"Bridge Over Troubled Water": Platinum Gains While Stock Market Drops
Sept. 3 1998,
Precious Metals Gain as Wall Street and the Dollar Tumble
Over $1 Trillion in Value Wiped Off Wall Street
Platinum Price May Benefit From Russian Crisis, Reports Business Day
New Generation of Memory Chips to Use Platinum Electrodes
GENERAL MARKET OVERVIEW
Over a trillion dollars in shareholder value has been wiped off the books in the past week, according to The Wall
Street Journal, due to the stock market downturn. The Dow's decline over the past week was the worst since it
plunged 7.8% in October 1989. Hong Kong stocks are apparently being kept afloat by heavy official Chinese
buying. Southeast Asian equities markets continue to wheeze for air.
The Nikkei average in Tokyo last week plummeted through to the 14,000 level to a 12-year low, to recover some
on threats of official intervention to support the yen. Concerns over deflationary trends are high. The 21-year low
in world commodity prices has made it especially hard on commodity-dependent economies, from Canada to
Australia, to Russia, South Africa, most of South America, and Indonesia.
The Russian short-term debt default and devaluation of the ruble can fairly be called the catalyst for this week's
market downturns, but market watchers have long worried about the overvaluation of American equities. The
pressing question now is to what extent will the stock market continue to decline.
Long Term Capital Management reported Russia-related losses this week of over $2 billion. Sometimes referred to
as "Solomon North," Long Term Capital Management is a hedge fund specializing in bond arbitrage, built up from
the now disbanded bond trading unit of Solomon Brothers. The fund is not alone in its losses; The Wall Street
Journal reports that more than $8 billion so far has been lost due to the Russian default imbroglio. US bonds
continue to do well thanks to the broad investor flight to quality.
The dollar has declined somewhat against the yen, with two factors working against it. First is the official
jawboning coming from Japan threatening intervention, which has cowed many of the long-dollar speculators
who were hurt during the last yen-supporting intervention made in the spring. Second is the vague sense that
other havens for capital might have competing attraction - precious metals being one of the alternatives.
METALS MARKET OVERVIEW
Platinum's links with the Nikkei (covered recently in this report) have been dramatically illustrated with the
Nikkei's 1.9% gain one day this week coinciding with platinum's 1.5% increase, and moving fairly well in lock-step
as this drama has played out. The decline in the dollar has been a booster for the precious metals overall.
With world commodities having sunk to a 21-year low, there is much talk of deflation. It is worth noting however
that many, if not most, hyperinflationary binges were commenced as a reaction to fears of broad-based deflation.
Amidst the overall market uncertainty, one point must be emphasized: In a world of general asset depreciation,
the comfort holders of precious metals can derive is that their assets will depreciate less (or actually increase due
to safe-haven buying). This will mean that in an overall deflationary environment, the purchasing power of
precious metals holdings will increase, though the absolute numbers may be declining.
A report in The Financial Times today warned of some commodity prices, particularly base metals, being "too
low." A case in point is nickel, where the report says that 95% of global nickel production is losing money at
present. Consequently, capital investment is at a long-run, unsustainably low level. Comments from a recent
Merrill Lynch Commodity Market Trends publication quoted in the report indicate a belief that these commodities
may be at the long bottom of their cycle. Fewer new supply sources and dwindling stocks will eventually bring
many commodities markets to new, higher, equilibrium price levels.
The South African newspaper Business Day reports that the apparent near-depletion of Russian stockpiles of
platinum and the economic implosion there could create an additional 300,000-ounce a year platinum supply
deficit. Rene Hochreiter, considered by some to be one of the world's best platinum analysts, said Russian
stockpiles were almost exhausted. Norilsk Nickel, Russia's primary producer, is capable of producing about
600,000 ounces a year - about 300,000 ounces less than current estimates for exports. Economic deterioration in
Russia is likely to discourage further investment to improve these figures.In a recent article in Solid State
Technology, the next generation of memory chips - FeRAMS and DRAMS - will be using noble metals, including
platinum, iridium, and ruthenium as electrodes in the capacitor structure. Apparently the use of the platinum
group metals increases the lifetime and maintains the integrity of the films used on these chips. Previous chip
designs relied upon silicon, silicon compounds, and aluminum alloys. |
