Bold Gold, The Rhodium Rodeo and Cash For Clunkers

I was inspired to write this article by the flaming punch; counter punch exchange between Market Ticker (aka Karl Denninger) and Gordon Gekko (aka apparently we don't know). Have a look for yourself here Gordon Gekko On Denninger and here Denninger On Gekko . Good points were made on both sides, but I'm predis positioned to err on the side of Market-Ticker's view. I looked at the Gold piece in depth a few months ago before I even had a thought about launching and writing a blog, of which this analysis was used in my article published on Seeking Alpha On Our Token Economy.

My view on Gold was that all it would take is for someone to announce that they had figured out a way to turn Lead into Gold and the market would go down like a lead balloon. By the way you can turn lead into Gold, it was accomplished way back in the 50's and again later unintentionally by the Russians in the 70's.

Transmutation of lead into gold isn't just theoretically possible - it has been achieved! There are reports that Glenn Seaborg, 1951 Nobel Laureate in Chemistry, succeeded in transmuting a minute quantity of lead (possibly en route from bismuth, in 1980) into gold. There is an earlier report (1972) in which Soviet physicists at a nuclear research facility near Lake Baikal in Siberia accidentally discovered a reaction for turning lead into gold when they found the lead shielding of an experimental reactor had changed to gold. Turn Lead Into Gold

I suspect the techniques have gotten better and the cost has gone down significantly and or with the run up in Gold is more cost effective. I continue my assertion that as long as Gold goes up so will the value of the dollar, mainly because the US has the largest Gold reserves in the world. Another observation from that article was to point out that Portugal had surprisingly larger Gold reserves than the UK and likely made a better credit risk than did the UK. This was primarily due to the UK selling nearly or nearly half (415 Tonnes) of it's Gold reserves in 1999 at an average price of $276 an ounce.

Apparently this was at a low that is affectionately referred to as "The Brown Bottom" after the then Exchequer of the British Treasury (Then Gordon Brown) decided to sell UK Gold for a pittance. In what appears to be just irony too good to be true, Nick Leeson of Barings Bank fame gets to comment on this particular trade and compare Browns 6.6 Billion Pound loss with his $1.3 Billion loss. You have to think that Brown conveniently excoriated Leeson on his trade, and probably rode Leeson's hide all the way up to the role of Exchequer, only to have done an even worse trade, threatening a whole Commonwealth. For their efforts Leeson went to jail and Brown became Prime Minister of Britain!

OK so this is all well and good, so now we have gone from the "Brown Bottom" to the "Gold-Man Top" so now what? Is Gold a better play, well I think what happens is the price run up will create the demand which we have seen which will continue until supply can catch up.

A perfect case study is when the Hunt Brothers attempted to corner the Silver market and they were done in by Dr. Jarecki of Falconwood Corporation, aka. Gresham Investments fame, as the principle counter party to the Hunt Brothers trade. Here it is described in his own words.

“As the price of silver over very few months rose from $7 to $17 and then to $30, 40, and 50, the American public took its rings off, sold its silverware, and some even took their silver teeth out of their mouths. People lined up, two hundred deep, to sell silver. The smart people laughed at them. The market price of silver was $50 and the yokels were selling it for $30 to the scrap dealers who were selling it to the bullion dealers for $40 who were hedging it in the futures markets at $50. But when these billions of dollars worth of new silver got refined and came on the market and the Hunts, in an effort to keep the supply-induced price drop from causing margin calls that would bankrupt them, had to buy it up, the corner failed. It was not by an act of the Federal Government, but because the market itself corrected the imbalance between supply and demand and thus ultimately bankrupted the Hunts. It is here worth mentioning, of course, that it was the little guy who made the big profit and that it was he, through the market, that foiled the Hunts’ attempt.”

This posting is also worth checking out if you also want to consider the effect of recent alleged market manipulation of the world gold and silver bullion markets, by two large banks. Bullion Market Manipulation

This aspect of Gold as a hedge and the idea of it being thought of as a "Disaster Hedge" which it isn't really as I pointed out in as referenced here What the Rebound In The Art Market Signals got me to thinking well if Gold is the rube trade?  Then where is the real precious metals trade?

This question led me to discover the Rhodium Rodeo... What is Rhodium?

To summarize, Rhodium, is likely THE rarest precious metal you can find in existence. It's current price is roughly $2,635 per Troy ounce as of May28th, and since it isn't and exchange traded commodity you basically have to own it to have it. Interestingly enough Rhodium, is also a by product of spent nuclear fuel and generally produces 400g of Rhodium per ton of spent fuel. The half-life of the radioactivity in the Rhodium is less than a year or in some isotopes and not more than 20 years in others, but it still is a relatively expensive process to reclaim. However, what is so remarkable about Rhodium was the price it was at in the Summer of 2008 when it was at a high of $10,010.00 per Troy Ounce. This was from a standing start of $533 an ounce in 1979 and a breakneck jump from $2000 in 2005. Back to a low of $760 an ounce in January of 2009. Talk about "buy and hose"!

The natural demand for Rhodium is in the manufacture of automobile catalytic converters.  In fact 81% of the world production of Rhodium in 2007 went to this use. If you look at the USDOC finding below you see an astounding revelation that the Rhodium in your cat converter, if you bought a car in 2007-8 the 1/8 of an ounce Rhodium added $1,200 in cost to the price of your car! Don't even think about the 15-20% cost added by adhering to Emission Standards which was another surprising revelation.

"The US Department of Commerce has estimated, according to a 2008 report titled "Increase in Vehicle Cost Due to Implementation of Emission Standards"[citation needed], that catalytic converters add as much as $1200 on to the sticker price of a vehicle. The same report also stated that EPA required equipment, including catalytic converters, cost somewhere between 15% to 20% of the sticker price of a new vehicle. As an example, if the MSRP of a vehicle is $20,000 then 20% ($4000) of the MSRP price is due to EPA emission standards. Not only is there a rise in the cost of a purchase of a new vehicle, but also an increase in the cost of gasoline over the life time of the car. Catalytic converters limit the airflow of exhaust through the exhaust system making the system less fuel efficient. The EPA has estimated the loss of fuel efficiency by 5% per gallon. That is, a vehicle burns 5% more fuel to travel the same distance with a converter than it would without."Catalytic Converter"

So when the car market hit a wall Rhodium got ejected over the wall and off a cliff. Funny enough not even the dust up between Russia(Second largest producer of Rhodium, 1of3) and Georgia couldn't put rhodium back together again, as that all transpired in August 2008 while Rhodium was well into it's cliff dive.


Oh and what a beautiful dive it was.  The drop off is astounding, and no splash even.  Even more astounding  when you factor in the time frame which was pretty much the height of the equity market down trend which also failed to break its fall.


OK so Bold Gold, The Rhodium Rodeo, where does Cash for Clunkers fit in?

Well I left you a teaser in the discussion about Rhodium and its use in the catalytic converters of cars. Of the total 2007 production of Rhodium 22 tons of it was mined and 6 tons was recycled or reclaimed, mainly from the recycling of catalytic converters.

When you consider that the "Cash For Clunkers" program was derided as a huge waste of money you have to consider the genius of the idea, and possibly why it didn't cost nearly as much as we thought it did. The fact that it took less fuel efficient cars off the road, and provided a big shot in the arm for the auto manufacturer's. Not only because it created a short demand spike.

You have to consider that the Rhodium, Platinum and Palladium held within those cars made the program half as expensive, and twice as effective. Generally because the dealers benefited from the scrap money, the recyclers benefited from the metal recovery and the automakers benefited from the lower prices of these metals as the market after being crushed was held back from running up again to because of a brand new supply of reclaimed precious Rhodium.

I thought it curious that the program could care less about cars more than 25 years old, the ones you would think have the most inefficient engines and most pollution, but it was really all of the cars with old catalytic converters the US Government was really interested in.

But wait there's more! Remember the 15-20% added cost of a car to keep emission standards, that part doesn't include the cost of 5% extra fuel consumption that the old cars had as a result of having catalytic converters in the first place.  Originally the program was targeting 250k cars off the road, by the end of the program they had succeeded in taking off 678k "Gas Guzzling" cars off the road. At a cost of $2.854 Billion, however, when you factor the fall in prices of precious metals due to reclaiming precious metals from old catalytic converters and the collapse in the market for Rhodium the Auto industry benefited hugely.

The National Highway Traffic Safety Administration (NHTSA) also released the final eligibility requirements to participate in the program. Under the CARS program, consumers receive a $3,500 or $4,500 discount from a car dealer when they trade in their old vehicle and purchase or lease a new, qualifying vehicle. In order to be eligible for the program, the trade-in passenger vehicle must: be manufactured less than 25 years before the date it is traded in; have a combined city/highway fuel economy of 18 miles per gallon or less; be in drivable condition; and be continuously insured and registered to the same owner for the full year before the trade-in. Transactions must be made between now and November 1, 2009 or until the money runs out.

I'm guessing the cars today are much more efficient with gas and have mitigated a lot of the fuel consumption issues introduced when catalytic converters were just introduced. I suspect as well that the process for using Rhodium in cat converters requires a less of Rhodium than it did even several years ago. So this was clearly a net net gain.

But wait there's more... Russia at 14% of world supply (S. Africa is 82%) was suspected to be intentionally and artificially lowering the supply for these precious metals there by increasing the price, it is clear that Rhodium was in a swoon at this point but what isn't clear is why did it fall lower. Like to less than $800 from $10,000… perhaps we had Russia in the throes of their financial worries dumping there stockpiles on the market.  This could happen to any commodity, and it does.

Things to worry about with the gold trade...

The IMF in September made a big announcement about the intention to sell about 400 tonnes of it's gold reserves of which India(200 Tonnes, Sri-Lanka (10 Tonnes) and Mauritania (2 Tonnes) leaving approximately 191 Tonnes left to sell.  The question is to whom are they going to sell it too?  The only entities capable of taking this amount are the Central Banks and none of them are running to do so.  So I guess this means that if their aren't any Buyers the only thing left are sellers.    

Indeed- as promised in yesterday's post- we were hoping today, to highlight the positive angle via which the WGC viewed last year's slowdown in central bank gold disposals. In its Gold Demand Trends publication, the organization spoke of the supply of gold from the official sector as: "all but [having] dried up during 2009. Net sales of 44 tonnes compared with sales of 236 tonnes the previous year and an annual average of 444 tonnes over the five years to 2008. The net sales were wholly concentrated in the first quarter of 2009, which was followed by three subsequent quarters of net purchasing, albeit at very modest levels. Sales of gold under the auspices of the Central Bank Gold Agreement (CBGA) were virtually non-existent during the fourth quarter, amounting to less than 2 tonnes. Gold Prices Down On IMF Sale

The Gold market is so exposed to the Central Banks, the very entities for which we owe the rich re-birth of gold prices can easily commit patricide, and kill it. I also ask if the demand is so high for Gold why isn't anyone stepping up to take the last 191 tons of it off the IMF's hands?

In closing Rhodium is by far a better disaster trade as it the most rarest of the precious metals, and as a disaster hedge is ounce for ounce a better store of value, but why did it at the height of the market uncertainty in 2008 and again in 2009 fail? I guess you could make the argument for it being highly illiquid as one of the reasons, but you don't keep it as a trade you keep it as insurance. This is trouble with precious metals as a whole, it's volatile temperamental and no sure thing.

One thing to note, the annual production of Rhodium is 1% of Gold, yet its price is only about 50% more than Gold so if you are looking for a good disaster hedge, consider this.  No one knows about it and it is really under the radar, and it's rarer than Gold.  Rhodium is once again on the move how much is attributed to the rebound in the car market vs. the disaster hedge alternative is up for analysis, but no doubt it is on the move and should be watched carefully or even owned.

Bold Gold, The Rhodium Rodeo and Cash For Clunkers