stop right below today’s intraday low. If the 2b reversal is valid then the low will hold and the stops will not get triggered. If nothing else it’s a low risk setup with a minimal loss but huge upside potential if we did print a bottom today.

If the manipulation is going to continue it will probably try to regain control tonight. If we see another premarket hit tomorrow then step aside and wait to see if gold can fend off the attack again.

As of 7 O’clock this morning the attack on gold has begun. The intervention is going to try and hold gold below $1250. If gold can fight off the attack two days in a row, that would be a strong sign the daily cycle has bottomed and maybe the bull has finally broken the manipulation.

Gold Daily and Silver Weekly Charts – Comex Option Expiration Overnight Antics

Jesse’s  Cafe’ Americain

Gold took a big overnight hit in the futures, which was probably a pre-emptive effort to shake out a few more weak hands ahead of this afternoon’s option expiration for gold and silver.

The metals actually finished fairly well, given that this is a very light trading week even by our unusually light trading volumes.

There was a little inflow to the Comex metals warehouses.

As you can see from the metals calendar below, the December contract makes its debut towards the end of this week.  Let’s see if December will live up to its title as an active month.

Have a pleasant evening.




John Rubino: Inflation is Raging – If You Know Where to Look

by Jan Skoyles
The Real Asset Co

Apparently there is no inflation. This is why the gold bull-run is over (never mind that gold rose without high inflation between 2000-2011).

Gold (apparently) climbed because inflation was coming, but we misjudged it. Or did we? When economic pundits tell us there is no inflation because prices are not climbing then we must remind them that this is like saying there is no rain because the sun is shining, it just doesn’t work like that. Inflation is, by definition, an increase in the money supply, rather than an increase in prices.

Whilst consumer price inflation (officially) remains low, we can once again point to stratospheric bubbles in many assets – London house prices anyone? Or perhaps fine art is more your thing. When there is more money to go around, there is more money to pump up asset bubbles. As we see today, and as we saw prior to the Global Financial Crisis.

Continue Reading at…

US Dollar

By Charles Vollum
Gold Eagle

The charts below show clearly just how far the once mighty US Dollar has fallen. Until 1933, people carried gold coins in their pockets, and paper bills were exchangeable for gold and silver coins at any bank. Prices were remarkably stable, and had been for a hundred years or more, except for periods of war or other calamities. In 1933, US citizen’s gold was confiscated by the government, the dollar was devalued by 41%, and we entered a period in which the treasury attempted to hold the value of the dollar at 1/35 of an ounce of gold.

As you can see, this was largely successful until the late 1960s, when so much gold was required to buy up all the dollars foreign countries were selling that the US government simply gave up, and “closed the gold window” in 1971. The value of the dollar collapsed over the next 10 years, hitting bottom in 1980. By paying high rates of interest and reducing taxes, the dollar slowly recovered some of its value over the next 20 years, but expansive money policy in the 1990s eventually caught up with the dollar in 1999.

Continue Reading at…

With India’s Market Interventions, Thailand’s Gold Demand Is Up 125%

It does not happen very often but The Economist dedicated a blog post to the gold situation in Asia. In particular, it discusses the effects of the numerous interventions by the Indian government to suppress gold demand in their local market. We reported recently that 15 different measures had been taken since early 2012, mainly gold import hikes and internal market regulations with the banking industry and bullion dealers. By doing so, the country imported a lot less physical gold. Official figures show that 148.2 tonnes had been imported between July and September of this year, which would be a drop of some 30% than the same period a year ago.

The article in The Economist explains that the Indian insatiable demand for gold has resulted in a surge in gold smuggling. Customs officials at airports in India, Nepal and Bangladesh seem to report a spike in gold originating from other Asian countries like Abu Dhabi, Bahrain and Dubai. According to the article, “the effects of India’s attempts to curb gold imports are most widely felt in Thailand.”

From The Economist:

With India’s market ring-fenced, more physical gold has made its way to Thailand. In the most recent quarter demand from Thai consumers surged 125% compared with the same period last year, to nearly 36 tonnes—faster than in any other country. And demand from investors has grown more than 80% this year. The World Gold Council attributes the increase “in no small part due to Thailand being used as a route to channel gold into other markets, notably India and Vietnam.”

But other factors play a role too. Gold has become cheaper recently, the Thai economy and the baht are wobbling, and real short-term interest rates are close to zero. In addition, a period of relative political stability has come to an abrupt end: Thailand has recently seen the biggest street protests since 2010.

Thailand has its own experience with interventions that create unwanted side effects. The Thai government pays high prices for rice produced by local farmers, who are an important political constituency. But their colleagues in Cambodia, Myanmar and Laos have long figured out that by shipping their rice across the border to Thailand, they can pocket a multiple of what it is worth back home.Thai gold smugglers now play this trick on India.

Business has been swift on the top floor of one of Bangkok’s glitziest shopping malls where gold traders and banks make their case for investment in gold. Trading screens outnumber gold bars, of which a few are on display to remind investors of the stuff. But this should count as progress compared to the days when gold shops made a killing in trading gold bars bartered for opium 850km north of Bangkok where Thailand, Myanmar and Laos meet—an area which still is called “Golden Triangle”.

India was the world’s largest consumer of gold until the first half of this year. After the gold price drop of April and June, the demand for gold in China had truly exploded. China is expected to import some 1,000 tonnes of goldthrough Hong Kong in 2013, becoming the number one gold consumer country in the world.

Platinum Faced With Large Supply Shortage

Hitch a Ride on This Supply Crunch

By Jeff Clark, Senior Precious Metals Analyst

Can you name a commodity that’s currently in a supply deficit—in other words, production and scrap material can’t keep up with demand? How about two?

If you find that difficult to answer, it’s because there aren’t very many.

When you do find one, you might be on to a good investment—after all, if demand persists for that commodity, there’s only one way for the price to go.

At the end of 2012, the platinum market was in a supply deficit of 375,000 ounces. Much of it was chalked up to the sharp decline in output from South Africa, where about 750,000 ounces didn’t make it out of the ground due to legal and illegal strikes, safety stoppages, and mine closures.

The palladium sector was worse: It ended the year with a huge supply deficit of 1.07 million ounces—this, after 2011, when it boasted a surplus of 1.19 million ounces. The huge reversal was due to record demand for auto catalysts and a huge swing in investment demand—going from net selling to net buying in just 12 months.

What’s important to recognize as a potential investor is that the deficit for both metals isn’t letting up, especially for platinum.

Since platinum supply is dwindling, let’s take a closer look…

Will the Supply Deficit Continue?

According to Johnson Matthey, the world’s largest maker of catalysts to control car emissions, platinum supply will decline to 6.43 million ounces this year, largely due to lower Russian stockpile sales. But the company claims the decline will be made up by a 7.4% increase in recycling.

Ha. Projections on scrap supply are almost always wrong. Analysts said in early 2012 that supply from recycling would grow 10-12% that year—but it declined by 4%.

There are critical issues with scrap this year, too…

  • Impala Platinum (“Implats”) reported a 17% decline in output, not due to decrease in production but in scrap supply. Other companies have not reported this problem, but Implats is one of the biggest producers of the metal.
  • Recycling of platinum jewelry in China and Japan is falling and is on pace to be 12.9% lower than last year.
  • European auto sales are declining, so one would think demand would be the most impacted. However, this has major implications for supply, too: The average age of a car in Europe is eight years, with more than 30% over 10 years old. When a vehicle exceeds 10 years, the wear and tear on the catalyst is so significant that a substantial portion of the platinum has already been lost. So the jump in supply many are anticipating will be much less than expected.

Some of these declines are offset by scrap from auto catalysts in the US, but this obviously hasn’t made up for all of it.

Demand Isn’t Letting Up Either

Platinum demand is driven mostly by the automotive industry and jewelry, which account for 75% of world demand. What happens in these two sectors has a significant impact on the metal.

We’ll let you draw your own conclusions from the data…

The Cars

  • Auto industry analysts forecast total monthly sales in the US last month will reach about 1.23 million for passenger cars and light trucks, up 12% from 1.09 million in October 2012.
  • China, the world’s largest auto market, saw a 21% rise in passenger car and light-truck sales in September to 1.59 million units, an eight-month high.
  • PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will have nearly doubled by 2019. This trend largely applies to other Asian countries too, becoming a constant source of demand for both platinum and palladium.

The Politicians

Both platinum and palladium will benefit from new regulations that take effect in 2014 in Europe and China:

  • Europe’s new “Euro 6″ emission regulation will force diesel vehicles to have new catalysts going forward.
  • China has already accepted tighter emission standards that will substantially push platinum demand in the country. It’s worth mentioning that car markets in China and other emerging countries are at the “Euro 4″ level, so they have some catching up to do before reaching US and European levels.

The Investors

NewPlat, a platinum exchange-traded fund, launched in South Africa on April 26 and has already seen an inflow of 600,000 ounces through the end of September. This unprecedented surge is expected to lift platinum investment demand by 68% to a record 765,000 ounces.

The Jewelers

Jewelry is the second-largest use for platinum, representing 35% of overall demand.

China dominates this market, and demand has doubled in the past five years. According to ETF Securities, China is well on its way to make up around 80% of total platinum jewelry sales in 2013—their report calls Chinese platinum demand “a new engine of growth.”

Johnson Matthey expects the interest for platinum jewelry to soften in China this year. However, a recent article in Forbes suggests the opposite may be happening:

A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.

Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10,522 kilograms (or approximately 338,300 ounces).

And this from International Business Times

Net platinum inflows into China hit their highest levels in two and a half years … China’s net imports of platinum rose by 11%, to hit almost 70 metric tons for the first three quarters in 2013, higher than the 62 metric tons from the same period last year.

Overall, platinum demand is expected to be greater than ever before, reaching a record 8.42 million ounces this year. And this while supply continues to decline.

This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven’t moved all that much yet, but that doesn’t mean they won’t. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.

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