Saturday, April 16, 2011

BW: How to Pay No Taxes

Tax avoidance is not just for the Greeks or American multinationals.

Quite a fascinating cover story in last week's BusinessWeek, on strategies (all perfectly legal) the top 0.1% utilize to pay little to no taxes. I was unaware of all this, and some of them are so sophisticated, only the brightest minds doing "God's work" could have originated them. A lot of the techniques seem to be borrowing against assets for cash flow - which replace "generating income".

Some examples
  1. The "No Sale" Sale - cashing in on stocks, without triggering capital gains
  2. The "Friendly Partner" - an investor can sell property without actually selling, or incurring taxes

Here is a quick video on the topic - 4 minutes

Link to story here

  • For the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years. "This is clearly far and away the most generous tax situation that's existed," says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. "It's a once-in-a-lifetime opportunity."
  • For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS.
  • The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That's because those figures fail to include the additional income that's generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes.
  • Developers such as McCourt, according to a declaration in his divorce proceeding,"typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes."
  • For those who can afford a shrewd accountant or attorney, our era is rife with opportunity to avoid, or at least defer, tax bills, according to tax specialists and public records. It's limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters.

The 6 Most Common Portfolio Protection Strategies

The key to successful long-term investing is the preservation of capital. Warren Buffett, arguably the world's greatest investor, has one rule when investing - never lose money. This doesn't mean you should sell your investment holdings the moment they enter losing territory, but you should remain keenly aware of your portfolio and the losses you're willing to endure in an effort to increase your wealth. While it's impossible to avoid risk entirely when investing in the markets, these five strategies can help protect your portfolio.

One of the cornerstones of Modern Portfolio Theory (MPT) is diversification. In a market downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one. Investors create deeper and more broadly diversified portfolios by owning a large number of investments in more than one asset class, thus reducing unsystematic risk. This is the risk that comes with investing in a particular company as opposed to systematic risk, which is the risk associated with investing in the markets generally.

Non-Correlating Assets
According to some financial experts, stock portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic risk. Unfortunately, systematic risk is always present and can't be diversified away. However, by adding non-correlating asset classes such as bonds, commodities, currencies and real estate to a group of stocks, the end-result is often lower volatility and reduced systematic risk due to the fact that non-correlating assets react differently to changes in the markets compared to stocks; when one asset is down, another is up.

Ultimately, the use of non-correlating assets eliminates the highs and lows in performance, providing more balanced returns. At least that’s the theory. In recent years, however, evidence suggests that assets that were once non-correlating now mimic each other, thereby reducing the strategy’s effectiveness.

Leap Puts and Other Option Strategies
Between 1926 and 2009, the S&P 500 declined 24 out of 84 years, or more than 25% of the time. Investors generally protect upside gains by taking profits off the table. Sometimes this is a wise choice. However, it’s often the case that winning stocks are simply taking a rest before continuing higher. In this instance, you don't want to sell but you do want to lock-in some of your gains. How does one do this?

There are several methods available. The most common is to buy put options, which is a bet that the underlying stock will go down in price. Different from shorting stock, the put gives you the option to sell at a certain price at a specific point in the future. For example, let's assume you own 100 shares of Company A and it has risen by 80% in a single year and trades at $100. You're convinced that its future is excellent but that the stock has risen too quickly and likely will decline in value in the near term. To protect your profits, you buy one put option of Company A with an expiration date six months in the future at a strike price of $105, or slightly in the money. The cost to buy this option is $600 or $6 per share, which gives you the right to sell 100 shares of Company A at $105 sometime prior to its expiry in six months. If the stock drops to $90, the cost to buy the put option will have risen significantly. At this point, you sell the option for a profit to offset the decline in the stock price. Investors looking for longer-term protection can buy long-term equity anticipation securities (LEAPS) with terms as long as three years.
It's important to remember that you're not necessarily trying to make money off the options but are instead trying to ensure your unrealized profits don't become losses. Investors interested in protecting their entire portfolios instead of a particular stock can buy index LEAPS that work in the same manner.

Stop Losses
Stop losses protect against falling share prices. Hard stops involve triggering the sale of a stock at a fixed price that doesn't change. For example, when you buy Company A's stock for $10 per share with a hard stop of $8, the stock is automatically sold if the price drops to $8.

A trailing stop is different in that it moves with the stock price and can be set in terms of dollars or percentages. Using the previous example, let's suppose you set a trailing stop of 10%. If the stock goes up $2, the trailing stop will move from the original $9 to $10.80. If the stock then drops to $10.50, using a hard stop of $9, you will still own the stock. In the case of the trailing stop, your shares will be sold at $10.80. What happens next determines which is more advantageous. If the stock price then drops to $9 from $10.50, the trailing stop is the winner. However, if it moves up to $15, the hard stop is the better call.

Proponents of stop losses believe that they protect you from rapidly changing markets. Opponents suggest that both hard and trailing stops make temporary losses permanent. It's for this reason that stops of any kind need to be well planned.

Investing in dividend-paying stocks is probably the least known way to protect your portfolio. Historically, dividends account for a significant portion of a stock’s total return. In some cases, it can represent the entire amount. Owning stable companies that pay dividends is a proven method for delivering above-average returns. When markets are declining, the cushion dividends provide is important to risk-averse investors and usually results in lower volatility. In addition to the investment income, studies show that companies that pay generous dividends tend to grow earnings faster than those that don't. Faster growth often leads to higher share prices which, in turn, generates higher capital gains.

In addition to providing a cushion when stock prices are falling, dividends are a good hedge against inflation. By investing in blue chip companies that both pay dividends and possess pricing power, you provide your portfolio with protection that fixed income investments, with the exception of Treasury inflation-protected securities (TIPS), can't match. Furthermore, if you invest in "dividend aristocrats", those companies that have been increasing dividends for 25 consecutive years, you can be virtually certain that these companies will up the yearly payout while bond payouts remain the same. If you are nearing retirement, the last thing you need is a period of high inflation to destroy your purchasing power.

Principal-Protected Investments
Investors who are worried about protecting their principal might want to consider principal-protected notes with equity participation rights. They are similar to bonds in that your principal is usually protected if you hold the investment until maturity. However, where they differ is the equity participation that exists alongside the guarantee of principal.

For example, let's say you wanted to buy $1,000 in principal-protected notes tied to the S&P 500. These notes will mature in five years. The issuer would buy zero coupon bonds that are maturing around the same time as the notes at a discount to face value. The bonds would pay no interest until maturity when they are redeemed at face value. In this example, the $1,000 in zero-coupon bonds is purchased for $800, and the remaining $200 is invested in S&P 500 call options.

The bonds would mature and, depending on the participation rate, profits would be distributed at maturity. If the index gained 20% over this period and the participation rate is 90%, you would receive your original investment of $1,000 plus $180 in profits. If it loses 20%, you would still receive your original investment of $1,000 while a direct investment in the index would lose $200. You are forfeiting $20 in profits in return for the guarantee of principal.

Risk-averse investors will find principal-protected notes attractive. Before jumping on board, however, it's important to determine the strength of the bank guaranteeing the principal, the underlying investment of the notes and the fees associated with buying them.

The Bottom Line
Each of the five strategies described herein can help you protect your portfolio from the inevitable volatility that exists when investing in stocks and bonds. Choosing between them is depends on your individual financial situation.

Did The World’s Largest Futures Exchange Enable $200 Oil?

Petrochop - A Sign of a Petrocurrency Shift

Did the world’s largest futures exchange enable $200 oil?

What happened?

  • On April 18, 2011, the Chicago Mercantile Exchange launched six Euro-denominated oil contracts - one Brent crude oil and five gasoil.1
  • Pricing, margining and treasury for exchange-cleared oil price management can be fully executed in Euros.

On the surface, this appears to be a reasonable product suite offer from the CME. These contracts are financially-settled and rely on the US dollar oil contracts that trade on ICE, the Intercontinental Exchange. These contracts should make certain trading functions more streamlined for oil exporters to and oil consumers in the Euro-zone. For some users, no need to buy US dollars to effect oil trades. Seems like a nothing-to-see-here moment….

The Petrodollar Economy

Most oil sales throughout the world are denominated in US dollars. Since 1973, OPEC exports have been priced in US dollars. This marketplace gave rise to trillions of petrodollars that get cycled into international oil trade and international US dollar assets. As global oil sales grow (volume times price), the recycling of US dollars into US dollar assets grow.

What if US dollar hegemony in oil settlements changes?

Since most countries rely on oil imports, they are forced to maintain large stockpiles of dollars 2,3,4in order to continue imports. 5 This creates a consistent demand for US dollars and upwards pressure on the US dollar’s value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to issue currency below cost of currency production (seignorage) and bonds at lower interest rates than they otherwise would be able to.6 As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger US dollar also means that goods imported into the United States are relatively cheap. It appears to be to the US’ advantage to maintain US dollar hegemony.7

If the denomination of oil sales changes to another currency, such as the euro, many countries would sell dollars and cause the banks to shift their reserves, as they would no longer need dollars to buy oil. 8 Forty years of petrodollars would start to get flushed from central bank reserves. This shift in petrocurrency reserve status would lower the volume and velocity of US dollar recycling and thus weaken the dollar relative to the Euro. The EU would accrue the same benefits from Euro-denominated oil sales that the US

What did the CME do?

The CME offered six Euro-denominated oil contracts. The oils are European delivery and the contracts are financially-settled. These are generally for hedging and risk management purposes. At this writing it is unclear if these contracts will be successful (as gauged by turnover). It is unknown if the CME or other energy bourses will offer more oil futures contracts denominated in Euros.

If the contracts are successful, could there then be a move towards Euro-denominated oil sales? There is doubt as to whether oil settlements can really move away from the US dollar. 9 There is evidence that OPEC cannot unilaterally decide to price their exports in Euros. There is no evidence that the network of global oil trade has requested non-US dollar contracts. In the early 2000’s, Russia floated the idea of oil settlements in Euros; the idea died in 2003. Other oil export countries have made more recent pronouncements of movements away from US dollar oil sales that appear to be more political than administrative for now. 10,11

Is this a nothing-to-see-here moment? What is known, however, is that the world’s largest futures exchange has made it possible for any entity to enter into Euro-denominated oil trades. If these contracts get traction and grow, there may be a significant effect upon the USD/Euro relationship. USD 200/bbl oil is in the cards and a petrocurrency change may be a reason cited should the oil market achieve that round number.

GRAPHIC: 10 Years, 10 Broken U.S. Debt Ceilings

Congress has raised the federal debt ceiling limit 10times in the past 10 years, and Treasury officials say the government will hit the current $14.3 trillion limit no later than May 16. Without another increase, the government will either default on its bonds or have to slash spending by about 40 percent. Republicans say they won't vote for an increase without big additional cuts in spending.

Data Source: Congressional Research Service and news reports

When it comes to debt, the United States Congress is all grown up. They can make their own rules--and have 10times over the past 10 years. According to a warning letter sent recently from Treasury Secretary Timothy Geithner to Senate Majority Leader Harry Reid, D-Nev., it’s time to change the rules again.

Unless Congress votes to raise the debt limit, the United States could hit its statutory debt ceiling by May 16. Geithner warned Reid that unless the ceiling is raised, the Treasury would not be able to borrow money to meet the needs of the country, including “military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits, and tax refunds.”

Since the debt limit’s introduction in 1917, Congress has never failed to raise it. But now, in the midst of a serious spending debate, some Republicans may threaten to hold the increase hostage unless they see substantial cuts in government spending. Sen. Kelly Ayotte, R-N.H, said on Wednesday, “As a new member of the Senate, I refuse to perpetuate this cycle. We cannot let this moment pass us by and I cannot in good conscience raise our debt ceiling without Congress passing real and meaningful reforms to reduce spending. That plan should include a Balanced Budget Amendment, statutory spending caps, spending cuts, and entitlement reform."

To be clear, reaching the debt ceiling would not directly trigger a government shutdown in the way a failure to negotiate a budget would. And the debt is not to be confused with the deficit, which represents the difference between spending and revenue, but is vulnerable to its effects.

The Economist - April 16, 2011

The Economist - April 16, 2011
PDF | 105 pages | 55.5 Mb | English

The Economist is a global weekly magazine written for those who share an uncommon interest in being well and broadly informed. Each issue explores the close links between domestic and international issues, business, politics, finance, current affairs, science, technology and the arts.

Why Is JPMorgan So Eagerly Acquiring Bars of Physical Platinum?

JPMorgan Chase (JPM) is the biggest derivatives issuer of all U.S. banks, but it is busy below the radar, loading up its vaults with 50 troy ounce platinum bars. JPMorgan has been a large net physical platinum buyer in 2011, and it was also a big buyer in 2010.

In 2010 the bank "stopped" a total of 975 platinum contracts, while delivering only 463, resulting in a net accumulation of 512 contracts, representing 25,600 troy ounces of platinum. In 2011, the delivery pace increased substantially. In January, 2011, JPM took delivery of 333 contracts, representing approximately 16,650 troy ounces of platinum.That month, a sum total of only 527 contracts were delivered to all clearing members, leaving JPM with 63% of all the delivered platinum at NYMEX. Then, in March, JPM took delivery of 12 more contract, even though it was a nonstandard “off-month” for platinum futures contracts. The off-month adventure added another 600 troy ounces to its kitty.

As of April 8, 2011, about 680 total platinum contracts were delivered at NYMEX. Of those, 307 contracts, 15,350 troy ounces, or over $27 million worth of platinum went to JPM. There are still over 100 April contracts left to be delivered, so it is likely that JPM’s gross intake will likely rise further this month. Set against these stoppages[i], are a mere 101 deliveries, so net 2011 intake has been 551 contracts, 27,550 troy ounces, more than $49 million worth of the precious white metal - even though the year has barely begun! [ii] So far, combining this year and last, noting that the April NYMEX delivery month is not yet over, JPM has accumulated approximately $76 million worth of physical platinum bars. That does not count any bars that may have been delivered to it at the secretive London Platinum and Palladium Market Association (LPPM).

The platinum "market" is bigger than that, but most of it is actually made up of a combination of derivatives and unallocated storage schemes. In other words, $76 million in physical platinum is a huge amount for anyone, except, perhaps, a big international auto/truck manufacturer to buy in about 12 months. This raises a few questions. Who exactly, within the JPM-Universe, is accumulating physical platinum through NYMEX deliveries? Is it the bank itself? Or, is it one or more of its customers?According to the bank, it closed its proprietary trading division back in October 2010.

Rumor has it, however, that most of the positions and the executives were simply transferred to closely related hedge funds. But, in any event, accumulation of physical platinum started last year when JPM's proprietary trading division was very actively operating. So, chances are that the accumulation of platinum bars is a bank decision, not one from its customers.

Why is JPMorgan Chase taking physical delivery of platinum? Why not simply open OTC or futures exchange "long" positions and "roll" them over and over again to the next delivery period, never taking physical delivery, as so many large speculative players do? JPMorgan Chase is, to some extent, repudiating the very concept of derivatives by doing this, even though it remains one of the premiere gambling “houses” in the world's most important “casinos” (a/k/a futures and OTC derivatives "exchanges").

A very interesting schism now exists between JPMorgan Chase and Goldman Sachs (GS). Goldman Sachs has been busy advising clients to dump platinum. On Monday, April 11, 2011, Goldman advised clients to close a profitable long commodity position that including both crude oil and platinum. While they are saying that, JPM is taking delivery. But taking delivery implies an intention to hold a position for a very long time.It is possible for both JPM (in the long run) and GS (in the short run) to be right. Generally speaking, however, we ignore the public pronouncements and recommendations of big investment houses. They are usually so filled with conflicts of interest as to be worthless. In this case, we don't know what J.P. Morgan has been advising its clients to do. We do know what it is doing.

We have seen over the past few years that advice often runs opposite to what bank executives are doing with their own portfolios. Advice can be motivated by factors other than the best interest of public clients.For this reason, we are careful NOT to listen to what they say, but, rather, we pay careful attention to what they do. JPMorgan Chase is buying platinum...a lot of it. They are buying it in the form of physical bars, rather than derivatives. This buying will continue to diminish the supply of a very rare metal, putting intense long term upward pressure on prices. That is because only a finite amount of platinum is mined every year. Total mine supply is about 6.1 milion ounces per year, which is about 14.7 times less than the amount of gold taken from the ground each year. Derivatives, in contrast, can be manufactured at will, in whatever quantity is needed to manipulate markets into believing that more supply exists than really does. It seems to me that JPM would not be taking physical delivery unless it believed that the age in which derivatives dominated the precious metals markets is close to being over.

On the other hand, it is
impossible to say how big the JPM OTC and/or exchange traded platinum long position in derivatives might be. Maybe, it is huge, many times bigger than deliveries it is taking. England's London's Platinum and Palladium Market (LPPM) is a notoriously opaque organization, with a penchant for secrecy, much like the London Bullion Market Association (LBMA). They'll never tell. NYMEX is not quite so secrective, but the CFTC refuses to disclose the positions of big banks, even when they are large enough to profoundly affect the direction of markets in the short run. JPM's derivatives positions are unknown. But, one thing is clear. When you take delivery of physical precious metals, you pay in full. The metal it is acquiring is going to become a part of its Tier 1 asset base. It is not a leveraged investment. If other banks follow in its footsteps, and at least one, Deutsche Bank (DB), seems to be doing just that, platinum may join gold as a "financial asset" rather than a mere commodity.

Regardless of JPMorgan Chase and/or Goldman Sachs, platinum’s fundamentals are remarkably bullish. Even assuming the worst in terms of auto sales, and a total cessation of all “QE” counterfeiting operations by the Federal Reserve, by our calculations, the platinum market should still be in mild deficit by late 2011, and in severe deficit by 2012-2013. If Japan manages to get its auto parts factories online again and/or the Federal Reserve announces QE-3 or continues with QE-Lite, platinum will go into deficit faster and more severely. Actually, in the medium term, the Japanese quakes and tsunami are positives for platinum even though they are negatives for its sister metal palladium. Platinum's use as an anti-pollution catalyst is now almost exclusively restricted to diesel engines. Perhaps, car sales will be lower in the next few months. But, a lot of heavy trucks and earth moving equipment are going to be used to rebuild. We are going to see an increase in Japanese heavy truck manufacturing. That means more diesel engines, if we turn a blind eye to the tragedy, and look only at platinum prices, it is clear that it will have a positive effect.

In making these calculations, we have not yet even considered the so-called “indiginization” program in Zimbabwe. The eventual decline in Zimbabwean production makes soaring platinum prices a virtual certainty within a year or two, even without consideration of Japan and the Fed.Zimbabwe is the only place left where new deposits of platinum can be mined at a reasonable cost. The corrupt government of Robert Mugabe, however, is making it unprofitable for miners to operate there. If that situation does not resolve very quickly, it will remove expected additional supplies over the next few years, creating a more severe shortage, sooner than previously predicted.

We expect the price of platinum to climb very high over the next few years, in real terms. This will happen regardless of whether the dollar and/or the stock market rises or collapses, in the face of inflation or deflation, and without regard to Japan, the Fed or Zimbabwe. The traders at JPMorgan Chase, apparently, agree with us. You can learn more about the fundamentals of the platinum market here. Up until now, platinum has been the wall-flower of the precious metals world, and has trailed the performance of other precious metals. While gold and silver are hitting record highs, platinum is not close to its highs of 2008, let alone the inflation adjusted high of 1980, or the much higher inflation adjusted high it made back in the early part of the 20th century.

As you can see in the 100 year chart, below [iii], the price of both platinum and palladium was higher, in inflation-adjusted terms, in 1920, than it was at the end of the “Great Stagflation” in 1980. This is not true of gold or silver, which both reached their historical highs in 1980. So, how far can the price of platinum travel? We should remember that rhodium, another metal heavily used in catalytic auto exhaust systems, climbed to as high as $12,000 per troy ounce in 2008. That was before the advent of quantitative easing and during a period in which the debasement of the U.S. dollar was tightly controlled, compared with now.

100 Year History of Platinum and Palladium Prices
(Click chart to enlarge)

Frankly speaking, precious metals are one of the few liquid investments worth buying right now. The long term fundamentals underlying platinum are the strongest of the four main precious metals. The "market view" seciton of the 2010 Anglo-American Platinum (AAUKF.PK) annual report tells us that platinum demand in Europe, Japan, North America, China, and the rest of the world (including Brazil, Russia, Korea, etc.) rose by 36% (to 1.4 million ounces), 31% (to 500,000 ounces), 30% (to 470,000 ounces), 50% (to 260,000 ounces), and 21% (447,000 ounces), respectively. During 2010, admittedly, there were a number of incentives for car purchases being given by various governments. However, the price of oil will continue to rise in the long run, and a higher percentage of cars, outside of Europe, are going to be built with inherently more fuel efficient diesel fueled engines, as opposed to gasoline. Platinum is the primary catalyst for diesel and it cannot be replaced by palladium. So, long term, the future demand increase is going to be much bigger than 2010, regardless of incentives or the lack thereof.

Anglo-American is also one of the biggest palladium miners in the world. It says that the demand for platinum's sister metal, palladium, also rose substantially. However, it rose more slowly in almost every market. This difference seems to fly in the face of common sense, given palladium's spectacular price performance in 2010, until we recognize that rapidly increasing palladium prices have more to do with constricted supplies than increases in demand.

An unusual condition currently exists in the palladium market, as a result of a strategic decisions by Russia to reduce the amount of palladium being sold from state stockpiles. This does NOT mean that the stockpiles are empty. We have carefully calculated the production and sale of palladium, over the last 100 years, and are certain that the Russian state palladium stockpile currently totals, at minimum,15-20 million troy ounces. With greatly increased gasoline engine production in China, Russia, and in the rest of the developing world, the stockpile will eventually wind down, but it will take at least 10 years and, maybe, up to 20, for that to fully happen. In the meantime, strong increases in demand are a more stable source of increasing prices. That is why we favor platinum over palladium.

If the Fed continues QE, stocks will rise in nominal terms, but QE will spur more producer price inflation in a time when it is difficult to pass costs on to consumers. This will lead to very bad earnings reports, and the stock market will fall in real terms. Yet, with or without a new round of counterfeiting, all precious metals prices will inevitably rise. In fact, the more stocks fall, the higher metals prices will rise, because investment will be shifted into precious metals and the supply is extremely limited.Should the Fed eventually choose more counterfeiting, as is likely with incompetents like Ben Bernanke and Janet Yellen in charge, all precious metals prices will rise. Platinum will rise higher because the fundamentals are stronger.

We could spend a lot of time speculating on the reasons behind the platinum purchases by JPM. Is it to offset elevated levels of demand by customers, who want to convert unallocated to allocated storage in London? Maybe, and we hope so, but, if it that were the case, it would be centering physical platinum buying in London, rather than in New York. Also, platinum futures prices would already be in backwardation, like silver prices. But, perhaps, the bank is expecting the situation in platinum to evolve into the same type of crisis, and wants to be ready when heavy physical demand begins, That being said, we believe the most likely reason for JPM's platinum buying spree is simply that its analysts have decided platinum is an excellent long term investment. They probably want to get in the door now, before price pressure on the physical commodity rise too far.

As noted in the previous article, positions in platinum can be taken using several different investment vehicles. First, you can buy platinum coins and small bars at a local shop. Second, you can buy shares of the platinum trust ETF (PPLT). Third, you can purchase futures positions at NYMEX. Buying on the futures market is often the cheapest and most efficient method of obtaining large quantities of precious metals[iv].Finally, you can also buy shares of stocks in platinum miners such as Impala Platinum (IMPUF.PK), Aquarius Platinum (S. Africa), Anglo-American (AAUKF.PK), The problem with the mining stocks, as opposed to bullion, is that the miners are susceptible to errors by management, including excessive compensation, but, also errors such as building mines in countries like Zimbabwe, causing the loss of shareholder capital.

If you choose to accumulate platinum at the futures markets, you may might want to do the same as JPMorgan. The bank, it appears, is very bullish on platinum and is now accumulating the physical metal by taking delivery from the exchange. If you've got enough money, keeping in mind that each contract requires the purchase of a minimum of 50 troy ounces of one of the most precious of precious metals, you should do the same.

It should be remembered that this article emphasizes fundamentals rather than technical analysis. These markets, especially the precious metals markets, are beset by corruption and manipulation. They are also burdened with an alleged regulator, known as the CFTC, which has been awarded exclusive jurisdiction to enforce the commodities laws, and chooses not to do its job, except if that involves attacking a small inconsequential player. We are talking about the long term, which is less subject to corrupt activities. Short term platinum prices could go up or down, all depending on the capricious decisions of a small handful of executives at various banks and hedge funds.

[i] Stopping means taking delivery in the parlance of the futures markets.

It is worth noting that, in addition to JPM, As of April 2011, another big international financial organization, Deutshe Bank, has also started to buy up physical platinum. According to NYMEX statistics, in January 2011, it was a seller, delivering 132 contracts worth about $11.7 million. But, by April 8, 2011, the German bank was a buyer, having taken delivery of 194 platinum contracts, or a total of 9,700 troy ounces, worth about $17 million. As always, the statistics do not make it clear whether the bank is buying for its own account or that of a customer.

[iii] Which we have "borrowed" from the U.S. Geological Service.

[iv] Check your broker’s fees before choosing who to deal with, because some futures brokers are now attempting to charge much higher fees, given how popular delivery from the futures market is becoming.

Disclosure: Long platinum.