“Newly Issued ‘Platinum Notes’ Set to Soar 1,173% — or More — by January 27th”

By Travis Johnson, Stock Gumshoe, November 19, 2009

How’s that for a promise, eh? 1,173% — not just a great return, but a remarkably specific prediction. Will it come true?

Well, let’s see if we can figure out what they’re talking about — the ad is for a special report that Sara Nunnally is pitching, published by the folks at Taipan, called “Gain 1,173% From South Africa’s Platinum Supply Squeeze.”

And the investment is something she’s calling “Platinum Notes” — of which she says there are several different flavors. Huh?

Let’s dig into the letter to get the big picture they’re drawing for us, and see if the clues lead your friendly neighborhood Gumshoe down the right path …

“Here’s the situation and why it could hand you a 1,173% return early next year…

“The U.S. Mint has suspended sales of its $100 platinum coins because of historic supply shortages.

“At the same time, demand for platinum is going through the roof.

“In fact, the U.S. Mint is so desperate for platinum, it’s offering to pay $1,322 for a $100 Platinum Eagle Coin.

“Think about that… If you had a few Platinum Eagle Coins in your pocket, you could sell them to Uncle Sam for a 13-fold return!

“Problem is, getting your hands on Platinum Eagle Coins is nearly impossible, which is why the U.S. Mint is so eager to buy them for 13 times face value.”

OK, so that’s very misleading. The mint has indeed suspended sales of the American Eagle platinum coins, both the proof and uncirculated and “bullion” versions, so that’s true, and they haven’t sold any 2009 coins yet, though they did recently announce that they’ll once again be offering the proof version of the platinum Eagle starting on (or about) December 3 (they won’t be selling the other versions this year).

What is misleading is the emphasis on the $100 face value on the coin — that might as well be a random number, it has no real meaning and I’m quite sure that a platinum American Eagle one ounce coin has never knowingly been sold for as little as $100. Just like a gold one ounce American Eagle has never been sold for $50, despite the fact that that’s the denomination stamped on the coin, or a silver Eagle for $1. You get the idea.

So any promised return that takes that $100 face value and says that the current price of an ounce of platinum (which is actually more like $1,450 at the moment) means you’re getting a 13-fold return is, well, ridiculous.

It’s worth noting, by the way, that the platinum coin program, and all of the mint-sold proof and uncirculated precious metal coinage that is sold directly by the Mint, is voluntary. The Mint is obligated by law to produce as many gold and silver coins as the market demands, but those are the bullion coins that are sold through distributors and dealers, not the collectible proof and “uncirculated” coins minted in West Point and sold directly to collectors in fancy little boxes, or the much more obscure platinum coins that aren’t really at the top of the government’s list of concerns.

So this year, for example, we’ve seen lots of teasers about how the Mint was unable to produce American Eagle coins in gold or silver — and while technically sort of true, they were unable to produce the proof and uncirculated coins; in actuality they’ve continued to produce plenty of the plain ol’ bullion coins — record numbers, in some cases — and sell them into the regular distribution channels, as the law requires, it’s just that demand for those bullion coins has been so great that they haven’t had the gold and silver “blanks” available for the collectible program.

The teaser continues, of course:

“While not a ‘collector’s item’ like Platinum Eagles Coins… some of these ‘Platinum Notes’ are government regulated, easy to buy and safe.

“Best of all, they offer the same astounding leverage as Platinum Eagle Coins.

“Remember, because of the supply/demand crisis, $100 Platinum Eagle Coins go for $1,322…

“‘Platinum Notes’ offer similar riches…

“In fact, people who claim the next issue of “Platinum Notes” could turn every $100 into as much as $1,173. In the following pages, I’ll tell you all about “Platinum Notes”…

“I’ll tell you how they work, and why they could make you very rich, very soon.

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“There is one catch…

“You’ll have to act fast. With the desperate situation we are in with platinum supplies, there’s no telling how long these newly issued “Platinum Notes” will be available.”

Of course you have to act fast! Otherwise you’re in danger of forgetting to order your special report, and going on about your life, never realizing that you could have sent Taipan two hundred bucks. It would have been awful.

Some more of her argument in favor of platinum investing …

“Of course, it’s too late to get in on the mega-boom in gold, silver or cobalt.

“But there is one commodity still on the launching pad… waiting to launch into the profit stratosphere: platinum.

“And there’s no telling how high prices will go. That’s because platinum is one of the rarest metals on Earth.

“Here’s an interesting fact:

“If you poured every single ounce of platinum that has ever been mined into an Olympic-sized swimming pool… it would just cover your ankles.

“Platinum is 16 times as rare as gold… and 100 times as scarce as silver.

“It’s so rare that a recent single seven-day miners’ strike… in a single country… decimated supplies worldwide.

“Bottom line: In a world in which supply/demand gaps can turn ordinary investors into millionaires…

“… platinum is in a class by itself.

“Thing is, most people never think of platinum as an investment opportunity. Which is why… if you move fast… you have a remarkable opportunity to get in on the ground floor of an explosive upswing in platinum prices.”

OK, so we can summarize their position: “platinum is awesome.” Got it? Now, why is it going to shoot up in short order? To summarize: Mining strikes.

South Africa has had terrible problems supplying electricity to its mines in recent years, and also some burgeoning labor disputes that have shut down operations, and, because South Africa is responsible for almost all of the world’s platinum production, those kinds of disruptions disproportionately hit the platinum market.

“Right now, at this moment, the South African platinum miners union is planning to strike against the two largest platinum miners in the country — combined they dig up four-fifths of all the platinum produced worldwide.

“Reuters reports of a sit-in by 240 workers that halted operations at a South African platinum mine that happens to be the world’s second largest platinum producer, and supplies a quarter of the world’s platinum.

“The company said it expects to lose 100,000 ounces in platinum output this year.

“Do you think platinum prices might skyrocket very soon?

“You’re darn right they could!

“Here’s the thing. The current situation is much worse than last year’s strike. South Africa is in its worst recession in 17 years. The government is struggling to keep up with demand for basic necessities like power and housing.

“Mining workers want more money. The mining companies say they can’t afford to pay higher wages. Neither side is giving an inch. Last year when miners went on strike, platinum supplies dropped by 6% but caused a 49% increase in prices for the metal.

“If the world’s largest platinum producers lose as much as 20% in platinum production, platinum prices could climb to $3,371 an ounce. That’s a 163% increase!

“And, if history is any guide, ‘Platinum Notes’ could soar a total of 1,173%. That’s because ‘Platinum Notes’ move in line with platinum prices. But the prices on ‘Platinum Notes’ move exponentially higher than platinum itself.

“Even a small move in platinum prices generates explosive gains in ‘Platinum Notes.’ If supplies of platinum drop 20%, the price of the metal will soar… but “Platinum Notes” could soar 58 times in value.”

The ad then compares the chart of platinum over the last six months against the chart of some of these “platinum notes” for a recent ten month period — the charts don’t appear to me to match up at all, but they imply that the platinum notes perform “exponentially better.”

Well, in the case of the “Platinum Notes” that they use for these charts, that’s not necessarily clear — they are more volatile than the metal price, but not that much more so. The charts that they appear to be using to represent the “platinum notes” concept in this particular part of the teaser appear to be for the two main platinum-related exchange traded notes that are currently available for US investors. I could tell this after some careful sleuthing, where I read the little tickers under the chart that said “PGM” and “PTM.”

Those two ETNs are designed to track the commodity price of platinum on a non-leveraged basis, though there’s a bit of a hitch in that plan currently.

To give you the full details, they are the iPath Dow Jones-UBS Platinum Subindex Total Return ETN (ticker PGM, as in platinum group metals), and UBS E-TRACS UBS Bloomberg CMCI Platinum Total Return ETN (ticker PTM). Both of those are notes that essentially act as bonds, with the promise being that the issuer (Barclays and UBS, respectively) will keep the principal value of the note in line with the change in the commodity price in the futures markets.

And both are not being issued right now, due to problems that have plagued many of the commodity-related ETNs and similar investments, largely related to issues about position sizing in commodity futures contracts. The fact that they aren’t currently creating new notes, however, doesn’t change the fact that there are already thousands and thousands of shares of these ETNs in existence.

And what happens when supply gets cut off but demand spikes due to enthusiasm for platinum?

You got it — the prices get out of whack quickly. Both of those ETNs are trading for more than they’re technically worth right now — or for those more familiar with closed-end funds, they’re trading at a premium, for more than their “net asset value”. So in that way they can have a magnified return compared to the price of platinum, though it’s not likely to be an exponential one. And of course, if the CFTC and the ETN providers and commodities traders work out these position limits foofaraws, maybe they’ll start issuing new notes, which could easily mean that the current notes lose their trading premium (which exists only because supply is smaller than demand) very quickly as supply returns.

And as far as identifying whether or not these are really the “Notes” she teases, Nunnally says that some of these “notes” have the “same astounding leverage as Platinum Eagle Coins,” which to me means that they aren’t leveraged at all (remember, the $100 “value” of the coin doesn’t mean anything), so it could easily be that the “Platinum Notes” they’re teasing us about are, indeed, just these two ETNs. Which, like platinum coins, are trading at a bit more than their “real” platinum value.

But since the concept of these “Platinum Notes” is kept intentionally vague in the ad, and there are a variety of ways to invest in platinum, let me just give you the quick lowdown on a few others that they might be considering, or that might make it into their special report — this isn’t likely to be an exhaustive list, I’m not much of a platinum maven, but this is what I know:

First of all, to answer the question that hasn’t yet been asked, no, there aren’t yet any physical platinum ETFs available to US investors. Meaning, though we have these ETN investments available that are based on the futures contracts, we don’t have any exchange traded funds or trusts like GLD (for gold) or SLV (for silver) which actually promise to hold platinum bullion in a vault.

This might be changing soon — we hear every now and then about a possible ETF launch for physical platinum group metals, primarily platinum or palladium, and there may well be one available in the months to come. There are such funds available in South Africa and the UK, but not for US investors (the main company behind these funds, ETF Securities, offers a Physical Platinum ETF on the London exchange that’s not available to US investors, and they have also filed to list a physical palladium ETF in NY with the proposed ticker PALL — not sure if that will happen or not.

Each time that physical platinum ETFs have been floated in the past they’ve been quashed in the US, and even had some of the big miners come out against them for fear of hoarding and crushing the very small, mostly industrial market for platinum group metals. Still, it’s certainly possible that we’ll someday see a platinum trust in New York akin to the GLD exchange traded trust that holds platinum bars in a vault, as ETF Securities’ PHPT does in London.

So if you don’t want to buy the exchange traded funds, which effectively are now closed-end funds that own futures contracts on platinum and palladium, and you can’t invest in PHPT in London or the equivalents in Johannesburg or Australia, what can you do to get platinum exposure?

Well, there are those coins from the US mint that they expect to put on sale in a couple weeks — they’ll be proof coins, so they’ll be priced at a significant premium to the platinum price. You can check back here for details on when those become available, or you can buy older platinum American Eagle coins from any dealer that has inventory or on eBay if you like, there aren’t nearly as many around as there are silver and gold coins, but I see them offered regularly. The ideal time to buy them was last year, when everyone was panicked about the state of the auto industry and platinum was selling for less than gold and the coins were often available at a discount … now, of course, with interest in platinum on the rise again, along with the platinum spot price, the coins usually trade at a substantial premium. The cheapest price I’ve seen is just under $1600 for platinum one ounce coins, either Maple Leafs or American Eagles, at Kitco, but I haven’t looked around that much.

And you could buy direct access to the physical metal in a variety of other ways, without taking possession — the Perth Mint offers unallocated platinum certificates, for example, and Kitco offers pooled accounts, both of which will sell you platinum for just a small premium of more like 2-3% over the spot price. None of those strategies give you any real leverage, of course, but they will ensure that you keep up with the changes in the platinum spot price.

To get leverage, in this case, you probably really have to either invest in platinum miners, or get into futures trading yourself, or futures options. Commodities futures are not as complicated as you probably think, but they follow a set of rules and procedures that will create a learning curve for folks who haven’t traded futures before. If you want to learn how to trade platinum futures yourself, or platinum futures options, I don’t do futures trading myself and I’m not your guy — you might want to start with the educational materials from the CME Group, such as the basic futures and futures options tutorials available here, then decide whether you want to get a futures broker (or start trading futures with your current broker).

The more familiar way to get exposure to platinum and palladium is by investing in the companies who explore for it and mine it out of the ground — just like with gold, the miners tend to move in an exaggerated, leveraged reaction to the changing price of the precious metal, so you get big swings in either direction depending on how the spot price is moving.

If you’re investing in this theme based on the fear that South Africa’s production will be cut due to strikes (or continuing power troubles), you obviously don’t want to make a big wager on the major South African miners — after all, while they will be leveraged to the platinum price in normal times, if they’re not able to produce platinum their share price will be leveraged a lot more to their labor disputes than to the spot price.

Which begs the question, who are the non-South African producers? Platinum and Palladium (and Rhodium, the third biggy in the platinum group) are quite rare, with the other significant resources largely in North American and Russia. The big South African miners are Anglo Platinum (a subsidiary of the massive AAUK) and Lonmin, with several smaller ones also operating there, and there are a bunch of little guys exploring for the white metal, including old Gumshoe targets Jubilee Platinum (produces in South Africa, but exploring in Madagascar) and Duluth Metals (exploring near Lake Superior).

But if you get down to actual substantial producers who aren’t in South Africa, the list is pretty short — we have Stillwater Mining (SWC), the biggest US miner, though they mine a lot more palladium than platinum. A lot of folks like these guys for strategic reasons as well, but it’s also true that some investors are concerned about their heavy reliance on contracts with the Detroit automakers — not as concerned as they were a year ago, perhaps, but concerned nonetheless. Stillwater has been teased before, too, I wrote about this one back in June. Polymet Mining (PLM) (another one I wrote about years ago — they’re still trying to produce in Minnesota) and North American Palladium (PAL), the largest primary platinum group miner in Canada (also heavily leveraged to palladium, as you might guess from the name), may also be worth a look on this front, too.

And though I may be missing some of the other platinum explorers and producers, the other main one that jumps out is in Russia — the big resource there is in Siberia, and the main producer is Norilsk Nickel, though there are often questions about how much they can really produce, and whether or not they’ll be willing to export it. There are other reserves in Russia, too, mostly smaller ones on the Kola Peninsula and in the far east. Norilsk Nickel is still also the majority owner of Stillwater, with a stake just above 50%, if memory serves.

If you’re curious about platinum mining and the places where it’s profitably carried out, including Zimbabwe, which I haven’t mentioned yet, Johnson Mathey runs a nice website that covers platinum pretty broadly called Platinum Today. Johnson Mathey, by the way, also just released their interim review for supply and demand of platinum group metals, expecting platinum to be between $1,280-1,550 in 2010, with industrial and automotive demand falling precipitously but jewelry and investment demand climbing significantly. You can see the executive summary of that report here [pdf file].

So there you have it — I don’t know where platinum is going, but if you’re interested in the white metal you can fairly easily buy exposure through an exchange traded note that should fairly closely track the metal price, or a coin or bullion dealer account that should track it quite precisely. And if you want real leverage, as Nunnally implies, I don’t see an easy way to get it outside of the futures markets unless you’re willing to buy mining equities or options on equities.

And just to get you excited about this rarest of the preciou metals, she closes out with her “five reasons” to summarize the arguments for us …

“Five Reasons You Must Own ‘Platinum Notes’ Today

“Reason #1: Vanishing Supply. Platinum is the rarest metal on Earth, and supply is diminishing every day. The U.S. Treasury has suspended sales of its $100 platinum coins because of historic supply shortages. In fact, the U.S. Mint is so desperate for platinum, it is offering to pay $1,322 for a $100 Platinum Eagle Coin.

“Reason #2: Soaring Demand. The demand for platinum is soaring. That’s because for many industrial uses, there is practically no substitute for platinum. In fact, one in five manufactured goods either contains platinum, or uses platinum in the manufacturing process. We have to have it!

“Reason #3: The Price Is Right. In July 2008, platinum traded over $2,000 per ounce. Today, it is at roughly $1,300 per ounce. Even if supply/demand forces drive platinum only a small fraction of the way back to its recent high, people holding “Platinum Notes” could make a fortune.

“Reason #4: “Platinum Notes” Are Ultra-Liquid! In fact, you can buy and sell “Platinum Notes” with a simple two-minute phone call. You could literally buy “Platinum Notes” on Monday… and sell them in a few months’ time for a 538% gain. It’s happened before, and it could happen again, very soon.

“Reason #5: Imminent Mining Strike Could Deliver 1,730% Total Gains! A recent strike sent platinum prices soaring. And it’s about to happen again. At this moment, the South African miners union is planning to strike against the two largest platinum miners in the country — combined, they dig up four-fifths of all the platinum produced worldwide. When this happens, folks holding “Platinum Notes” could make a fortune fast.”

So what do you think? All revved up about platinum? Trying to leverage that enthusiasm, or would you like to just diversify some of your commodities holdings into the platinum group to take advantage of demand for catalytic converters and platinum jewelry in China? Or does it all seem silly? Or better yet, do you think I missed the obvious solution to this teaser, and I’m just grasping at straws with these platinum ETNs? Let us know with a comment below