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Today's Featured Article
In a move perhaps as metaphorical as it is lucrative for the commodities bulls, gold and platinum surged to record highs after South Africa shut down production at the world's largest mines. The reason for the production halt? The country is dangerously low on electricity, and a hiccup in the coal supply meant there wasn't enough juice in the grid to run the miles deep mining operations.
With the top platinum producers effectively shut in, platinum futures went ballistic, racking up a $170 per ounce gain in three trading sessions. Gold followed suit, pole vaulting off a successful retest of the old 1980 high of $850 in symphony with the Federal Reserve's emergency interest rate cut to finish off the first month of 2008 comfortably into the $900 handle.
If you cannot view the Platinum Futures Chart, go here.
The South Africa situation resonates with those of us who have been pounding the table on the need for defensive investors and aggressive traders alike to maintain a hold on the natural resources sector.
Here you have the convergence of today's dominant market forces at work, and the subsequent -and in this instance immediate- reaction in the futures markets.
The dynamics may be complex, but the theory is simple enough. The world is growing faster than ever.
In fact, despite rumors of imminent recession, the world is still booming. China has once again put out numbers in full contradiction of its stated policy of contained growth, posting an 11.2 % growth in GDP for 2007. China growth has been at or near double-digit growth for the whole of the 1st century, and a host of other up and coming third world consumer bases are fast on their heels.
Add to this the more modest growth in the G-7's multi-trillion dollar economies, and you start to see growing pains within our global family of 6.5 billion with population growth rate in excess of a quarter of a million people a day. Leaving the algebra to the academics, more people plus a higher standard of living equals more demand for the world's limited resources.
In our modern world, we are dependent on two key factors to facilitate growth: Capital and energy. |
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The need for capital is clear enough. Look at the pariah nations such as North Korea and Cuba, where demographics and geography match their neighbors, yet foreign investment and growth are mutually zilch. Sure they are communists, but then again, so is boomtown China.
The truth, hard as it may be to swallow at times, is the growth of money supplies in leading nations -- especially the US -- is the major driver for the constant and steady expansion of the world economy.
If you cannot view the Money Supply Growth Chart, go here.
The eventual consequences of this continual replenishment and expansion of money remains as the proverbial Sword of Damocles over the whole system, and its prophesied demise has been a contentious point of debate and election rhetoric across many shades of the political spectrum since the days of FDR.
Yet the world continues, on average, to grow and thrive and innovate, and the system has pushed the due date on the bar tab into the unforeseeable future for 3 full generations with no discernable catastrophic results. As Maynard Keynes famously explained away the long-run problems created by deficit spending, "In the long run we're all dead". Indeed, Keynes has been dead for 60 years, as have most of his critics of the day.
Whether it's a coincidence that these 60 years has seen the greatest economic expansion and development in all of recorded history is an intriguing but wholly academic discussion for another time and venue. But the bottom line is clear when we look at money supply contractions and expansions. Money is the fuel for economic growth, and we are today seeing the fastest world growth pacing the fastest money supply growth, and the term "parabolic" may be the keyword for defining the first decades of the 21st century.
The need for energy is also clear, as there is almost a straight line correlation between a nation's energy consumption and their GDP. And this factor is the quintessential counterbalance to the current fiat fuel being tossed on the fire of global economic expansion.
Crude oil didn't run to $100 a barrel in the wake of energy abundance, and altruisms of freedom and democracy aside, the Middle East oilfields are not the flashpoint of world military activity and geopolitical crisis for a lack of interest in securing control and influence of energy resources. World oil production may have peaked in 2006, and in any case new supply has only just barely outpaced demand in the last 4 years despite a 300% increase in price that has spurred new exploration everywhere from Colorado and Nevada to the South China Sea. Natural Gas supplies are also a contentious issue, and despite some significant new finds, the price remains more than double that of 5
years ago.
And so it has been for a long time: Easy money and bountiful energy fueling decades of increased consumption, production, and population. So what happens when the unstoppable force of freshly minted capital hits the brick wall of maximum energy production capacity? |
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Let's return now to events in South Africa for some clues, for a look at why
this week's gold and platinum price explosion is more than a headline, more
than a brief opportunity to capitalize on today's news, more of a signpost
on the road to record commodity prices and another screaming indicator of
things to come.
Forget the inflation statistics and the government's various interests in
dressing the numbers, the relative stability of consumer goods 'outside
of the volatile food and energy prices' as they like to say. South African
mines shut down because the country has seen huge inflows of foreign investment,
driving up their currency and boosting their GDP. Easy money is the first
key to growth.
But the growth is such that the energy infrastructure hasn't kept up, and
now the electricity generating capacity of the country is so vulnerable
that they must risk shutting down their most profitable mining operations
to keep the lights on in the cities. The obvious solution is to expand their
capacity, to purchase and consume more energy to facilitate more growth.
At record energy prices, this will take much more money invested, and reduce
profit margins accordingly.
Physicists call this "rising entropy"- the amount of energy consumed in a process
goes up while the yield of the process remains the same. In the minds of South
African policy makers and utility operators, this week the relative cost of bringing
platinum and gold out of the ground actually exceeded the value of the metals,
and so they halted operations until electricity could be supplies could be increased.
And of course the end users of these metals now must turn to the market to procure
existing stockpiles and up and away went the price of metals. All this is good
for South Africa, because higher receipts from mining revenues will help offset
the high energy costs they must now pay to do the mining.
Therein lays all the key components of a vicious cycle. It didn't start here
in South Africa in 2008, it started a few years ago all across the globe.
It's not just South Africa's problem- this story is a microcosm for the
entire planet and it may have only just begun. The solution, thankfully,
is higher prices. MUCH higher prices. Prices so high that consumption reverses
or production explodes, or some combination of the two.
The weakest component of the equation is the paper money, because it is unlimited
in supply, whereas the natural resources are not. This is also a driving
factor in the precious metals, a record-low dollar explains high gold prices,
but then why is gold also at a record high when priced in record- high Euros?
If you cannot view the Gold Priced In Euros Chart, go
here.
Because this 'fiscal entropy' has set in, and will likely continue to exacerbate
the situation for the rest of the year, as central banks throw more money
at a problem which can no longer be solved along the old axis of loose capital
and cheap energy.
Gold is arguably the truest measure of this relationship between the value
of energy and the value of money. As you can see by the chart, despite shifts
in currency values and market forces totally unrelated to one another, the
relative value of gold to oil is at about 10 barrels per ounce, exactly
where it was in 2000 when Gold was below $300 and crude oil was below $30.
If you cannot view the Gold vs Crude Oil Chart, go
here.
As the 'true' value of deficit backed capital bleeds into the harsh reality of limited resources, pundits, policy makers, and especially consumers may be aghast at where prices eventually peak. Traders, properly positioned and informed, may well be in for the ride of their life. |
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About the Author
| An 11-year veteran of the futures markets, Jonah Ford
provides exclusive market research and analytics for Greenrush Capital clients. Featured in Barron's, Dow Jones Newswires, Delta Farm Press, Bloomberg, and publisher of Greenrush Market Reports, Jonah also provides commentary for the Minneapolis Grain Exchange. As Senior Broker and Branch Manager for the Greenrush Capital Oregon office, Jonah holds a unique position of being a highly skilled technical analyst with an extensive understanding of market fundamentals and macroeconomics. |
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