Dear Readers,

It’s been an eventful week around the world, with Ukraine, Georgia, and Moldova signing a landmark economic cooperation agreement with the EU, and the US suddenly ‘fessing up that its economy tanked in Q1.

Ukraine Crisis

As you read this, news may have broken regarding the Russian response to three former Soviet states realigning themselves with the West. Whatever the Kremlin says, I think it will be more important what the Russians do—and beware, their actions may be considerably more subtle than sending in the tanks.

I’m sure Putin and his allies are smart enough to realize that East and West still face each other in a balance of mutually assured destruction, though the focus is now economic rather than nuclear conflict (though that threat is still there and should never be forgotten). Russia and China may be more than happy to see the wealth, power, and influence of the West decline, but they also know that a crash in the West will take their economies down as well.

The smart response is a sort of 12-step plan to wean the East from the West economically—always pushing for greater independence and internal strength, until things reach a point at which the West no longer matters to the East.

Unfortunately, smart people often do stupid things, so there are no guarantees. It may yet turn out that the signing of this agreement on the anniversary of the assassination that sparked World War I is prophetic.

Makes me glad I own gold.

US Economic Crash

Meanwhile, back in the USA, Toto has pulled back the curtain, revealing the government’s GDP figure for Q114 to be a shocking -2.9%. It’s striking how unanimously the mainstream press reported this, in the voice of Oz, demanding that we pay no attention to the crash: “It was the weather! The recession is over! Everything is much better now. Honestly, I promise!”

Fact: In almost 70 years of US data, there’s never been a time when GDP went so deeply negative and the US was not in recession.

This implies that Q214 is going to provide a very unpleasant surprise for most analysts, investors, politicians, and pundits… or, if there’s a dead-cat bounce this quarter, that Q314 is really going to pack a wallop.

It’s either that or all of economic history is irrelevant now, trillion-dollar deficits are the new normal, and everything really is peachy.

Uh-huh.

Makes me doubly glad I own gold.

South African Mine Strike

As metals and mining investors, there was another major piece of news worthy of our attention last week: the longest-running strike to ever hit the South African platinum mining industry has just ended.

What’s really interesting about this is that the end of the strike did not cause platinum or palladium prices to fall, as many industry observers were expecting. This is particularly eye-opening in light of the fact that when a potential deal was announced a couple weeks ago, platinum fell almost $60 and palladium dropped almost $50.

That deal unraveled, and both platinum and palladium started heading north again. Then came the real thing: the actual end of the strike, with miners returning to work last week. And the price of both metals has been increasing ever since. What gives?

Well, readers of this dispatch already knew that the end of the strike does not mean an end to the supply problems in the platinum sector. Even a casual glance at the press coverage reveals that it will take time to get the mines up and running again, and that the work stoppage at South Africa’s three top producers for almost half a year has already exacerbated this year’s projected supply deficit—a 1.2-million-ounce shortfall is a figure commonly used.

But look at the strike-ending deal with your business glasses on, and the view becomes even grimmer. The industry as a whole was making money, but some of the individual mines were not—and now they have to start the expensive process of going back into production a good $2.3 billion worse for the wear.

Meanwhile, the unions wanted doubled wages and no loss of jobs (restructuring). What they got was yearly 20% wage increases, and clear warnings from the companies that restructuring will be necessary. Our take: the strike was hurting the miners too, and they got hungry enough to bring the unions back to the negotiating table with the companies. With demands only met in small part, there’s likely to be trouble when the companies start shutting down unprofitable mines made even more unprofitable by higher wages.

Remember that many of those mines in South Africa are very deep and getting deeper every year. That makes them very energy intensive and expensive to operate—often dangerous, too. Those are serious challenges anywhere, but all the more so in a country fraught with social unrest, a struggling power grid, and a government that seems to see the mining industry as an inexhaustible cornucopia.

In short, mining has been in decline in South Africa for decades—and things just took a turn for the worse. Higher metals prices will mitigate some of the problems, but not all, which is why we’ll see much higher platinum group metal prices in the not-too-distant future.

Makes me glad I added platinum and palladium to our portfolio.

Russia and Metals Prices

The intractably difficult conditions in South Africa, however, aren’t the whole picture. As we’ve written previously, there are rumors in the industry that Russian nickel giant Norilsk—source of much of Russia’s global dominance in palladium production—is in much worse shape than it admits.

Hard data are difficult to come by, but some of our contacts in Eastern Europe tell us that problems with the company run far deeper than the 15% drop in profit in 2013 and the public retreat to core business assets suggest. The company says it’s all because of lower metals prices, but what we hear is that it’s facing declining grades in some key deposits.

If that’s true, then, as with South Africa, higher prices would help, but costs are going up and staying up. It’s hard to solidify an “if” based on rumor, but it fits the data, and it’s another potentially long-term, structural supply constraint.

And this is completely apart from the impact of further sanctions and other fallout from the Ukraine crisis—which is really the tip of a renewed “Russia vs. the West” conflict.

Which brings us back to the subject of the economic mutually-assured destruction standoff whose edges so-called world leaders are sparring around. If you doubt that the situation is that serious, just remember the much-worse-than-realized performance of the US economy in Q1.

Makes me doubly glad I added platinum and palladium to our portfolio.

Now What?

I do not expect a shooting match between East and West anytime soon. (With the possible exception of Littler Kim’s threat of war over criticism of his most excellent haircut—and despotism.) But I do expect Russian and other powers in the East to do what they can to push the US and the US dollar off center stage as quickly as possible without making the whole global house of cards collapse. The risk of a miscalculation with serious consequences is high.

I expect initial Q214 GDP estimates for the US economy to show a sharp improvement, but I also expect them to be revised significantly downward, and I have a hunch that Q3 numbers will prove that the US is back in recession. The risk of being wrong about such short-term predictions is high, but I’m sure the US will have to pay the piper sooner or… not quite so soon.

I expect platinum and palladium prices to continue rising this year, even if with major volatility along the way, and to continue doing so for years to come—with a significant probability of going near vertical for a time, if/when South Africa goes off the rails again.

What to Do

As Doug Casey says, buy precious metals for prudence and speculate on related mining stocks for profit. The latter should include a solid, profitable platinum-palladium producer outside of South Africa or Russia, like the one we mentioned last week.

For clarity, when I say to buy precious metals for prudence, I mean gold and silver, not platinum and palladium. That’s not because I’m not bullish on them—I am—but because most people can’t tell platinum and palladium from any other silvery metal, and unlike gold and silver, they are not widely regarded as money.

For wealth protection, stick with the two metals that have done the best job at it for thousands of years: gold and silver.

I would, however, recommend to take a look at our favorite platinum/palladium company—a stock that could easily turn into a 5-bagger or more. You can do this on your own, or subscribe and let us help you.

However you play it, I do urge you to take action soon, before prices start rising in earnest.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research