PRECIOUS METALS & The Death Of The Business Cycle

The precious metals will offer one of the best safe havens as the world enters into the next paradigm… “The Death of the Business Cycle.”  Unfortunately, very few analysts, economists or investors realize the darkness that lies ahead.

While science, technology and specialization allowed mankind to advance to levels thought impossible during the 1800’s, it also destroyed of our ability to perceive the FULL PICTURE.  Basically, the left hand knows not what the right hand is doing.

This is a very dangerous situation indeed as analysts and economists continue to provide forecasts based on superficial and incomplete data.  This very factor was the inspiration to start my website.  My attempt was to provide information and data to help analysts–investors CONNECT THE DOTS.

Unfortunately, my energy articles receive a fraction of the reads my precious metal articles receive.  I have found that most energy analysts do not want (or care) to understand the merits of the precious metals, while many of the gold and silver bugs could care less about the ramifications of peak oil.

This strange dichotomy would be simply HILARIOUS if the future wasn’t so bleak.

ENERGY & THE PRECIOUS METALS are tightly interwoven, regardless if analysts or investors fail to make the connection.  That is why I made the point in my article, Why Gold’s Base Price Should Be North of $2,000, that the Gold-Oil Ratio is way below its historical norm shown in the table below:

Gold vs Oil Ratios & Price Values

I labeled it as a GOLD BASE VALUE of $2,000 because it doesn’t include any future revaluation (gold backed fiat currencies) as well as the huge amount of leverage in the debt and derivatives markets.  What I mean is, the paper price of gold should be north of $2,000 without any of the factors listed above.

Of course, the Central Banks manipulate precious metals LOWER, while the stock and bond markets are pushed HIGHER.  Evidence is found in a recent article by Zerohedge, “Cluster of Central Banks Have Secretly Invested $29 Trillion In The Markets”:

To summarize, the global equity market is now one massive Ponzi scheme in which the dumb money are central banks themselves, the same banks who inject the liquidity to begin with.

You see, the current plateau in global oil production forced the Central Banks to prop up the markets as real growth is virtually impossible.  So, inflation is now the only tool remaining which gives the illusion of world GDP growth.

Not only will the peak and decline of global oil production kill future world GDP growth, it will also destroy the BUSINESS CYCLE.  According to Wikipedia, there are four business cycles:

All of these cycles are based on a growing energy supply.  Rome fell victim to the Death of the Business Cycle as it basically ran out of cheap and available energy (Falling EROI – Energy Returned On Invested) to sustain its empire.  The decline of the Roman Empire was shown by the debasement of its monetary currency — the silver Denarius:

Collapse Of Roman Silver Monetary System

(courtesy of Martin Armstrong)

The United States took the Roman monetary debasement playbook…. HOOK, LINE & SINKER:

GreenBack Purchasing Power

Even though the U.S. Dollar still functions as the world’s reserve currency, the United States (and world) will soon experience the same fate as the Roman Empire.  The debasement of the monetary system is due to the FALLING EROI – Energy Returned On Invested of our economic system.

As I mentioned several times before, the EROI of U.S. oil and gas was 100/1 in 1930, declined to 30/1 in 1970 and is currently… 10/1.  Shale oil is not an energy solution as its EROI is a lousy 5/1…. lower than the EROI energy carrying capacity of our modern economic system.

Note:  an EROI of 100/1 means the energy of a barrel of oil provides 100 barrels for the market.

As the Romans suffered from the EROI decline, their collapse was inevitable and the DARK AGES were the result:

Dark Ages & Death of Business Cycle

(courtesy of NOBELIEFS.COM)

This chart represents the crash after the Roman Empire and what will occur after Peak Oil.  While this chart provides a religious cause in the demise of the West, to me it really doesn’t matter.  The Dark Ages had more to do with the decline of the Roman Empire’s EROI than it did with religion.

So, I would imagine many of the Roman economists and analysts during the last days of the empire were offering solutions and forecasts for continued growth and prosperity.  Unfortunately, MSM in Ancient Rome fell victim to the same IGNORANCE the modern MSM suffers.

Again… the LEFT HAND knows not what the RIGHT HAND is doing.

The 2014 BP Statistical Review was just released, and let me tell you… the oil production-consumption data doesn’t look pretty.  And, it only gets worse from here on out.

Folks, PEAK OIL will destroy the BUSINESS CYCLE:

Typical Business Cycle RED SLASH

After much research and a great deal of reflection, I believe the best physical assets to own in a peak oil environment are the PRECIOUS METALS.  The world is heavily invested in paper and physical assets that derive their value from a growing energy supply (which is now peaking).

Not only will the world suffer from a peak in global oil production, it also has two other nails in the ENERGY COFFIN:

1) Decline of Net Oil Exports

2) The Falling EROI – Energy Returned On Invested

In my opinion, the world will be a much different place by the end of the decade.  Those who believe most Stocks, Bonds, Insurance Funds, Retirement Accounts and Real Estate will be excellent investments in the future (due to the eventual UPSIDE of the business cycle), will experience a rude awakening.

The precious metals are not investments or stores of wealth to trade or relate to the insane valuations in our present markets.  Gold and silver are more than insurance…. they will be the wave of the future, and the future is now here.

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27 Comments on "PRECIOUS METALS & The Death Of The Business Cycle"

  1. Damon Williamson | June 16, 2014 at 10:24 pm | Reply

    Thanks for your good and timely article about where we are in the economic cycle. I totally agree that if a person buys precious metals, he should do so (immediately) with an attitude of buying for insurance and a form of savings as a way to retain their purchasing power. As for following in the footsteps of Rome, you are exactly correct to compare the US to making the same stupid economic mistakes. I personally believe that the US Dollar will first rally as Europe and other regions disintergrates due to mis-management and wars, money will flow to Dollar as the illusion of safety, but eventually (and sooner than most think) the Dollar will collapes into the dust bin of currency history. Better have your retirement, savings, and holdings in anything BUT paper! Get ready for a very bumpy and wild ride! DW- Texas

    • Insider trading began the day that the trading of stocks became a part of everyday life. It was a way to swindle uninformed investors out of thousands of their hard earned dollars. As the ruse matured, the dollar amount jumped to the millions. Billions was the next inevitable step and of course today we look at trillions. The “MARKET” is about ready to strip the fools once again. Any guesses as to how many trillion gets ripped off this time?

  2. Powerful summary of your position. Frustrations noted and understood. But hoeing your own row means perforce saying goodbye to consensus opinion and hope of mass acceptance. Were you to achieve a position of influence amongst 2% of the 2% or so who already buy into the metals meme…

    that would be sufficient to land your roccoship on the carrier deck and declare victory! What should matter more to you is that in the circles that really matter, your work is already highly regarded…they, in turn, are constrained by the limits of their own ‘customer base’ as to what parts of your package they can feature.

    The chart provided from ‘nobeliefs.com’ is a doozy! Couldn’t have asked for a better “illustration” of the way in which the ‘western’ mind manages to obviate the rest of the world from it’s history and it’s awareness. Look at the big empty space where the world supposedly flat lines because Europe is dozing!
    During the period it calls ‘the Dark Ages’ Europe was a small outlier of the Asian core of civilization… a rather backwards one at that! The great majority of trade, cultural exchange, and advancement in thought AND technologies was taking place in the vast circle of space bounded by the Indian Ocean to the south, and the Silk Road(s) to the north. China, India, and the Islamic world formed a trading bloc and dynamic growth engine for human advancement, the very existence of which has now been swept under the rug…

    to be replaced by a narrative spun by professional liars tasked with mis-educating the western mind into insularity and self-absorption – at the expense of that natural curiosity which springs from the instinct to learn what others are about… in order to better improve one’s competitive position, and chances of survival!

    As that same powerful arc of trade, finance, and (post)technological advancement spring to life once again… in the form of the “Eurasian trade alliance” which our man JW so adroitly paints the outlines of… in golden hues and silvery brush strokes…

    it matters little, whether the western Jack Horners, sitting in corners, catch on to the seismic shifts or not. The west will continue to rot, full of pride, hubris, and continued incapacity to adapt and renew. In that benighted zone, precious metals will provide but the materials for a display of useless wealth on a sarcophagus of stubborn self-delusion… while elsewhere those same metallic materials will be the backstop for an era of peace and plenty!

    The ‘rest of the world’ will look back on that fallen empire with a mixture of sadness and disdain – for a civilization and a people brought low by failure to follow the lessons of the ancestors.

    • Please expound on why you think:

      “In that benighted zone, precious metals will provide but the materials for a display of useless wealth on a sarcophagus of stubborn self-delusion… while elsewhere those same metallic materials will be the backstop for an era of peace and plenty!”

      Thanks,

      • Well, it’s comin! I’ve changed things up a bit, so that Part Three of BR will go into that … in enough depth to do it more justice than a comment can. Apologies for seeming to fob off a request… but I believe a delayed response to be beneficial …. because

        lessons learned from the previous segments, as to how to ‘strawman-proof’ the precis – and force a creative response instead of dead-end diversions … will loosen things up, profiting the reader and myself considerably. Takes time for this ol dog to learn new tricks!

        By refining my approach I aim breakup the logjam cause by endless repetition of the same tired mantras, and spark an active sharing of real thoughts/feelings about the future of peoples pm investments – in a forum free of bullying and cant. I suspect this would go far to bring about that happy conjunction of bigger picture people which our host so clearly pines for!

        And then ol rogue can step back to his high steppes driftin, letting miner folk get on with things… minus the Coy Lahoods and their lariats of legacy thinkin! As Stever says…. Stay tuned!

  3. Herbert Schuhmann | June 17, 2014 at 6:03 am | Reply

    When it comes to the stock markets you may have overlooked something. In my opinon the stock markets are not driven by a business cycle at the moment. As we know many countries want to get rid of their dollar – and euro reserves (one aspect of the de-dolarization). The precious metal markets are far to small for all these dollars and euros flooding back to the “sender”. As long as the interest rates are so low, bonds are not interesting any more. Therefore the central banks around the world began to buy equity (it started in 2009). Even if the profits of the european – and us-companies decrease in the near future we have to realize that for example China has also other reasons than profit to buy chosen stocks – they want to buy “technology”.

    http://www.wantinews.com/news-8579815-Global-central-banks-turned-into-the-largest-Chinese-investment-in-the-stock-market-the-stock-holders.html

  4. Herbert Schuhmann | June 17, 2014 at 6:48 am | Reply

    Let’s say you are a creditor (imagine China) and your debitor (imagine the USA) cannot pay the debt in real goods. The debitor has also not much (physical) gold and (physical) silver left. How could the debitor compensate the creditor (may be unwillingly) ? Just in case, if you think the debitor will try to betray the creditor by devaluating the currency you are shurely right – the inflation cannot only be witnessed by increasing food – and energy prices but also by rising stock markets. (As long as the renminbi is bind to the dollar the trade deficits of the USA will remain until China owns the whole USA – or will there be war ?).

    • Herbert,

      Who knows how things unfold between the super-powers. However, I can honesty say that most assets will decline in value as PEAK OIL reveals its ugly head. Furthermore, Net Oil Exports are the key as they decline even faster than overall production — basically a double-edged sword.

      I don’t have the study in front of me, but the German Military put out a study stating that if the world understood that peak oil was here… it would cause a collapse of the stock and bond markets. We must remember, the valuations of these investments are based on the notion that BAU – Business As Usual will continue, which it won’t.

      Things will get quite interesting as Shale Energy peaks much sooner than most realize. By 2020, the world will be a much different place and those who were wise enough to store some of their wealth in precious metals will be glad they did so.

      steve

  5. Powerful chart illustrating the dark ages, despite the subjective nature of the y axis. And the dark ages people didn’t even have global resource depletion and the compromised environment that we’re looking at now. Holy shit.

    The biggest argument that regular normal intelligent people (I’m not counting the completely oblivious) will counter with is that technology is going to save us. I used to think that also. We’ll all pull together and “do the right thing” to save ourselves.

    • Rojelio,

      I totally agree that technology won’t save us. However, the basic technology that created a hand shovel did allow mankind to do work a great deal more efficiently. Thus, the shovel actually helped increase the EROI ratio of human gardening and farming. Furthermore, a shovel can last a lifetime if one takes care of it. Even if the wooden handle breaks, it doesn’t take much to replace it and the metal shovel can continue for another several lifetimes.

      On the other hand, the modern agricultural equipment becomes outdated in just a few short years. If a modern farmer doesn’t have a high-tech satellite guidance tractor system, he is in the dark ages and can’t make a decent living. Our systems today are so dependent and fragile… its quite scary if you think about it.

      steve

      • I guess the question is, “are we in ecological overshoot?” If so, a large die-off is unavoidable, even with a shovel and a thinner Smart-phone in hand.

        Peak oil might be just the tip of the iceberg. For example, consider plankton, the basis of the food chain. The Oceans are losing plankton just like Wall Street is losing their middle class plankton.

        I really appreciate that you urge people to consider energy in this equation. I would add one more as well. Energy Economy, Environment is like a 3-legged stool and all 3 legs are getting sawed off at the same time. I don’t think you can have a meaningful discussion without considering all 3.

        • Rojelio,

          I understand the environmental and climate situation all too well now. This is part of the reason the REPORTS PAGE is late in being released. I spent the better part of the first 2-3 months of the year researching and reading all the new data on climate change… and let me tell you, it scares the living HADES out of me.

          I always knew climate change was a real issue, I just thought it wouldn’t reveal its ugly head until 100+ years. However, it looks like we may be entering into a RAPID, NONLINEAR WARMING EVENT that will make peak oil seem quite insignificant.

          I will be including some of this new Climate Data in my THE U.S. & GLOBAL COLLAPSE REPORT. Even though the REPORTS PAGE is late… it’s still coming.

          steve

  6. I don’t understand why any (size) primary silver miner would continue to produce at these prices. It’s not that difficult to shutdown and break even is it? Too watch the ore come out next year and have silver at $30 per would be awful nice until you thought about the ore that came out this year. I absolutely agree with those of you that contend that a mine owner can’t speculate and survive, but shooting at a price above “breakeven” isn’t real speculazation is it?

    • “I don’t understand why any (size) primary silver miner would continue to produce at these prices. It’s not that difficult to shutdown and break even is it?”

      Yeah actually it is hard to shut down. Investors expect return or the hope of a return. You want to keep your core talent and skill people working for you. If you shut down who says you will have the resources [capital, skilled people, working machinery, supply chains, refiners waiting to buy, etc.] to start up again?

      Mining & refining is complex.

  7. Sooo…as roguefaction has said, only about 2% of the Anglo-Empire buy into the PM meme.

    Living in the Empire as I do, how will they benefit? Who will use them? Is the plan to wait until they spike and trade them in for FRNs and trade the FRNs for some productive land, etc.?

    Should I punch my ticket to the Far ,while I can, to be among the traditionalists?

    These thoughts come from someone who sees a very dismal future for the world where food, water and staying alive will consume every waking hour of your life. Surpluses of anything will be non existent. And surpluses are the only reason to have money of any kind.

    OK…now I need a beer…

  8. Steve

    Could not agree more. I spend a great deal of time reading energy related articles especially oil production statistics. My feeling is we are in trouble now. Look at the oil price today. It actually traded down amidst a world gone wild. Oil needs to be priced MUCH higher now. Forget those that say the economy doesn’t work with high oil prices, that is now REALITY and nothing can change that. Stagnant wages and peak oil are a damn bad combination.

    Can’t really own oil other than futures. However, gold and silver will always be priced to oil on some level. I own gold and silver along with the miners. The miners will be sold and converted to physical at some point. Silver is an easy and affordable way to own oil.

    • DaleFromCalgary | June 17, 2014 at 9:47 pm | Reply

      Re: “can’t really own oil other than futures”

      I’ve never bought any kind of futures. My portfolio is roughly 25% petroleum, as follows:
      (all are in Alberta)

      – Mineral rights for conventional oil. The last ones I got were in 2007 and I would be surprised if anyone sold theirs nowadays, but I mention it for completeness. I lease my mineral rights and get several automatic deposits every month from the wells.

      – Preferred shares of petroleum companies pay dividends, and are probably the easiest way to invest into oil.

      – Limited-partnership units share the gross cash flow of a group of oil wells. Seldom advertised because they sell out by word-of-mouth and you have to live in a petro-city such as Calgary where you can personally contact people.

      – Private equity where you buy shares and get direct ownership in a group of wells. For the sophisticated investor only.

      – Drilling companies but only those who mostly get paid in cash rather than taking back-in positions, and which pay out dividends.

      I find it more and more difficult to find good opportunities in conventional oil. I stay away from shale oil because those wells never seem to provide return OF capital, much less return ON capital. (Except drilling companies as noted above.)

  9. Long John Silver | June 17, 2014 at 8:53 pm | Reply

    Porter Stansberry recently made a comment that Peak oil is a myth, plenty of oil in Texas.. Is he delusional? It’s hard for the average guy like myself to actually know the truth.. Big oil wants us to worry about a shortage they say.. Just like I can’t confirm that we landed on the moon, this is what they tell us, but the flag is on the other side, so my telescope can’t help me in this matter.. I yet don’t have a tool to measure and see if there is or is not an abundance of oil.. I just have to pick a side..

    • Long John Silver,

      The way to understand the oil market is by understanding the EROI – Energy Returned On Invested. In 1930, the U.S. oil & gas industry had an EROI of 100/1. Which means the oil industry could provide 100 barrels of oil to market by consuming 1 barrel of oil in the process.

      By 1970, the U.S. oil and gas EROI fell to 30 to 1, and presently the average is 10/1. Shale Oil has an EROI of 5/1… twenty times less than the EROI the U.S. oil industry was producing in 1930. This has nothing to due with the devaluation of the Dollar, but the huge increase in cost to explore, drill and produce oil today.

      Porter Stansberry has no idea about the falling EROI. Furthermore, Shale oil suffers from 40-50% annual decline rates. Which means the shale oil companies have to drill like rabbits to keep production from declining. Compare this to the Global average decline rate of the existing large oil fields at 5-6%.

      I don’t believe you will have to wait long before the GREAT SHALE HYPE in the United States peters out revealing that it was nothing more than Ponzi scheme.

      Does Porter tell his readers that the typical Shale Gas Player spends 2 times on CAPEX to continue drilling (offsetting 40-50% decline rates) than they make in operating cash flow. The Shale Gas players have to get financing from the JUNK BOND MARKET to continue their Ponzi scheme. This will end badly.

      I believe the declines in U.S. shale oil and Gas take place within the next year or two. Let’s see if Porter can BS himself out of that one when the time comes.

      steve

      • Long John Silver | June 18, 2014 at 9:03 pm | Reply

        Steve, thanks for your reply.

        I am more inclined to believe that we are in precarious times.. We cannot keep on destroying resources on nonsense, and that’s what it is.. For the system to continue, energy is required.. There will come a time that it will no longer be possible, and all the fools driving their gas guzzlers will be left scratching their heads..

        I’ve been visiting your site for a while now, and appreciate all the work you put in..

    • Back in the good old days, you could burn 1 barrel of oil to pull out another 99 barrels (EROI 100). Those 99 extra barrels could be used to crush Hitler, go to the moon, pave the earth with interstates, whatever. You could burn more energy flying a bunch of fat slobs to visit the Egyptian pyramids than it took to build them in the first place.

      Now with the fracking 1 barrel of oil pulls out something like 5 more barrels (EROI 5), not to mention way more environmental damage. And you might want to look into how much water is used for that process as well.

      Sure, there’s “plenty” but that doesn’t mean it will be affordable.

      • Excellent points IMO.

        And as Steve points out a growing economy can;t afford expensive energy. Individuals and families whose income hasn’t “kept up” [half of Americans on one or more types of welfare now; without which the scene would look like the great depression breadlines…but with a more violent society than then] would put society in crisis…without eveb considering water supplies.

  10. This is an interesting read and theory on what happened. Though the dark ages reliving itself? I find that very hard to believe what will happen to mankind again.

    Now the people in the Middle East areas are trying to inflict this upon mankind; but there is a breakaway society now underway in the world. Those who subscribe and contribute to the brighter side of mankind’s admiration and inspirations.

    I believe there might be some global reset or something along the lines of basket of currencies. Depression is possible in either such situation as they have to bring down some standards of living; now who that’s going to be I would like to see.

    America is still and armed society; and there’s only so much she will take from anyone.

  11. Bob in Philly | June 19, 2014 at 5:32 pm | Reply

    Excellent post Steve. Anyone who watches a newscast these days can see exactly what Steve is pointing out. The U.S. is throwing good dollar after bad into the Middle East to “stabilize the region” while it continues to explode into factional violence which it has done so for thousands of years. In reality the U.S. is involved in an energy war to control oil and gas. At the very same time gasoline prices are going up along with food prices as the weather in the U.S. continues to grow increasingly severe. Its all about available energy resources and the increasing expense to get it.

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