Energy & Commodities
American oil production is surging. Yet oil prices remain near $100 a barrel. You may be wondering: When will all of this additional production finally overtake demand and push the price of oil down? You can find one answer in the price of oil futures — which say we can expect oil to fall to closer to $80 in the coming few years and stay there.
….read more HERE
Right after the financial crisis hit and the Federal Reserve started printing money with no end in sight, many of the media talking heads and even some very influential economists claimed that central banks were out of ammunition.
There was nothing left they could do to stem the tides of deflation, they said. Central banks had no more weapons left.
I tried to set them straight, but to no avail. I told everyone I could, in no uncertain terms, that the central banks of the world — including the European Central Bank – had many more weapons left at their disposal.
Chief among them, I said, were the following:
A. They could reduce the bank reserve ratio, the amount of funds that must be held in the bank’s vault (or at the central bank on behalf of the bank) on deposit by banks. Currently, for U.S. banks with more than $79.5 million of customer deposits, that requirement is 10 percent.
B. They could demand that banks buy assets, like equities, real estate and more. And …
C. They could punish banks by charging them a negative interest rate for depositing funds they’re’ not lending out to the economy with the central bank.
If you’re a bank, for instance, with $100 million in customer deposits that you’re not making use of (lending out) and instead you parked that money with the central bank for so-called safe-keeping …Then the central bank would charge you for holding that money. You’d get no interest on that money, but instead, take a haircut for depositing that idle cash with the central bank.
The U.S. Fed has not yet employed any of the above three additional weapons it has at its disposal. Simply because the U.S. economy, as weak as it is, is surviving such that it’s actually off life support, and the Fed is now tapering its money printing operations.
However, as I have pointed out all along, the real disaster facing the world is not the U.S. but Europe.
Its economy is dying. It is collapsing in the nightmarish consequences of horrendous policy decisions … the most ill-advised of which was the implementation of the euro … not to mention the euro region’s mountain of debts that are going bad.
Europe is in a depression. A deflationary depression that will only get worse. Where 123 million people — one out of every six – now live in poverty … where total unemployment is above 20 percent in many countries … and where youth unemployment is greater than 60 percent.
Which is precisely why the European Central Bank (ECB), headed by Mario Draghi, last week rolled out Weapon C above …
And is now charging any European bank that wishes to deposit funds with the ECB a negative interest rate, or penalty, of MINUS 0.10 percent.
Mark my words: Draghi’s negative deposit rate won’t matter one iota when it comes to Europe’s depression. Europe’s depression will only end when the euro breaks apart at the seams and each country is allowed to take back its native currency, devalue it and stoke the flames of inflation.
Until then, Europe will continue to sink deeper and deeper into depression. And the longer Europe’s policymakers try to stick to the hair-brained single currency, the worse the social chaos in Europe will become, as the war cycles I have been telling you about ramp up ever higher.
Mark my words now a second time: Before this great financial crisis ever comes to a close, you will see our very own Federal Reserve also implement negative deposit rates to try and get commercial banks to lend money into the economy.
That’s a year or two off based on my research, but negative rates will come to the U.S. Federal Reserve. I have absolutely no doubt about it.
So what do negative central bank rates mean for the markets?
That’s the heart of the matter for us investors. I see three chief consequences:
First, since negative rates have hit Europe first, we should now see the euro’s demise accelerate. Why? There are many reasons, but chief among them is that there is nothing to prevent European banks from taking their excess funds and depositing them into banks in other countries where they can indeed get a better return, instead of being penalized.
That’s going to depress the euro, and cause other stronger currencies to rally: Asian currencies, and especially the U.S. dollar — which is now clearly in bull mode — a forecast I have made that is now unfolding very quickly.
Second, but on a longer-term basis, we will see the U.S. equity markets fulfill my forecast of much higher prices to come, with the Dow Industrials eventually heading toward the 32,000 level.
As I’ve spelled out in previous columns and in detail in issues of my Real Wealth Report, there are several forces that are going to drive the U.S. equity markets much higher over the longer-term. Negative rates in Europe is now one of them.
Third, we are going to see a renewed bull market in commodities, especially gold, silver and select mining shares.
There are two simple reasons:
1. Europe’s negative central bank interest rate — the first time ever that a central bank has had to take such a drastic measure — also sends a loud and clear signal that Europe’s economy is in worse shape than most people realize … and that the euro is on its death bed.
That means savvy European money is now going to take a fresh look at tangible assets — commodities — again, especially gold and silver.
In addition …
2. It’s a huge boon to mining shares, just like it was in the 1930s, when Europe last went bankrupt, and mining shares such as Homestake Mining soared from $65 a share in 1929 to nearly $373 in 1933 — a 474 percent gain in just four years …
And where Dome Mining soared from $6 to $39.50, a 558 percent gain.
Thing is, this time around, the gains in mining shares will likely be far greater, even greater than they were in the first phase of gold’s bull market from 2000 to 2011.
The two chief reasons:
1. Due to gold’s three-year bear market, many mining shares were completely destroyed. As a result, there are now only a handful of mining shares that savvy investors would want to buy.
That means a rush to buy the best of the best, which will rocket their share prices higher, multiplying investors’ money many times over.
2. As the war cycles continue to ramp higher and the world enters an almost unprecedented period of social chaos, the flood of money into commodities and mining shares will become ever greater.
Best wishes,
Larry
P.S. To help you position yourself to ride this tsunami of rising stock prices, I have a special gift for you: My FREE Dow 31,000 Preparedness Kit. Click here to get your copy now!
If you look at the many charts and read many of the articles being published today you couldn’t be faulted for thinking the rise in food prices is a fairly recent phenomena.
The Food and Agriculture Organization (FAO) of the United Nations publishes the FAO Food Price Index, a measure of the monthly change in international prices of a basket of food commodities.
In 2002 FAO’s Food Price Index stood at 89.6, in May of 2014 it’s at 207.8. In 2002 meat was 89.9, dairy 80.9 and cereals 93.7. In May 2014 the three individual index’s stood at:
- Meat 189.1
- Dairy 238.9
- Cereals 204.4
The International Monetary Fund (IMF) recently published its Index of Primary Commodity Prices.
The reality is food has been soaring in price for decades. Look at this eye popping chart from the St. Louis Fed.
The next time you are in the supermarket play this game – compare today’s prices for the following items to 1970’s prices:
- Apples – .15lb
- Ham – $2.29lb
- Campbells Tomato Soup – .10
- Crest Toothpaste – .77
- Folgers Coffee – $1.90lb
- Turkey – .43lb
- Ground Round – .79lb
- Potatoes – .98 for 10lb
- Large Eggs – .59 dozen
- Pork Chops – .59lb
- Sliced bread – .16 loaf
- Sugar – .39 5lb
- Rump Roast – $1.69lb
- Bacon – $1.29lb
Experts and industry insiders often agree about some of the basic underlying causes of the recent jump in prices – drought, disease, climate change, loss of arable land and soaring input costs, such as diesel and fertilizers. It’s pretty obvious they all have an impact on the price of what eventually reach’s your supermarket shelves.
But most pundits don’t get it, fortunately we at ahead of the herd do – in the agricultural industry today, as it has been for the past 70 some years, it’s all about supply and demand.
And supply isn’t keeping up with demand. Food prices have been on an upwards march for a very long time. That’s what happens when demand outpaces supply.
Why is demand outpacing supply?
- Growing global population – The global population is increasing by over 75 million people a year. Impacts from weather and natural disasters will ebb and flow but population growth is a constant driver of demand.
- Climbing the protein ladder – Many people in emerging/developing economies have increasing discretionary income, they are becoming richer. As income increases people move up the protein ladder, from staples such as rice they climb the ladder and demand more protein in the form of meat and dairy.
Food prices will have to climb ever higher over the coming decades as billions more people are born further increasing demand and stretching the Earth’s limited resources.
By 2050, the world’s population is expected to reach around nine billion -maximum projections range up to 10.6 billion. By the mid 2060s it’s possible that as many as 11.4 billion people will inhabit this planet.
The term Green Revolution refers to a series of research, development, and technology transfers (the shift to high-yielding rice, wheat and corn varieties that are dependent on irrigation and heavy fertilization) that happened between the 1940s and the late 1960s.
The initiatives involved:
- Development of high yielding varieties of cereal grains
- Expansion of irrigation infrastructure
- Modernization of management techniques
- Mechanization
- Distribution of hybridized seeds, synthetic fertilizers, and pesticides to farmers
All these new technologies increased global agriculture production with the full effects starting to be felt in the 1960s.
The Green Revolution’s use of hybrid seeds, irrigation, chemical fertilizers, pesticides, fossil fuels, farm machinery, and high-tech growing and processing systems combined to greatly increase agriculture yields. The Green Revolution is responsible for feeding billions – and likely enabling the birth of billions more people.
“When wheat is ripening properly, when the wind is blowing across the field, you can hear the beards of the wheat rubbing together. They sound like the pine needles in a forest. It is a sweet, whispering music that once you hear, you never forget.” Norman Borlaug, father of the Green Revolution
Cereal production more than doubled in developing nations – yields of rice, maize, and wheat increased steadily. Between 1950 and 1984 world grain production increased by over 250% – and the world added a couple more billion people to the dinner table.
Many experts believe technological advancements in agriculture, energy & water use, manufacturing, disease control, fertilizers, information management and transportation will always keep crop production ahead of the population growth curve.
That’s a lot to ask as over the next fifty years we add another 4 billion people to the world’s population. Global demand for food will increase almost 70% if population growth predictions are correct.
What many of these ‘experts’ don’t get is the Green Revolution’s reality. It wasn’t about the fertilizers, pesticides or irrigation etc. These were all secondary players, add on technologies or basically derivatives to the main technology – dwarfing. By breeding plants to invest less energy in producing stems more energy goes to grain.
“In 1953, Dr. Borlaug began working with a wheat strain containing an unusual gene. It had the effect of shrinking the wheat plant, creating a stubby, compact variety. Yet crucially, the seed heads did not shrink, meaning a small plant could still produce a large amount of wheat.
Dr. Borlaug and his team transferred the gene into tropical wheats. When high fertilizer levels were applied to these new “semidwarf” plants, the results were nothing short of astonishing.
The plants would produce enormous heads of grain, yet their stiff, short bodies could support the weight without falling over. On the same amount of land, wheat output could be tripled or quadrupled. Later, the idea was applied to rice, the staple crop for nearly half the world’s population, with yields jumping several-fold compared with some traditional varieties.
This strange principle of increasing yields by shrinking plants was the central insight of the Green Revolution, and its impact was enormous.” Justin Gillis,Norman Borlaug, Plant Scientist Who Fought Famine, Dies at 95
Conclusion
Well, we’ve been there done that dwarfing thing. So what’s next? What’s going to save us this time round the mulberry bush? Nada, zilch, nothing, zip. We’ll have to keep dumping increasing amounts of fertilizer on a decreasing arable land base while trying to increase irrigation using our rapidly depleting fresh water aquifers. All the while suffering from the effects of climate change, rising transport costs and increasing geo-political risks.
Already over one billion people, or a seventh of the world’s population, goes to bed hungry each night.
Somewhere in the world someone starves to death every 3.6 seconds – most of the names on starvation’s role call are children under the age of five.
Rising agricultural yields have always outpaced population growth, perhaps today that is no longer the case. ‘Been there, done that’ should be on all our radar screens. It’s definitely on mine. Is it on yours?
If not, maybe it should be.
Richard (Rick) Mills
Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including:
WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com and the Association of Mining Analysts.
Please visit www.aheadoftheherd.com
If you are interested in advertising on Richard’s site please contact him for more information, rick@aheadoftheherd.com
***
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
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Canadian Oil Sands is a pure investment opportunity in light, sweet crude oil. Co. indirectly owns a 36.74% interest in the Syncrude Joint Venture (“Syncrude”).
Syncrude is involved in the mining and upgrading of bitumen from oil sands near Fort McMurray.
Co. also indirectly owns 36.74% of shares of Syncrude Canada Ltd. (“Syncrude Canada”). Syncrude Canada operates Syncrude on behalf of the owners and is responsible for selecting, compensating, directing and controlling Syncrude’s employees, and for administering all related employment benefits and obligations.
Click Chart or HERE for larger view
Think interest rates are going to head higher soon with the Federal Reserve’s bond tapering program?
Keep dreaming…
The Fed is still buying tens of billions of dollars in bonds, which will continue to drive down rates. And the money supply is still increasing – just at a slower pace.
So the 10-year U.S. Treasury bond – which is yielding just under 2.5% – is bound to head lower still.
Of course, the United States isn’t the only country seeing lower rates…
The bond yield in Germany and France is actually more than 100 basis points below the United States’ 2.5%.
And in Italy and Bulgaria, the bond yield is only 50 and 75 basis points higher than in the United States, respectively.
With lower rates around the globe, two immediate concerns should come to mind…
Concern #1: Sluggish Growth Ahead. Low yields are usually a signal of slow growth in the months and years ahead.
Indeed, the only major global economy that’s growing right now is the United States. And even our economy experienced a setback with the latest GDP numbers, which showed a decrease in GDP in the first quarter by 1% (after a 2.6% increase in the fourth quarter of 2013).
Now, the decrease can be attributed to a harsh winter that forced many to curtail spending. But in a strong, growing economy, negative GDP numbers should never occur.
However, uneven growth is still preferable to the rest of the world – where markets like China are showing signs of a real slowdown in spending and consumption.
Concern #2: Are Oil Prices in Trouble? Shrinking GDP numbers and decreasing yields from the bond market can signal danger ahead for oil price growth.
But is it time to sell your oil stocks? Heck, no!
Granted, at best, the oil market will stay static from here – or grow slightly.
At worst, we’ll see oil prices tick down into the $90s, as there’s no lack of supply in the market. U.S. oil production is nearing the same levels as the boom times of the ‘70s. And Middle Eastern oil facilities are pumping out as much oil as they can, since their concerns are related more towards making money for their oil-financed economies.
The picture for oil prices might not look as robust as it did just a few months ago – when the global geo-political situation was in flux and the United States was in the midst of a stronger recovery. But it’s definitely not time to sell!
Holding Out Hope for a “Goldilocks Recovery”
There’s a chance that we’ll see a “Goldilocks recovery” – or an economy that’s “just right.”
In that case, global economies will respond to the cheap money and continue to post growth (albeit nothing spectacular).
That would support oil prices in a range of $90 to $110 – levels high enough for all to continue to make money and pay out dividends
If you’re looking for true earnings growth from the energy complex, though, you need to be investing in integrated oil and gas companies.
These opportunities will continue to benefit from the resurgence of natural gas prices, which are the standout in the energy sector today.
In an upcoming issue, I’ll feature a couple of my favorite plays in the sector.
And “the chase” continues,
Karim Rahemtulla
About Karim Rahemtulla
We’re currently in the midst of a “global resource chase.” So says Oil & Energy Daily’s Chief Investment Strategist, Karim Rahemtulla – a 20-year veteran of the global financial markets. What’s more, this increasingly intense chase for power and energy means there’s no better time to be an oil and energy investor. And with Karim on your side, you’re in great shape to profit. Learn More >>
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