Units of this trust were trading well above $20 a few months ago. But today, even after silver’s January rally, the units are trading below $15. That’s a 25% decline, which is in sync with the drop in the price of silver.

This recommendation isn’t intended to focus on short-term moves. The idea is to build a solid silver position for the longer term. It’s your way of building a silver play for the next couple of years, by which time we should see very healthy gains.

The Sprott Physical Silver Trust is a closed-end trust that’s entirely focused on physical silver. The intent behind the trust is to invest in and hold substantially all of its assets in silver bullion. It provides a secure, convenient means for investors to hold silver without taking personal physical delivery. The trust does NOT speculate with regard to short-term changes in silver prices.

Specifically, the trust invests in unencumbered, fully allocated London Good Delivery (LGD) silver bars. That is, it owns real silver — the metallic kind that hurts when you drop it on your foot — and not paper promises from any counterparty. About 99.8% of the trust’s current net assets are invested in physical LGD silver bars.

The trust stores its silver at the Royal Canadian Mint, a “Crown corporation” located in Ottawa, Canada. The Mint is responsible for loss or damage to silver in its custody. To ensure security, the silver bullion is subject to periodic inspections and annual audits.

The Mint is also the counterparty to the Sprott Trust, meaning that there’s no financial institution standing between the unit holder and the silver. Thus, this Sprott Trust is almost as good as keeping silver yourself (which I still recommend, in reasonable quantities). I’ll even grant that this trust is, in some respects, more convenient than buying the metal and having to store it on your own.

The trust has a unique physical redemption feature for large unit holders. Investors who hold the equivalent dollar value of 10,000 ounces of LGD silver bars, or more, may “redeem” their units for physical silver. If you do that, then the Mint will deliver the bars (almost) anywhere in the world via an armored transportation service. The trust is structured such that any physical redemptions will not dilute remaining unit holders.

Furthermore, there’s a nice tax advantage for non-corporate US investors. If you hold trust units for a minimum of one year, and timely file the appropriate forms with the IRS, the trust units are taxed at a capital gains rate of 15%, versus 28% — which is the higher rate that applies against most silver exchange-traded funds and silver coins.

I’ve seen an estimate that, over the course of history, mankind has mined and produced over 42 billion ounces of silver. If that’s true, I have no idea where most of it is. Evidently, all that silver has been used up in industrial processes or lost to corrosion and the like. The point to keep in mind is that there’s very little silver out there for investment purposes.

According to the silver scholars at Sprott, the current physical silver supply that’s available for investment, in US dollars terms, is worth less than 1% of the equivalent value for investable gold.

Looking at it another way, for every one dollar available in physical gold bullion and coins, there’s less than one cent available in investable silver. This supply discrepancy isn’t reflected in the current silver price.

What else? Among other things, we’re already seeing a slowdown in copper output due to declining industrial demand. But a copper slowdown will — as night follows day — certainly cause a slowdown in silver output. That’s because a large percentage of the world’s available silver comes as a byproduct of copper mining.

Give the copper slowdown a few months and the decline will induce a shortage of silver. This phenomenon will just plain bite the silver markets in the rear end. We may even see another sharp upward spike in silver prices a few months down the road.

I would never tell you that silver prices couldn’t fall further. In this market, anything is possible. But if silver prices do fall in the near term, this Sprott Trust is still a solid play over the long term.

The bottom line here is that the Sprott Physical Silver Trust offers a convenient and tax-efficient investment in physical silver. It’s the next best thing to buying your own bars.

Regards,

Byron King
for The Daily Reckoning

My Favorite Way to Own Silver originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

In the US, there’s over $1 trillion of “student loan” debt on the books. This is money that people borrowed from banks and government agencies (Sallie Mae comes to mind). The funds flowed through the “education” landscape and cash flow mills, paying for faculty, administrators, buildings, overhead and much else.

This gusher of student loan money over the past two generations (!) has been a key factor — THE key factor — in the super-inflation of the cost of education. That is, the more money that goes for loans and grants, the more leeway and incentive the schools have to raise tuition and let internal costs soar.

At the student level, some people borrowed to pay the tuition at impressive universities, where they received things like medical degrees and Ph.D.s in physics. Good for them.

But at other times and places, students borrowed funds to attend school and major in things for which there’s not much of a demand in the true, competitive economic marketplace. You know what I mean, right? Courses with the word “studies” appended to the end come to mind.

How bad is the student loan situation? Currently, around 9% of student loans are “slow pay,” if not in technical default. That’s after two years of alleged economic recovery from the crash of 2008-09. To make matters worse, it’s next to impossible to discharge student debt, even in bankruptcy.

So I don’t have a warm feeling about this student debt bottomless pit.

Let’s think it through. We have a generation of young people, many of whom with sizeable student debts, along with their underwater basket weaving degrees and such. They are unable to obtain the jobs they believed their degrees would accord them.

So there’s a lot of resentment and bitterness, which I witnessed firsthand during a recent walk through the “Occupy Pittsburgh” crowd downtown. I saw a lot of protest signs concerning student debt. It’s a very raw nerve.

The bottom line is that a lot of US young people will never find suitable employment that aligns with their education. Consequently, they’ll never earn enough to repay their student loans. Yet due to the banking lobby, and how that particular cabal has gamed the legal system, the indebted young basket weavers of the nation can’t get a classic “fresh start” in bankruptcy.

Something has got to give, and I believe we’ll see some sort of crash in the student loan markets. The student debt sector has failure built into it, down to the debt-DNA.

Also along the lines of the education bubble popping, I’ve been pondering where and when the first pin would penetrate the latex. Just this week, I believe we may have seen it: The Penn State scandal.

I’ve always had a high regard for Penn State, which is one of America’s great public universities. But if you’re following the news, you’ve likely seen where Penn State President Graham Spanier and iconic football coach Joe Paterno were just fired.

Neither Messrs. Spanier nor Paterno personally committed any indecent act. But they, apparently, knew that a subordinate within the university hierarchy — within the nationally ranked football program — was totally out of line (and I’ll spare you the disgusting details on that).

In a manner reminiscent of how certain churches cover up bad acts — “for the greater benefit of the institution,” goes the excuse — Penn State never properly handled its issues. After a period of time, however, the pot boiled over. A grand jury convened, and people testified.

This week, several Penn State officials and a former high-level Penn State coach were arrested. The Pennsylvania attorney general announced a major prosecution. All around, it’s a bad time for the Nittany Lions.

Yes, this may just be an “isolated” incident of one bad guy doing something bad, and several other people sweeping the issues under the proverbial rug. But the larger story here tells another tale of how some things in the university sector have gotten just too darn big — as in “too big to fail” — until they fail.

With Penn State, we’re seeing Big Football fail, and take down Big Coaching — as in Joe Paterno. This failure is taking down Big University Management too — as in, the president of the institution.

University managements — and, I hope, their boards of trustees — across the country had better be watching the Penn State scandal and looking hard in the mirror. They had better be asking themselves the hardest questions and looking under those lumpy rugs.

This Penn State scandal is not just some issue of having an academically ineligible kid playing linebacker for a few minutes in the fourth quarter. Or even that the star quarterback “borrowed” a Corvette automobile from some car dealer who’s a major football booster.

No, when people start to dissect this Penn State thing, they’ll have to follow the money. At Penn State, Big Football meant Big Money, and it spawned an entire culture that affected everything — permeating the overall university culture.

And while people are dissecting the Big Football money, they had better check out the Big Student Loan money, too — courtesy of government grants and loan guarantees. What ELSE is going on in the dim shadows of the locker rooms and shower stalls, what with all that money at stake? What’s going on with the fundamental mission of the education institutions of this nation?

The Big Money, provided so liberally by the student lending institutions, created lots of excesses and corruptions — great and small — that are just beginning to unwind.

Big Money means that people wind up doing whatever it takes to keep the cash flowing. It means that people will find some way to justify cutting corners, even ethical, moral and criminal corners. Until it all blows up.

Don’t sell your gold.

Regards,

Byron King,
for The Daily Reckoning

Penn State Pricks the Student Loan Bubble originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Whatever daily disaster leads the news cycle, the fact is that people everywhere still want their world to work. People want food and clean water. People want housing, and they want the lights to come on when they flick a switch. They want gasoline for their cars (and they want cars!). Basically, people want stuff, and that requires a resource economy to deliver the energy and minerals that the world needs.

Invest in it.

You create wealth by digging or pumping something out of the ground. Then you refine it and process it, adding value along the way. Then you turn the product into a finished good that somebody else needs or wants. The idea of “finance” is OK to facilitate the foregoing, but not as an end in and of itself.

That’s why I pound the drum so hard for you to “occupy” the resource space, so to speak. Banks come and go — although many of them don’t go fast enough, in my view. But the resource industries endure. Occupy that.

The investment ideas in my letter, Outstanding Investments, are based on companies that control solid resource assets. I mean oil, natural gas, uranium, gold, silver, copper and much more. These are real things, not vaporware.

The companies I recommend not only have great assets, but also great management and excellent business plans. These companies are building themselves over time and creating new wealth. Over the long haul, I’m not overly concerned about these companies. When the smoke clears, they’ll be standing tall.

Still, in the short and medium term, the declining stock markets hurt. The markets reflect the world’s economic and political issues. Thus, it’s fair to say that the world is hurting us.

We’re living through some serious history right now.

The welfare-warfare state is broken…and broke. The West doesn’t have the overall economic capacity, or the future population of young, educated workers, to make it all work. The wheels are coming off, and we’re in for a romping ride on a rocky road.

Since the 1960s or so, politicians everywhere made too many promises that the long-term economy could not afford to pay. Whether it was defined-benefit pensions for government retirees or “free” medical care for everyone or “long wars” that transcended generations, there was simply not enough money to pay for it. And no, you can’t tax the “millionaires and billionaires” and make the numbers work.

Face it. Whether you’re liberal or conservative, or anything else, you can’t deny that most politicians in the West have spent their national treasuries deep into debt. Most national obligations — the U.S., the EU, the UK and many more — are far beyond the ability of their respective national economies to support the debt service, let alone to re-pay the original funds.

Greece speaks for itself. As does Italy. And Spain and Portugal. And the U.K., to get blunt. And of course, the U.S., with its $14 trillion national debt — a year’s worth of GDP. Hey, can a whole country work for free for a year, just to pay down debt? No way.

So if things are so bad, what can you do? What will you do? Go to a Tea Party rally? That’s nice, but will that alone secure your future? Or how about going to an Occupy Wall Street (OWS) protest? Yeah, right. A lot of good it’ll do you.

Here’s my plan. Skip the rallies and protests, and buy gold and silver. Which gets back to the point that I’m bullish for precious metals because I’m bearish on the prospects for the dollar, as well as the euro and most other national currencies. Long term, it’s just a question of which ones will decline the most, and in what order.

As the current, bloated structure of the Western Welfare State comes to an end, so will the currencies issued by those Welfare States.

We’re going to have to come up with other ideas for how to transact business. Maybe people will go back to trading seashells and wampum. But I’m inclined to think that the next financial revolution will bring competition to government-issued currencies. The next useful currencies will be backed by real assets — gold, silver, energy and more. So owning an interest in oil, uranium, precious metals and more will be like owning the “banks” of the future.

Every household ought to have, at the very least, a well-stored stash of bullion coins and small ingots. Keep the loot in a bank safe-deposit box if you can’t ensure security at home.

Gold is money. So is silver. If you’re reading this, I hope I don’t have to explain it. If you’re reading this, consider yourself part of the monetary resistance.

How much of your portfolio should be in precious metals? At least 10%. That’s the absolute bottom-line number. Any less, and you’re really taking your financial situation for granted. In my view, metal holdings of 15% or 20% of your total portfolio are better. Or hold more, if your circumstances warrant it.

People have been telling me that “gold is risky” and “silver is risky” for at least 10 years. That is, I’ve heard the warnings since I was buying gold at $290 per ounce and silver for under $4 per ounce.

But what if you didn’t buy gold and silver, starting 10 years ago? What if you’re just starting now? Well, there’s more downside than before. If you buy silver at, say, $30, it can drop to $20. Heck, it might fall to $10 — but not for long, in my view.

Gold and silver prices have been rising for ten years because politicians and bureaucrats across the planet, who control the world’s money supply and public spending, have messed things up. So unless you think that the political classes are all about to have a huge epiphany and begin governing responsibly, gold, silver and most other hard assets are a buy…still.

Regards,

Byron King,
for The Daily Reckoning

Occupy Gold originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

It compounds the pain when I watch the downward share price drift, while I KNOW that great things are happening with the companies I have recommended in my investment service, Energy & Scarcity Investor. Heck, just in the past six weeks, I have traveled to Alaska, Manitoba and Quebec with my eyes wide open, looking for what needs to go on to build great companies.

Earlier this year, I travelled to Russia, Kyrgyzstan, Serbia, New Mexico, Texas, South Africa, Namibia and other locales to check out the goods.

During my travels, I saw real ore deposits, real hydro, real geothermal, real drilling sites, real cores, real ore assays. I saw real people — geologists, engineers, scientists and more — working their butts off, working to design projects, drill holes, create mines and to generate primary wealth from the Earth.

Meanwhile, all summer, the markets just seemed to sell off and sell some more. What’s the excuse? Macroeconomic problems in Europe, Asia and North America. The out-of-control banks. A potential bubble popping in China.

Don’t forget that the US budget is hemorrhaging. And then there’s that bizarre US tax and regulatory monster system that’s wrecking creativity and risk taking in the world’s largest economy. All of which leads to…a generally negative sentiment across the broad investing landscape.

Within the wide range of different resource sectors, there are more-specific issues. For example, in the rare earth space, the share prices for pretty much all the companies are down.

Over the past couple of months, former ESI holding Molycorp has been gyrating within the $50-60 range — as if awaiting its Waterloo. Well, last week, Molycorp’s deal with Japanese giant Sumitomo fell through…and the stock tanked. As of this morning, the stock was trading for $33 and change. Looking back, we sold Molycorp out of the Energy & Scarcity Investor portfolio at the right time and booked a nice gain. I don’t know where Molycorp will go from here, but my hunch is that there’s more downside than upside.

Or look at former ESI holding Rare Element Resources. It’s been as high at $16 per share this year and now is hovering near $8. Rare Element has a good ore deposit at Bear Lodge, Wyo., but in general, it’s tougher to get things done (like metallurgy) than a lot of people thought earlier this year. And with Rare Element, people have been selling.

Then there is Australian hot-runner Alkane. Alkane was a rare earths darling for a while, with a share price over $2.60. Now it’s down in the $1.30 range, and likely lower with a recent announcement of higher costs and more delays for its entire business plan.

Shares in the Canadian firm Arafura have been up over $1.60 in the past year. Now the share price is below 60 cents. It’s the same old story of difficult metallurgy, high costs and delays in getting things done.

The market goes up and down over days, weeks and even the months. But I’m looking for investment ideas that will work out over a longer term, more like a two-three-year time frame. The idea is to buy into these companies along the way and stick it out through the market upheavals. Let management do its thing — as long as management shows that it’s on “our” side.

Eventually, these kinds of companies — with the great assets and strong management — will arrive at a share price that truly reflects the inherent worth of the organization. No, not every company will, say, smack the ball out of the park. But we want the winners to more than pay for any losers.

If a company is good, it doesn’t really matter what the share price does in the short term. Up? Down? Sideways? The market is going to do what it’s going to do. But with good, well-run companies, just hang on and let the business plan evolve. Don’t panic out of your position.

On behalf of my subscribers, I travel to places like Quebec, northern Manitoba and Prince of Wales Island — not to mention Moscow, Belgrade and Windhoek — to see what’s going on. I go there, look around, meet the players and then tell you what the companies are doing, and whether they’re doing it well and doing it right…

We’re in a tough market, with all sorts of unpleasant things happening at the global macro levels, as well as with issues within the different investment sectors. But I’ve looked hard to find you good companies with excellent assets and strong management. We need to ride out the short-term market scares and keep focused on what the companies are doing.

As I said above, a year from now, we ought to look back and smile. I expect more and better things — great things, to be frank — from the companies I have recommended. They’re all the real deal. I’ve seen things up close, and I’ve got the dust on my boots to prove it.

Looking ahead, we’re going to see rare earth deals and positive developments with the gold, silver, oil, uranium and potash fertilizer plays. We’re watching valuable companies develop even greater value as they supply important things that the world needs and wants.

Regards,

Byron King
for The Daily Reckoning

Stocks Go Boom! – A Buying Opportunity! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The disaster in Japan slammed the uranium sector…and it still has not recovered. But this washout looks like a buying opportunity, as long as you’re not in a hurry to make a big gain.

I won’t go into the Japan-specific details, but for our purposes, it’s a safe bet that the Japan disaster means that we may not see a large-scale “nuclear renaissance” during the next generation.

Why not? Well, just consider the ability of people to mobilize opposition to large-scale energy development — especially something with the media-driven fear factor of nuclear power. Looking ahead, it’ll be hard for any new nuclear program, anywhere, to make headway. Yes, we’ll see developments here and there — more in China, say, than in the US. But we probably won’t see a global breakout into the nuclear power space.

Still, the fact is that the world has an installed base of over 400 nuclear power reactors, and these systems generate almost 20% of the world’s electricity. The problem is there’s not enough new uranium coming out of the mines and mills of the world to keep these plants running. One key source of nuclear fuel for the past decade has been decommissioned atomic warheads from the Cold War era. But that source is soon about to dry up — in 2013, to be precise.

The investment point is there’s a looming uranium shortage, within the next two years. Two years? That may as well be tomorrow in terms of finding new sources of industrial supply. Two years really means “now,” as in today. This means that the existing players have to step up the pace. It also means that there’s room for new players and growth within the primary uranium and yellowcake spaces.

In my investment letter, Oustanding Investments, I recommended Cameco Corp. (NYSE:CCJ) early in 2006. The stock is down 40% since then! You see, even the nation’s #1-rated investment letter misfires from time to time. Usually, I would suggest cutting losses long before a stock had fallen this much. But I think Cameco is an exception. It is a blue chip company that has faced some very bad luck.

Canada-based Cameco is one of the world’s largest uranium producers. Its shares were trading at over $42 each early in 2011, but crashed to below $30 after the Japan disaster in March. Then, over the past summer, Cameco shares have continued drifting lower. Today, they trade for $21.75.

Last week, Cameco launched a $520 million hostile takeover bid for a much smaller uranium firm named Hathor Exploration. Cameco wants to get hold of Hathor’s high-grade “Roughrider” deposit in Saskatchewan’s prolific Athabasca Basin. Whatever the technical merits of the transaction, this news just dropped Cameco shares to near $20.

At the current share price, Cameco has a price-earnings ratio of 18, with a dividend yield of 1.9%. Yet if uranium pricing firms up over the next year — leading up to the post-2013 looming shortage — Cameco’s earnings could and should increase strongly. So here’s a large company whose shares, on the fundamentals, are poised for a recovery.

Yes, there’s a downside with Cameco from here. But in my view, there’s a strong upside to Cameco as well. Indeed, I think the chances of Cameco going to $30 are better than the chances the share price will drift too far below $20. Cameco is a buy.

Regards,

Byron King
for The Daily Reckoning

Looking at Uranium…Again originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

So what’s happening? Is it 2008 redux? Or are things now worse than 2008 and we just don’t know it yet? Oh, for a copy of a tomorrow’s newspaper! Still, let’s do the best we can with what we’ve got.

Let’s start with oil. In an eerie similarity to 2008, oil prices ran up for much of 2011. Posted US oil prices were well over $100 per barrel for a while. Then prices faded a bit, and traded in a $90-100 range. In August, oil prices suddenly dropped nearly 17% within a couple of days, into the high $70s. US oil prices are now in the mid $80s per barrel.

To state the obvious, there’s a lot of money in play. Here’s the raw math. The US consumes over 20 million barrels of oil per day, while world consumption is over 90 million barrels per day. So roughly, a $10 price decrease per barrel pulls $200 million per day out of the cash flow of the domestic oil industry. That same $10 price decrease pulls about $900 million per day from the cash flow of the global energy industry, from everything from independent oil companies to large state-owned actors.

Thus, if oil prices just stay where they are for any length of time, we’ll see lower top-line numbers across the energy industry, and likely lower bottom-line numbers, as well. Oil producers tend not to make large capital decisions based on temporary price swings, and most of the current cap ex will likely remain programmed. But at least some companies will scale back expenditures where and when possible. So the large, quick oil price swing we’re experiencing could make a major difference to energy sector investors over time.

What’s driving this gyrating action in the oil trading pits? Start with the run-up. Earlier in 2011, events in the Middle East — unrest in Tunisia, Egypt, Yemen, etc., as well as civil war in Libya — contributed to supply fears and higher oil prices. Oil prices climbed a wall of worry, with a particular focus on the perennially worrisome Middle East.

Rising oil prices aren’t all bad, of course. High oil prices support capital investment in energy projects, from shale gas to oil sands to offshore projects and more. So along the way, with rising oil prices, we had nice run-ups in the oil and oil service sectors. But recently, market retreats have taken almost everything down across the board.

Now we’re witness to share price massacres, even for the normally long-term oil business. A broad-based stock market calamity is accomplishing what nothing else has been able to do this year — take down oil prices and pull the support from related share prices in the energy sector. Heck, even the Obama administration’s ill-advised sale of oil from the US Strategic Petroleum Reserve in midsummer didn’t have a fraction of the oil price effect we see in the current market crash.

The precipitous decline in oil prices has given crew cuts to some of the best names in the energy sector — Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), FMC Technologies (NYSE:FTI) and more. The nominal losses in share value seem bad now, but when the dust settles, you’ll have bargains galore in this sector. You’ll have a chance to pad your portfolio with the best of the best names.

It’s hard to say this during a market meltdown, but don’t fear investing in the energy sector. Things will get better because energy sector fundamentals are solid. That is, keep in mind that the oil price crash isn’t due to a sudden increase in global supply, let alone a sudden drop in global demand. It’s much more due to speculators despeculating, which I’ll address below.

First, let’s look at the supply side. Most of the world’s daily oil output comes from legacy fields — some of which are decades old, and “not getting younger,” if you get my drift. For all the new technology that’s bringing “new” oil upward, the global industry still faces the same old issues of inexorable depletion.

On the demand side, there’s also no significant negative change. The general economy may stink, and people may even be rioting in the streets — as in London and other places. Yet one of the last things people do anywhere is cut back on fuel usage. Once people get used to living with the convenience of gasoline, diesel and jet fuel, they won’t give it up easily.

The US Energy Information Agency (EIA) recently confirmed this point about inelastic oil demand. The EIA just released a report stating that worldwide oil consumption will increase in 2011 and 2012, spurred by increasing demand in developing countries. In other words, rising demand is baked into the cake via worldwide growth, no matter what happens in the sclerotic Western economies.

Thus with this in mind, why did we see an oil price crash, and oil share takedown? The bottom line is that oil prices and share prices for oil and service companies are sliding due to massive liquidations of positions by traders and speculators (especially hedge funds) that are caught in a price downdraft. The traders and hedgers have to fire sell positions just to raise cash to cover margin calls.

Looking ahead, the energy sector is destined to recover. I expect oil prices to drift back upward, restoring the otherwise missing cash flows to producers. I believe that oil prices, and share prices within the energy sector, will recover sooner than most other parts of the economy and stock market.

Regards,

Byron King,
for The Daily Reckoning

2008, Redux originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

But there are other metals of great value besides gold and silver. In the two centuries after Christopher Columbus landed in the New World, the Spaniards seized the gold of the Aztecs in what’s now Mexico, and took that of the Incas, as well, further south in the Andes Mountains. But this was just the beginning, because the men from Iberia had developed a bad case of gold fever. They wanted more.

High in the mountain streams of New Granada – modern-day Colombia – the Spaniards panned for gold and found plenty. They followed the shows and traces. They looked for the mother lodes, where they located even more gold, and in those mountains they also found silver. Over many decades, the Spanish treasure ships went home heavily laden.

But as the Spanish searched for gold and silver, they also found another substance, and at the time it was quite a nuisance. There were smallish, dense white nuggets mixed in with the nuggets and flakes of gold.

These small particles were difficult to separate. They wouldn’t oxidize. They were dense, and in the sluices they dropped out with the gold. The particles had a high melting point and wouldn’t separate even in the hot crucibles from which the smiths poured gold bars at the refineries that dotted the Andean landscape. A few early chemists even tried to dissolve the white particles in acids, to no avail.

After a while, the Spanish named the white nuggets “platina,” a diminutive of the Spanish word plata, meaning silver. The metallurgists of the time – alchemists, as the term was used for many centuries – thought that the dense metal was a form of “unripe” gold.

Yet the substance wasn’t gold, and it wasn’t silver, and no one had any idea of what to do with these nuisance contaminants. Thus, for many years, the platina had no value.

By the mid-18th century, European scientists were applying an early form of scientific method and deciphering the nature of many metals and other elements. In 1751, a Swedish chemist named Henrik Scheffer was experimenting with a small sample of platina. At first, he wanted to take the “unripe” gold and upgrade it to the real thing. Based on his knowledge of gold, professor Scheffer added arsenic to the mix.

Lo and behold, professor Scheffer melted the platina, which he at first called “white gold.” But then, after a few simple tests based on density and hardness, professor Scheffer realized that he was dealing with an entirely new element. He named it platinum.

In 1802, it was the turn of an Englishman, a medical doctor-turned-chemist named William Wollaston, to develop a process to recover platinum in commercial quantities. During his research into platinum, using primitive electrical methods pioneered by the great American experimenter Benjamin Franklin, Dr. Wollaston and his collaborators also discovered the element palladium, followed in 1803 and 1804 by the elements rhodium, iridium and osmium.

At the request of the French Academy of Sciences, in 1879, Johnson & Matthey created what became the standard meter for nearly 80 years – a rod made of an alloy of platinum-iridium. Looking back, in 1799, the international meter was originally defined as one ten-millionth of the distance between the North Pole and the equator, at the longitude of (where else?) Paris. Later, in the 1880s, the Johnson & Matthey rod redefined the length of a meter based on the distance between precision marks on a new X-shaped rod composed of 90% platinum and 10% iridium, cooled to 0 C. The French Academy of Sciences used platinum-iridium alloy because it doesn’t oxidize, is hard, can be highly polished and expands or contracts very little with temperature changes. This particular bar served as the international standard of measurement until 1960, when the meter was redefined in terms of the wavelength of light emitted by the krypton-86 isotope.

Over the next several decades, any number of European, Russian and North American scientists pursued studies into the nature of what became known as “platinum group metals” (PGMs).

In particular, in England, there was a metallurgist named Percival Norton Johnson. He ran a mineral assaying business. One day, he received a shipment of exotic ore from Russia, and that led Mr. Johnson to work on refining PGMs. In 1838, Mr. Johnson teamed up with another metal-man named George Matthey, eventually giving rise to the famous partnership of Johnson & Matthey.

Over time, the Johnson & Matthey group pioneered and perfected numerous techniques to separate and refine PGMs. Eventually, Johnson & Matthey developed methods to melt and cast pure homogeneous platinum ingots. Johnson & Matthey is still a famous name in the metals world today.

So now you know the modern history of platinum, but let’s approach things from another angle. What is platinum, really? What’s the big deal? Why is platinum important? What makes platinum the basis for an investment idea?

The basics are that platinum is a soft, dense, ductile metal. As we’ve seen above, platinum is very resistant to corrosion. These days, you’ll find platinum in high-end jewelry, exotic forms of wire, electrical contacts and nonreactive laboratory vessels.

Platinum also plays an important role in industries as divers as chemicals, plastics, oil refining and pollution control and more. Beyond industrial demand, there’s also a strong market for platinum in the jewelry business, as well as in bullion form, for investment. Platinum jewelry has experienced strong growth in demand, due to its purity, color, prestige and basic value. Meanwhile, the ongoing decline in the value of the dollar has led to strong demand for platinum as an investment, particularly in the form of bars, coins and other collectable items.

Looking ahead, there are entirely new uses for platinum in the fields of medical technology, exotic alloys and other forms of technology and nanotechnology.

It’s all good, right? So what’s the downside? The problem for future platinum users is that the global supply of platinum is tightening. It’s an expensive substance to mine, separate and refine. During a recent trip to South Africa, I heard story after story from senior mining executives about the difficulty of expanding production.

One mining engineer with a long track record of success told me, “When you look at the demand trends and how hard and expensive it is to expand production, there’s no way we can avoid shortfalls over the next two years and more. There’s not going to be enough platinum from any source to meet demand. I expect prices to shoot up in 2012 and beyond.”

How do you play the tightening platinum market? In my view, the best large-cap company to own is South Africa-based Impala Platinum Holdings Ltd. (IMPUY:PINK SHEETS).

The company goes by the name of Implats, and it’s a South African blue chip. Implats shares trade on the Johannesburg Exchange, the London Exchange and as American Depository Receipts (the Pink Sheets) on the OTC market. About 60% of Implats shares are owned by South African people and institutions, with 40% owned by others across the globe. For OI tracking purposes with Implats, we’ll use the OTC.

Impala is big and substantial. Implats produces about 25% of all the PGMs that come out of South Africa, using about 54,000 workers, including contractors, with 49,500 in South Africa and 4,600 in Zimbabwe. With production numbers and employment rolls like that, the company carries clout in political circles.

In 2010, Implats’ revenues were $4.4 billion, with $821 million net. After adjustments, Implats’ profit margin was 18.6% in 2010, with operating margins over 29%. The current Implats share price is just over $24, which is down from a recent high near $34. The lower share price is due to the general market swoon, based on fears of the world economy drifting into a double-dip recession. With the pullback, Impala has a market capitalization of $15 billion, and is selling for less than 10 times next year’s estimated earnings.

I like this entry point. Implats is a “Buy.”

Regards,

Byron King,
for The Daily Reckoning

The “Other” Precious Metal originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

A few weeks back, I alerted the subscribers of my investment letter, Energy & Scarcity Investor, that the Chinese would be ramping up their stockpiling of Rare Earth products. The very next day, news hit the wires that Rare Earth prices are skyrocketing. Dysprosium oxide prices, for example, doubled in the first two weeks of June. Price and availability are going nuts.

Beryllium prices are not on a tear…yet. But I am very bullish about the long-term prospects for this “minor metal.” The Daily Reckoning faithful may recall my column from June 7 entitled, “Beryllium…Even Sexier Than it Sounds.” I mentioned a couple of beryllium plays, while also asserting, “The rare earths are one of the very few industries that possess robust long-term, growth potential, even if global economic activity continues to disappoint.”

Well I’m back today to pound the drum again on this unique rare earth. Beryllium demand might receive a significant bump over the next few years, if a developmental nuclear energy technology takes hold. This one could be a game-changer.

Beryllium has phenomenal heat-flow characteristics. It cools off very quickly. So take that idea, and now mix beryllium with uranium. You can build fuel rods with much greater ability to transfer heat away. That is, you can heat up the fuel rods and they’ll cool down a lot faster. In theory, therefore, if you exposed hot beryllium alloy fuel rods to air, they wouldn’t melt down on you.

This is what did NOT happen at Fukushima, Japan, with the old-technology fuel rods that are zirconium-clad uranium. The Japanese rods – as with all fuel rods, everywhere across the world – held the heat and needed cooling water. When the system lost the cooling water, the Japanese plants experienced a series of catastrophic meltdowns. Big problems for a long time to come.

Researchers at Purdue University, Texas A&M and MIT are working on making the beryllium-uranium metallurgy work. It’s not as easy as just adding a bit of beryllium to the uranium melt. It’s a much more complex engineering process than that. There’s a lot of research ahead. But at this stage, it’s very promising. The research is yielding excellent data.

How long will it take to get the beryllium idea running in the nuclear field? It’s hard to say just now. But the up-side is that if beryllium winds up in the nuclear fuel cycle, it’ll increase global beryllium demand by an order of magnitude.

Materion (NYSE:MTRN), a company with large beryllium resources and extensive processing abilities, is one that stands to benefit from rising beryllium demand…and rising prices.

There’s a lot of shaking going on throughout the Rare Earth space. For the longest time, the spotlight has been on the two companies closest to production. That’s Lynas Corp. (ASX:LYC), with its mine in Australia and its plant in Malaysia. And Molycorp, which is rebuilding its facilities in California.

If you read the generalized reportage about Rare Earths in the mainstream business press, a lot of it is pretty uninformed. The reporters just don’t get the Rare Earth business. Not long ago I saw an article under a globally-recognized news feed, along the lines that Lynas and Molycorp will produce a large volume of Rare Earths by 2013 and the currently-tight world markets will settle down. Ergo, Rare Earth prices will fall.

Oh really? That sort of analysis is entirely wrong.

Lynas is having problems with its plant in Malaysia, and will likely not make the deadline of November 2011 for first runs of RE product – mostly lower-priced “light” Rare Earths by the way.

And Molycorp’s “new plant” in California is still a bare patch of ground where they’re pouring concrete footers. There’s no floor. There’s no structural steel. There’s no roof. There’s no new equipment installed. Nothing is running, in any industrial sense. And it’s halfway through 2011.

So neither Lynas nor Molycorp are close to producing a final product and selling it.

Furthermore, in a general, it’s hard for any one company to be fully integrated in the Rare Earth space, from mines to final end product. Mining ore, crushing and concentrating is the first step. Then there are numerous intermediate steps to upgrade the concentrate. There’s downstream refining. Then there’s cranking out the final product.

Each one of these steps takes a high level of understanding about the Rare Earth chemistry and mineralogy. It requires high levels of technology, strong managerial competence and plenty of financial depth.

When I see the hype that has surfaced about Lynas and Molycorp, it seems ridiculous to believe that the new-design, new-build, new-process will work seamlessly. Somebody will just cut the ribbon on the front door of the factory and then start pouring ore into one end of a big, magic machine.

A lot of people in this world know how to drill an oil well, then refine and deliver refined products to the marketplace. But the Rare Earth business is different. It’s relatively small, and the Chinese dominate 97% of it. Here in the West, we have to rebuild our intellectual capital in Rare Earths expertise, as well as new-build every facet of Rare Earths production – from mining to logistics to refining to end-product fabrication.

The Rare Earths business is not easy. The successful players will have to do many things right, with few glitches, and be really competent. At the same time, the early players stand to make a lot of money.

Keep a very close watch on this unique corner of the commodities markets.

Regards,

Byron King,
for The Daily Reckoning

Beryllium…Still Sexy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Dan Rodricks, Host, Midday: I’m Dan Rodricks, and you’re listening to a special edition of Midday we call Power Ahead, The Energy Future. We finish our discussion about energy with a look into the coming decades, the innovations ahead, and the power sources that are probably going to be with us for a while. Our guests include Byron King, resident energy expert with Baltimore-based Agora Financial. He’s the editor of Outstanding Investments and Energy & Scarcity Investor. Byron King is a Harvard-trained geologist, a self-described old rock hound who keeps an eye on energy, mining, and precious metals for his readers. Byron King, thank you for joining us on Midday at WYPR in Baltimore.

Byron King, Agora Financial: It is a pleasure to be with you. Thank you.

Rodricks: Byron King, please draw a picture of the year 2031 in terms of energy. What does the world look like? What sort of power-related technologies will be in wide use that are not in wide use now? Could you draw that picture for us?

King: Well, it’s a great question because twenty years is a long time. Twenty years ago, people didn’t know what cell phones were. Now they’re ubiquitous around the world. Twenty years from now, it’s going to look a lot the same, and there’s going to be some things that are different. Much of the world is powered by coal today. Much of the world will still be powered by coal in future years. We might burn it differently or what have you, but when people build coal plants, they’re built for 50 years, and the Chinese have been building hundreds of them, so they’re not going to go away. Natural gas is going to take a much bigger share.

We’re starting to figure out how much more natural gas there is out there than people estimated. An absolute revolution in technology in the past few years has been in this shale gas development… Nuclear has taken it on the chin in the last month or two, but nuclear isn’t going anywhere.

I think the long-term view is that we’ve had problems with the [nuclear] technology from the ’50s, ’60s, and ’70s. There’s different technology today, and I think it’s going to be around. And don’t count out oil. There is a lot of oil out there. There is a lot of oil yet to be found. And there’s a lot of oil that’s going to stay in the system for many decades to come. And when you look at it in the year 2031, I think that you’ll see perhaps up to 10% of the world running on what we consider alternative energy, alternative fuels, things like that. But I think that the main base of energy and of power to run things is going to be what we have today, natural gas, oil, and coal, with nuclear.

And lots and lots and lots of different technology in how it’s produced, how it’s distributed, how people use it, efficiency, conservation, things like that.

Rodricks: I think everyone agrees that a post-carbon world is not possible in 20 years, but Byron King, what about 50 or 60 years? You say many, many decades. There are a lot of people listening who are probably a little disappointed to hear that because they’re hoping that with renewable energy sources and more innovation, we’ll be able to get away from king coal and big oil.

King: Well, you can take your renewables, and you can double them, double them again, double them again, maybe even double them again. And in terms of running the world, you might get to 10% of the total world power system. I’m sorry to break the news to you.

Rodricks: You mean in 20 years.

King: In 20 years. In 50 years, what will things be like? That’s a good question. When the Wright brothers flew an airplane in 1903, did anybody know that in 1953, people would have broken the sound barrier? So a lot of things can happen in terms of technology. Much of how people use energy is not – it’s obviously technical, but a lot of it is sociological. I mean, 50 years from now, that’s two or three generations down the road. People might have different attitudes towards what they do, how they do it…

Rodricks: Byron, you touched on nuclear just for a moment. What is your take on nuclear? Could there still be a nuclear renaissance in the United States and Europe and Asia post Fukushima?

King: Post Fukushima, yeah. There could be actually. Right after Fukushima, I was thinking this is the nail in the coffin for nuclear. Just kiss it good-bye. But really, in terms of the world reaction to it, and I follow these kind of things in Europe, in China, in Russia, in parts of the developing world, Brazil, South Africa. I mean, people were remarkably sanguine about it. And among the policymakers globally, there is this idea that Fukushima was a 1950s and 1960s siting…

I mean, I don’t think people understood the seismic hazards in the ’60s the way they do now. If it’s ’60s technology in terms of nuclear, what the nuclear guys are telling me is that today, with passive nuclear systems, you wouldn’t have that issue of the meltdown in Fukushima. And really, it was the failure of 1960s era diesel generators to cool the reactor that brought the resulting meltdown. So there’s a lot of thinking that goes into this, a lot of systems thinking that goes into this. I don’t think people are giving up on nuclear, certainly not globally. Here in the US, we have to fight about everything, so the jury is still out on that one…

Rodricks: How about this on policy? How about we say to big oil companies, you’re getting some subsidies from us, some tax breaks. We’ll continue those if you develop more renewable energy.

King: Actually, you don’t really have to say that. All you have to do is buy shares in companies like Chevron or Exxon. The biggest geothermal power producer in the world is Chevron Oil Company…[Also] Chevron has a huge effort going with Weyerhaeuser, the big tree-growing company to use tree mulch and turn it into biofuels. I mean, one of these days, you might buy biofuels for your car. You’re not going to buy them from Biofuels, Inc. You’re going to buy them from Shell and Exxon and Chevron, the usual suspects. They’re already doing that.

Rodricks: Yeah. At Exxon Mobile just a couple of years ago at a shareholders meeting, they laughed down these ideas of investing in green energy.

King: I’m not sure about that one. All I know is that they put their money where their mouth is. And Exxon has a very aggressive development program with a California biotech company in terms of algae. It’s third-generation stuff. If you want to talk about biofuels, one of the worst subsidies, one of the ones that we ought to do away with tomorrow is the ethanol subsidy. I mean, the idea that 40% of the US corn crop is going to turn into ethanol to run cars is doing nothing but driving up food prices across the world. And in terms of net energy, it’s almost a loss really in terms of the energy that goes in versus the energy you get out…

One of the things that you have to keep in mind as well, is understanding the concept of the grid. And it’s transmission wires, it’s pipelines, it’s everything because it’s one thing to create electricity or create a thermodynamics, but it’s another thing to get it to where you need it.

You’ve got your production, but…you need transmission, and transmission is your market enabler. And that is another of the great bugaboos. It’s a huge technological challenge… Power distribution, power transmission is a massive problem in this country, especially rebuilding the old grid that we have. Rebuilding it with new, modern stuff. When you see just the kinds of cabling and wiring that it requires, these are not your father’s or your grandfather’s little copper wires with some plastic wrapping or something.

These new cables that bring the power in from offshore or that take the power out to an offshore platform or that bring the power from the windmill farm up in the mountains down to the city, these are incredibly technologically complex wires. These are works of art. They are engineering marvels just the wiring alone.

Rodricks: Okay, so if you had $1,000 to invest in any facet of energy what would you do?

King: If I had $1,000.00 to invest in the future of energy, I would…buy one stock and it would be a company that mines and manufactures graphite because I think that graphite is one of the unseen, under-the-radar products that everybody is going to need no matter what they do in terms of the future of electricity. If you have an electric car, it’s not going to be run by lithium batteries. You might as well call it graphite batteries. There’s more graphite than lithium in those batteries.

Rodricks: Thanks, Byron!

Regards,

Byron King,
for The Daily Reckoning

The Future of Energy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Below is a chart that shows the percentage of US government income that goes to pay interest on the national debt. It also shows the historical price of gold in real terms.

Before 2010, the chart uses historical data for both gold and the percentage of revenues going to pay interest. In the years ahead, the interest payments are an estimate based on known outstanding US debt and the anticipated rates. It’s just following the math.

As you can see, in the immediate future, interest on the debt will eat up more and more of the overall federal revenue stream. That’s because national debt and interest on that debt are growing far faster than taxable GDP.

What does chart this mean to you, as an investor? It means that within the investment horizon of every Outstanding Investments subscriber age 12-92, we’re staring at the potential for utter economic devastation. If you’ll grant me a bit of artistic license in all this…life as we know it in the US could come to a crashing halt.

From the standpoint of investing, the chart also gives us every reason to anticipate even higher prices for gold, and, by association, silver. So if you don’t have some gold and silver, get some.

Historically, the gold price rises when there’s an increasing percentage of federal revenues going to pay interest on the national debt. And historically, the gold price declines when US interest payments move down as a percentage of federal revenues.

So if you follow the correlations on the chart, the forecast for the price of gold is simply up, up and away. That is, by 2020, we may be living in a country where the government is chronically insolvent, due to interest payments, and gold is going stratospheric.

We’ll enter into an era when the government won’t pay its day-to-day bills on time, if it pays them at all. Eventually, we may see the US currency in free fall, if not collapse. That’s why your ONLY real long-term hope in all of this is to invest in “real” assets – things that will retain value over time. Energy and minerals come to mind, certainly to include physical gold and silver.

The mainstream media and old-line politicians pretty much ignore the looming debt crisis, or they talk around it. And compare this sense of economic non-urgency with how the media and bureaucrats deal with, say, the idea of “global warming” – a scientific possibility, but something subject to much debate.

It’s as if protecting future generations from the possibility of a few extra fractions of a degree of atmospheric temperature – over the next century – is a high mission. Yet there’s no need to wrestle with the absolute certainty that the country is immediately mortgaging its financial future. The US economy is loaded down with untold trillions of dollars’ worth of debt, and it’s only getting worse.

Why is that? Why the neglect? Why isn’t every church bell in the country ringing, sounding the alarm over the financial catastrophe that’s happening before our eyes? Perhaps it’s because addressing the idea of so-called “climate change” will increase the power and control of the political class. While dramatically cutting the federal budget and letting the private economy grow will reduce political power. Can’t have that, right?

During the last ten years, Outstanding Investments became the nation’s the No. 1 investment newsletter, according to Hulbert’s Financial Digest. We earned that spot by recognizing the frailties of the American economy and, by extension, the US dollar, long before most other investors. We continuously advocated investments in hard asset sectors like precious metals and energy. Fortunately, most of these investments performed very well.

The road ahead looks a lot like the road behind. Unless and until America’s leaders become serious about addressing our broken finances, Outstanding Investments will maintain course and speed – advocating investments in traditional hard assets like gold and silver, as well as investments in non-traditional assets like the “rare earth” elements.

Regards,

Byron King
for The Daily Reckoning

A Dark Shadow Lights Up the Gold Market originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".