The U.S. and world are heading towards serious trouble. The financial markets are being kept alive due to the monetization of debt on a massive scale. This has produced a huge dislocation in the fundamental valuation of assets.
Currently, stocks, bonds and paper assets are on the receiving end of this monetary stimulation, while the physical assets such as the precious metals & commodities have been beaten down to assist in lowering the already low manipulated inflation rate.
Investors who once thought the precious metals were a safe store of value, are now beginning to question their confidence in gold as the price continues to head down towards its low set in June. This is precisely what the fiat monetary authorities planned for and the public has taken it…. HOOK, LINE & SINKER.
There seems to be no shortage of gold forecasts. David Einhorn was on CNBC and stated:
“certain aspects of the market are very much in bubble,” with investors “dismissing valuation metrics.” “The market is confused,” between useful products and real profit streams, he suggests for a number of headline-grabbing highly speculative names.
“Fed policy is a headwind to the economy,” as he quantifies the hundreds of billions in lost interest income relative to wealth gains. Owning gold makes sense, he adds, “in case they lose control.”
Here, Einhorn believes the reason to own gold is just in case “THEY” lose control. In all actuality, I believe THEY HAVE LOST CONTROL, however the world doesn’t realize it yet. Einhorn gets an “A” for effort here, but fails to understand the critical underlying reason to own gold.
Another long-term forecast of the price of gold was put out by Edison Investment Research November Gold Report. In the report they forecast gold to hit $1,642 in 2015 and reach $2,070 by 2020. This may seem a great deal better than some of the other more bearish bank and brokerage forecasts such as Goldman Sachs who see gold falling to $1,050 by the end of next year.
I read the entire 46 page Edison Gold report as they actually put some excellent data and analysis into producing their forecast. Below is their gold price forecast table up until 2020:
The difference in their two gold price forecasts are based on either negative or positive real interest rates. You can read their analysis and detail in their report at the link provided above.
The next chart from their report is the long-term price of gold to 2034 based on the forecasted increase of the U.S. monetary base supply:
According to Edison (Charles Gibson, the analyst who wrote the report), the price of gold doesn’t reach $3,000 until around 2028. Then after 2033, it finally moves up towards $12,000+ by 2039.
Again, I really enjoyed the Edison Gold Report and recommend investors to take a look at it, but I believe we are going to see much higher gold prices way before 2030… and more than likely, within the next 5 years.
The problem with these reports is their failure to include the coming energy constraints in their forecasts. I have been writing articles on how energy will impact the precious metals, mining and overall economy for several years. There are two recent articles that explore some of the important problems facing the oil & natural gas industry that are worth a read if you have not already done so:
This next chart comes from the Energy Watch Group 2013 report. It shows global oil production and forecasted decline from a country by country assessment:
As we can see, forecasted global oil production is set to decline in a large way, starting in the next few years. According to the folks at the Energy Watch Group, by 2030 the world will producing about half of the oil that it is currently. Of course this is a forecast and we could see the decline to be more gradual. However, if there any financial black swan events… it could be more rapid.
The U.S. and world are trying to offset the decline of conventional oil production with sources such as Tar Sands, Deep Oil and Shale. While these unconventional sources have brought on more production, they have come at a much higher cost and their annual decline rates (Deep & Shale Oil) make increasing production over a long period of time… impossible.
The major Banks and Brokerage Houses of the world are putting out forecasts for everything (including gold) based on the world to continue to produce the energy it needs to RUN BUSINESS AS USUAL. As I wrote in the text box in the chart above, the majority of the valuations of stocks, bonds and most paper assets will head down the toilet as the impact of peak oil are finally realized.
And… it’s even worse than that.
As I have mentioned in several articles, it doesn’t matter how much oil a country can produce, but rather how much it can export that matters. I have to repeat myself, because we have new readers everyday and furthermore… sometimes a subject has to be stated several times for it to finally sink in.
Jeffery Brown came up with the Land Export Model that shows the decline in Net Oil Exports in an equation form. His Land Export Model is described in Wikipedia at the link I provided.
Jeff and I have had several email exchanges on many issues concerning energy & oil. One of the aspects I am looking at now is the huge increase of CAPEX spending in the world to produce oil. I am working on getting some of the details, but I can honestly say… the world is spending currency hand over fist in trying to keep overall production from declining. Soon, they will lose the war on this battle.
Okay, getting back to net oil exports. In Jeff’s chart below we can see the forecasted decline of ANE – Available Net Oil Exports until 2020:
Jeff has assumed a very conservative 1% annual decline rate in oil production for the top 33 net oil exporters. Even with this conservative rate, we can see that the ANE – Available Net Oil Exports to the remaining 155 oil importing countries may decline in half, from 34 mbd (million barrels a day) in 2012 to only 17-18 mbd by 2020.
Let me clarify this chart. The Red portion of the chart represents the domestic oil consumption of the top 33 net oil exporters. The Pink area shows the consumption by China & India and the green portion at the bottom is what is left over for the remaining 155 oil importing countries. The ANE = the green area.
Basically, net oil exports are the difference between a country’s oil production minus its domestic oil consumption. All oil exporters go through the same cycle. Their oil production peaks and decreases as the domestic consumption increases — a double whammy.
For all those who have emailed me the question, “Why has the cost of silver increased so much since 2002?”, it’s quite simple. The reason is due to the quadrupling of the price of a barrel of Brent Crude from $25 in 2002 to $111 in 2012. The increase in the price of oil has less to do with manipulation or monetary printing and more to do what we are discussing here… the decline of ANE.
In 2005, ANE peaked at 40.7 mbd (million barrels a day) and fell to 34.4 mbd in 2012 (figures from Jeffrey Brown). The world has 6 million barrels a day less of ANE than it did seven years ago. Thus, we have much higher oil prices due to increased competition on a falling supply.
So, if we consider that global oil production is going to decline in a good percentage by 2020 and quite severely by 2030… what in the living hell is that going to do to the AVAILABLE NET OIL EXPORTS?? How low will ANE decline to by 2025 or 2030?
GOLD IS THE HEDGE AGAINST PEAK OIL
Without trying to sound like a broken record… GOLD (as well as silver) will be a hedge against peak oil. Why? The world is awash in $trillions of paper assets that derive their value from a healthy and growing economy. What happens when that is no longer possible as energy constraints hit in a big way? The value of these assets become increasingly worthless.
Do you remember that chart of the long-term gold forecast by Edison above showing the increase of monetary base and the price of gold to 2034. Unfortunately, these folks have failed to incorporate the changing (negative) energy environment in their forecasts. I highly doubt the growth in the U.S. monetary base will continue until 2034. Rather, I see a collapse of the U.S. Dollar and the Treasury Market well before that time period.
This chart below from one of my prior articles shows the huge amount of Global Conventional Assets under management:
The nearly $90 trillion in Global Conventional Assets will perform rather badly in a peak oil environment. The reason why gold and silver will be a hedge against peak oil is due to the store of “Economic Energy.” Mike Maloney talks about this in his Hidden Secrets of Money series.
As global oil production declines making the drop of ANE – Available Net Oil Exports to the remaining The 155 importing countries fall even further, investors throughout the world are going to see the value of these historic conventional assets disintegrate. These so-called assets are not a hedge against peak oil, but rather a huge liability.
Because there is such a small amount of physical gold and silver to go around, the movement into these precious metals will make their values increase substantially in the future while most other assets decline.
Precious metal investors who are currently frustrated with the ongoing manipulation which has pushed the price of gold and silver back towards their previous lows in June… need to be patient. The fundamentals will play a vital part in the market once again.