Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert. 

No other precious metal has a tighter supply than platinum.

Though platinum prices have remained high over the last few years, supplies are getting thinner by the day as South African production draws to a standstill. Lately, these tight supplies have helped platinum prices shoot up north of US$2,000.

In fact, platinum has climbed so high that its sister metal, palladium is becoming the new exciting speculation. Right now, palladium is sitting at 56% off its all-time high in 2001 of US$1,100 an ounce. The platinum-to-palladium differential hit its widest level in history in late May as platinum prices rocketed to new highs.

So the question is: Has the price of platinum climbed so high that industries will start switching to palladium?

The Boom in Platinum

Platinum has a variety of uses. The automobile industry uses platinum for gasoline-powered catalytic converters and it's also widely used in jewelry.

Investment demand is also draining platinum supplies. Recently, another platinum exchange traded fund (ETF) began trading in New York. In 2007, two platinum ETFs began trading in London and Zurich, respectively, effectively draining more supply from a thinning market.

Platinum initially led the bull market in the precious metals complex earlier this decade. But now platinum has fallen behind silver (+330%) and gold (+234%). Since December 2001, platinum has recorded a 230% total return.

Meanwhile, platinum's sister, palladium has lagged behind the other metals. Palladium also still has an abundant supply. That's mainly because Russia dumped a large supply of palladium on the market earlier this decade. As other metals have risen in price, palladium prices have declined 54% over the last seven years.

Deficit of 480,000 Ounces in 2007, 711,000 Ounces in 2008

No other precious metal has suffered more from growing supply shortages since last year than platinum. And it's getting worse.

According to Johnson Matthey, a metals and chemicals forecasting firm, platinum reached a deficit of 480,000 ounces last year. They're forecasting platinum will hit yet another record deficit of 711,000 ounces in 2008.

Platinum Sails to the Moon and Beyond

This follows massive production downgrades from AngloPlatinum (OTC-AGPPY-PK) and Lonmin (London-LMI.H) - two of the world's largest platinum mining companies.

Platinum production in South Africa accounts for about 80% of global output. Just in 2007, South African production declined 4.9% to 5.04 million ounces. South African mines are facing several issues including smelter closures and a host of safety issues interrupted mining operations.

Worse, widespread electricity shortages in South Africa this year are lending to another major price increase. Still, supplies continue to shrink and extend into a major net deficit situation. South African platinum output has hit its lowest levels since 2002 and continues to contract in 2008.

Can't Hide Production

Unlike crude oil, which has doubled year-over-year in the midst of a parabolic bull market, spot platinum is much easier to quantify in terms of overall supply.

It's hard to hide platinum output. We know that one country mines more than 75% of all output. And if that one country can't boost supplies, it's an easy speculation that prices are going to rise much higher.

In short, South Africa can't produce enough supply to meet demand. And according to Johnson Matthey, global platinum output last year fell 4.1% to 6.55 million ounces and that amount was easily absorbed by the auto industry and jewelry market.

Palladium to Benefit?

Palladium is the worst-performing precious metal this decade. But it might receive a big boost if platinum prices remain so high.

Palladium always competes with platinum in the auto industry for catalytic converters. So if prices continue to rise, the industry will have to switch to the cheaper metal — palladium.

In the absence of a significant drop in jewelry demand or a major recession in new auto sales outside of the United States, platinum prices are likely to remain high. That should help palladium, which has gained a cumulative 29% in 2008.

Palladium Starts Its Rise to the Top

Palladium, however, remains in net supply surplus heading into 2009. Unlike platinum, there are no threats to palladium's production. Russia is the main palladium producer. And unlike South Africa, where mining output has stalled, Russia continues to supply the palladium market.

Platinum prices will have to rally significantly from current levels if palladium is to absorb market share in the auto industry. Still, judging by technical chart patterns since 2006, palladium is looking strong.

Platinum Up-Crash Ahead?

Since 2003, spot platinum prices have soared a cumulative 250% from US$594 an ounce to US$2,077 now. Platinum reached an all-time high of US$2,290 in March and sits 9.3% below that best level.

According to RBC Capital Markets, platinum demand continues to average about 3-4% annual growth. Once again, that's mainly from catalytic converters and jewelry.

If platinum supplies continue to shrink, which is almost a virtual guarantee with these production problems in South Africa, we will have a much higher platinum price by Christmas.

The advent of exchange traded funds investing in platinum since last year in Switzerland and now in the United States since May will continue to suck more supplies from an already strained market. This is bad news for consumers, but great news for investors seeking the Perfect Storm in the commodities markets.

Platinum and palladium are probably two smart speculations in mid-2008. If you divide your portfolio equally between these two metals, you're likely to get a handsome reward over the next 12-24 months.

ERIC ROSEMAN, Investment Director

EDITOR'S NOTE: In Eric's Commodity Trend Alert portfolio, his metal recommendations alone have already leaped 67.8%, 79%, 116%, 120%, and 213%. As both these twin metals rise, Eric will continue to give his subscribers the information they need to profit. Now you can get your hands on Eric's entire portfolio — and all his winning recommendations. Get the details here.

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The Passing of a Good Friend

It was my good fortune to work with my good friend, the late Senator Jesse Helms of North Carolina.

The Senator died on July 4th at the age of 86. No doubt he would have found some amused pride in passing on his country's birthday that he so loved, (as did both Thomas Jefferson and John Adams).

My eight years of service in the U.S. House of Representatives in the Chesapeake Bay area of Maryland coincided with some of the 30 years Jesse served in the United States Senate.

As the most conservative members of each chamber in Congress based on our voting records, we often cooperated jointly on legislation. We differed on issues of racial segregation and a national holiday marking Martin Luther King's birthday. In fact, the media dubbed him "Senator No," for his stance on that. At the same time, he and I agreed on most things. We both wanted the least government possible, fighting Communism in the long Cold War, against deficit spending, and adherence to the Constitution.

I had the honor of introducing Jesse at many meetings of conservatives. In 1980, I did so at the Republican National Convention in Detroit on short notice. So I nominated him for president and gave the Senator the chance to graciously withdraw in favor of the eventual nominee, Ronald Reagan, while stating his stand for conservative principles.

Washington is a town where shallow compromise constantly tries to pass for principle.

Jesse, God bless him, would have none that. He once wrote: "Compromise, hell! That's what has happened to us all down the line — and that's the very cause of our woes. If freedom is right and tyranny is wrong, why should those who believe in freedom treat it as if it were a roll of bologna to be bartered a slice at a time?"

John Fund writing in The Wall Street Journal today said: "If Ronald Reagan was the sunny and optimistic face of modern conservatism, the uncompromisingly defiant exemplar of it was Jesse Helms...While Reagan has undergone a revisionist make over by many historians who now recognize his accomplishments, Helms is still the conservative liberals most love to hate."

And they hated him because they knew he was an unstinting champion of liberty.

Asked late in his career how he would like to be remembered, the modest Senator Helms responded very much in character: "I would like for them to say, 'Well, he did the best he could.' If they say that, that'd be enough."

As do we all, Jesse made mistakes, but he did the best he could according to his own lights, and with unswerving devotion to principle he was a true national leader and patriotic American — and most of all he was my friend.

May he rest in peace.

BOB BAUMAN, Legal Counsel

What Gives a Dove His Wings?

If you're in the currency world, you'll often hear about an inflation dove or an inflation hawk.

Usually in the news, the talking heads are discussing our very own dove, Fed Chief Ben Bernanke or the eternal inflation hawk, European Central Bank (ECB) President, Trichet.

But what's the difference?

A hawk is known to be an aggressive predator that keeps a sharp eye out for potential prey. In a similar fashion, a "hawkish" central banker keeps a sharp eye on interest rates because they're ready to swoop in and aggressively raise rates to fight inflation if necessary.

The dove has a harmless, docile nature. Therefore if you hear a central banker referred to as "dovish" or called an "inflation dove," then he's not concerned with inflation (think Ben Bernanke when he refuses to hike rates). He would rather lower interest rates because he feels inflation will have a minimal effect on society.

So these terms don't describe the central bankers' long-term stance on inflation, but just their current short-term views. These are likely to change over the course of their tenure.

During any Fed chairman's tenure, he's likely to raise interest rates and then lower them depending on the economy's situation at the time. So the present view of the central bank is termed "hawkish" or "dovish."

Up until now, "Uncle Ben" has proved he prefers doves to hawks. But down the road, he could change his tune (he's known to do that every once in a while).

ERIKA NOLAN, Managing Director

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