Tuesday, December 30, 2008

Oil is not well - 2

The brave have fallen, and they have fallen hard in the times. Oil was one of the best performing commodities in 2008 till it started falling, and fell it did hard.

Now literally on its knees, people have shunned it like a pariah.

Just to give you a relative perspective let us see the following commodities which are off from their 52wk highs

Commodities % drop from their 52wk highs
Oil 75%
Copper 70%
Nat Gas 57%
Silver 50%
Gold 15%

So, in 2008 - commodities have fallen hard and the related stocks in many cases have performed worst. Thus, naturally - the majority have gone foul on commodities many proclaiming, 'the bust of commodity super cycle'.

But we dont think so. The argument that demand destruction is greater does not hold good when it is seen in the light of the fact that the new resources of commodities are being increasingly getting more expensive to get into production. Eg. shale oil in Canada needs atleast $80 a barrel of oil price to make the project viable or roughly 70% of the new exploration in gold mining is done by juniors and by the way HUI index fell to 150 levels, has raised serious questions about the ability of the juniors to get capital to carry out the existing projects or start new ones and coupled with low gold prices, it is definitely impacting the ability of new production to come above the ground in time.

Moreover, China which now has a much greater role to play in commodity markets as it is one of the rice setters due to its consumption binge, is now gearing up to increase its GOLD AND OIL RESERVES which is being increasingly seen as strategic commodities by its top policy makers.

Like: Zhang Guobao, head of the National Energy Administration, said:

The severity of the economic downturn has brought a marked decline in demand for oil and unprecedented pressure on prices. The amount of crude oil on the international market still far exceeds global demand.

China will push ahead with building the second phase of its strategic oil reserves, having largely completed the first, Zhang said.

One of my friends working in Cairn India, is worried these days about the price of oil going down. But I see his worry not lasting too long, due to the supply issues rearing up their heads soon enough.

For future, prices estimated by the experts are the following and on the upper side of the $38 a barrel it is trading at today.

For 2009
Deutsche Bank is estimating average price of oil @ 47.50 in 2009
Merill Lynch @ 50
Moodys @50
Goldman @45 but drop to $30 in first quarter
Marc faber is buying oil at these prices
Jim Rogers says oil will reach @200 in 2013

Now I would go by the last two experts as over the years they have been proved right again and again.
So gear up for the next up leg in oil which is not going to be pretty until and unless you are invested in it.


Thursday, December 25, 2008

Oil is not well

Layman out there across the world is rejoicing as oil prices come around $35/ barrel. The conventional thinking goes 'see we told you the fundamental did not justify oil @
$100'. But nothing can be far from the truth at this point in time. Like a rubberband - the more the prices will contract, the more the projects of oil exploration will get delayed and thus lesser the supply will be when it is called .

The drop of oil price by 67% in less than 6 months is unprecendented. Never before we have witnessed such as crash this fast.
The price right now oil is hovering is breaking the camel's back in the economies which pre-dominantly depend on petro dollars for the budget surpluses.

Countries like Russia, Venezuela and Iran are vehement supporters of Oil prices around $75-90 per barrel. Otherwise this is going to be disastrous for the budgets and thus stability of the regimes in these countries. Eg. "Initially, Russia was hit with a huge exogenous shock when its terms of trade deteriorated sharply because of the sudden fall of oil, gas, metals, and other global commodity prices. With current commodity prices, the country's exports next year could plummet by some 40 percent in current dollars, or by $200 billion. Budget and current account surpluses will quickly turn into deficits." - source- http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1086

Where are all the talks of speculation right now, I heard them a lot when oil was at $147 a barrel. The contango right now in the oil futures market gives you an instant profit of $10-12 a barrel instantly and that smacks of someone trying to short oil in huge quantities in the markets.
And hence the smart oil producers are buying oil in the spot market, and selling them in futures.

Markets as efficient as they might claim to be are not working as they are supposed to. If you have seen prison break season 4, you might relate the happenings in these markets being manipulated by a COMPANY for their own gains. Slowly but steadily - POWER is being concentrated in few hands and corruption is running rampant, and to give ourselves a false sense of optimism and security - WE CRY: SEE I TOLD YOU SO.

Wednesday, December 10, 2008

New investment themes for 2009 (1 of 4)

The times are extremely volative right now. No geograhical region, no asset class world over worth investing in with enough liquidity has been spared due to the crisis we are in right now.

As Marc faber pointed out in the latest of his reports, whenever volatility has been more than the average of past recoreded period, say a decade, returns on investments in equities have not been good. Only the saviest of investors are able to wade through all the noise, called volatility.

So, going ahead into 2009, one of the primary questions in front of every investor, trader, speculator is what theme to get into, what to invest into.

Also, I should remind a cliched statement, that in every bull run a new sector has taken the lead to suggest the change in leadership.

So, i intend to write a three part blog, covering the investment themes that can be looked into and invested for the next upsurge in equities, when it starts here in India and abroad.

To cite these themes, I believe
  1. Agriculture
  2. Energy
  3. Precious metals

are the places where fortunes of the next century will be made.

So, see you in next post.


Thursday, December 4, 2008

ECB rate cut release - 4th December 2008

4 December 2008 - Monetary policy decisions
At today’s meeting, which was held in Brussels, the Governing Council of the ECB took the following monetary policy decisions:
1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 75 basis points to 2.50%, starting from the operation to be settled on 10 December 2008.
2. The interest rate on the marginal lending facility will be decreased by 75 basis points to 3.00%, with effect from 10 December 2008.
3. The interest rate on the deposit facility will be decreased by 75 basis points to 2.00%, with effect from 10 December 2008.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
European Central BankDirectorate CommunicationsPress and Information DivisionKaiserstrasse 29, D-60311 Frankfurt am MainTel.: +49 69 1344 7455, Fax: +49 69 1344 7404Internet: http://www.ecb.europa.eu
Reproduction is permitted provided that the source is acknowledged.

Wednesday, December 3, 2008

US government default risk grows

Derivatives are still the Neutron bomb waiting to explode. Despite all the stupid things that Bernanke and Paulson are doing in order to 'supposedly bailout' the US economy, I still admire their ability to have averted the meltdown so far, along with the supression of key asset classes in order to incur profit only to the US government.

CDS, one of the many soldiers of PONZI finance, is supposedly a financial instrument which is an indicator of the 'probability of default' of an entity. CDS when the times were good made a lot of money for a lot of people, a lot of time. But, now the tables are turning. Why is this the case? Let us look at the history....

The graph below is that of Iceland, when market sensed that there was a growing probability of Iceland defaulting on soverign debt, CDS exploded skywards.

And the implosing was so suddent & voilent that participants did not have the time to get out and were caught with tails between their legs.

Similar fate happened to AIG. Again we see a lone standing skyscraper before the mighty went tumbling down.

Bear Sterns met the same girl down the road.

Now let us see the graph below. The CDS on the 10 Yr treasury notes has jumped 4 times in value from January 2008.

That means the market - pack of Wolves sense that US government is 4 times more likely to default on its soverign debt today, compared to start of the year.

And with the latest pleadge of backstoping the industry with $7.76 trillion 'unprinted money' uptil now, I am sure we are going to see rise in premiums. The thought of US defaulting on its debt may be unthinkable to all of us, but so were the siutations that have developed over the past 1 year.

Keep tight because, pack of wolves would run wild the day US defaults on its debt, and considering the imploding CDS spreads, that day does not seem to be far.

Saturday, November 29, 2008

Chinese conundrum - Currency revaluation?

Chinese are a harried lot these days. With the US export pit having been filled, leading to a slowdown in the demand for the Chinese export, China is looking to several different ways to kick back its economy into higher gear again.

The constant devaluation against USD coupled with great economic growth, when things were going good, was manageable although it did give rise to hot inflows, which made returns on your investment one of the best in the world. But the 2008 has brought in a new set of challenges for the Renminbi and thus Chinese government is looking at various aspects of relooking at the managing of currency.

Have a look in the article with the link provided by MS on the changes that might be brought about in Renminbi regime.

USD's last gasp - implications for India

Like a drowning fellow, who is unable to swim against the tide, catching breath of stay alive as long as possible is one of the ways to extend the critical last moments. USD's resurgence after July 15,2008 is somewhat similar.

Historically, after the gold standard was done away with, USD has been the gold standard for the world. The reason was the sheer dominance & impact of US on global trade and the fiscal and monetary aspects of the trading partners. USD was thus de-facto currency to have of you wanted to trade at global scale, thus fueled the demand for the USD.

However, such is the nature of man-he digs his own grave knowingly. US Fed - helicpoter Ben and along with the Treasury secretary Hank Paulson have shown to the world, they are ready to reinflate the system at all costs. It is but natural, that anything thrown into the market more than what the demand is, leads to reduction in the value of that object. The same is going to happen to USD in the coming months. USD is on a precipice waiting to take a dip into the abyss.

There are two options with Fed, ahead.*
1] Because of the huge influx of USD into the system, US Fed will have to accept that down the road; US would have to deal with huge inflationary pressures in the economy.
2] US Fed instead of letting free market system, letting it devalue USD in a cruel, fast & furious way, handles the devaluation systematically to avoid serious consequences of free market reaction.

Thus, what does it mean for a country like India?
Take a look at our RBI annual report 2007-08, released on the web on August 2008.

As of on June 2008, RBI had gold reserves amounting to 9BN USD (valued at market price).
Assuming that the average market price at that point in June was USD900/ ounce, this amounts to a gold holding - 283 tonnes or 10,000,000 ounces.
FOREX assets were USD302Bn, majority of which are in USD. Out of total USD312Bn of total FOREX reserves, having just USD9Bn worth of gold, is sheer madness.

You can go and check the details at http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/86606.pdf

Never, before in the last 100 years has the world faced economic headwinds of such staggering effects as we have seen in the last 1 year, and would keep on seeing ahead for atleast 1 year or so. Currencies globally are in turmoil with only Yen and USD strengthening due to factors out of the scope of discussion of this post.

Now due to the reasons cited above*, USD is going to be devalued either way, drastically in the coming years. So much so that there is a talk of a new currency replacing USD, called Amero by the last years of Obama administration.

Thus having majority of the FOREX reserves in foreign currency, and that too predominantly in USD is harakiri.
The reason, why i cited the gold holdings above is: in this age of high volatility and uncertainty, gold is one of the assets that has surpassed ages preserving its status as safe haven investment in troubled times. Chinese, having surpassed Japan as the biggest holders of UST bonds, have announced that they will start to diversify their FOREX reserves into gold, and want to take their present gold reserves of 600tonnes to 4000 tonnes. Check out one of the several news articles at link

May be they know something, we dont, because lets accept the fact that they are far more superior businessmen than we are.

As of today, i have not come across any news article stating that RBI intends to increase its gold holding in the near term. Hence, as the USD would go down, Rupee would have serious implications for it, to preserve the trade across the major trading partners, are we going to devalue Re along major currencies. Since no currency has yet emerged as the replacement for USD as global reserve currency, I assume that other world currencies too would have to take the bait.

Incase, Re devalues, then we as citizens of India are going to see a loss of purchasing power over the years. Hard assets will be the investments rising in this scenario going ahead.
Thus as a safe way to retain, even enhance your purchasing power over the next 3-5 years, i would suggest you hold some share of your investments in physical gold only.

And there is a sweatner too.
We are hearing (as mentioned above) from experts a new monetary system. A possibility to returning to gold standard is also being mentioned.

US right now has official gold reserves 8100 tonnes.
Fed balance sheet size is USD2trillion.

Thus if the world would go to the gold standard, all the balance sheet of Fed would have to be backed by the gold holdings they have, thus valuing gold @ a staggering $7000/ ounce.

Against this, in India the gold prices would shoot up to Rs 12lakh for an ounce with the balance sheet at Rs 14.6 trillion and gold holdings of roughly 283 tonnes.

Now the balance sheet size of RBI in 2007-08, rose by a staggering 46% to Rs14.6 trillion. http://www.blogger.com/post-create.g?blogID=5517697057834512009

Going ahead, for you as citizens living in India, buying physical gold might be the way to new found riches in a new age that lies ahead of us.

With that I am finished for the day.

Friday, November 28, 2008

Nothing much in terms of fireworks today-as of now

Not much of activity on gold commodity markets as per KITCO chart. So lets us see if any thing boombastic happens when US opens today.


Thursday, November 27, 2008

Golden moment might be today - 28 November 2008

Today might be the day for what GATA and gold bugs have been waiting for. Today on 28 November 2008 is the report period for the December contract at COMEX.

In normal times, this day might have passed as any other day, but in this era of interventions and manipulations, the contracts on the short side of the trade are much more of what can be delivered.

Thus shorts would look to get out of the trade in case the normal percentage of 2% of people asking for the phyiscal delivery rises dramatically and leads to a spectacular rally in the gold prices.

It has long been known and accepted that COMEX is no longer insync with the phyiscal gold prices in the market, thus GATA and other gold bugs have long been on the crusade to prove the interventions by the PPT - plunge protection team. Today might turn out to be their salvation day, a momenet when people would know - THERE ARE NO FREE MARKETS!

Look out for probable fireworks tonight (IST) at COMEX.

Wednesday, November 26, 2008

US Fed: Greatest scam of mankind history

Very few people in this world know that US Fed is a private entity controlled and owned by a cartel of central banks, many of them headquartered in Europe.

More surprising is the role of US Fed in the economy of United States. Just for records, since the origin of Fed, USD has depreciated by around 95% (since 1913), primarily due to the monetary expansionary and inflationary policies persued by Fed.

Now I must tell you what Fed does. It must be the greatest scams around in the history of mankind. When US government needs money, it can issue its own US notes backed by the faith and promise of US government. But wait, this is not how the things work- US government issues treasury bonds to US Fed, Fed buys the bonds by 'CREATING MONEY OUT OF THIN AIR'. Fed has the electronic printing presses in this modern age and prints money out of thin air. Then gives the money to US government and to add to the shame, US government pays out interest on the very bonds US government issues - where were the forefathers of US when this bill was passed.

One of the acts that runied the United States, and the climax is yet to come in 2009 and 2010.

Fed motor on full throttle

There was never a doubt on Mr. Ben Bernanke's objectives to pump as many US dollars into teh system to prop up the sinking economy. Although the measures were late, as always the Fed was behind the curve; no there is no dearth of will and enthusiasm (pun intended) to get as many dollars into the economy.

Contrary to the current scenario and the popular opinion at present - that deflation is the evil that has to be tackled, down the road around soemwhere begining of 2010, inflationary environment would be the reason for Fed loosing its sleep.

The link in the post has the pdf to the latest on the FOMC meet and their opinion of tackling the current mess the US economy is in. Have a look.

As one of my first posts on this blog, I would not be going much deeper into this topic.

This is analysis by Liz Ann Sonders, Senior VP, Chief Investment strategist, Charles SchwabLiz is vehemently claiming that US entered recession in 2007 and it may be time to look out for signs of reovery. Enjoy the analysis. The link for the same is given below.