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Commentary

Opportunities & Peril in the Gold-Food-Oil-QE Connection


April 25, 2011

“Things are certainly speeding up, and it is my conclusion that we are not more than a year away from the next major financial and economic disruption…

In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time…

The world's banks face a $3.6 trillion "wall of maturing debt" in the next two years and must compete with debt-laden governments to secure financing, the IMF warned on Wednesday…

The debt rollover requirements are most acute for Irish and German banks…

When both big banks and sovereign entities are simultaneously facing twin walls of maturing debt, it is reasonable to ask exactly who will be doing all the buying of that debt? Especially at the ridiculously low, and negative I might add, interest rates that the central banks have engineered in their quest to bail out the big banks…

"Contagion" is the fear here. With Ireland and Portugal already well down the path towards their own defaults, it is Spain that represents a much larger risk because of the scale of the debt involved…

If Spain is hoping for a rescue by China, it had better get their cash, and soon. As noted here five weeks ago in "Warning Signs From China," a slump in sales of homes in Beijing in February was certain to be followed by a crash in prices. I just didn't expect things to be this severe only one month later:…

Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday…

Housing transactions in major Chinese cities monitored by the China Index Research Institute (CIRI) dropped 40.5% year-on-year on average in March

What happens next is also easy to 'predict' (not really a prediction because it always happens), and that is mortgage defaults and banking losses, which compound the misery cycle by drying up lending and dumping cheap(er) properties back on the market…

If China enters a full-fledged housing crash, then it will have some very serious problems on its hands.

A collapse in GDP would surely follow, and all the things that China currently imports by the cargo-shipload would certainly slump in concert…

The reason we care if China experiences a housing bust is the turmoil that will result in the global commodity and financial markets as a result…

China is barreling toward its own full-fledged real estate crisis, which will drain its domestic liquidity just as surely as it did for the Western system, and probably even more quickly, given the stunning drop-offs in volumes in prices…

…it would seem that the financing needs of the West will not be met by the East…

One important way to track how this story is unfolding is via the Treasury International Capital (TIC) report…

Net foreign purchases of long-term securities totaled a lower-than-trend $26.9 billion in February

…the US government will need someone to buy roughly $130 billion of new bonds each month for the next year. So the question is, "Who will buy them all?"…

Sadly, the budget 'cuts' proposed so far in Washington DC are too miniscule to assist in any credible way… The Obama administration has proposed $38 billion in spending reductions…

How much is $38 billion?

  • Less than 2 weeks of new debt accumulation (on average)
  • About 2 weeks of Fed thin-air money printing, a.k.a. QE II

 

In other words, it's a drop in the ocean.

It is this lack of seriousness that is driving the dollar down and oil, gold, silver, and other commodities up…

There are two entirely, completely, utterly different narratives at play here. One of them is that the economy is recovering, policies are working, and the vaunted consumer is either back in the game or close to it. The other is that the world is saturated with debt, there's no realistic or practical model of growth that could promise its repayment, and the level of austerity required to balance the books is so far beyond the political will of the Western powers that it borders on fantasy to ponder that outcome…

The IMF, the World Bank, the BIS, and numerous other institutions with access to $2 calculators have finally arrived at the conclusion that there's still 'too much debt' and that it cannot all be paid back. And they are now alert to the idea that the predicament only has two outcomes: either the living standards of over-indebted countries will be allowed to fall, or the global fiat regime will suffer a catastrophic failure.”

“The Breakdown Draws Near”
Chris Martenson, chrismartenson.com, 4/19/11

 

Yes, indeed there are two possible economic financial futures. Either the Citizens/Investors of Fiat Currencies Countries take a Huge hit through the Degradation of the Purchasing Power of those Currencies (already happening is the U.S. Dollar " the trade weighted dollar adjusted value of the S&P has actually dropped this year) " OR The Mega Bankers (whom we citizen/Investors Bailed Out) will have to take a substantial Haircut on the money “owed” to them.

Indeed, the former is already occurring via QE and similar policies.

Thus, the increasing number of Commentators who claim that Fed Money Printing (e.g. QE) and Credit Policies are The Main Cause of recent Rampant Food and Energy Price Inflation are correct.

This Fact is likely among those which impelled Marc Faber to comment that Bernanke is the “Murderer of the Middle Class”.

For Investors, it is important to put numbers on the Oil-Food Connection. The Food Supply System uses about 12%+ of the World’s Total Energy Supply from All Sources (not just oil).

But of the Energy devoted to Food Production nearly two-thirds comes from Oil (Chefurka, Pfeiffer). And that two-thirds which comes from Oil constitutes about 23% the world’s oil Production.

Bottom line: Nearly one quarter of all Crude Oil production is used for our Food Production.

It is important to understand Why from Oil? Oil is a Portable Fuel, and Portable Fuels are essential (and/or the most useful) to Plant, Cultivate, Fertilize, Harvest and Process Food. While LNG and electrically charged vehicles could in future reduce oil demand from agriculture (though not energy demand overall) widespread use of these alternatives is a long way off.

There is legitimate debate over when “peak oil” production will occur (or whether it has already), but there can be no dispute that actual production has been relatively flat " about 84 Million bbl/day for the last few years, notwithstanding new discoveries (e.g. off the coast of Brazil) and new technology for unlocking oil from shale (as e.g. in South Texas). Production from The relatively “Easy” Elephant Fields (e.g. Ghawar in Saudi Arabia and Canterell off shore Mexico) and Reserves are diminishing significantly.

But the World’s Population is increasing by some 80 Million/Yr. with Much of that increase coming from the BRICs whose increasing affluence is increasing demand and, therefore, the Price of Food. But in the past few months, The Primary Factor in the dramatic Food and Energy Price Spikes we have seen is neither Oil Price Spikes nor increasing demand (though they have been and will be Major Causes over the long haul).

Indeed, The Major Cause of recent Food Price Spikes has been the Fed’s Money Printing (QE 1 and 2). Yes, we know much of that money has gone into Increased Reserves to help Banks’ Balance sheets rather than being lent to Main Street, but those reserves have provided the capital to make increased speculation possible. Leveraged Positions are just about as high now as they were before the 2008 Market Crash.

While that QE (via e.g. POMO-pumping and Fiat Currency Purchasing Power Degradation) has kept Equities Markets inflated, it has launched Food and Energy prices UP also.

But Food Demand (and to a lesser Extent Energy Demand) is relatively Inelastic, compared with, say, demand for, say, Vacation Cruise Ship Bookings.

People must eat and need some (but somewhat variable) amounts of energy.

And (mainly because most quality arable land is already in Production and requires increasing fossil fuel inputs merely to sustain current levels of production) the 80 Million annual World Population increase tends to Drive up Food Prices. For example, consider specifically what this means for the USA, which is growing by some 4 Million Plus/Yr. 90% of which comes from Immigration " see Note below.

And when this Factor is coupled with dramatically increased Fed-facilitated money printing and borrowing, prices for Essential Food and Energy Skyrocket.

In sum, unlike Equities Markets Levels, which have been and are subject to Price Manipulation, Food and Energy Price levels are in large part a Function of Real Demand in the Real World. As QE degrades the Purchasing Power of Fiat Currencies like the U.S. Dollar, Food and Energy Prices Soar.

To put this in perspective consider that every 0.6 Tonne (six tenths tonne) of Grain produced requires one Tonne of Oil.

Here, it is essential to note that Official Figures do not give us an Accurate Picture of Real Price Inflation or Related Key Indices. Indeed, in many important respects Official Figures are Bogus.

For example, Shadowstats.com calculates Key U.S. Statistics the way they were calculated in the 1980s and 1990s before Official Data Manipulation began in earnest. Consider

Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)

Annual U.S. Consumer Price Inflation reported April 15, 2011
2.68% 10.2% (annualized March, 2011 Rate)

U.S. Unemployment reported April 1, 2011
8.8% 22%

U.S. GDP Annual Growth/Decline reported March 25, 2011
2.78% - 2.21%

U.S. M3 reported April 17, 2011 (Month of March, Y.O.Y.)
No Official Report - 0.87%

Reviewing the Aforementioned Figures (Note: CPI is rising up to 10.2% annualized from 9.6% in February) makes it easy to understand why Gold and Silver Prices have been skyrocketing lately.

Gold and Silver are Real Money, and as increasing numbers of Investor-Citizens around the World become aware that the Purchasing Power of their Fiat Currencies is diminishing (10.2%/yr. in the USA!), the more they flock to purchase these Precious Metals.

Of course, thus Trend greatly concerns the Mega-Bankers because it tends to delegitimize and degrade the value of their Paper/Digital Treasury Securities and Fiat Currencies (as well it should!).

That is why for many years This Cartel* has conducted and continues to conduct Price Suppression Operations on Gold and Silver.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.

But these operations are becoming increasingly difficult as the Fiat Currency printing presses continue to roll, and as there is increasing evidence that physical Gold and especially physical Silver are in increasingly short supply, and that certain Precious Metal repositories do not have the Physical Metal they say they do.

It is no secret that Deepcaster has for many months recommended being long Gold and Silver. (Indeed, Subscribers who followed our Recommendations should have made substantial profits on Partial Position liquidation of Silver recently.)

But given the aforementioned overview, and the Specifics regarding Oil and Food set out in the Note below, there is another Sector which is not yet very prominently on the Radar Screens of many Investors: Food and Potable Water.

More than Energy or Even Precious Metals, Food and Potable Water must be at the top of Consumer Shopping lists everywhere around the world. With demand increasing from the 80 million plus annual world population increase, and increased resources of a growing Middle Class, especially in BRIC countries, to buy more and better Food, Food Producers are in the Catbird Seat. The Problem is exacerbated by the fact that most of the World’s best arable land is already under cultivation.

Bottom Line: Gold and Silver Investors should also invest in selected Food Producers at the Right Time, because the Factors which help cause Gold, Silver and Crude Oil Prices increases, will also impel Food Price increases.

Thus, Deepcaster recently recommended two such Food Producers and one Water Producer and Management Company, all of which we believe to be deeply undervalued (one is trading at under $6/share and the other two under $2/share), in our recent Letter and Alerts.

One is China’s largest producer and Seller of Fresh Fruits and Vegetables. It also grows Rice and breeds and sells livestock and has over 20,000 employees.

It recently had a P/E Ratio under 4 and profits have grown over 20%/yr.

As we write it is trading at around 65 cents per share U.S. or just below $5 HK, near its 52 week low.

To Consider these three “Best of the Best” Food Sector Core Position Investments, read our March Letter " “Main Gold, Silver & ‘Sleeper’ Sector Price Movers; ‘Sleeper’ Buy Reco.; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar, and U.S. T-Notes & T-Bonds; March 2011 Letter”, and our Alerts " “Golden Green Opportunity Buy Reco.; Forecasts: Commodities, Gold, Silver, Equities, Crude Oil, U.S. Dollar, and U.S. T-Notes & T-Bonds” (week ending February 4, 2011) and “Eye of the Storm; ‘Liquid Gold’ Buy Reco.; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar, and U.S. T-Notes & T-Bonds” (week ending February 11, 2011) in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com.

Keep Buying Physical Gold and Silver on the Dips. You may need them some day to buy Food.

 

Best regards,

Deepcaster
April 21, 2011

 

Note: Regarding the USA’s Oil-Food Future Probable Crises consider the following Excerpts from “Eating Fossil Fuels” by Dale Allen Pfeiffer and distributed by Carrying Capacity Network (www.carryingcapacity.org).

  • “Today, virtually all of the productive land on this planet is being exploited by agriculture.
  • At present, nearly 40% of all land-based photosynthetic capability has been appropriated by human beings.
  • The energy for the Green Revolution was provided by fossil fuels in the form of fertilizers (natural gas), pesticides (oil), and hydrocarbon fueled irrigation.
  • The Green Revolution increased the energy flow to agriculture by an average of 50 times the energy input of traditional agriculture.
  • In the United States, 400 gallons of oil equivalents are expended annually to feed each American
  • production of one kilogram of nitrogen for fertilizer requires the energy equivalent of from 1.4 to 1.8 liters of diesel fuel
  • energy input has continued to increase without a corresponding increase in crop yield
  • modern agriculture must continue increasing its energy expenditures simply to maintain current crop yields
  • fossil fuels are nonrenewable
  • Total fossil fuel use in the United States has increased 20-fold in the last 4 decades.
  • The U.S. food system consumes ten times more energy than it produces in food energy. This disparity is made possible by nonrenewable fossil fuel stocks.
  • Modern intensive agriculture is unsustainable.
  • It takes 500 years to replace 1 inch of topsoil. In a natural environment, topsoil is built up by decaying plant matter and weathering rock, and it is protected from erosion by growing plants.
  • Former prairie lands, which constitute the bread basket of the United States, have lost one half of their topsoil after farming for about 100 years. This soil is eroding 30 times faster than the natural formation rate.
  • The expanding human population is putting increasing pressure on land availability. Incidentally, only a small portion of U.S. land area remains available for the solar energy technologies necessary to support a solar energy-based economy. The land area for harvesting biomass is likewise limited. For this reason, the development of solar energy or biomass must be at the expense of agriculture.
  • Agriculture consumes fully 85% of all U.S. freshwater resources.
  • Modern intensive agriculture is unsustainable.
  • Yet this necessary fossil fuel input is going to crash headlong into declining fossil fuel production.
  • Considering a growth rate of 1.1% per year (90% from legal and illegal Immigration " Ed.), the U.S. population is projected to double by 2050 (Ed note: and to reach 1 billion by about 2075). As the population expands, an estimated one acre of land will be lost for every person added to the U.S. population. Currently, there are 1.8 acres of farmland available to grow food for each U.S. citizen. By 2050, this will decrease to 0.6 acres. 1.2 acres per person is required in order to maintain current dietary standards.
  • Presently, only two nations on the planet are major exporters of grain: the United States and Canada. By 2025, it is expected that the U.S. will cease to be a food exporter due to domestic demand. The impact on the U.S. economy could be devastating, as food exports earn $40 billion for the U.S. annually.
  • Professors Mario Giampietro and David Pimentel postulate that a sustainable food system is possible only if four conditions are met:
    • Environmentally sound agricultural technologies must be implemented.
    • Renewable energy technologies must be put into place.
    • Major increases in energy efficiency must reduce exosomatic energy consumption per capita.
    • Population size and consumption must be compatible with maintaining the stability of environmental processes.

Providing that the first three conditions are met, with a reduction to less than half of the exosomatic energy consumption per capita, the authors place the maximum U.S. population for a sustainable economy at 200 million. (Energy and Population, Werbos, Paul J.) (Ed. Note: But U.S. Population is 320 Million plus Now)

  • The current peaking of global oil production (and subsequent decline of production), along with the eventual peak of North American natural gas production will very likely precipitate an agricultural crisis much sooner than expected.”