Market Observations with Frank Barbera CMT

Frank Barbera CMT

Looking Ahead: Will Platinum Bottom in 2009?

By Frank Barbera CMT. January 6, 2009

In the last few weeks, I have tried to help investors keep an even-handed view of the chaos which has unfolded in the capital markets. To that end, for nimble traders, there have been any number of excellent trading positions, some of which I have highlighted in my recent work on both energy and oil services. I have also tried to point out that bearish economic news notwithstanding, the stock market was overdue to move still higher and has come through nicely over the last few days. Since my last update through today’s high, the S&P has gained an additional 4.08%, with Crude Oil moving up 25% since my 12/23/08 update (USO from $30 to $37), while Oil Service stocks have quickly moved to the top of the best performers list with SLB up 28%, RIG up 28.66% and OIH up 29.85% all since my 12/23/08 update, “Oil Services in the Trash Bin?” Not bad gains for a year, let alone a period of just 9 trading days!

At this point, while both Oil and the Oil Service stocks probably have moderately higher prices still ahead, I suspect that the lion’s share of the initial bounce off the lows has been seen. While both the commodity and the equities may manage some slightly higher highs in the days ahead, the ‘easy money’ as it were, has now probably been made. For the stock market, my overall sense of things at this point is that while the short term and medium term trends are still up, and prices are likely to press toward the 970 to 980 area on the S&P, once that zone is reached, the upward progress in the market will become more and more difficult with a more important market peak due in later this month. It would not surprise this writer to see equity prices peak the rally very close to, or just after, the Obama inauguration, putting a more important medium term top in the S&P out to around 1/20/09. Overall, I remain of the opinion that a primary bear market remains in force for global equity markets, and that the early going in 2009 (post-Jan, especially February thru June), is likely to be a difficult period of time for investors.

For most investors, the safest place to be during this period will be in cash. Even with a return of virtually nothing on the money, this will be a time when the return of your money is as important as the return on your money. Nevertheless, I believe that the second half of 2008 will likely be a much more fruitful period for investors, with the summer months potentially producing some spectacular buying opportunities. Since we are in the ‘inflation/reflation’ camp and not the ‘deflation’ camp, I believe that all of the Central Bank money printing seen in recent months will ‘goose’ the global economy in the second half of next year, producing a recovery in capital markets and eventually the return of inflation. In my view, a deflationary overhang will likely remain for most of 2009, with a more material pick up in the inflation indices in 2010. As an important aside, we note that the last data point for the ISM Manufacturing Index, which I wrote about back on December 2nd, showed a plunge in December to 32.40, from 36.20 in November. Subtracting 50 from 32.40, we arrive at an oscillator value of –17.60 for December down from –13.80 in November.

0106.01

Above: Detrended ISM Manufacturing Index Oscillator. At –17.60 in December, below –15.00 (see lower dashed line).

As I noted in early December, readings below –15.00 on this gauge are difficult to sustain for more than a few months. Six months at the outside below –15.00 has been historically oversold where the economy is concerned. As a result, December 2008 is Month #1 below –15.00. In my view, even if this gauge remains below –15.00 into May 2009, bringing the cumulative total of months below –15.00 to six months, it is unlikely that it will remain that depressed much beyond May. As a result, a second half recovery is probably not a bad bet, and that is likely what the improved stock market action is telling us as well. Mind you, I am not saying that either the recession or the bear market is over. In fact, the next ‘recovery’ in the economy is likely to be virtually no recovery at all, where real tangible improvement such as rising wages or increased employment is concerned. Instead, I believe we will see the economic equivalent of a ‘dead cat bounce’ where the numbers improve, but very little else gets better. A year of statistical recovery, could easily break up two recessions, all of which is really a single, much larger soft depression.

In my view, the second economic contraction will almost certainly be driven by a currency crisis in which rising interest rates eventually choke off both the markets and economic growth. That will be far more painful than anything seen thus far, and could impose massive damage to the US Middle Class. To preserve purchasing power in an inflationary recession/depression, precious metals will be the asset class of choice. To that end, I think that Precious Metals will do very well in 2009 with Gold and Silver moving out to new highs early on in the first half of the year.

I believe that Platinum is another precious metal which could be on the bargain table in 2009.
So far over the last few months, there is no doubt that Platinum has been treated as an industrial commodity akin to a base metal like Copper, or Aluminum, and not a precious metal like Gold or Silver. In the chart below, I show the price of Platinum overlaid against the price of Copper. Pretty striking correlation on the way down, and the markets way of saying that a severe drop off in auto catalyst demand will depress platinum for some time. While this could be the case, as 50% of total platinum demand comes from the auto industry (catalytic converters), we believe that the market is probably placing too much emphasis on this one element of the market. In the case of platinum, there is a major trend already underway toward future supply destruction, with many mines cutting production or shutting down. In the case of platinum, since there are very few platinum mines in the world, it doesn’t take much of a mine shut down to quickly impact available supply. As a result, while I believe the price will remain weak in tandem with global equity markets during the first half of 2009, the second half of 2009 may be a much better story.

0106.02

Above: Platinum (Bold) and Copper (thin) prices overlaid.

When looking at Platinum prices on a very long term view, all of the action from 1978 to 2002 produced one very large triangle base. Notice that while prices have fallen sharply from the highs, the area of the old highs (Points B and D) should now act as a support zone allowing a base to form. On a secular basis, I believe that the trend toward lessening sources of new supply, and the forthcoming inflation of paper money, will imply much higher PGM prices in the years ahead. As a result, I tend to view this decline as a large Wave II reaction, a sort of bear market within a still positive long term trend.

0106.03

0106.04

The next chart zooms in on the daily chart for spot platinum and shows the price action of the last seven years worth of bull market behavior. The blow off to the upside, up and out the top of the parallel trend channel was seen earlier this year on news that South Africa, the world's largest PGM producer, was having severe power outages that were affecting the mines. Since then, the collapse of the global economy has emerged as a counter veiling theme forcing Platinum prices down in what has turned out to be an exact .618 fibonacci retracement of the prior bull market advance. In my view, while the recent lows in the low $800 zone for Platinum may be retested again around May-June 2009, or even just slightly (and briefly) exceeded, the odds are high that the very high $700’s and/or low $800’s will produce a secular low in Platinum over the next six months.

0106.05

Above: Platinum [A] [B] [C]

As I see it, prices could enjoy a bit more bounce in the near term, but will probably retest the lows in a very erratic and slower paced decline unfolding over the next few months. On an Elliott Wave basis, Platinum has completed a clear cut A-B-C decline from the all time highs. The recent low at $775 on November 20th completed Intermediate Wave (C) down. In all likelihood, this A-B-C movement was itself just Wave (A) of the next higher degree. Under this outcome, a
Higher degree “B-Wave” is now underway and should peak in the zone between 960 and 1100. Once a medium term peak is seen, a final decline could assume the shape of a falling wedge which, were it to occur, would be a huge marker for a major secular low. A falling wedge is always in the C-Wave position (“[C]”) and could take several months to build and complete. In such an outcome, prices could then erupt out of this basing structure and begin moving sharply higher during the second half of 2009. Under this type of scenario, we would not be surprised to see Platinum close the year above 1,100, which would equate to a 20% plus type gain.

Among a variety of gauges which now hint at this kind of ultimate positive outcome, I believe the Platinum to Gold Ratio is now announcing the upcoming secular low. While this is NOT a short term timing gauge, and is likely to remain at depressed levels for some time, it is nevertheless worth noting that the Ratio of Platinum to Gold has narrowed to flat values, something which in the past has been thrown a spotlight on major platinum lows. In the chart below, I show this gauge which is figured by computing the percentage premium of Platinum over Gold as follows: [(Platinum – Gold) / ( Gold)] *100.

0106.06

Above: the Ratio Spread of Platinum and Gold could become even more extreme in the months ahead.

In my view, if Gold moves toward a minimal target of say 1025 by mid year, and mid year finds Platinum still languishing near $800, the mid year 2009 could see Platinum at a $225 discount to Gold or a –20% (+) reading on our oscillator. That would be pushing historical negative extremes on this gauge, and I believe should that occur, it could be a once in a lifetime opportunity for PGM investors to ‘back up the truck.’ While there are many top draw platinum miners traded on the various exchanges, perhaps the most direct approach to buying platinum would be the PGM ETF’s now trading on the London Stock Exchange. Again, while it is too early to buy Platinum right now, the London Stock Exchange now hosts four ETC’s, what are called, exchange traded commodities.

0106.07

Above: The London Stock Exchange ETC on Platinum, has done a good job tracking prices.

The ETC’s are like ETF’s, but are backed by a metal security in trust. As an investment vehicle at the right time, these may be a good idea to keep in mind in the months ahead.

That’s all for now,

Frank Barbera

© 2009 Frank Barbera

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Gold Stock TechnicianFrank Barbera CMT
Editor, Gold Stock Technician
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