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Precious Metals Float on Heavy Oil Last week was one of the best for the resources sector in many months, at least for the junior issues I follow. Helping the situation was stronger gold and silver prices, and a much lower U.S. dollar. Gold closed today at $417.80, pushing it's way back toward the multi-year high of $425.50 recorded last January. Silver has been strong of late, too, closing today at $7.06 per ounce, but still well below it's multi-year high of $8.295 set last April. Silver, however, is more volatile than gold, and is capable of much stronger moves up, or down. Since early Spring, the trade weighted U.S. dollar index has been tracking it's downward resistance line. In other words, it's value has been falling, but on a chart showing the upper "channel" line proscribed by connecting the highs over time. That trend line has been down, and it has moved down without significant breaks below this level. If it had some dips along this path, that would help to define the lower limits of the "channel," the support line. The dollar has been eerily and unusually steady in this regard, though on a down track. It closed on Friday at .8776, nearly in line with the 200-day moving average that's fallen about 9 percent in the last year. Should this continue, the dollar index will be around .80 one year from now. However, as the dollar has been strangely hanging along it's upper trend line, it could also suddenly break quite steeply to the downside, or otherwise assume a normal trend line at some lower level within the channel. The importance of the dollar index, of course, is that many of the worlds commodities are priced in dollars. If the dollar weakens, as it has been doing over the last 42 months, Americans have to expect higher prices for imported raw materials, and items manufactured abroad. That spells inflation, regardless of Federal Reserve policy on interest rates. All other factors aside, a falling dollar means higher gold prices, a higher cost of living, higher interest rates (to keep capital from leaving the country), and higher unemployment. Now, combine these concerns with other factors, such as the pending commodities melt-up, caused by too much demand and not enough supply, and Americans could be facing some pretty tough years. Just when we as a nation may need access to credit to keep our economic wheels turning, we may well find that we are already over encumbered and may not be able to borrow our way through the developing dollar crisis. And, oil? Back over $50 per barrel, if you didn't know, and at the high today it hit $51.24, before settling back to a new closing high of $51.09. It is defying expectations from some quarters of falling back into the $30-to-$40 range. Given the lack of additional capacity for increasing supply, on-going security issues, and escalating demand in the Far East, I don't see how prices can fall to those levels, especially under the added burden of a falling dollar. For what it's worth, check the two-year XOI stock index.
In a recent interview, gold guru and author James Turk, said of the current state of the oil market: "Oil is going a lot higher. If you look at the price of oil in terms of gold, which is the way I measure it, the historical average is about 2.27 grams of gold per barrel of crude oil. At present, it takes 3.54 gold grams to buy a barrel of crude oil. In the 704 months since January 1946, we've only been above that level six different times. What that means is that either crude oil is very, very expensive or gold is very, very cheap. I think it is the latter. We're consuming about 30 billion barrels of crude oil a year and that's not being replaced in current reserves and as a consequence crude oil is being re-evaluated by the market. The trigger for the revaluation was when Royal Dutch/Shell restated its reserves earlier this year. That shocked the market and the repercussions of that shock wave are still being felt and will be felt for years to come. Not only did other companies start revaluing their reserves, but it gave rise to a lot of skepticism about the kind of reserves countries have and whether they are recoverable and, if they are, at what price? Where we see crude oil today is probably a natural reaction to the market coming to understand there is not an infinite amount of oil in the world." [See Barron's link - subscription required] [Mr. Turk's newest book, The Coming Collapse of the Dollar and How to Profit from It, will be released in late December. You can back order from Amazon.com, as I did.] Quotes from Selected Readings: "Speaking on Moneyweb Radio on Tuesday, Absa economist, Chris Hart, gave some insight into the oil market. He said that although the oil market is “opaque”, or difficult to fathom, there were some indications of supply constraints in the future. Hart said that in the past five years there has been “an alarming depletion rate”. This is because the amount of oil that is being pulled out of the ground exceeds the amount of oil being discovered by a multiple of anywhere between five and nine." Apocalypse Now? Julius Cobbett at MineWeb, http://www.mineweb.net/columns/curve_ball/350567.htm Reprise (from January): "I printed out stock tables from 1975 up until the January 80 top and was totally stunned at what I found. Let me give all you fellow gold and silver investors (and people reading this essay who are thinking about buying some gold and silver shares) a few of the many examples of the kind of gains that were made in the last gold and silver bull market a generation ago (before cell phones, the Internet, and p4 computers)..." ..."Lion Mines – 1975 price $.07 / 1980 price $380" ... "Bankeno – 1975 price $1.25 / 1980 price $430; Wharf Resources – 1975 price $.40 / 1980 price $560; Steep Rock – 1975 price $.93 / 1980 price $440; Mineral Resources – 1975 price $.60 / 1980 price $415; Azure Resources – 1975 price $.05 / 1980 price $109." The 21st Century Gold Rush, Edward Gofsky The author is being selective with his examples, of course, and he's forgotten the bull run of the mid 90's, but that does pale by comparison. Even in that period, I recall some few penny mining stocks that ran to between ten and twenty dollars per share, and without a hint of then being near production (and some never did prove up anything economic). As analyst Bob Bishop is fond of saying, "When the wind blows, even turkeys will fly." The point is, if we even come close to the hysterical market of the late 1970's for precious metals stocks, a few well chosen issues acquired with a modest few dollars can become the proverbial "life altering experience." THE CHINA SYNDROME: (News related to Asian influences on commodity and other international markets) 27/09/2004
- Chinese metals trader wants to buy Canada's largest miner! 28/09/2004
- China's #2, Wen Jiabao, was a mining executive/geologist, and remains
in charge of all metallurgical projects in the country. 28/09/2004
- BHP of Australia locks in a 25-year deal doubling iron ore sales to
China. 30/09/2004
- India's growth surpasses expectations in the second quarter. 01/10/2004
- What China says and what China does regarding exchange rates are two
different things, as it is in all other countries. Food for thought: Would this be an issue at all, if world currencies were commodity based? 01/10/2004
- Developed nations fear flood of Chinese textiles. 01/10/2004
- Japanese are optimistic about their economy. 01/10/2004
- BHP to sell most new nickel production to China. Some
thoughts: End
legal tender laws. End government debt as an "asset"
for reserve banking. End the Federal Reserve System. "The
study of money, above all other fields in economics,
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Larry S. Levy is editor of Arts 'n Mines, a private email newsletter for special friends, guests and selected industry insiders. It is not available to the public. EXTRACTS is compiled from portions of the newsletter not dealing with specific mining issues. Mr. Levy also contributes economic and historical commentary on these subjects to international publications. He is retired from his former practice as a property valuations expert, during which time he held leadership roles in the premiere trade associations, lectured, and published articles on valuation topics. |