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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Damon Williamson
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Damon Williamson

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… Read more »

Jack Koch
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Jack Koch

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?

roguefaction
Guest

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… Read more »

David
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David

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,

roguefaction
Guest

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… Read more »

Herbert Schuhmann
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Herbert Schuhmann

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… Read more »

Herbert Schuhmann
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Herbert Schuhmann

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… Read more »

Rojelio
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Rojelio

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.

Norm
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Norm

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?

David
Guest
David

“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.

Dave
Guest

Great read!

jrs
Guest
jrs

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… Read more »

jrs
Guest
jrs

Should read Far “East”…

Tas
Guest

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… Read more »

DaleFromCalgary
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DaleFromCalgary

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… Read more »

Long John Silver
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Long John Silver

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… Read more »

Rojelio
Guest
Rojelio

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… Read more »

David
Guest
David

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.

Seattle206723
Guest

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… Read more »

Bob in Philly
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Bob in Philly

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… Read more »