Tuesday, September 11, 2007


The CRB is composed of energy, agricultural and industrial commodities. The price of precious metals is a whole 'nother story. The recent "flight" to quality saw the price of treasury securities jump and the price of gold jump. Any "flight to quality" is a "fear response" to an event or events. The "meltdown" of the sub prime paper market had people around the world running for safe havens. Even the price of gold is getting lower and lower in inflation adjusted terms. Those who bought gold more than a year ago at $700 cannot sell it now at a real, after inflation adjustment, profit. Seven hundred dollars in a good money market account for a year is now better than $730.

Gold is special but it pays no dividend; it earns no interest; it is what it is, but never more or never less. Yes, gold is an industrial metal, but we use substitutes whenever we can. As an industrial metal, gold is used up but most of the gold in the world is held as a "safe" store of value. Holding gold is very much like insurance. There is a significant cost to owning an insurance policy but we do it to reduce the extremes of our personal risk-reward. In other words, I cannot fault anyone for keeping a few thousand dollars in gold, provided they understand this is an emergency reserve and that there is a steady long term loss of value. The after inflation value of gold drops at about the same speed as the value of a printed dollar. It makes no sense to keep a lot of cash or gold hidden in a mattress.


The false reasoning that I constantly see is the idea that "we are running out of resources". The idea was common for centuries because lots of people were always at risk of running out of food. The supply of gold available is more than we will ever need. Just as the supply of oil available is much more than we will ever need.

Over the next 10 years, more industrial metals will be used in the production of electronic gadgets than ever before. The boom in gadgets is nowhere near the end. However, each of these gadgets is more powerful and smaller than the gadgets they replace while using less resources per gadget. The real "win" is that these gadgets often replace the need to spend many times more resources.

A lot of gold will be used in the production of electronic connectors over the next 10 years but one gaudy gold chain is enough to produce 10's of thousands if not 100's of thousands of connectors. There is still more gold in the ground than all that we have ever dug. Indeed, there is more gold on the ocean floor than we have ever used. There is a cost to go get it and depending on the next invention, the relative value of gold to titanium might change dramatically. However, in the long run, the relative value of gold goes lower and lower and lower to our standards of living. In the old days, a fellow who owned a bar of gold was a very wealthy man. Today, millions of people live in houses that would make that wealthy man's house look like a chicken coop.

OIL, OIL and More OIL

Today, OPEC will decide to hold production levels or not. Saudi Arabia has an extra 500,000 barrels of supply available. In two more years, a huge project will give Saudi Arabia another 1.2 million extra barrels. With Iran and Venezuela pumping at 100% of capacity, they have little desire to increase quotas. From a fairness point of view, it makes sense for all the OPEC producers to produce at a set percentage of capacity. The current excess capacity of about 3 million barrels per day is largely available from Saudi Arabia. Does it make sense that Saudi Arabia would spend $6 Billion to develop a 500,000 barrel field only to sequester 100% of its production?

In the old days, OPEC routinely increased production quotas in the winter time in order to supply the heating demands of the Northern Hemisphere. However, substitutions have been easy for winter time heating needs relative to summer time transportation needs. It is simply much easier to burn extra coal for heating purposes than it is to somehow convert coal into fuel for automobiles. Even Toyota has struggle when trying to make their hybrid vehicles "more electric and less gasoline". Much work is being done to figure out the best way to "refine coal" into liquid fuel.

The political left continues to beat their drums about "renewable" energy. They are willing to fight the use of more coal at every juncture. It does not matter if coal can burn clean to them. They score no political points for finding a solution to the "energy crisis" but they win big as long as they are able to convince a gullible public that we must develop renewable energy because we are going to "run out" of the good old stuff. Of course, the battle is tangled up with the "environmental cause". We plow 90 million hectares of rich top soil annually to grow pesticide laden corn in order to "save the environment". What a shame and what a waste!

The good news is that the "energy crisis" is on its last cyclical leg. Over the next two to five years, the investments already made and being made in energy production will start to bear fruit, just as the investment in production of more efficient autos and other uses will bear fruit. Keep in mind that the extra money now being spent on gasoline is going to flow into "electronic gadgetry" and the software required to operate these gadgets. This software will include music and videos. The hand held "Dick Tracy" watch is just around the corner. The use of these gadgets will save a lot of gold.