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Oil Demand’s Triumphant Return

By Frank Holmes, 5 December

Lost in the shuffle of the European debt woes, a second round of quantitative easing and gold’s record run has been the resurgence in global demand for oil. Global oil demand is strong; in fact, it has never been stronger. Oil demand during the third quarter of this year was up 3.7 percent, the fourth-straight quarter of growth.

Who’s behind this increase in demand? Emerging markets.

You can see from the chart that global oil consumption has bounced well off of early 2009 lows and now exceeds pre-crisis consumption levels. Consumption in the developed world, represented in the chart by the Organization for Economic Co-Operation and Development (OECD) countries, has been flat for the past 18 months and remains roughly 8 percent below 2007 levels.

While developed world demand has flatlined, emerging markets have captured a significant share of global oil consumption over the past three years—narrowing the usage gap between the two from roughly 12 million barrels per day in 2007 to 4 million barrels per day currently.

This week, Dr. Fatih Birol of the International Energy Agency presented his bullish long-term outlook for oil demand to analysts at Barclays, predicting that global energy demand will grow by 36 percent between 2008 and 2035. Birol says China and India will lead the way but the Middle East won’t be far behind.

He gave three reasons for the demand leadership of emerging markets: Economic growth, population increases and heavy fuel subsidies in many countries will give consumers a buffer from rising oil prices.

Chinese oil demand is expected to grow at the fastest rate of any country in the world at 10.4 percent this year. Figures on China’s share of global oil demand growth range between 25-40 percent but there’s no question that there is still substantial room for Chinese demand to grow.

Fabulous growth in auto demand will likely be the catalyst for China. Birol says that 700 out of every 1,000 people in the U.S. and 500 out of every 1,000 in Europe own cars today. In China, only 30 out of 1,000 own cars and Birol thinks that figure could jump to 240 out of every 1,000 by 2035.

When Japan hit $5,000 of GDP per capita, oil demand grew at a 15 percent annual rate for the next ten years, according to oil-industry consultant firm PIRA. It was a similar story for South Korea. China reached the $5,000 GDP per capita mark in 2007 but oil demand has only grown at a 7 percent compounded annual growth rate. This highlights China’s superior growth potential if China is to catch up to historical patterns.

Macquarie expects global oil demand to grow by 2.3 percent on a year-over-year basis in 2011, which the firm says would be met with drawdowns in oil stockpiles, higher prices and an OPEC response.

However, OPEC’s ability to control the oil market is in a precarious state. Ten of the cartel’s 12 countries will produce less oil in 2011 than they did in 2008, with Iraq and Nigeria the only countries expected to see production increases.

OPEC still controls 40 percent of the world’s oil supply but its spare capacity peaked in the early 1980s and is projected to fall an additional 2 million barrels per day in 2011, leaving the cartel with little ability to manipulate production as demand continues to grow.

Rising demand from emerging markets and a lack of maneuverability by OPEC should result in a very tight global oil market. We expect oil prices to continue trending upward throughout 2011.

This article is written by Frank Holmes and with his kind permission, O B Research has been privileged to publish his work on our website. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. To find out more about Frank Holmes’ work, please visit:


IMF Gold Sales Completion Imminent

With the IMF gold sales program expected to end this month or next and Central Banks becoming buyers rather than sellers, the balances in the gold market are changing. (Julian Phillips)

At the end of October the International Monetary Fund (IMF) only had 32.7 tonnes of gold left to be sold. In September it sold 32 tonnes of gold and in October 19.5 tonnes, in the open market.   Should it continue selling at the pace of September then we would expect to hear the announcement of completion of its gold sales program in December and probably in the first half of December. If it continued the slower pace of selling of October then we will have to wait until January 2011 for the announcement. We believe that this is significant because it will signal the real end of “Official” selling of gold. The signatories of the Central Bank Gold Agreement, with the exception of small deals in coins have not sold for over a year now.  With the completion of the IMF sales the annual 400 tonnes of ‘official’ selling will not be available to the market.  

We believe they have stopped selling as we look back on their activity in the last year. We accept that they still have a ‘ceiling’ of 400 tonnes sales a year, but this is now simply a gesture. Central banks are solid buyers, primarily taking up their own local supplies first. We have to consider that more and more gold producing countries may well buy their own local production further reducing the supply of gold to the London and other markets.

We should also now accept that the main driving force behind the gold price rise is from central banks, with other investment demand following.  

INVESTMENT DEMAND CHANGES

At this point we should again be careful to note that more and more investment demand not only from Asia but in amongst the Western institutions, is not with a profit in mind. Their investments are becoming more and more because of the instabilities and uncertainties that surround the developed currency world. It is becoming more and more difficult to value assets internationally with currencies swinging backwards and forwards as they are now. Gold is a better place to hold wealth in these stormy days.  

All from the head of the World Bank down are also aware of the useful role that gold can play in acting as a ‘value reference point’. Should this happen gold will have returned to the world of money in real terms, albeit in a slightly different role to the one it had in the past. We termed this in earlier issues of the Gold Forecaster as gold no longer being a ‘means of exchange’, but as a ‘measure of value’.

WHAT HAPPENS TO DEMAND WITH A 400 TONNE DROP IN SUPPLY?

  • A 400 tonne drop in supply in a balanced market will pressure the demand side to find more gold.  
  • With mine supply pretty inelastic there will be only a small additional flow from that source.
  • With jewelry demand in the developed world back to former levels, only much higher prices will deter them.
  • With industrial demand [particularly electronics] now a necessity, demand is unlikely to be deterred by higher prices.
  • With demand in India after an excellent monsoon and good harvests and GDP growth at 8.9% Indians are keen to buy at these prices and will not be deterred except by sharply higher prices.
  • With the Chinese middle classes expanding rapidly as that country continues to develop, demand from there will continue to grow and most likely irrespective of the rising gold price.
  • Central Bank demand is unlikely to abate no matter what the price, because their interest is solely in acquiring tonnages of gold. We note that as part of their ongoing program of gold buying Russia also bought 18.66 tonnes in October (against the I.M.F. sale of 19.5 tonnes). Not only are they buying local production but are present in the open market.

Consequently, the only additional source of supply will have to be scrap supply or supply from current holders. So we ask, “At what price will current holders sell?

Source

Which World Cities are Affordable to Live In?

By Frank Holmes, 3 December

This week’s chart plots the residential prices of major cities around the world against the purchasing power of the people living there. In terms of affordability, the upper left quadrant is where you don’t want to be. That means that the cost for housing is high while the average income per household is low.

What about the lower right quadrant? Abu Dhabi is the outlier there because it has the third-highest GDP per capita in the world behind Luxembourg and Norway but residential prices remain low. This can be both a good and bad quality. On the one hand, Abu Dhabi has a very wealthy population which reflects the city’s economic vitality. On the other hand, residential prices are still showing the effects of the 2008 crash when prices for higher-end apartments and homes fell 35 percent in just three months. 

The ideal place to be is right in the center, striking a balance between residential prices and incomes.

Two cities that are moving toward the center, though at different speeds, are Moscow and Istanbul. Residential real estate in both Russia and Turkey stands to benefit from historically low interest rates, recovering unemployment and improving consumer confidence, according to Merrill Lynch.

In Turkey, the strength of the recovery has resulted in record auto sales, growth in mortgage loans and restored consumer confidence, Merrill Lynch says. Recently, this strength has raised inflation concerns but there are several pillars to support the residential market.

Demand from the young and growing middle class is jumping as developers have begun offering smaller units, banks are offering longer loan durations and interest rates are at an all-time low. As a result, mortgage loans have grown 32 percent so far this year and are estimated to grow an additional 30 percent in 2011.

If you need more evidence, just look at what happened yesterday when property developer Emlak’s initial public offering jumped 12 percent in its first day of trading and another 11 percent in early trading today. We were fortunate to participate in this offering in our Eastern European Fund (EUROX); adding Emlak to the fund’s existing weighting in Turkey. Emlak isn’t the first Turkish company looking to tap into Turkey’s potential growth. Six Turkish real estate investment trusts have already sold shares to the public this year, according to Bloomberg.

Though the Russian economy has recovered, it is not nearly as far along as Turkey. Affordability is an issue in Russia. Official statistics show only 20 percent of the population can afford their mortgage payments at the moment, but the expectation is that this will extend an additional 20 percent in the next five years.

Banks are using government subsidies as a crutch and have been reluctant to hand out mortgages not backed by the government, but the market could heat up quickly once more mortgages are released into the system. Russia is currently under-levered in terms of debt compared to its Central Emerging European peers, which means there is ample catch-up potential when consumer confidence returns.

Long term, the trend for both residential markets looks positive. Low mortgage penetration in both markets means there is room to grow if inflation can remain under control.

This article is written by Frank Holmes and with his kind permission, O B Research has been privileged to publish his work on our website. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. To find out more about Frank Holmes’ work, please visit:


More Stimulus Means Fewer Jobs

By Peter Schiff, December 3

Today’s payroll report severely disappointed on the downside and left economists scratching their heads to explain the weakness. The explanation, however, is plain as day. As I have been saying for years, the US economy will not create jobs as long as the Fed keeps interest rates artificially low, and Congress keeps stimulating spending and consumer debt, punishing employers with mandates, regulations, and taxes, crowding out private investment with massive government borrowing, and preventing market forces from restructuring our out-of-balance economy.

As new data comes in that continues to bolster my hypothesis, the politicians in Washington continue to follow the wrong diagnosis, while ignoring evidence that their policy prescription has failed. Rather than reassessing the effectiveness of their remedy, they are merely prescribing more of the same.

No doubt the 9.8% unemployment rate (17% when counting the under-employed or discouraged workers) will spark another extension of unemployment benefits, which will provide yet additional incentives for the unemployed not to work. In addition, we will likely get another round of stimulus – paid for with higher budget deficits – that will further hinder the capital investment and business formation necessary to produce sustainable jobs. Then, the inflation created by the Fed to finance those deficits will send consumer prices higher, making life that much harder for all Americans, regardless of their employment status.

All the talk in Washington that demand must be stimulated to create jobs is farcical. The news reports of mobs of shoppers trampling over each other to fill their carts shows there is plenty of demand. What is truly lacking in our economy is supply. Those mobs are still filling their carts almost exclusively with imported products. If it were true that demand creates jobs, we would be at full employment right now, but the truth is that demand is meaningless without the productive means to supply the goods.

It’s ironic that extending unemployment benefits, one of the reasons unemployment remains so high in the first place, is actually being touted as a jobs bill. Keynesian proponents argue that giving money to unemployed people will create jobs wherever they spend their government cheese. This is utter nonsense.

If printing money and dolling it out to the unemployed could create growth and jobs, why hasn’t it already worked? After all, we have already extended benefits to 99 weeks. Where are all the jobs? Also, if every dollar of unemployment benefits generates two dollars of growth, as our legislators claim, why not double or triple the benefits? In fact, why limit them to the unemployed? Just give the benefits to everyone – then we will really get this economy going.

Politicians cannot create economic growth at will simply by doling out money. If it could, the Soviets would have won the Cold War. Handing out cash does not create additional production, it merely changes who benefits from existing production. Transferring purchasing power from producers to consumers undermines economic growth and destroys jobs.

For now, production is being supplied from abroad. But this dynamic merely worsens our trade imbalance, putting our nation deeper into debt. As the dollar losses purchasing power, foreign goods will become more expensive and American living standards will plummet.

What will it take for our leaders to realize that their solution is exacerbating the problem they are trying to solve? Unfortunately, I doubt they will learn until the situation becomes intolerable for the majority of voters. These jobs numbers bring us one step closer to that critical mass.

Unless politicians can be roused from their stupor, we will soon confront an imminent sovereign debt and currency crisis that will make the credit crisis of 2008 look like a happy interlude. Hopefully, when the first major shock strikes in the US, as is currently happening in Ireland and Portugal, it will finally provoke a 180-degree change of policy in Washington. Hopefully, it won’t be too late to spare millions from a life of subsistence, or worse. These are my hopes, but my fear is that we are on the cusp on the largest economic downfall in modern history.

This article is written by Peter Schiff of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

‘BP’ Investing: The Only Way to Go

By Jeff Clark, Senior Editor, BIG GOLD

Wanna know how to make a small fortune in the stock market? Start with a large fortune and buy stocks based on your emotions. Wickedly funny. Disastrously true. Letting your emotions determine the timing of stock purchases means buying when everyone around you is buying – that’s why you feel so certain – and ensures you will enter near an interim top.

We prefer a “BP” (Big Picture) approach to buying. As an example, at the height of the recent Gulf oil disaster, wild speculation of British Petroleum’s ultimate demise drove the stock price down in a wave of panicked selling. To use a classic Doug Casey idiom: there was blood in the streets on this stock. That is the time to buy, and those that kept the big picture in mind have profited nicely.

If you were peeking over my shoulder as I reviewed reader email, you’d eventually notice that when it comes to complaints, most center on one thing: losses on stock positions. And the circumstances for the losses consistently boil down to these: bought just before a downturn; panicked in a correction and sold for a loss; bought too much; or expected prices to head for the moon by Tuesday.

Emotional buying and impatient owning. These unfortunate patterns of investor behavior are all too common and underscore the importance of following a disciplined plan of accumulation.

Which leads to this: understanding my philosophy, and that of Casey Research in general, will help you interpret our buying recommendations and stick with the plan. It’s actually very simple:

–> We’re investing in the big picture and for the long haul.

Although we monitor the precious metals markets daily, when it comes to putting our money on the table, it’s done with the big picture in mind. What are these major themes? Our research points to massive and ongoing economic, fiscal, and monetary forces that are not only positive for gold but make owning it essential. So that’s where we’re placing a large chunk of our chips at this point in the cycle.

How do you make the highest returns with gold stocks? Don’t panic and sell if they drop. Maintain an appropriate level of exposure to them – enough to make a difference in your life if we’re right, but not so much that you are wiped out if we’re wrong. And don’t let short-term market noise sabotage your plan; stay focused on the long-term trend.

Why the reminders? Because after watching our positions run higher over the past few months, it’s perfectly normal to expect them to take a breather. And we want to buy when they’re tired from running, not when they’re in the middle of a sprint. 

Here’s some big-picture perspective. This chart shows the percentage gain in gold and gold stocks since the bull market began in 2001 (based on beginning-of-month prices).

You can see two obvious takeaways. From 2001 through 2007, gold gained 220% while gold stocks, represented by the HUI index, returned 945%. Think about that… gold producers, as a group, returned over ten times your money in six years. That represents more than 4-to-1 leverage to gold.

Conversely, in the 2008 meltdown, gold stocks lost roughly a third more than gold itself. And if you study the chart, you’ll see plenty of other times where gold fell and gold stocks fell further.

The point: spotting a bargain means understanding prices within the context of the overall trend. Gold stocks are trending up, and will continue to do so, but there will always be corrections along the way. And the investment advice that flows from this outlook is:

–> Buy gold stocks when they’re correcting, not when they’re advancing. And be patient. There’s no rush, as the mania still lies ahead.

Jeff Clark keeps his finger on the pulse of the gold and silver sectors, resulting in handsome profits for his BIG GOLD subscribers: returns of 43.1%… 56.8%… even 187.9%. Read all about Jeff’s secrets for picking the best stocks at the right time – click here for details.