The Foundation Of The Financial Markets Took A Big Hit In 2015

Financial-Crash-FIMAGEThe Global Financial Market took a big hit in 2015 and most investors have no idea why.  The U.S. and global financial system both sit on a foundation that continues to erode each year.  While the disintegration of the global financial substructure has been going on for many years, last year was a BIG ONE.

How big?  Well, lets say…. the worst in 60 years.  So, what am I referring to here?  Well, I imagine some of you who have been reading my work for several years probably have an idea.  However, before I share this information, I wanted to say a few things about the precious metals.

Last week I listened to the Future Money Trends, EPIC Silver Debate! Bull vs Bear: Gary Christenson & David Trungale.  The silver bull was Gary and the silver bear was David.  Basically, Gary provided technical and some fundamental data why he saw the price of silver moving much higher over the next two years, while David said the market would continue to see low silver prices for quite some time.

David Trungale stated that someone who bought silver in 1980 (at the top) would have to wait several decades to get the return on one’s investment (I am paraphrasing here).  Mr. Trungale believes that it could be quite some time before silver investors saw higher prices.  I gather David is gauging his silver forecast by low inflationary forces and a similar silver washout timeline from 1980-2005.

While both individuals put out interesting information to prove their opinion on the future price move in silver, I think a few points need to be added to the debate.

1)  The reason we had nearly three decades of floundering silver (and gold) prices, is that the world was busy funneling their hard-earned funds into every single paper asset under the sun.  I have written and spoke about this in many articles and interviews.  Thus, the funneling of investors funds into paper assets kept them from going into physical assets such as gold and silver.  I discuss this in my recent article The Historic Dow Jones-Silver Ratio Points To $300 Silver.

2) The U.S. financial system continued to function on the back of the fiat U.S. Dollar due to a different bubble economy each following decade and the Petro-Dollar system.  As I mentioned in the article linked above, the U.S. had the 1980’s Military Spending Bubble, the 1990’s Tech Bubble, the 2000’s Housing Bubble, and the current Auto, Housing, College, HealthCare, Stock Market, Retirement and U.S. Treasury Bubble.  This along with the recycling of U.S. Treasuries for oil kept Americans buying everything under the sun especially each new gadget, trinket and gizmo they could get their hands on.

3) The world enjoyed a growing oil (energy) supply for the past 3+ decades.  However, the Peak of cheap energy is NOW here.  David Trungale believes silver will continue to languish for years, if not decades, because he doesn’t understand the ENERGY PREDICAMENT the world is in.  Remember this… Rising energy production drove the value of paper asset prices higher, while falling energy supply will destroy them.  Thus, the place to store wealth in the future will be in physical gold and silver, not declining paper assets.

Okay, that last point is a good segue into the eroding foundation of the financial system.

Why The Foundation Of The Financial System Took A Big Hit In 2015

The global financial system gets its power from burning energy.  Yes, that’s right… another article on energy.  While some of my precious metals readers are rolling their eyes, the following charts and information are vital in understanding the future value of gold and silver.

According to the data put out by the IHS Company published in a recent article from EconomicCalendar.com, the world spent a lot of capital and found 2.8 billion new barrels of oil (and associated liquids) in 2015.  This was nice, however the world also consumed a whopping 29 billion barrels that year:

World-Oil-Discoveries-vs-Consumption-2015-NEW

This is a very bad sign indeed.  The world oil industry replaced less than 10% of the oil it consumed in 2015.  The EconomicCalender.com article, Crude Oil Exploration Drops To A 60 Year Low In 2015, stated the following:

Most of the newly discovered crude deposits are deepwater. It takes seven years, on average, to develop such deposits and begin producing oil from them, therefore, current exploration results could lead to a supply shortage in the mid-2020’s.

A steep fall in oil prices, that began in 2014, led many producers to cut their expenses. Exploration took the biggest hit, as this type of expense isn’t expected to cause an immediate effect. ConocoPhillips, for example, has rejected exploration altogether, while Chevron and a number of other companies substantially curbed their operations.

The article states that most of the new oil discoveries came from deepwater.  Furthermore, ConocoPhillips has rejected oil exploration altogether.  We must remember, ConocoPhillips is one of the three major oil companies in the United States.

So, why are most of the new oil discoveries in deepwater?? Because most of the less expensive inland oil discoveries have been found already.  This is why we move to looking for more expensive oil offshore.

This next chart shows the declining worldwide petroleum discoveries.  Unfortunately, the data in this chart only goes up until 2005.  However, it provides a troubling trend:

Declining-World-Oil-Discoveries

If we take a close look at the chart, there are several points worth discussing.  First, world oil demand (Black line) is only about 24 billion barrels a year.  In 2015, global oil demand was 29 billion barrels.  Secondly, the future discoveries (Blue bars) suggest approximately 5 billion barrels was forecasted to be discovered in 2015.

The world didn’t find anywhere near 5 billion barrels of new oil in 2015… it was only 2.8 billion barrels.  Lastly, the oil we are discovering now has a much lower EROI – Energy Returned On Invested than the oil we found 60 years ago.  This is a very important aspect that isn’t factored into the future energy equation.

Here is an excellent chart by energy analyst Art Berman from his article, The Crude Oil Export Ban–What?  Me Worry About Peak Oil?

World-Conventional-&-Unconventional Liquid-Production

As Art shows, conventional oil production peaked back in 2011.  What has continued to grow is unconventional oil production.  This is the extremely expensive stuff.  This expensive oil was extracted and supplied to the market with the help of the Fed and Central Bank zero interest rate and easy monetary polices.  These are policies that will not continue indefinitely.

Unfortunately, we are living on past cheap-low EROI oil discoveries.  I believe the world will not be able to afford the expensive future oil discoveries we are currently finding due to the massive amount of debt in the system.

This is precisely the reason I disagree with the analysts who are bearish on silver.  There will not be another 20+ years of a silver price washout as their was from 1981 to the early 2000’s.  Again, this is due to the peak and decline of cheap oil production.

As I have stated in several interviews and articles, U.S. oil production is likely to decline 30-40% by 2020 and 70-75% by 2025.  The United States will be in a world of hurt as domestic oil production drops like a rock.  This will put severe stress on most paper assets (debts)

This is the precisely the reason silver will not suffer the same trend as it did from 1981-2005.  The global financial system took a big hit last year as the world added the least amount of new oil discoveries in 60 years.  Investors or analysts who believe we will see a return to higher oil prices and production will be sorely mistaken.  Again, this is due to the massive debt that overhangs the system.

Lastly, if you haven’t checked out our new PRECIOUS METALS INVESTING page, I highly recommend you do.

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15 Comments on "The Foundation Of The Financial Markets Took A Big Hit In 2015"

  1. “Investors or analysts who believe we will see a return to higher oil prices and production will be sorely mistaken.”

    I think half of that is right; we will see higher oil prices.

  2. OutLookingIn | May 12, 2016 at 5:41 pm | Reply

    Looks like Glencore is going for broke. Just out on ZH that Glencore is holding a 30% position in Brent futures for floating storage in their tanker fleet. Hoping to drive up the oil price and cash out.
    All I can say is – good luck with that. They are really going to need it!

    Chinese petroleum consumption for Q1 is down by 2% from an average five year growth of 5.5% per annum. This shrinking demand is indicative of an unfolding deflation, that China is exporting to the west. Not a continuing healthy, growing economy.

    As for silver – The average silver/gold ratio over the last 40 years has been 42.8 conversion rate with gold. History has shown that a rise in silver prices are all but guaranteed when the ratio tops 70.
    The last 3 times in the past 25 years that this has occurred (1997,2003,2009) silver prices saw large gains. The current ratio has been above 70 for some time now.

    • Goldcore is systemic, will be saved by central banks one way or another.
      They have finally understood that commodities obliteration was counterproductive from their point of view and objectives.
      The most logic thing to do for them is to buy some commodities futures. overproduction of oil or metals will be an issue is a second step. For now they have to push up input costs.

  3. Other major contribution was the manipulation by the big banks in pursuit of #1 & #2.

    SteveW

  4. Three years ago a friend of my family I met at a dinner party told me he read Mike Maloney’s book and was going all in physical silver.
    Luckily he told me and I told him I was short silver and implored him to not by physical. He thanks me every time he sees me.
    Only precious metal experts can be wrong for years yet somehow claim to be right. When silver was $35 David Morgan confidently predicted silver would never break $30. I stayed short. Then Clive Maund said $26 support would not break, Then he said to short the house @$15 and it went to $17.
    There are videos of Mike Maloney telling people to buy silver @$40 right at the top of the bear trap.
    I hold physical gold and silver but not because any experts told me. They are riddled with confirmation bias.

    • Governments and central banks are taking over economies and financial markets as we speak. When the game ends due to shortages in cheap energy, what was the reason for this ‘takeover’ in the first place, nothing can be said about the ‘price’ of silver and gold, physical that is.

      Net worth is another story however.

    • “Pundits” revealed the new truth. Namely, PMs have entered a new bull market. It is obviously wrong as PMs have only reached resistance. If gold goes to at least $1350 and silver reaches $20, one can be sure that a new bull market is in place.

  5. Great research Steve but I now see you are looking to 2025 for silver. A year ago it was mine
    production of $30 an ounce that would create mine failures and drop supply. Then it was $25
    cost to produce, then it was $20 per ounce production cost and it’s $15 an ounce. The lower
    silver spot goes the better these mines seem to perform. With all these price drops how many mines failed? We’ve had $100 oil and almost $30 oil and silver was $14 for quite a time in 2015. All the factors you mention like India, China, silver coins & bars up 25% year over year do nothing. The reason is supply is ahead of demand. We need buyers Steve, not more prognosticators like Morgan and Schiff who are sellers of silver on their websites. .

    • Please stop this scam of physical supply and demand. What matters is what the few people in the wall street titans will do. I do not think silver but especially gold considering the above ground stocks really matter. What is important is : will it be their interests ie making money to be long rather than short in gold&silver ?
      It is the only issue, they can complete control and will have for many more years if not decades because there is nobody at the other side of the table…

      • Over here in Europe it can make more sense to buy gold rather than silver as the gold is tax and often gains tax free whilst silver in most of the EU has a 20% sales tax (VAT) and potential gains tax liability. I think Switzerland is lowest at 8% but it is not in te EU.

        In the UK the gold sovereign in particular has been used for wealth preservation for hundreds of years.

    • “We need buyers Steve, not more prognosticators like Morgan and Schiff who are sellers of silver on their websites. ”

      You are right we need more buyers to break the COMEX.

    • Come on Guys,

      You have got to lose your myopic perception of the gold and silver market. Precious metals, at least for stackers, is not an “investment” but INSURANCE against the collapse of all that is fiat.

      Yes they are driven by supply versus demand as are all markets.

      On the supply side, mining costs have gone down significantly with the declining costs of oil but this has forced some mines to close so relative supply is declining.

      On the demand side, TPTB, governments, central banks and all of the big commercial banks have manipulated the price to protect fiat currencies because if the don’t, their house of cards with all the fiat based derivatives and credit swaps will collapse and they will be out of business. Now that Deutche’s Bank has admitted the manipulation it will be much more difficult for the banks to continue to support the world of fiat. Central banks are out of ammo and governments show no sign of changing their outrageous spending ways.

      As Steve has shown in a recent post, industrial silver demand is down over 4% and the purchase of coins and bars is up nearly 30%. This is about a clear a sign as you could want that the day of fiat is quickly approaching it’s inevitable demise.

      When the cascading credit crash hits there is not nearly enough fiat currency in existence, so supply chains will collapse, chaos will ensue and precious metals will be the only universal money left.

      This is a very slow tsunami. TPTB will pull out all the stops to prevent it but it is inevitable.

      Do you hold it against companies like Wise foods that sell survival supplies based on the coming collapse? I don’t. They are providing a product that will come in handy when grocery stores are empty. Why should PM sellers be castigated for doing the same thing?

      The difference between the next collapse and all the previous ones is the energy industry. We will not have the cheap and easy energy to help us out of this one which will make it many many times worse.

      Be patient, keep on stacking and be careful what you wish for.

      Buy for cash and stash.

      SteveW

  6. “Silver-hater” Fofoa has an interesting story:

    http://fofoa.blogspot.nl/2016/05/the-debtors-and-savers-2016.html

    Nothing about the energy equation of course, but still a good read.

  7. We should realize that our future is even more dire given that agriculture was seized by industrialists. The days of cheap food (or any for some, for that matter) are running out.

    “Between 1945 and 1994, energy input to agriculture increased 4-fold while crop yields only increased 3-fold.11 Since then, energy input has continued to increase without a corresponding increase in crop yield. We have reached the point of marginal returns. Yet, due to soil degradation, increased demands of pest management and increasing energy costs for irrigation (all of which is examined below), modern agriculture must continue increasing its energy expenditures simply to maintain current crop yields. The Green Revolution is becoming bankrupt.”

    https://www.organicconsumers.org/old_articles/corp/fossil-fuels.php

    “If we think we are food secure here in the UK and other industrialised countries simply because we have gas in the car, frankly, we are delusional.”

    http://www.resilience.org/stories/2005-04-01/why-our-food-so-dependent-oil

    We have made a terrible mess of it all. Gold and silver will buy you bread when it all goes south. As was the case in Zim. At least they were able to pan for gold.

    https://youtu.be/7ubJp6rmUYM

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