The Eye of the Storm
By Louis James, Senior Analyst/Editor, Casey’s
International Speculator - December 18, 2009
At a recent Casey Research editors’ meeting, the team took on the question of
whether the somewhat steady recovery since last February’s washout
bottom in the broader markets had any of us thinking that the recession might
be over. The gathering of minds included: Doug Casey, Managing Director David
Galland, CEO Olivier Garret, Casey Chief Economist Bud Conrad, Senior Energy
Analyst Marin Katusa (my counterpart on the energy side), myself heading the
metals division, and several other editors.
Doug’s guru-vision remains locked on the disaster channel. The U.S.
economic problems, he says, remain so profound and, if anything, have
been worsened by the government’s actions, that Americans are headed
for a significant lowering of their standard of living.
As this reality unfolds, it will send out shock waves that will impact
much of the world: the Greater Depression.
And the next step, Doug believes, will be a change in interest rates.
The Bright Boys in DC will resist doing this, but while they seem
willing to let the dollar slide to ease their mounting debts, they
don’t want it to crash. They may soon be forced to raise interest
rates. When that happens, Wall Street usually moves in the opposite
direction – which could be the end of the “Things Aren’t as Bad as
We Thought” rally of 2009.
Bud Conrad – in proper, responsible chief economist-style – considered
the question carefully and conceded that there do indeed seem to be
many “green shoots” now, but still concluded that conditions will
continue deteriorating. He sees the government deficits in the driver’s
seat, the main variable to keep a watch on.
As the U.S. government persists with its spending spree, valiantly
dousing the deficit fire with more debt-gasoline, it will continue
destroying the dollar, and that will push ever more people into gold.
A year ago, Bud predicted that gold would top $1,150 by year-end 2009.
His call was bolder than most forecasters’ – but he was right. Looking
at the numbers today, Bud’s new baseline 2010 forecast is for gold
to top $1,450. He sees a “possibility of further international instability
or currency debasement as adding to that baseline.” In plain language,
Bud’s confident that resource stocks of all sorts will, on average,
benefit greatly from the demise of the U.S. dollar.
Somehow, I can’t shake the image of Bud singing Don’t Fear The
Reaper with Blue Öyster Cult for back-up… but that’s really
more like something Marin would do.
Speaking of Marin Katusa, he commented that there is money to be made
in the current rebound environment, but speculators should be extremely
cautious: “You should know you’re dancing with the devil in the pale
moonlight. You need to make sure you know the dance steps: get in
early and exit before you get the dip by the devil at the end of the
song.” (Marin not only has made huge amounts of money for our subscribers,
he sings in a rock band, so he knows what he’s talking about.)
My own thinking has evolved into seeing 2009 as being like the eye
of a monstrous storm.
The sky has cleared substantially, and the sea looks amazingly calm,
given what we’ve just been through. But it’s not over yet; the trailing
edge of the storm always delivers the most damage, and that’s yet
to come. Anyone fooled into abandoning shelter is taking a terrible
risk.
This doesn't mean we should stay huddled in our huts, however – it
makes more sense to go out, restock supplies, repair what damage we
can, and get ready for the deluge to come. The renewed fury of the
storm will sink many more ships, but it will also make vast fortunes
for those who invest in the ships that survive and even thrive in
the tumult.
Essential strategy: For the near term, buy only
an initial “tranche” (portion of your desired position) in the most
storm-proof (cash-rich) companies you can find – ideally with great
discovery or development stories that will deliver exciting news regardless
of market conditions – and hold a good chunk of cash in reserve for
the next big buying opportunity.
Nothing goes up in a straight line, as share prices over the last
month have amply demonstrated. There are some great picks that have
been heading up all year that are now paused in their advances. Any
more correction in precious metals could put them on sale, temporarily,
offering great buying opportunities with a lot of the technical (e.g.,
discovery) risk removed from the plays. You’ll kick yourself if you
don’t have any cash on hand to take advantage of them – and kick twice
as hard if you paid too much for a large whack of something that goes
on sale.
Worried about sitting on cash with the U.S. dollar in a death spiral?
Remember: gold is also cash, highly liquid, and with terrific speculative
upside to boot.
With gold having just corrected sharply (as I predicted it would
in Casey’s
International Speculator), gold is unquestionably the best investment
we can recommend right now – fluctuations aside, it has nowhere to
go but up for quite some time. Perhaps as long as a decade.
That, plus our essential “eye of the storm” strategy as above is what
we’re recommending to all our subscribers – and indeed to all investors
around the world who want to not only survive the trailing edge of
the financial storm still to come, but thrive because of it.
While gold has gone up 38% since last December, junior gold stocks
can provide even greater gains than the yellow metal itself. Currently,
for example, Louis is following eight juniors that have all the right
conditions to become takeover targets by gold majors… which would
drive share prices through the roof. If you want to get in early,
this is the time: with our special holiday offer, you’ll save $400
on a one-year subscription of Casey’s International Speculator –
but only until midnight, December 18. Hurry up and click
here to learn more.
When Will Inflation Really Hit Us?
By Terry Coxon, Editor, The
Casey Report - Mounted October 23, 2009
Most of us are gathered at the station, watching for the
Inflation Express to come rumbling in. But we've been waiting for
a while now. Just when should we expect the big locomotive to arrive
and start pushing the prices of most things uphill?
We’d all like to know the exact date, of course, but no one can know
for sure. Not even a careful reading of the Mayan calendar will help.
What we can do is estimate a time range for price inflation to show
up, and that alone should have some important implications for investment
decisions.
Why It’s Expected
The reason for expecting price inflation is the recent, rapid growth
in the money supply and the deficit-driven likelihood that more such
growth is coming.
As of July, the M1 money supply (currency held by the public plus
checking deposits) had grown 17.5% in a year's time. That's not just
unusually rapid, it's extraordinarily rapid. Since 1959, M1 has grown
more rapidly in only one other 12-month period – and that was the
one ending last June, when the M1 money supply jumped 18.4%. Even
in the inflation-plagued 1970s, growth in M1 never exceeded 10% in
any 12 months.
Dropping large chunks of newly created money into the economy leads
to price inflation, because the recipients are likely to find themselves
overprovisioned with cash. As they try to unload the excess, they
bid up the prices of the things they buy, whether it be stocks, shoes,
gasoline, silver coins, or granola. The sellers of those things then
find themselves cash rich and start doing some buying of their own,
and so the wave of excess money and the bidding it inspires propagate
through the economy.
The process isn't instantaneous. It takes time. Just as each player
in the economy has a sense of how much of his wealth he wants to hold
in the form of money, everyone will move at his own speed to make
adjustments when his actual cash holdings seem to be off target.
And the process can seem to stall, especially when fear is growing.
When people are worried or otherwise feel a heightened sense of uncertainty,
they will gladly hold on to abnormally large amounts of cash – for
a while. But when fear abates, as it will when the economy begins
to recover from the recession, that temporary demand for extra cash
will also fade, and the hot-potato process of trying to pare down
cash balances will emerge to do its inflationary work.
But when?
The speed at which the public tries to unload excess cash and the
timing of the effects have actually been measured, in the work of
the late Milton Friedman and his monetarist colleagues. The method
was indirect and roundabout, and so the results, unsurprisingly, were
nothing as precise as nailing down the value of a physical constant.
What the monetarists (or the first of them to be equipped with computers)
found was that when the growth rate of the money supply rises:
- The initial effect is on the prices of bonds and stocks, an effect
that comes within a few months.
- The peak effect on the growth rate of economic activity comes
about 18 to 30 months after the pick-up in the growth rate of the
money supply.
- The peak effect on the rate of consumer price inflation comes
about 12 to 18 months after that, which is to say it comes 30 to
48 months after the peak growth rate in the money supply.
As Friedman famously put it, the lags in the effects of changes in
monetary policy are "long and variable." He might have said, "It's
a big, wide blur, but we're sure we've seen it."
And even that picture exaggerates the precision that's available to
us. The emergence of money substitutes, such as NOW accounts and money
market funds, has added its own muddiness to the picture of how growth
in the money supply translates into growth in the level of consumer
prices. It is only because the recent episode of monetary expansion
has been so extreme that we can look to the results just listed for
an indication of what's to come.
If you apply the findings of the monetarists to the present situation,
here's what you get. The peak growth rate in the money supply occurred
last December, so based on the general monetarist schedule:
- Some of the effect on stocks and bonds should already have been
felt.
- The peak effect on economic activity should come between the middle
of 2010 and the middle of 2011.
- The peak effect on consumer price inflation should come between
the middle of 2011 and the end of 2012.
A More Particular Schedule
This time around, should we expect things to move more rapidly or
more slowly than average? My bet is on slow, which would push the
peak inflation rate out toward the end of 2012. One reason for slow
is that the government's rescue packages are delaying the process.
Rescuing banks that are choking on bad loans postpones the day of
reckoning for both the banks and the loan customers. It retards
the pace of foreclosure sales (whether of real estate or other collateral)
and puts the deleveraging that has been going on since last fall
into slow motion. A wilting of the recent stock market rally would
confirm this.
Investment Implications
The big plus about the Mayan calendar is that, right or wrong, it
is very definite about things. Human civilization will come to an
end, I'm told, on Dec. 21, 2012 – not on the 20th and not on the 22nd.
There was no room for monetarists in those step-sided pyramids, but
there still are few what-to-do implications from the monetarist findings.
- When you hear would-be opinion leaders cite the current absence
of rising prices at the supermarket as proof that all the new money
isn't a source of inflation, don't believe them. It is much too
early for the inflation bomb to be going off, even though the powder
has been packed and the fuse has been lit.
- If the large and growing federal deficits and the Federal Reserve's
unprecedentedly easy policies tempt you to leverage up on inflation-sensitive
assets, such as gold, give the idea a second thought. It likely
will be a year or more until price inflation becomes obvious and
undeniable (which is what it would take to bring the general public
into the gold market). In the meantime, your inflation-sensitive
assets could get paddled rudely as the deleveraging that began last
year continues.
For at least the next year, the simple, fire-and-forget strategy
is 50-50 gold and cash – gold for what looks to be inevitable but
on its own schedule, cash to be ready for the bargains that may show
up while we're waiting for the inevitable to arrive.
The editors of The
Casey Report keep their ears to the ground, listening
for the first rumblings of the inflation stampede coming in. But you
can bet on rising inflation – and interest rates – right now and be
way ahead of the investing herd. To learn more about investing in
this all but inevitable trend, click
here.___________________________________________________________________________
What If Everyone in the World Wanted a
1-ounce Gold Coin? Mounted
September 25, 2009
By Jeff Clark, Senior Editor, Casey’s
Gold & Resource Report
If we’re right about where the price of gold is headed, the general
public will someday clamor to buy all things gold. While gold stocks
will be where the real leverage is, the rush will start with gold
itself. As a gold editor, I have a very natural question: is there
enough to go around?
According to the U.S. Census Bureau, there are 6.783 billion earthlings.
Meanwhile, CPM
Group, a highly respected industry organization, estimates there
are 4.8 billion ounces of above-ground gold in the world. And this
includes jewelry, electronics, and dental. So, even if everyone
around the world volunteered to have their chain, cross, or tooth
melted into a coin, we’re already short. Those towards the end of
the line are out of luck.
However, it’s worse than that. Of all the physical metal ever mined...
- 2.1 billion ounces, or 43%, is found in jewelry, decorative, and
religious items.
- Private stock – gold already held by various private parties –
accounts for 1.1 billion ounces.
- Official reserves (central banks, IMF, etc.) stand at 1 billion
ounces.
- Industrial use accounts for 530 million ounces.
Very little of this is likely to come available for purchase in coin
form. After all, you’re not selling any of your gold, and neither
are many banks or institutions. Most everyone is buying.
So for those who don’t yet have a gold coin (or you greedy investors
who want more than one), this pretty much leaves us with mine production
and scrap sources.
CPM forecasts that total new supply in 2009 will be around 122 million
ounces. Only a small percentage of this is made into gold coins and
bars, but if all of it were, it would amount to less than two one-hundredths
of an ounce, or about half a gram, for every man, woman, and child
on earth this year. A product of this dimension is about half the
size of that small button on your shirt collar.
Since this supply is only available annually, it means 0.018% of the
global population – one in every 55 people – could buy a one-ounce
gold coin this year. Or, said differently, it would take 55 years
before everybody had one, assuming the population never increased
(it is) and supply never decreased (it is).
But it’s worse than that. Actual 2009 coin production will be around
5 million ounces (excluding medallions or “rounds”), leaving two one-hundredths
of a gram of gold (or 0.3 of a grain) available this year
for each of the planet’s inhabitants. This is about half the size
of the sesame seed that fell off your hamburger bun at dinner last
night. It means that only 0.0007% of earth’s citizens – or one in
1,356 – can buy a one-ounce gold coin this year, and it would take
1,356 years for everyone to get one.
How’s that for a supply squeeze?
But it’s worse than that. Demand continues rising. Gold is more frequently
in the news, attracting more customers every day. Hedge funds, which
never before considered gold, are now buying physical metal (Greenlight
Capital actually sold $500 million of GLD and bought physical gold).
Central banks are net buyers of gold for the first time in 22 years.
China is running TV ads encouraging its citizens to buy gold and silver.
Last month Russia bought more gold than they actually produced. In
a recent survey, 20 out of 22 fund managers bought physical gold for
their personal investments. In other words, some investors are already
scrambling to get it… and in big quantities.
But it’s worse than that. Most of the ramifications of the money printing
and dollar debasement haven’t even surfaced yet. How will the general
public react when the dollar is crashing and standards of living are
threatened? What will they do when milk and gas prices surge to twice
what they are now? How will the greater collective respond when they
lose faith in government interventions? Where will they invest when
they see gold and silver prices screaming upward and don’t want to
be left behind?
The panic into gold by the general public hasn’t begun yet. Available
supply is scarce and will get smaller. There won’t be enough.
Better get your speck while you can.
[The current issue of Casey’s Gold & Resource Report has
a few charts that should come with a warning. We examined just how
small the gold and silver markets are, and “explosive” barely describes
the potential. If you want to check it out for yourself, consider
a trial subscription – 3 full months with 100% money-back guarantee. Click
here for more.]
.___________________________________________________________________________
Is the Fun for Gold Just Beginning? September
11, 2009
Jeff Clark, Senior Editor, Casey’s
Gold & Resource Report
You likely heard that the Central Bank Gold Agreement was extended
by the signatory banks last month. This is the agreement where central
banks around the world agree to limit sales and to do so in an orderly
fashion so as to not disrupt prices.
While most writers focused on the fact that the agreement set a lower
limit (400 tonnes per year, down from 500) – clearly a bullish indicator
– I think there’s a more obvious fact many are overlooking that’s
even more bullish.
In the first two 5-year agreements, CBGA signatories sold 4,000 tonnes
of gold, or approximately 141 million ounces. This is an incredible
amount of gold to dump on the market; it’s equivalent to almost two
entire years of global production. Based on an average gold selling
price over those 10 years of $600, this equals approximately $84.6
billion of gold.
This amount of sales should’ve had a hugely depressing effect on such
a small market. After all, the gold market is smaller than the market
cap of Walmart. If I had asked you in advance of those sales to estimate
the price of gold once all the metal had hit the market, you probably
would have said it would have lost half its value from its $252 levels
(when the selling started), or more. In other words, a price around
$125 per ounce.
But what happened during those 10 years? The gold price soared,
rising from a 1999 low of $252 to its current price of $950, close
to a quadruple. I wonder what the price would be if central banks
had been hoarding gold, like us, instead of selling it?
Now that the CBGA has agreed to sell even less gold, the depressing
effect sales have on the price will lessen. Add in the fact that sentiment
among central banks is shifting from anti-gold to pro-gold, and I
think it won’t be long before $1,000 is the new floor of the gold
price and not the ceiling.
Yes, the fun is just beginning.
And while gold is likely to move up, gold-related investments – such
as large-cap gold producers and near-producers – can give you even
more of an upside. One of our current favorites is a stock that has
been providing steady gains over the last year, even during times
when the Dow and S&P dropped off a cliff… that’s why we call it
“48 Karat Gold.” Learn
more about it here.___________________________________________________________________________
Washington Capitulates: Peak Oil Is Real
By Doug Hornig, Editor, Casey’s
Energy Opportunities
Each year, generally in May, the Energy Information Administration
publishes a less-than-eagerly-anticipated tome called the International
Energy Outlook, 250+ pages of mind-numbing text, charts, graphs,
and tables.
No one reads it. The mainstream media ignore it.
It’s the product of the best prognosticators in the Department of
Energy. Okay, that may be what puts most people off. But if you’re
patient enough to dig into it, it will cough up some fascinating nuggets
of information.
The present edition is no exception. The report refrains from spelling
out the conclusion that seems most obvious from its data. However,
confirming a trend begun just last year, the 2009 edition clearly
reveals that the government has been forced to admit that Peak Oil
is coming. Moreover, it’s expected to arrive much faster than was
believed as recently as two years ago.
This represents a remarkable turnaround in the agency’s opinion.
Up until 2008, they were predicting unbroken growth in world oil supplies
for the next two decades. But in ’08 and ’09, the rosy picture turned
decidedly unrosier.
Before we look at the numbers, a couple of notes on terminology.
The EIA makes its projections based on what its analysts call the
“reference case,” i.e., average economic growth. It also provides
estimates for better- and worse-case scenarios, but the reference
case represents the best guesses they have.
Oil (as we generally think of it), upon which most of the world economy
depends, is termed “conventional liquids,” i.e., the stuff that comes
gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy
oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are
also covered in the report, as we’ll see, but conventional is far
and away the most important one at this moment in history.
With that in mind, by 2007 the IEO was in its final year
of irrational exuberance, confidently predicting that world production
of conventional liquids would be 107.5 million barrels/day (up from
81.9 in 2005). That dovetailed nicely with a forecast for world demand
of 118 million b/d, with 10.5 million barrels of unconventional liquids
taking up the slack.
By ’08, they had put the info into table form, and look what happened:
Same table, ’09:
Projected production, as you can see, is suddenly shriveling up.
From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9
million b/d in 2008, to this year’s meager expectation for 93.1 million.
That’s a drop of 13.4% in only two years, and posits production growth
of only 11.6 million b/d (14.2%) from 2006 levels.
If that isn’t an admission that the era of Peak Oil is upon us, what
is?
The report assumes that some of this stunning shortfall will be made
up by development of unconventional liquids to the tune of 13.5 million
b/d, including a jump of 5.9 million b/d in biofuels. At the same
time, while conventional liquid production from non-OPEC nations is
projected to grow only 7%, OPEC is expected to substantially increase
its contribution, ramping up output by almost 25%. (All figures are
for the period of 2006-2030.)
Does this seem optimistic? Well, it presupposes some heavy lifting
on the part of OPEC, a dicey proposition in the best of times.
And it means creation of the infrastructure necessary to
exploit extra-heavy oils, tar sands, shale, ultradeep deposits and
other unconventionals, all of which require sophisticated technological
know-how and face significant environmental challenges.
Biofuel production could more easily be elevated. But to reach the
lofty level of nearly 6 million b/d would necessitate a huge diversion
of cropland from food to energy, certain to be attended by a rise
in food prices, not to mention potentially serious food shortages.
The need for food being rather more primal than the need for gasoline,
politicians are going to be reluctant to risk loosing angry mobs into
the streets.
Even if all of these developments proceed flawlessly, though, we’ll
still have to face a widening gap between production and consumption.
Or will we?
As it turns out, we’re in luck! Or so the EIA would have us believe.
Because, accompanying that falling supply is – you guessed it – declining
demand. In 2007, the IEO anticipated world demand for all
liquids of 118 million b/d in 2030. This year, that estimate shrank
to 107 million b/d, right in line with production.
The important point to take away from the IEO’s analysis
is that the world is facing a decline in liquid fuel production and
the government, after years of straight-faced denial, is now admitting
it.
Does this mean we’re going to run out of oil? No. But supply constrictions
mean that the good old days of limitless, cheap oil are gone. And,
though viable alternatives eventually will be developed, there’s no
way of putting a timetable on that. In the interim, we’re going to
have to pay up if we want to keep the family jalopy on the road.
How much? The IEO report’s reference case calls for $130/barrel
oil in 2030, but that’s based on relatively modest demand increases
from India, China, and other developing nations, and we find it very
optimistic. It easily could be twice that.
Rising oil prices mean some belt-tightening, but they also offer
investment opportunities, in both conventional and unconventional
resource companies. In addition, power-generation alternatives such
as solar, nuclear, and geothermal will be coming to the fore.
But discovering the right companies with sound fundamentals and the
potential for handsome returns isn’t easy. Read our report how a math-prodigy-turned-multimillionaire
finds those companies… and how you, too, can profit from his secret
system. Click
here to learn more.
___________________________________________________________________________
What You Have in Common with King Nebuchadnezzar
By Jeff Clark, Editor, Casey’s
Gold & Resource Report Posted August 12, 2009
“There’s no reason to invest in gold,” said the finance editor of
a major newspaper interviewing me. “If gold goes up because of inflation,
then so does everything else, so why buy it? It’s not really a good
investment.”
She was serious. Yes, she is a finance writer. And yes, it’s a newspaper
you’ve heard of.
I was so dumbfounded that I must have sounded like an infant struggling
to form its first words when I attempted to counter this inane line
of thinking. Tell me you’re a deflationist, tell me the Fed will rescue
us, tell me foreigners will keep buying our debt – but don’t tell
me that gold serves no purpose!
I tried to point out the exploding monetary base, the soaring debt,
the failing economy – but it was readily apparent her mind was made
up. The interview was over and she hung up.
It may sound vengeful, but I’m tempted to keep a list of people whom
I could remind someday of their negative comments about gold. I’d
put “Betsy” at the top. I probably would chicken out in the end, but
right now it’s a wonderful reminder of why we’re not in a bull market
mania yet. Besides, I think the odds are stacked in my favor that
she’ll someday be buying insanely inflated gold stocks from me. I’ll
have to thank her then.
But I can address Betsy’s misunderstanding now, because part of what
she said is correct: gold is not an investment. Gold’s
primary purpose is to preserve your purchasing power. Whether
it be roaring inflation, or dollar debasement, or economic upheaval,
or out-of-control government spending, it has been the absolute best
form of protection throughout the history of mankind. And I can prove
it.
Let’s trace what an ounce of gold or silver – true money – has been
able to purchase at various periods in history, and how it compares
to today.
1979: Gold’s average price that year was $306.68.
This bought an average-priced full size bed.
►30 years later, $950 would still buy you a full size
bed.
1963: A gallon of gasoline in America sold for 31
cents. This meant that 3 silver dimes could buy a gallon of gasoline. The
total weight of silver in 3 silver dimes is .217 of an ounce.
►Today, 3 silver dimes would buy a gallon of gasoline anywhere in
the U.S.
600 AD: In the Middle East, a chicken at the time
of Mohammad would cost a family one silver Dirham (3 grams).
►Today, 1,400 years later, a chicken in the Middle East would still
cost a family one silver Dirham.
Time of Christ: Under the Roman Empire, an ounce
of gold purchased a Roman citizen his toga (suit), a leather belt,
and a pair of sandals.
►Today, one ounce of gold will still buy a man a suit, a leather
belt, and a pair of shoes.
400 BC: Some scholars report that during the reign
of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread.
►Today, an ounce of gold still buys about 350 loaves ($950 divided
by 350 = $2.73/loaf).
1000 BC: King Solomon was known to have purchased
many horses for his army. Historical records show he bought them in
Egypt for 150 shekels of silver each. 150 shekels was about 55 troy
ounces of silver.
►Today, you can still buy a riding horse for 55 troy ounces of silver
($800).
Betsy, gold has characteristics no other matter on earth has...
Gold cannot be…
- Printed (ask a miner how long it takes to find it and dig it up)
- Counterfeited (you can try, but a scale will catch it every time)
- Deflated or inflated (it can’t be reproduced)
Gold cannot be destroyed by…
- Fire (it takes 1945.4 degrees F to melt it)
- Water (won’t rust or tarnish)
- Time (a gold coin remains recognizable after a thousand years)
Gold doesn’t need…
- Feeding (like cattle)
- Fertilizer (like corn)
- Maintenance (like printing presses)
Gold has no…
- Time limit (most gold mined is still in existence)
- Counterparty risk (remember Bear Stearns?)
- Shelf life (it never expires)
Gold as metal is…
- Malleable (spreads instead of crushes)
- Ductile (stretches without breaking)
- Beautiful (just ask an Indian bride)
Gold as money is…
- Liquid (easily convertible to cash)
- Portable (you can hold $50,000 in one hand)
- Private (no mandatory reporting here)
Gold is internationally accepted, lasts for thousands of years, and
best of all, they aren’t making any more of it.
Now, Betsy, are you sure there’s no reason to buy gold?
As the editors at Casey Research have been saying over and over again:
Buy Gold, buy silver, buy sound gold-related investments. Our current
favorite has been gaining so steadily – even in times when the Dow
and S&P were tanking – that we call it “48 Karat Gold.” Click
here to learn more.
___________________________________________________________________________
Is Natural Gas Cheap? July 25, 2009
By David Galland, Casey
Research
At the height of its late 2005 rally, natural gas in the U.S. was
selling for just over $16/MMBtu, 350% higher than today’s price of
$3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting
that natural gas is dirt cheap. So, it’s a buy, right?
In a phrase, not exactly.
According to a recent report by Natural Gas Intelligence,
U.S. natural gas available for production “has jumped 58% in the past
four years, driven by improved drilling techniques and the discovery
of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania,
according to a report issued Thursday by the nonprofit Potential Gas
Committee (PGC).”
According to the report, the increase in gas discoveries and production
improvements means that North America shouldn’t have to be concerned
about gas supplies for up to 100 years!
Dr. Marc Bustin provided an overview of the situation
in the May edition of Casey Energy Opportunities.
In the United States, the tremendous growth in natural gas resources
and estimated recoverable natural gas, particularly from gas shales,
just in the last two years (Figure 1) is sending tremors through the
entire industry. These tremors include the risk of making obsolete
the proposed $26 billion Alaskan and $16 billion northern Canadian
pipelines to tap northern gas resources and a slue of proposed LNG
terminals... unless they are for export!
The numbers currently kicked around are that something around 2,000
trillion cubic feet of gas are technically recoverable in the United
States. At current production rates, this supply would last about
90 years.
Some analysts are predicting that even if the U.S. economy recovers
in the next year, the amount of gas discovered to date in gas shales
will severely dampen any increase in gas price for some time. According
to a new study by energy consulting firm CERA (Cambridge Energy
Research Associates), new technologies for unconventional gas
fields are being applied so successfully that supply is essentially
no longer a driver in either production or price in the North American
gas market – whatever the market wants, North American gas fields
can supply. CERA reports that natural gas production in the Lower
48 states has risen a startling 14% from 2007 to 2008, for example.
Figure 1. Major shale areas or formations
in the U.S. and the estimated recoverable natural gas in 2006 and
2008. Modified from Daily Oil Bulletin (May 4, 2009).
Given the increase in production and the small slide in demand, the
price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down
from $13 per MMBtu last summer). At these prices, many gas prospects
are uneconomic, and thus there has been a marked decline in the number
of wells being drilled. Rig activity (how many rigs are operating)
is down about 50% in North America.
But here is where an interesting feedback mechanism kicks in. One
of the characteristics of unconventional shale gas wells, and to a
lesser extent natural gas wells in general, is that the production
rate declines through time. Most shale wells’ production rates decline
60 to 90% in the first year. If you were a gas company trying to survive
amidst today's low prices, the rate of return on your capital investment
would also be painfully low for a significant amount of gas if this
were your initial year of production.
Another complementary fact is that over 50% of natural gas consumed
in the United States today is from wells drilled less than three years
ago, and 25-30% of the gas produced today comes from wells drilled
last year (Figure 2).
Hence it follows that if there are 50% fewer wells drilled this year
(from the drop in rig activity), new production will decline about
35-40% by the end of the year, so there will be gas shortages. Those
will in turn lead to higher North American prices, which in turn should
lead to additional drilling.
Figure 2. Historical gas production
in the U.S. showing the percentage of production from vintage of well
(modified from Chesapeake April 2009 Investor presentation from original
data of HIS Energy)
Everything else being equal (which it's not, this being the real,
not the mathematical world), gas prices and drilling will see-saw
until an equilibrium is reached. In detail, of course, things are
more complicated, but it is pretty clear that gas prices will have
to rise within the year, and the big losers will remain the more expensive
plays that require higher gas prices to be economic.
Where will the gas price end up in the short term? A poll of analysts
by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009),
but I don’t think I would bet on a gas price based on a vote by analysts.
At the same time, it's an interesting coincidence (or not – coincidence,
that is) that many prospects become economic at around the $6 MMBtu
range. Among them are the Haynesville and Marcellus shales – and it's
no large leap from there to see their tremendous gas production potential
acting as a buffer to gas prices going much higher in the near term.
Thus, while there may be some seasonal and relatively short-term trading
opportunities in natural gas, the overhang of ready supply places
a fairly firm cap on the price. Which begs the question, which big-trend
energy opportunities should be getting our attention today?
Marin Katusa, who heads the Casey Research energy
team, answers the question by, correctly, cataloging the opportunities
according to geography.
In North America
1. Geothermal -- the most interesting of the alternative
energy sources, by a wide margin.
2. Nuclear.
3. Oil.
In Europe
1. Unconventional gas has, by far, the most upside.
2. Unconventional oil.
3. Small hydro (such as run of river).
In Africa
First and foremost, you want to avoid infrastructure plays (pipelines,
refineries, etc). Then you want to look for areas with huge oil potential,
which have been held off the market by concerns over political risk.
I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya,
hunting for “elephants” with the idea of eventually selling the discoveries
off to the Chinese.
In Asia,
1. Liquid Natural Gas (LNG)
2. Coal Bed Methane (CBM)
Lessons to Learn
There are a couple of useful lessons to be derived by investors looking
to tap into the virtually unlimited opportunities in energy.
First, just because something is “cheap” doesn’t mean it can’t stay
cheap, regardless of historical ratios -- if there has been a fundamental
shift in the supply/demand equation. Which is very much the case with
North American natural gas.
Secondly, geological and transport considerations make much of the
energy complex a “local” market.
For example, while North America enjoys an abundance of natural gas,
Europe is forced to rely on the heavy-handed Russians for the bulk
of supplies. As you read this, there are companies looking to break
the Russian grip by applying the same unconventional gas technologies
that have so successfully built gas supplies in the U.S. -- technologies
that are only just now being applied in Europe. Early investors could
reap huge profits.
In short, the real opportunities are not found by simply “investing
in energy” but rather by taking the time to understand the structural
differences within the energy complex and cherry picking the special
situations that invariably exist in a sector this large.
David Galland is the managing director
of Casey Research, LLC., a private research firm providing independent
analysis and investment recommendations to individual and institutional
investors in North America and over 100 other countries around the
globe. To learn more about the monthly Casey Energy Opportunities advisory,
including a special three-month,
fully guaranteed trial subscription, click here now.
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