The Case for $200 Oil

On Tuesday I wrote a post about the prediction from a Goldman Sachs Analyst that Crude Oil could hit $200 a barrel, $200 Crude Oil-surely not ? today I want to spend a bit more time looking at some of the reasons why that is not a crazy prediction and may even be on the low side.

The world’s known supply of crude oil has decreased by about 13% since 2001 It was estimated that the total world supply of Crude Oil was around 2 trillion barrels. We have already used around half that in about 150 years. As the planet’s supply of oil slips below one trillion barrels, and America’s pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.

But crude oil is not the only natural resource that is depleting and/or in short supply. And the U.S. dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.

Most of us have some vague idea that one trillion is the number that lies somewhere north of one billion ,beyond that, we have no clue. So how much is one trillion anyway?

• 1 trillion seconds = 31,546 years.
• 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun.
• The average new car costs $28,400. $1 trillion would buy more than 35 million cars.
• The entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times.
• Gross Federal debt is more than $8.7 trillion, which would make a stack of dollar bills that would reach from the Earth to the Moon and back with some to spare.
• $8.7 trillion in one-dollar bills would cover an area larger than each U.S. state except for Alaska and Texas.”

 

But there is something else at play that doesn't help the situation-the weakening of the US dollar which helps pay off the US debt but it also has some undesirable results in the form of $1000 gold and $120 crude oil.

In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time. And that’s why you should listen to that little voice inside your head when it tells you: “$200 crude oil may be crazy, but not nearly as crazy as the size of the US Deficit.”

We are running out of Natural Resources there is no doubt, it is unlikely that we will see them completely depleted in most of my readers lifetimes,however if the Dollar continues lower (or is allowed to weaken to cover up for poor fiscal policies) then it will accelerate the incessant rise of these Natural Resources.Since the vast majority of Natural Resources are paid for in Dollars it stand to reason that as the resources become scarcer and the dollar becomes worth less that suppliers will be demanding more of them for whatever it is they have to sell.

Best Wishes

 

Alan

 

Technorati Tags: $200 Oil,Commodities,US Dollar,Strong Dollar Policy,Oil

Why a Weaker Dollar is good for America

For a long time now we have been exposed to the US President ,Treasury Secretary and various Senators talking about the benefits of a strong Dollar and how that is in the interests of America.This is really all just political rhetoric the reality is somewhat different . In its current situation the last thing that the US needs or wants is a strong dollar- but unfortunately it just isn't politically the right thing to say.So why is a weak dollar good for America ?

Well if anyone has been to the US recently or if you are indeed a US citizen you cannot fail to have noticed the increased prevalence of foreign accents that seem to be in every restaurant or store.It seems that America is on sale and the rest of the world is buying. Since 2002 the dollar is down about 25% and the rest of the world is taking advantage .Not only do they flock in their droves to the US to spend their money but it is good for exporters as well who find that demand for their goods increases the more the dollar weakens.

Tourism is a huge industry for the US but not only for attracting foreigners to its shores but as the dollar weakens and it becomes more expensive to go abroad more and more Americans are opting for Disneyland Florida and not Disneyland Paris. Not only does the weaker dollar make it more attractive to vacation there but it also makes it far more attractive for foreign investors -whether it is the huge cash piles of some of the Far East and Middle Eastern Sovereign Wealth funds or someone looking for  a US holiday or retirement home

Foreign ventures put $407 billion to work in the U.S. in 2007. That was a 93% increase over 2006. The Chinese, in particular, were an active bunch. Chinese investment soared from only $66 million in 2006 to $9.6 billion last year.American assets should attract even more foreign buyers this year. The Chinese are eyeing American timberlands, for example.  American farmland, mines and other hard assets must also seem cheap.The weak dollar affects things in a couple of ways. On the one hand, it makes imports more expensive. So far, a weak dollar has not stopped imports from growing nationally, though it has slowed the pace. On the other hand, the weak dollar has really benefited America's export engine as I indicated above.

Exports grew twice as fast as imports in 2007. For the first time since 1995, the gap between the two narrowed. America's commodity producers get a lot of help when the dollar falls. They incur their costs in dollars. Yet they sell into the global market for metals, minerals and other commodities. Global prices are all near multiyear highs, thanks in some measure to the weak purchasing power of the dollar.

America's manufacturers - what's left of them - also gain. Strong demand from overseas drives their sales. Suddenly, America's goods look cheap. "Foreign demand for advanced machinery is huge," reports The Economist. "Civilian aircraft, drilling tools, agricultural machinery and excavators all rose at double-digit rates in 2007."

So in terms of investment opportunities we should be thinking about companies that export a lot of their goods overseas and possibly those in the Hospitality and tourist industries. So no matter what Hank Paulson and his cronies trot out at each press conference the weaker the US dollar gets the more likely they are to be able to find a way out of their current situation and to reduce the Current Account deficit.

 

Best Wishes

Alan

 

Technorati Tags: Strong Dollar Policy,Weak Dollar,Foreign Investment in US,Investing in US Tourist Industry

Palladium is it the next Platinum ?

The precious metals are taking a breather at the moment pulling back off their highs, Palladium is no exception, having reached a 6 year high recently of $580 an ounce, it has now pulled back by over $100 an ounce.

The long term outlook for the metal however still looks promising and since it is not as high profile as Gold and Platinum may also offer some real potential in the mid to long term.One of the major countries that mines Palladium is South Africa.The recent problems regarding power cuts in the country have had an impact in the mining of Palladium, South Africa accounts for about 30% of the worlds production of Palladium so any disruptions to the supply here have a major impact on the price.

The power situation in South Africa is still fragile and any further disruptions would certainly cause another spike in the price, power issues aside, there are other fundamental issues which also give support to the view that Palladium is likely to go higher in the medium term.The recent run up in Platinum is a key factor here with the record prices seen recently making Palladium an attractive option for the autocatalyst market as well as the jewellery market.With the increasing purchase of cars in the emerging markets such as China and India then the demand for Palladium to be used in catalytic converters is only likely to increase .

 

The other major supplier of Palladium is Russia, in recent years they have been keeping the market well supplied but lately these supplies have been slowing ,adding further constraints into the supply chain, there are some who believe that the Russian supplies are starting to run out if that is the case then this will be another reason for Palladium to start to move higher. The increasing interest in Precious Metals is also likely to create demand as people look to other metals beyond Gold as the fear of inflation and a sinking dollar add to the safe haven status of Precious Metals.

 

The best way to take advantage of buying Palladium is via the London traded ETF  (PHPD), it is also possible to gain exposure to Palladium via the ETF (PHPP) which gives exposure to all 4 metals, Gold, Silver, Platinum and Palladium.I added some PHPD to my portfolio today at $48.77 as well as some more of the Silver ETF (SLV) .A chart of the recent prices showing the latest pullback is below.I think this pullback may be a good buying opportunity for anyone who believes in the metals longer term.

 

 

 

 

 

Best Wishes

 

Alan

 

Technorati Tags: Gold,Silver ETF,Precious Metals ETF,Platinum,Palladium

Will the Dollar Decline Further ?

The Financial Times had a short paragraph in their currencies section last week which caused a stir among currency traders. It told of a report which indicated that the central bank of the United Arab Emirates had set up a taskforce to help implement a possible depegging of the country's currency from the US dollar. This is something that had been written about months ago, but the talk of depegging jumped back up onto the trader's radar yesterday.

There is a meeting scheduled this  week by the six Gulf Cooperation Council states, including Saudi Arabia and the United Emirates. The committee meets four times a year and will be discussing the formation of a Gulf Central bank and other technical matters related to a proposed single currency. The meeting won't be attended by any central bank governors, so I don't expect an announcement of an agreement to drop the dollar peg at this time; but just the discussion is putting additional downward pressure on the US$.

 

On top of this the Euro continues to make new highs and the Swiss Franc is now at parity with the US dollar if we look at charts of the Euro and Swiss Franc over the last few years we can see the dramatic decline of the dollar in these two currencies.

 

 

The dollar has also reached below the psychological  100 yen mark as well, the slide in the dollar has been enough to start the rumour mill about  Central bank intervention, I personally don't think it will happen , but if the dollar keeps dropping as quickly as it has done in the last few weeks then it may spark some sort of response. The ECB must be starting to get concerned with the strength of the Euro and even Sterling is back  well over $2 even although the UK will suffer a lot of the same problems as the US since they too are having problems in the housing markets.

 

Every bit of bad news for the dollar is a boost for Gold, I still believe that the precious metals will do us proud in the medium term,sure there will be pullbacks some of them could be quite severe.I will be using any pullbacks as good buying opportunities. I also favour Silver a bit more than Gold for reasons I will go into in my next post.

If you are looking at ways to benefit from any further declines in teh dollar then look to the Currency ETF , I will be looking at the Yen  FXY and the Swiss Franc FXF.

 

Best Wishes

 

Alan

 

Technorati Tags: Currencies,Currency ETF,Gold Futures,Silver,Yen,Swiss France,Dollar Decline

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New Purchases FXS & FXE

Just a quick note to say that I am adding two of the Currency ETF's to my ISA. I am buying the FXS( Swedish Krona ETF) and the FXE (Euro Currency ETF).

Sweden is performing very well and its economy is strong, I expect that the Swedish Krona will strengthen further as we move into 2007.It will also give me some hedge against the potential of a falling Dollar(which doesnt seem to have happened yet !!-but I think it will).The dollar may confound its critics for the next while as (if you buy in to the conspiracy theories) the Presidential elections may mean that certain factions within the US government do not want their currency falling out of bed and impacting on the economy, in the run up to the Presidential elections.

I am looking at this holding being a longer term one anyway-assuming we do not hit our stop loss.I do not believe however that Krona strength will be dependent on Dollar Weakness anyway.

The second ETF was the FXE-Euro Currency Trust, the euro has pulled back here and we should find support in the mid 128 range if not before, from there I see that as a good launching pad for the euro to hit 133-136 sometime later in the year.

I have placed a stop loss of 5% on each of these as a 5% swing in the currency would be a fairly substantial move.

Best Wishes

Alan

Tags: ETF, Currency ETF, FXE, FXS, Dollar, Krona, Sweden, Euro, ISA

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