Rhodium: The ultimate unlevered "levered" play on reflation

With the Federal reserve yesterday writing on the wall that it will reflate at any cost, much more aggressively than Japan ever did, it is important to watch the behavior of precious metals. Gold staying so strong against the world's major currencies while oil collapses and banks hoard money points to a fundamental devaluing of most of the world's currencies while central bankers focus desperately on how to prevent deflation, all despite very real economic slowdown. Naturally, it is worthwhile to evaluate the precious metal space for opportunities to hedge this risk to buying power.



Rhodium, one of the rarest naturally occurring metals on the planet, is mostly demanded for use in sparing amounts in automobile catalysts. Increasing emissions standards have played positively to long term demand. A position might serve a dual purpose, rather than solely an inflation hedge. For an investor looking to bet on the auto industry, this metal should serve as a proxy to longer term recovery of automobile demand. There is no risk to exposure of deficient cashflow of automobile manufacturers as with their stock and bonds, which extended periods of recession inevitably serve to amplify. Rhodium may be a better bet with plenty more upside. The probability that Rhodium goes to 1972 levels of $200/ounce, considering its rarity and potential for jewelery use, is unlikely, and if so presents an opportunity to accumulate.

Looking at the 5 year chart, there is enormous upside potential if auto demand ever comes back. With the largest platinum producers tuning down production from South African mines (really the only substantial source), near term oversupply should be worked through regardless of the industry slowdown. At offer of $1160/ounce on ask, it offers a potential lottery ticket in a precious metals portfolio. If it falls below gold, the value proposition seems even more substantial. Not priced far above gold or platinum and much rarer (and usable in Jewelry), it offers plenty of potential as a store of value.

Distorted Markets Make Me Wonder

The December 11th posting of FNMA mortgage rates had an unusual event, a second post with mortgages trading 50 basis points lower. Here one can conclude the Fed must be finally now printing money to force rates down.

With effective fed funds trading near zero already, any rate move today is a symbolic gesture, but one that actually reduces the amount of interest the Fed pays to banks that hoard excess reserves. I've still yet to figure out why if you could borrow in the interbank market at .12% and get paid 1.00% from the Fed, why would you not borrow as much as possible to arb the difference. Here the FDIC outlines that it will not insure short term debt of a period of less than 30 days, so it doesn't look like a 75bp outlay is required to borrow in interbank. Am I missing something an informed banker can explain? In a world where 90 day T-bills are hitting negative yields where you can instead get paid to borrow money in excess reserves for a free .85% (1% - .15% avg effective fed funds lately), nothing seems to make sense.

With that said, Baltic Dry is bouncing, the precious metals are the strongest commodities, and the dollar has recently been weakening. Longer dated LIBOR rates are coming down, so trust between banks is gradually increasing. Besides the 30 year treasury at 2.95%, which has taken on a life of its own, the panic with extreme dislocations has subsided, leaving us only with a bunch of capital markets with historically strange aberrations.

I simply don't know what to conclude yet.