I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we are seeing is only the beginning of a 30 fold rise in prices similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.

So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using. To match the 1936 monetary value peak, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp-like by comparison. The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg to unload my own krugerands in 1979, was triggered by a number of one off events that will never be repeated.

Some 40 years of demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world?s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.

You may have noticed that I have not been doing much trading in gold or the other precious metals lately. That is because they are still working off an extremely overbought condition. Given some time, and a nice little dip in prices, and I?ll be back there in a heartbeat. You?ll be the first to know when that happens.

 

 

 

?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade, but so far every time I have dipped my toe in the water, it has gotten chewed off by a piranha.

To remind you why you hate the Japanese currency, I?ll refresh your memory with this short list:

* With the world?s weakest major economy, Japan is certain to be the last country to raise interest rates.

* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.

* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making Japanese any more.

* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt approaching 200% of GDP, or 100% when you net out inter agency crossholdings, Japan is at the top of the list.

* The Japanese long bond market, with a yield of 0.1.2%, is a disaster waiting to happen.

* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?100, then ?120, then ?150. That works out to a price of $40 for the (YCS), which last traded at $16.35. But it might take a few years to get there. The Japanese government has some on my side with this trade, not that this is any great comfort. Four intervention attempts have so been able to weaken the Japanese currency only for a few nanoseconds.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 15 year double top.

 

 

It?s All Over For the Yen

There are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.? I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

 

When I went back to UCLA I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site at?http://www.oxy.com ). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. The has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?

 

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

 

 

 

 

A Faberge Egg

 

 

I received some questions last week on my recent solar pieces as to whether I minded paying more money for ?green? power. My answer is ?hell no,? and I?ll tell you why. My annual electric bill comes to $1,500 a year. Since the California power authorities have set a goal of 33% alternative energy sources by 2020, PG&E (PGE) has the most aggressive green energy program in the country. More expensive solar, wind, geothermal, and biodiesel power sources mean that my electric bill may rise by $150-$300 a year.

Now let?s combine my electricity and gasoline bills. Driving 15,000 miles a year, my current gasoline engine powered car uses 750 gallons a year, which at $3/gallon for gas costs me $2,250/year. So my annual power/gasoline bill is $3,750. My new all electric Nissan Leaf (NSANY) will cost me $180/year to cover the same distance. Even if my power bill goes up 20%, as it eventually will, thanks to the Leaf, my power/gasoline bill plunges to $1,980, down 47%.

There is an additional sweetener which I?m not even counting. I also spend $1,000/year on maintenance on my old car, including tune ups and oil changes. The Nissan Leaf will cost me next to nothing, as there are no oil changes or tune ups, and my engine drops from using 400 overcooked parts to just five. We?re basically talking tires and brake pads only.

There is a further enormous pay off down the road. We are currently spending $100 billion a year in cash up front fighting our wars in the Middle East, or $273 million a day! Add to that another $200 billion in back end costs, including wear and tear on capital equipment, and lifetime medical care for 3 million veterans, some of whom are severely torn up.
We import 9.1 million barrels of oil each day, or 3.3 billion barrels a year, worth $270 billion at $82/barrel. Some 2 million b/d, or 730 million barrels/year worth $60 billion comes from the Middle East. That means we are paying a de facto tax which amounts to $136/barrel, taking the true price for Saudi crude up to a staggering $219/barrel!

We are literally spending $100 billion extra to buy $60 billion worth of oil, and that?s not counting the lives lost. Even worse, all of the new growth in Middle Eastern oil exports is to China, so we are now spending this money to assure their supplies more than ours. Only a government could come up with such an idiotic plan.

There is another factor to count in. Anyone in the oil industry will tell you that, of the current $90 price for crude, $30 is a risk premium driven by fears of instability in the Middle East. The Strategic Petroleum Reserve, every available tanker, and thousands of rail cars are all chocked full with unwanted oil. This is why prices remain high.

The International Energy Agency says the world is now using 87 million b/d, or 32 billion barrels a year worth $2.6 trillion. This means that the risk premium is costing global consumers $950 billion/year. If we abandon that oil source, the risk premium should fall substantially, or disappear completely. What instability there is becomes China?s headache, not ours.
If enough of the country converts to alternatives and adopts major conservation measures, then we can quit importing oil from that violent part of the world.? No more sending our president to bow and shake hands with King Abdullah. Oil prices would fall, our military budget would drop, the federal budget deficit would shrink, and our taxes would likely get cut.

One Leaf shrinks demand for 750 gallons of gasoline, or 1,500 gallons of oil per year. That means that we need 20.4 million Leafs on the road to eliminate the need for the 2 million barrels/day we are importing from the Middle East. The Department of Energy has provided a $1.6 billion loan to build a Nissan plant in Smyrna, Tennessee that will pump out 150,000 Leafs a year by end 2012. Add that to the million Volts, Tesla S-1?s, is Mitsubishi iMiEV?s hitting the market in the next few years. Also taking a bite out of our oil consumption are the 1 million hybrids now on the road to be joined by a second million in the next two years. That goal is not so far off.

Yes, these are simplistic, back of the envelop calculations that don?t take into account other national security considerations, or our presence on the global stage. But these numbers show that even a modest conversion to alternatives can have an outsized impact on the bigger picture.

By the way, please don?t tell ExxonMobile (XOM) or BP (BP) I told you this. They get 80% of their earnings from importing oil to the US. I don?t want to get a knock on the door in the middle of the night.

 

Is This Worth It?