Commodity Wealth Creation


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A case for investing in gold and silver during moments of financial crisis and inflation

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Commodity Wealth Creation

  1. 1. Equities, interest rates, energy, commodities and currencies now move in tandem ;
  2. 2. Gold will hit $1,650 before the end of the year) (the green line in the chartbelow) has held; gold is in a nice channel; we have broken out to new highs; andmid-March to the end of May is often a strong time of year for gold as is Augustto November since 2005 .This has been falling since 2000, when the Dow was incredibly expensive againstgold. In 1980 methinks that ratio is eventually falling back to 1:1. So, if the Dowis at 10,000, so will gold be at $10,000. I’m slightly more conservative than that.But here’s my simplification of his stepping-down pattern:
  3. 3. ;
  4. 4. Recent gold versus Dow behaviour suggest that even during periods of stockmarket volatility gold has continued to have a relatively smoother journeyupwards and the ratio can get much higher in favour of gold when the blow-out phase occurs.... The benefits of diversification are thus destroyed andthe volatility of once low-risk portfolios greatly increases. looking further afield to alternate assets ;
  5. 5. These prices have been also influenced by weaker & cheaper cost of money as Fedmonetized debt and flooded the system -- QE 1 ; QE 2 has seeped out to influencecommodity prices = most obvious manifestation is the lack of diversification, fat tail risk!! The Query for 2011 --* Risk on Risk off + Inverted yield curve + Year Ending CommentsLooking back at -- Fat Tail Risk + Bubbles
  6. 6. Consumption: 70% of the US economy is driven by consumption. This inturn accounts for 20% of the worlds consumption i.e. 5% of the worldspopulation accounts for 20% of its consumption.Talk about an imbalance! Savings: The US finances its consumption by borrowing from theChinese, Japanese, Mid-East etc.. because they save.... One more area of deep significance is the45% of GDP is exports for the Asian tigers , that means they are not de-coupled at all with USA infact they are anything but given how badly American consumer and consumer credit drivesdemand there and how much a tiger like China needs that export market.
  7. 7. Risk trades will test investors through 2011 Correlations have continued to increase despite falls in individual asset volatilityU.S. government debt is now over $13.7 trillion (not including estimatedstates debt of $2.8 trillion and agencies debt of $3.0 trillion). Theaverage rollover period for the debt is 49 months. With recent deficitsrunning over $1 trillion a year, the Treasury issues new debt and refundsold debt at a rate of about $4.3 trillion a year.A nation needs to inspire a lot of confidence to keep that Ponzi schemealive. Unfortunately, markets know that even the U.S. government willprint money to meet expenses when necessary.This leads to thequestion, being asked from Beijing to Brussels: Does the risk match thereward? A negative response to that question could lead tohyperinflation.Gold trading at more than $1,440 an ounce, despite no appreciableincrease in the consumer price index, is much more understandablewhen you realize that in periods of hyperinflation , gold tends toappreciate by 2,000% to 50,000% against a hyper-inflated currency.
  8. 8. The Lessons Of HistoryQuantitative easing hasn’t worked for Japan. If it’s going to work in theU.S., capital controls may be inevitable. The Fed must stop the seepageof liquidity overseas. It makes no sense for the Fed to take suchmonumental risks with its balance sheet if America isn’t reaping thebenefits.
  9. 9. Here we see the US dollar index, which shows the dollar against a basket offoreign currencies.
  10. 10. In Bear Market 4 stages -- stage 1: leverage killedStage 2: denial: market goes into a quite zoneStage 3: realisation and pessimism & poison gets flushed out…Stage 4: abject fear… which creates the base for the next bull market togerminate…
  11. 11. Shamik ;
  12. 12. Another week, another new high in gold and silver. The inexorable rise continuedwith gold breaking out to new all-time highs at $ xxxx per ounce. It’s now inpositive territory for the year; But here’s the action that surprised me: gold was upin the face of falling stock markets…and a ranged dollar index Shamik Bhose ;
  13. 13. Shamik ;
  14. 14. The best way to play a bull market –buy at the right time and then just sittightI have always said that of all the metals silver has the most potential. There is itsmonetary appeal. As a precious metal, investors are seeking it out because of itsincreasing value at a time where governments are debasing their currencies. And thereis its industrial appeal. It is finding more and more uses each year in industries that,recession or no recession, are growing. I’m talking particularly about its use in electricaland medical applications. Meanwhile there is an ever-increasing supply deficit. Share-lynx has charted this:
  15. 15. Share-lynx says: “Note that since 1950, almost 925,000 tonnes have gone into demandwith 570,000 tonnes of this having come from production. This leaves a shortfall of350,000 tonnes, which has come from central bank sales, stockpiles and scrap. Thisdeficit equals approximately 16 years of production”. The scrap is running out.Meanwhile, on the futures exchanges, there seems to be a genuine supply squeeze whichis pushing prices higher and higher. And since one of the bigger sellers, JP Morgan,announced the closure of its prop trading desks in late August, the price has catapultedhigher.
  16. 16. One day silver, much as it did in 1980, is going to rise higher than your wildestdreams. (That $50 number from 1980, is somewhere north of $200 in today’smoney.)
  17. 17. Shamik ;
  18. 18. ;
  19. 19. Nomura set the bar pretty high with a warning that $220 a barrel might evenbe overly-conservative should production in Libya and Algeria shut downaltogether. In 2007 Goldman had predicted a 150 $ per barrel of WTI crudeprice for 2010 only to see 147$ in 2008
  20. 20. To sum up his point, Libya has plenty of oil money and should have been able tobribe its citizens into submission. But they decided they want freedom instead.And if “that is the case with Libya, which has a comparable ratio of income topopulation to Saudi Arabia, one might worry more about the stability of Saudi Arabia,which is of course the big one”. That’s an understatement.
  21. 21. A New Superabundance of Game-Changing Shale Gas Will Provide 250 Years of Natural Gas A few years ago the United States was ready to import gas. In 2009 it had become the worlds biggest gas producer. The U.S. achieved the change through a technological breakthrough in which firmsfound a way of using tiny explosions to free gas previously trapped in a common rock - shale.Tactically this makes Americans less dependent on Middle East and Suez Canal and it also means over time as this plays out – the dollar will regain traction vis-à-vis other currencies............
  22. 22. 60990456, 60990522, 60990205 1750 1700 1650 1600 1550 A substantial tonnage of 1500 1450corn has been used as 1400ethanol bio-fuel in USA 1350 1300with the help of generous 1250 1200subsidies and green lobby 1150 1100media campaigns; this has 1050raised an ethical debate – 1000 950if food should be diverted 900 850with subsidy to become 800 750fuels as crop shortages 700and inflations have created 650 600 SOYBEANriots and surging grain 550 500prices have been helped 450along with the Fed’s cheap WHEAT 400 350and easy money policies 300 250 200 CORN 150 100 50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Attracted by these high prices farmers in USA have planted huge crops but weatherhas been truant ; substantial Chinese and Russian demands as dollar has been weakhas added to price rise along with massive hedge fund and index fund participation.All these connections are not linear though
  23. 23. Raw sugar and white sugar prices have been strong and getting higher ascrop shortages and demand have both played a part in the rally as has highercrude oil prices as many countries notably Brazil uses sugar ethanol to fireup flexi-fuel cars SUG AR 11 CO NT INUOUS 112000 LBS [NY CSCE] (30.6000, 30.7600, 29.0000, 29.8800), LIG HT CRUDE CO NT INUO US 1000 BARRELS [ NYMEX] (101.700, 104.940, 101.540, 104.420) 155 38 150 37 36 145 35 140 34 135 33 130 32 SUG AR 31 125 30 120 29 115 28 110 27 105 26 25 100 CRUDE OI L 24 95 23 90 22 85 21 80 20 19 75 18 70 17 65 16 60 15 14 55 13 50 12 45 11 40 10 9 35 8 30 7 25 6A S O N D 2005 A M J J A S O N D 2006 A M J J A S O N D 2007 A M J J A S O N D 2008 A M J J A S O N D 2009 A M J J A S O N D 2010 A M J J A S O N D 2011