Are Minor Metals the True 21st Century Hard (Metal) Assets?
By Jack Lifton
24 Jan 2008 at 02:42 PM GMT-05:00
http://www.resourceinvestor.com/pebble.asp?relid=39820
DETROIT (ResourceInvestor.com) -- The rollercoaster ride of the U.S. and global stock markets this week has so far been remarkable, but it does not seem to be happening to our favourite asset class of commodity metals - in particular with the so-called precious, exchange-traded metals. The prices of gold and silver have not varied inversely in step with the large daily market swings as speculators had predicted that they certainly would, and, in fact, the prices of these “precious” metals have seemed to be following the market, or “fiat,” value of the U.S. dollar as simple stores of value rather than reflecting growth potential. Gold is starting to act as a “flight to quality” type of relatively low but sure return investment.
The same thing seems to be happening with copper and even more so with platinum, which, with the others, used to be called the “coinage metals.” Prior to the rise of the need to generate and distribute electricity, the largest use for copper was in coinage, where the relatively low intrinsic value of copper, as values for metals went, allowed it to be used for low denomination but high mintage coins.
Ironically, Imperial Russia in the 1830s, which had then discovered that it had access to large amounts of the newly “discovered” metals, platinum and palladium, actually coined platinum rubles for a time in an attempt to create a “fiat” ruble; i.e., the platinum ruble was to be a ruble because the Czar said it was. The attempt was a flop, and by the time almost a century later that Louis Tiffany popularized platinum settings for diamonds and began marketing platinum as a “precious metal,” the Czar’s government had lost its interest in the metal altogether.
Those investors who want a “store of value” should for the time being stick to gold, and they probably won’t lose any value in today’s hard currencies, and they will be tricked and soothed into believing that the price of gold is going up if they only look at its U.S. dollar price. Investors, however, who want to speculate in the rise of value of hard assets, I believe, need to change their thinking and to revise a definition.
For most of the last 26 centuries almost all of the world has followed the lead of the ancient Greek city states of the Aegean Sea region and made it a state monopoly to issue specified weights of certain metals: first gold and silver alloys; and then, as metallurgy improved, gold and silver individually; and then copper and copper alloys, as mediums of exchange with intrinsic value. Note that the money changers in the Temple courtyard whose tables were overthrown were not Wall Street bankers; they were men who claimed to know the true weight of Athenian silver “Owls” and would give you the equivalent in weights of silver, gold or copper metals, minus a fee of course, in the coins of Rome or Judea.
This system survived, more or less intact, until the early 20th century when the first industrial revolution swept out of Europe to America and slowly thereafter to the rest of the world. The significance of the rapid spread of the industrial revolution was that the need for money overwhelmed the supplies of gold and silver, so that fiat currency came into the ascendant. The world’s most prominent grouping, the British Empire, went off the gold standard after the disastrous disruption of the world economy called the Great War. The United States, the actual world’s richest individual nation, went exuberantly into its “Roaring Twenties” and then crashed into a massive deflation and also went off the gold standard.
All of these events were three generations ago, and today we all take it for granted that the central banks of the U.S. and Europe, as well as of Asia, exist solely to regulate money supplies. Gold bugs make me laugh when they talk about the supply of gold being affected by a European central bank selling a few hundred tonnes; they do not want to see that central banks are not creating money by selling gold. They are raising money in place of a non-monetary asset which may have appreciated or may be losing its value. The supply of gold is today the newly mined gold produced annually in the world. Since no one “needs” this gold either for industrial purposes or to back their currency, it is more and more impossible to speak of a demand for gold as any different from the demand for jewellery - which is elastic, to say the least.
Please now glance at the chart below, from the Wall Street Journal, 6 January 2008 edition:
Let me re-iterate that although they were for a very long time items of intrinsic value which had been monetized so that not accepting them in exchange for goods in the market place was a crime, in the 21st century, however, gold and silver, or, at least, gold have become stores of value while a new paradigm has entered the hard assets arena: A hard metal asset is now one which has a strategic or critical value to industry. Most of the world’s new “hard” currencies, such as the Canadian dollar, the Australian dollar and the Chinese Yuan, are in fact resource-based, and the difference in acceptance between them and the non-resource based American dollar is becoming more favourable to the resource based currencies daily. That is one of the things that the chart above tells us.
The differences - strategic or critical or both - for metals are an important distinction, which investors must note, so here are some working definitions:
A strategic metal is one that gives an item manufactured from it the most value for the least cost; it may be substituted with a cheaper metal only when the total economic cost of the substitution is less. For example, during World War II, when a huge amount of electrical wiring was needed for the Hanford Washington Facility being built to separate fissionable material for weapons, the Manhattan Project was confronted with a crisis; copper, as brass, was critical to the war effort; small arms ammunition as well as some larger calibre types, could only be produced efficiently in the volumes needed from brass. Therefore the Manhattan Project requisitioned thousands of tonnes of silver, a better electrical conductor when pure than copper, but useless in building ammunition (pace: The Lone Ranger), and proving useless in wartime. The silver was returned to the treasury after the war as Hanford was rewired with a small portion of the huge immediate post-war beating of swords into ploughshares, cars, refrigerators, radios, household plumbing and electric wire for all those new appliances and homes and cars. Note that when the dollar fell to the point that the cost of the silver in a coin exceeded the stated denomination of the coin, silver vanished forever from American circulating coinage for which its value would need to fixed against that of the dollar (1964).
A critical metal is simply one without which an industrial process cannot today function, and which is or can be made available in sufficient quantity so that it can be used commercially, and for which no economical substitute today exists. For example, rhodium is critical to the reduction of acid forming nitrogen oxides to harmless nitrogen in automotive emission control catalytic converters. Another example is indium. In the form of indium tin oxide, it is the best and it is universally used to make the transparent conductive film which allows flat screen LCDs to function. The National Academies, in two reports discussed by me on this website last October (found here and here), named the critical metals for American industry and America’s 21st century military. These reports, plus some critical commentary, some of it by me on Resource Investor, make required reading for serious long-term investors in metals and minerals.
“The times, they are a changin’,” Bob Dylan sang, and he was and is right, not only about civil rights but also about economics.
The precious metals of our time are not those of the past - no matter how long and glorious a past it may have been. The precious metals of our time are the so-called minor metals that are strategic and critical to our industrial civilization and our standard of living.
Iron is not a precious metal or a critical metal, but it is a strategic metal. Its rising price in the 21st century is due to the fact that existing supply cannot keep up with growing demand. There is plenty of economically accessible iron ore, but a factor not normally considered has come into play: time. The free market advocates think in leisurely terms of demand driving the growth of new supply. They fail to account for the fact that if the demand occurs in a short time, then some existing users or uses must give way to the highest bidder for the fixed amounts available in the short term. Mines, at least in the capitalist world, are not developed to sit idle as inventory management devices; this is far too expensive a proposition for a free market economy.
The strategic nature of iron will become apparent to all as more and more of the supplies to make its most common alloy, steel, are diverted to Asia; the price of iron (steel)-dependent durable goods in America will continue to rise as a result of Asian demand and not of American demand; this is a first for America. But since there is no cheaper material from which to build the structure of cars and other durable items, there is no way out of the price increases.
The key critical metals for investors to follow are those minor metals, which are only produced as by-products and for which the uses are dissipative. This last word means that once the metal is used, it is not economical to recover it by recycling.
As an aside I need to point out is that a great many businesses have come and gone in the last 50 years based on recycling first military, then industrial, and finally consumer electronics. All of these businesses were predicated on recovering gold, silver, platinum and palladium widely used at the beginning of the industrial electronics era to ensure constant conductivity and provide resistance to corrosion. These stores of precious metals materials have now been exhausted and promoters who tell you of using low-cost Chinese labour to hand sort electronic components either for extracting gold or for re-use are mostly just trying to steal your money. I well remember the gleam of the gold over plating on Soviet-era missile electronics being scrapped at a facility in France; that gleam was overshadowed only by the gleam in the eyes of the managers of the facility as they watched the unaccounted for gold bars stream out in the night to a destination on a lake in the Swiss Alps; those days are gone. I’m telling you this story to illustrate that even gold once had an industrial use and, therefore, value, which has gone away. It is too expensive and too easily substituted by cheaper materials or dramatically reduced in use volume by new technologies to have any remaining industrial value that could drive its price.
Unfortunately for teenagers, the minor metals, which are now critical to the production of electronic devices, are used mostly in such small quantities per device that recovering the metals through recycling is at best prohibitively expensive and more likely simply impossible economically and technologically.
This means that many minor metals are literally used up in production. When you look at which of those are also produced only as by-products you get a list of truly precious metals.
Here is a brief list, in alphabetical order, of genuinely precious metals, which are used up in manufacturing small electronic devices. Note that only selenium and tellurium production approach 100 tonnes per year; the rest top out at 50 tonnes. The total global production of the six metals listed below is around one-eighth of the total production of gold annually:
Gallium, a by-product of aluminium mining;
Germanium, a by-product of zinc mining;
Indium, a by-product of zinc mining;
Ruthenium, a by-product of platinum mining;
Selenium, a by-product of copper, and to a lesser extent of gold and platinum mining; and
Tellurium, a by-product of copper, and to a lesser extent of gold and platinum mining.
Look on the website http://www.MinorMetals.com, published by http://www.TheBullionDesk.com, and look at the prices of these above “minor metals” over the last five years.
Imagine that you had bought these metals in 2002 and had physical possession of them, or, better, had them held for you and safeguarded as to purity in a bonded warehouse. Also imagine, please, always, that there is a willing buyer for these materials at the prices quoted on the sites such as the one named above, you would then be far better off today financially than if you had bought gold in the same circumstances. If you are an industrial-end user, imagine how your balance sheet could look if you had had a long range strategy which allowed you to hedge your future needs with off-take agreements with the primary producers. Which then are the precious metals, and which then are the hard assets of our time?
I will continue this analysis of the new hard assets in the future with: structural minor metals, such as molybdenum, tungsten, chromium, manganese, magnesium, titanium and vanadium, and power minor metals, such as the rare earths, cobalt, lithium, zirconium, hafnium, uranium, and what I think is the first new minor metal hard asset that the true value of which has only been recognized in the 21st century, thorium.
By Jack Lifton
24 Jan 2008 at 02:42 PM GMT-05:00
http://www.resourceinvestor.com/pebble.asp?relid=39820
DETROIT (ResourceInvestor.com) -- The rollercoaster ride of the U.S. and global stock markets this week has so far been remarkable, but it does not seem to be happening to our favourite asset class of commodity metals - in particular with the so-called precious, exchange-traded metals. The prices of gold and silver have not varied inversely in step with the large daily market swings as speculators had predicted that they certainly would, and, in fact, the prices of these “precious” metals have seemed to be following the market, or “fiat,” value of the U.S. dollar as simple stores of value rather than reflecting growth potential. Gold is starting to act as a “flight to quality” type of relatively low but sure return investment.
The same thing seems to be happening with copper and even more so with platinum, which, with the others, used to be called the “coinage metals.” Prior to the rise of the need to generate and distribute electricity, the largest use for copper was in coinage, where the relatively low intrinsic value of copper, as values for metals went, allowed it to be used for low denomination but high mintage coins.
Ironically, Imperial Russia in the 1830s, which had then discovered that it had access to large amounts of the newly “discovered” metals, platinum and palladium, actually coined platinum rubles for a time in an attempt to create a “fiat” ruble; i.e., the platinum ruble was to be a ruble because the Czar said it was. The attempt was a flop, and by the time almost a century later that Louis Tiffany popularized platinum settings for diamonds and began marketing platinum as a “precious metal,” the Czar’s government had lost its interest in the metal altogether.
Those investors who want a “store of value” should for the time being stick to gold, and they probably won’t lose any value in today’s hard currencies, and they will be tricked and soothed into believing that the price of gold is going up if they only look at its U.S. dollar price. Investors, however, who want to speculate in the rise of value of hard assets, I believe, need to change their thinking and to revise a definition.
For most of the last 26 centuries almost all of the world has followed the lead of the ancient Greek city states of the Aegean Sea region and made it a state monopoly to issue specified weights of certain metals: first gold and silver alloys; and then, as metallurgy improved, gold and silver individually; and then copper and copper alloys, as mediums of exchange with intrinsic value. Note that the money changers in the Temple courtyard whose tables were overthrown were not Wall Street bankers; they were men who claimed to know the true weight of Athenian silver “Owls” and would give you the equivalent in weights of silver, gold or copper metals, minus a fee of course, in the coins of Rome or Judea.
This system survived, more or less intact, until the early 20th century when the first industrial revolution swept out of Europe to America and slowly thereafter to the rest of the world. The significance of the rapid spread of the industrial revolution was that the need for money overwhelmed the supplies of gold and silver, so that fiat currency came into the ascendant. The world’s most prominent grouping, the British Empire, went off the gold standard after the disastrous disruption of the world economy called the Great War. The United States, the actual world’s richest individual nation, went exuberantly into its “Roaring Twenties” and then crashed into a massive deflation and also went off the gold standard.
All of these events were three generations ago, and today we all take it for granted that the central banks of the U.S. and Europe, as well as of Asia, exist solely to regulate money supplies. Gold bugs make me laugh when they talk about the supply of gold being affected by a European central bank selling a few hundred tonnes; they do not want to see that central banks are not creating money by selling gold. They are raising money in place of a non-monetary asset which may have appreciated or may be losing its value. The supply of gold is today the newly mined gold produced annually in the world. Since no one “needs” this gold either for industrial purposes or to back their currency, it is more and more impossible to speak of a demand for gold as any different from the demand for jewellery - which is elastic, to say the least.
Please now glance at the chart below, from the Wall Street Journal, 6 January 2008 edition:
Let me re-iterate that although they were for a very long time items of intrinsic value which had been monetized so that not accepting them in exchange for goods in the market place was a crime, in the 21st century, however, gold and silver, or, at least, gold have become stores of value while a new paradigm has entered the hard assets arena: A hard metal asset is now one which has a strategic or critical value to industry. Most of the world’s new “hard” currencies, such as the Canadian dollar, the Australian dollar and the Chinese Yuan, are in fact resource-based, and the difference in acceptance between them and the non-resource based American dollar is becoming more favourable to the resource based currencies daily. That is one of the things that the chart above tells us.
The differences - strategic or critical or both - for metals are an important distinction, which investors must note, so here are some working definitions:
A strategic metal is one that gives an item manufactured from it the most value for the least cost; it may be substituted with a cheaper metal only when the total economic cost of the substitution is less. For example, during World War II, when a huge amount of electrical wiring was needed for the Hanford Washington Facility being built to separate fissionable material for weapons, the Manhattan Project was confronted with a crisis; copper, as brass, was critical to the war effort; small arms ammunition as well as some larger calibre types, could only be produced efficiently in the volumes needed from brass. Therefore the Manhattan Project requisitioned thousands of tonnes of silver, a better electrical conductor when pure than copper, but useless in building ammunition (pace: The Lone Ranger), and proving useless in wartime. The silver was returned to the treasury after the war as Hanford was rewired with a small portion of the huge immediate post-war beating of swords into ploughshares, cars, refrigerators, radios, household plumbing and electric wire for all those new appliances and homes and cars. Note that when the dollar fell to the point that the cost of the silver in a coin exceeded the stated denomination of the coin, silver vanished forever from American circulating coinage for which its value would need to fixed against that of the dollar (1964).
A critical metal is simply one without which an industrial process cannot today function, and which is or can be made available in sufficient quantity so that it can be used commercially, and for which no economical substitute today exists. For example, rhodium is critical to the reduction of acid forming nitrogen oxides to harmless nitrogen in automotive emission control catalytic converters. Another example is indium. In the form of indium tin oxide, it is the best and it is universally used to make the transparent conductive film which allows flat screen LCDs to function. The National Academies, in two reports discussed by me on this website last October (found here and here), named the critical metals for American industry and America’s 21st century military. These reports, plus some critical commentary, some of it by me on Resource Investor, make required reading for serious long-term investors in metals and minerals.
“The times, they are a changin’,” Bob Dylan sang, and he was and is right, not only about civil rights but also about economics.
The precious metals of our time are not those of the past - no matter how long and glorious a past it may have been. The precious metals of our time are the so-called minor metals that are strategic and critical to our industrial civilization and our standard of living.
Iron is not a precious metal or a critical metal, but it is a strategic metal. Its rising price in the 21st century is due to the fact that existing supply cannot keep up with growing demand. There is plenty of economically accessible iron ore, but a factor not normally considered has come into play: time. The free market advocates think in leisurely terms of demand driving the growth of new supply. They fail to account for the fact that if the demand occurs in a short time, then some existing users or uses must give way to the highest bidder for the fixed amounts available in the short term. Mines, at least in the capitalist world, are not developed to sit idle as inventory management devices; this is far too expensive a proposition for a free market economy.
The strategic nature of iron will become apparent to all as more and more of the supplies to make its most common alloy, steel, are diverted to Asia; the price of iron (steel)-dependent durable goods in America will continue to rise as a result of Asian demand and not of American demand; this is a first for America. But since there is no cheaper material from which to build the structure of cars and other durable items, there is no way out of the price increases.
The key critical metals for investors to follow are those minor metals, which are only produced as by-products and for which the uses are dissipative. This last word means that once the metal is used, it is not economical to recover it by recycling.
As an aside I need to point out is that a great many businesses have come and gone in the last 50 years based on recycling first military, then industrial, and finally consumer electronics. All of these businesses were predicated on recovering gold, silver, platinum and palladium widely used at the beginning of the industrial electronics era to ensure constant conductivity and provide resistance to corrosion. These stores of precious metals materials have now been exhausted and promoters who tell you of using low-cost Chinese labour to hand sort electronic components either for extracting gold or for re-use are mostly just trying to steal your money. I well remember the gleam of the gold over plating on Soviet-era missile electronics being scrapped at a facility in France; that gleam was overshadowed only by the gleam in the eyes of the managers of the facility as they watched the unaccounted for gold bars stream out in the night to a destination on a lake in the Swiss Alps; those days are gone. I’m telling you this story to illustrate that even gold once had an industrial use and, therefore, value, which has gone away. It is too expensive and too easily substituted by cheaper materials or dramatically reduced in use volume by new technologies to have any remaining industrial value that could drive its price.
Unfortunately for teenagers, the minor metals, which are now critical to the production of electronic devices, are used mostly in such small quantities per device that recovering the metals through recycling is at best prohibitively expensive and more likely simply impossible economically and technologically.
This means that many minor metals are literally used up in production. When you look at which of those are also produced only as by-products you get a list of truly precious metals.
Here is a brief list, in alphabetical order, of genuinely precious metals, which are used up in manufacturing small electronic devices. Note that only selenium and tellurium production approach 100 tonnes per year; the rest top out at 50 tonnes. The total global production of the six metals listed below is around one-eighth of the total production of gold annually:
Gallium, a by-product of aluminium mining;
Germanium, a by-product of zinc mining;
Indium, a by-product of zinc mining;
Ruthenium, a by-product of platinum mining;
Selenium, a by-product of copper, and to a lesser extent of gold and platinum mining; and
Tellurium, a by-product of copper, and to a lesser extent of gold and platinum mining.
Look on the website http://www.MinorMetals.com, published by http://www.TheBullionDesk.com, and look at the prices of these above “minor metals” over the last five years.
Imagine that you had bought these metals in 2002 and had physical possession of them, or, better, had them held for you and safeguarded as to purity in a bonded warehouse. Also imagine, please, always, that there is a willing buyer for these materials at the prices quoted on the sites such as the one named above, you would then be far better off today financially than if you had bought gold in the same circumstances. If you are an industrial-end user, imagine how your balance sheet could look if you had had a long range strategy which allowed you to hedge your future needs with off-take agreements with the primary producers. Which then are the precious metals, and which then are the hard assets of our time?
I will continue this analysis of the new hard assets in the future with: structural minor metals, such as molybdenum, tungsten, chromium, manganese, magnesium, titanium and vanadium, and power minor metals, such as the rare earths, cobalt, lithium, zirconium, hafnium, uranium, and what I think is the first new minor metal hard asset that the true value of which has only been recognized in the 21st century, thorium.
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