Welcome to the Room - May 4, 2007
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Last Updated April 27, 2007
I’m on a pseudo-holiday this week, the occasion being a school holiday for the kids. “Pseudo” because even though I promise myself I’ll put down the tools for the week, I find myself almost hypnotically pulled back into the never-ending whirl of action that is Casey Research.
This week, for instance, Doug is checking out property in Uruguay and Marin Katusa is in Mongolia, getting a first-hand impression of (and maybe even an advance peek at) that government’s new mining policy. Given that the share prices of companies working in that geologically prospective country were suppressed last year by rumblings of government greediness, a new mining policy that is less draconian than expected could act like a slingshot on those very same share prices. Not content to hear the news second hand and late, we dispatched Marin to the scene.
Meanwhile, Chris Gilpin just returned from touring mine sites in Europe and is back in Vancouver working up his findings, Louis James and Bob Oberndorf are preparing for a trip to Columbia to look at an oil deal, Bud Conrad and Terry Coxon are at their desks in California, Olivier Garret is in Florida, and the rest of your Casey Research team is on the job in Vermont… with the exception of myself, who is only “sorta” on the job.
However, given the more pressing matter of family, I’ll be brief this week.
Before I get into some of the things catching my attention, I’d like to thank everyone who wrote such nice notes about our all new BIG GOLD. Rest assured we are not done yet in our quest to make this your single best source for analysis on the more staid corners of the precious metals markets, including large-cap producers and near-producers, gold mutual funds, ETFs, coins and so on. But it was nice of you to take the time to send me your input and best wishes -- much appreciated.
I would also like to thank those of you who wrote positively about last week’s brief dissertation here on the topic of gun control. Now, don’t get me wrong, I am not a card-carrying member of the NRA and guns, like, say, a hammer, only rarely pop into my conscious mind. But I am firmly against disarming the populace of this, or any, country and leaving the defense of the citizenry entirely in the hands of law enforcement.
Not to dwell on the topic, I remember some years ago, while living in Los Angeles, when my car was stolen. Per the established protocol, I called 911 and was left on hold for over 15 minutes. If the problem had not been a missing ride but, say, a determined intruder full of mal-intentions, I would have been toast.
Surprisingly, we had only a few negative emails regarding the article… one who rhetorically asked whether without his guns the VA Tech shooter would have been able to kill so many? In response I can only say that, given how plainly insane the man was, I suspect he could have come up with any number of ways to pursue his deadly aims. For instance, in a history book about the 1930s, one comes across the tale of Julian Marcellino who ran amok on the streets of Seattle with a bolo knife in each hand, killing six unfortunates and seriously wounding 15 others. Or one could take a less strenuous route, emulating a killer in the Russian city of Ukhta who, in July of 2005, simply torched a building, killing 24.
Unfortunately, humankind is not perfect and never will be. Which, if you ask me, is an argument for keeping a gun around the house, and not the opposite. And besides, any government legislation made in the heat of the moment based on the latest cover story will almost always be bad legislation. Just look at the Patriot Act.
But enough of that. Let’s move on to sunnier topics. Well, maybe not quite so sunny…
African Madness… Coming Soon to a Gas Pump Near You?
Last year marked the first time ever that the U.S. imports of African crude oil surpassed the imports of oil from the Middle East. The trend continued in the first few months of 2007 when three African countries (Nigeria, Angola, Algeria) accounted for 26% of crude oil imports, while three Middle Eastern countries (Saudi Arabia, Iraq, Kuwait) accounted for just 23%.
The drift toward African oil can likely be attributed to dwindling production from Mexico, the U.S.’ number two import nation… and the Iraq adventure.
[Ed. Note. We’re not quite sure what to call what’s going on in Iraq these days. I don’t think we are technically at war with Iraq anymore… and the Bush admin doesn’t like to call it an “occupation.” The phrase “crusades” was used a couple of times early on, but then disavowed… so, I guess adventure, or perhaps mis-adventure, will have to do.]
Regardless of what you care to call it, however, Iraqi oil production is still off by about 27% from its pre-adventure high.
Of course, as perpetually troubled as the Middle East is, the rest of Africa is no shirker in the constant chaos derby. That it is now a leading source of oil imports to the U.S. has far-ranging implications, above and beyond providing regular content with the theme of mayhem for our nightly entertainment… I mean, news.
On that front, you may have noted – but probably only in passing – that Nigeria is in the process of transferring power through a “democratic” election. While CNN et al broadcast stories relating the usual measures of corruption and death surrounding the voting, face it, few in the U.S. care for anything more than cheap fuel. In the case of Nigeria, the key to reliable production now lies in the ability of the newly elected president, Umaru Yar’Adua, to solidify political control despite strong opposition from militant opponents.
Unfortunately, in that regard, things don’t look quite so good… with oil prices jumping on the news of the election outcome, a bookie’s odds, if you will, on the likelihood of a coup or widespread unrest breaking out in the foreseeable future. As goes the fate of Nigeria, Africa’s largest oil-producing nation (2.1 million barrels a day), so now goes the cost of your daily commute.
Elsewhere in Africa this week, we heard that the Ogaden National Liberation Front (OGNF) attacked a Chinese oil field in Ethiopia, leaving 74 dead, and took as many as 5 Chinese hostages. The OGNF is a separatist rebel movement seeking independence on the border of Ethiopia and Somalia. Although a representative of the group claimed the Chinese killed in the attack were “caught in the crossfire,” the fact that there were guns ablaze around the oil field in the first place – not to mention the hostage-taking – casts those claims in a suspect light.
And in Algeria, the group formerly known as the Salafist Group for Preaching and Combat (GSPC) but which, perhaps because of the giggling, changed its name to the more serious sounding al-Qaeda in the Maghreb, set off a couple of bombs simultaneously, killing 17. (I have a vision of mullahs holding up placards with numbers grading the quality of these attacks… with synchronicity counting heavily in the voting). Even so, these bombs represent a potential return to the bad old days in Algeria, and a decided acceleration in violence aimed at anyone the Islamists find offensive to their rather strict religious beliefs. Invariably, the offensive extends to the infidel dogs… i.e. foreign oil executives and workers.
Regardless, now that Africa’s importance to U.S. imports has risen to new and lofty levels, strife and turmoil there will cause crude oil prices and futures to spike, as they have over the past few weeks. With the busy summer driving season looming and gasoline supplies dropping for 11 straight weeks in the U.S., more of the same – a certainty – will likely lead to much higher gasoline prices coming to a pump near you soon.
And, that, of course, adds further pressure on a U.S. economy being squeezed by the deflating housing bubble… but provides a steady wind to the sails of our favorite energy companies, followed in the pages of our Casey Energy Speculator
and, for the more active traders, the Casey Energy Confidential
Speaking of gasoline… Bud came across the chart below showing gasoline stocks (the red line) compared to the seasonal level in the dark band, helping to explain why gasoline is selling for upwards of $3.45 in Bud’s home town in California.
My Nervous Neighbor and My Grandfather’s House
I ran into a neighbor of mine down at the post office yesterday. He’s a builder. And he was clearly nervous. The source of his agitation is that he built a largish sort of house on spec last year, and there it sits, unsold and unoccupied, its price tag of $1.7 million finding no willing bidders. In fact, no lookers at all. According to him, his listing agent, the leading real estate agent in this neck of the woods, told him a couple of days ago that nothing, but nothing is moving.
Knowing that I keep an eye on such things, he asked me when I thought things on the housing front might improve. Of course, I have no idea, but that didn’t stop me from tossing out a few thoughts. For instance, now that the National Association of Realtors (NAR), cheerleaders for the industry, is reporting that existing home sales fell by 8.4% last month, the odds are greatly increased that prospective buyers will take a “wait and see” attitude. That, of course, is self-fulfilling, as the more people wait to buy, the better the prices they will ultimately be able to buy at. Which is why the NAR is also reporting that, for the first time since the Great Depression, housing prices appear poised to retreat on a nationwide basis.
So, I told my nervous neighbor that I didn’t see any joy in the near term, and that he might consider taking a nice holiday. The sight of his hang-dog expression on hearing that well-meant suggestion spurred me on to further analysis, flawed though it may turn out to be. And so I pointed out that with the massive amounts of liquidity floating around the world, and the almost inevitable shift towards things more tangible, I thought that once prices settled down in a year or so (a complete punt on the timing), real estate should once again return to favor.
But the fact remains that the house he is asking $1.7 million for today wouldn’t have sold for more than $650,000 even 8 years ago when we bought our house in the same development. And so who really knows how low he’ll have to drop the price before finding a willing buyer?
On that front, I recall a story about my grandfather, who was doing quite well back in the early 1930s as the president of the New York Mercantile Exchange and so plopped down a then substantial $65,000 for a stylish abode in an upscale neighborhood of New Jersey. (In today’s dollars, that is over $759,000).
As he told it, he had to hold on to the house for 30 years before he was able to sell it for the same price he paid.
I, for one, thought I would be writing you this week, extolling the wonderfulness of gold taking out the $700 level. But it was not to be, with the technical types punishing gold for not taking out the $693 resistance level.
The importance of the technicians in the short-term fluctuations of the gold market is made clear by the following chart showing the volumes of physical gold transactions, the London Bullion Market Association (LBMA) Clearing Volumes and the Futures & Options Exchanges Trading Volumes. One thing should become instantly apparent, the increasing importance of futures and options markets.
I said that technicians are important in driving short-term prices, because futures traders tend to put a lot of stock in technical analysis. In the longer term, however, it is the fundamentals that will control the prices… and the fundamentals remain very much in gold’s favor. In the meantime, watching the technical break-out points can be useful, which you can do in Merv Burak’s regular “Technically Precious” columns in our KitcoCasey research center.
Source: CPM Group
As for gold’s latest pullback, it is really nothing… just a step back ahead of five steps forward.
Inflation in England
Word out of Britain on the inflation front this week sent the pound through the $2.00 mark for the first time since 1992, with higher producer prices being followed by a consumer price inflation tally coming in at 3.1%, a full 1% higher than the Bank of England’s targeted rate.
Anticipating that the BOE might jolly well raise rates to try to keep inflation under control, FX traders pushed the pound higher.
The world is awash in cash, none of it backed by very much of anything, and that cash will, in time, show up in the price of pretty much everything.
On that front, here at the resort where I am hanging my hat this week, I noted with a gasp on opening the menu at the casual dining room here that a 10-ounce New York steak is on offer for $49. Now, I’m not cheap and not opposed to a little reckless spending while on vacation… but enough is enough, and so I ordered the $15 hamburger.
And yet, the government continues the deceit that inflation is tame and under control… nothing to worry about at all… all the while pursuing policies that assure our dollars – and pounds, and all the other fiat currencies – die the death of a thousand cuts. Actually, make that a thousand price hikes.
Speaking of which, I heard the other day – but have not yet been able to confirm – that the basic paper currency unit of Zimbabwe has now been so inflated that it has more value in BTU terms – i.e. in the energy it produces when you burn it – than for what it can purchase down at the store.
I would say that before this is over, there will be more than a few currencies who fall into the same category.
And, that, my treasured readers, is where I must leave it today… at least if I want to finish up my vacation with anything resembling familial harmony. Which I very much do.
Until next week, thank you very much for reading, and for subscribing.