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March 12, 2004

Rich Man's Gold
by David Chapman

Where is Paul Erdman when I need him? A few weeks ago we noted that Paul Erdman whose book and subsequent film The Silver Bears (1974 for the book, 1978 for the film) about a group trying to corner the silver market presaged the Hunt Brother's silver debacle of 1980. But a quick search proved that while silver is the subject of books and film and as well is gold (think Goldfinger (1964), Treasure of the Sierra Madre (1948) and numerous other gold heist films and books), rich man's gold, Platinum, attracts little attention.

But why would there be any fascination with Platinum when people are usually more gaga over gold or even silver. Maybe they should be, as Platinum is the rarest of all precious metals. It is so rare that the US considers it a "strategic metal" banning at one time its use in WW2 for non-military purposes. Platinum has a wide variety of uses although about 1/3 of production is used in automotive applications particularly in emission control catalytic converters. Platinum also has applications in electronics, chemical processing, petroleum refining, medical and dental applications and glass dies. It is increasingly desired for applications in fuel cells and other new technologies.

Its beautiful silver blue colour makes it in high demand for prestige jewellery. In China Platinum makes surprisingly for 18% of world demand and where Platinum jewellery is supplanting other precious metals and stones. Platinum is also available for investment through prestige coins and bars. It is even in investment funds where the Millennium BullionFund (MBF) (www.bullionfund.com, 416-777-6691) is the only fund to devote one-third to platinum (the balance being as well one-third each of gold and silver). (Note: I am a director of the Millennium BullionFund). Nick Barisheff, the President of the MBF, considered Platinum an important inclusion in the fund so that investor's would have a fully diversified precious metals portfolio. MBF is an open-ended mutual fund trust.

So just how well has platinum performed over the past few years? Platinum bottomed in 1998 near $336 and since then is up 175% to over $900, more than double the price of gold and approaching its all-time highs. Gold is up roughly 60% from its lows in 1999 and silver is up around 78% from its 2001 lows. Could it be that Platinum is leading the market because as a metal in limited supply, a small futures market and no ready supplies to dump on the market therefore making it makes it less susceptible to manipulation? But having Platinum as a part of the portfolio has paid dividends for MBF. MBF was ranked the top performing precious metals fund for the three months ended February 29, 2004, a period where the precious metals equity funds struggled.

During the 1970's the last great period of a precious metals bull market, the metals themselves eventually outperformed the equities. Gold soared from $35 to over $800, silver went from $2 to over $50 and platinum soared from $103 to over $900 per ounce. Homestake Mining, a poster boy for gold stocks, soared from around $1.40 to about $22. The performance of the metals alone is a solid reason to ensure one owns the actual metals as well as equities.

The only meaningful deposits of Platinum are found in South Africa and Russia. These two regions account for roughly 90% of global supply. But total global platinum production only represents about 6% of global gold production and less than 1% of global silver production. Hence its rarity and given its importance for key industrial usages it explains why the metal might be considered a "strategic metal".

In addition to Platinum being limited in supply it requires mining a lot of ore (8-10 tons) just to obtain one pure ounce of Platinum. While Platinum is rare there also exists uncertainty surrounding future supplies. There is little available data on Russian reserves while reserves in South Africa, who are responsible for some 80% of global production, are dwindling.

With global production centred in South Africa it is not surprising that the largest companies involved in Platinum are South African. The largest is Anglo American Platinum (AAPTY-PK) (www.angloplatinum.com) followed by Impala Platinum (IMPAF-PK) (www.implats.co.za). Given no listings on any major North American exchange their shares are not widely available. There are no Russian companies whose shares trade in North America.

In North America both Inco Ltd. (N-TSX, NYSE) (www.inco.com, 416-361-7539) and Falconbridge Ltd. (FL-TSX) (www.falconbridge.com, 416-982-7386) have limited Platinum production. Better are Stillwater Mining (SWC-AMEX) (www.stillwatermining.com, 406-322-8700) and North American Palladium Ltd. (PDL-TSX, AMEX) (www.napalladium.com, 416-360-2650) whose production is more predominately Platinum. Both these producers have been in very steady up trends with no discernible topping patterns. We rate both as buys.

Finding junior mining stocks involved in platinum is difficult. We did track down a couple. Platinum Group Metals Ltd. (PTM-TSXV) (www.platinumgroupmetals.net, 604-899-5450) is exploring for platinum, palladium and gold in both South Africa and in the Sudbury and Lac Des Iles areas in Ontario and Quebec. Recent results have indicated a possible significant Platinum/Palladium drill in South Africa. Still the chart currently looks short term bearish so investors should wait for a rebasing of the stock possibly down near the 200 day moving average near $1. Beartooth Platinum Corp. (BTP-TSXV) (www.beartoothplatinum.com, 416-861-5900) has significant holdings in the Stillwater complex in Montana and gold properties in Idaho. A good uptrend is in place. They are both highly speculative buys.

Our monthly chart of Platinum shows the powerful uptrend that rich man's gold is in. There is no sign of a top. Further, Platinum should continue to outperform gold as the Gold/Platinum monthly chart shows. The current pattern shows a descending triangle that should soon break to new lows. It is unlikely that this is a set-up for a double bottom just because of the steep downward sloping trend.

With Platinum a rare metal, difficult to find and to mine, with supplies predominately in one country yet with important industrial and military applications a huge squeeze could occur if there were disruptions to South African mining production. These disruptions could come in the form of a further soaring of the South African Rand or through strikes. While the Rand has now appeared to have dulled its rise against the US$ and indeed the US$ is finally showing signs of improving against the Rand that would lessen the possibility of the former. Nonetheless platinum is a metal that remains susceptible to supply shocks more so than gold or silver.

So Paul Erdman, time to look at rich man's gold, a "strategic" and important metal and see if there is genesis of a caper story. If not the other way to really raise its profile is for rap stars, baseball players and others to shed their gold chains and move up to real gold. Platinum!

Note: Chart created using Omega TradeStation or SuperCharts. Chart data supplied by Dial Data.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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