You can lead a horse to water...
04.26.04

As the editor of the Silver Bear Cafe, I spend a whole lot of my time reading. Reading things about the markets, the war, precious metals and energy. In this weekly column I will attempt to condense the week's events and put them in perspective. JSB

China has now become the world's second largest consumer of crude oil, although still far behind the United States who alone consumes 25% of the world's energy supplies.

Our government no longer has the power to cripple economies. Thanks to years of bipartisan mismanagement and the disastrous leadership of the Federal Reserve, that power now lies with the Chinese and Japanese governments. If the Japanese and Chinese want Bush out of office... all they have to do is sell their U.S. bonds. Interest rates would soar and the American economy would be toast.

Last Wednesday the number of new highs on the NYSE was 28, the lowest total since March 24, 2003, while new lows were 202, the most since March 12, 2003.

The Mortgage Bankers' Association's index of applications dropped 22.1% last week, the fourth straight decline, while the index of applications to refinance mortgages plunged 30.7%. Both declines were the biggest in nearly nine months.

Real Estate Investment Trusts (REITs) have plummeted 12% this month, thanks to worries about rising interest rates and overpriced shares. Real estate mutual funds haven't fared much better. Some of these funds, which invest primarily in REITs, tanked as much as 19%. Ouch!

Inflation is a result of liquidity, (money), pumped into the economy. This time the outrageous degree of liquidity injected into world economies was accomplished by a  totally mad Fed Reserve and an out of control Bank of Japan. The deed is done and the lady is pregnant. Her name is inflation and it is 9 months later. Inflation will cause interest rates to rise. It will wipe out the bond market. The dollar is in a unrecoverable downward spiral. The world economy has been so over inflated that it must pop. When it does, we will have massive deflation.

Is gold expensive? Well, not compared to the cost of a new suit; it is just about where it ought to be. Is oil expensive? Not when compared to the cost of an automobile. Oil and gold have merely followed the modest upward bent of consumer prices. An ounce of gold would have bought four suits in 1980; now it buys just one. But a basket of Dow stocks - which would have bought the same four suits in 1980 - will now buy a whole closet full of them... about 25. In a deflationary period, which is more likely to be deflated - gold or stocks? Stocks and real estate - the assets most puffed up by inflation - are going to tank in the great deflation "Bubbles" Greenspan tells you not to worry about. As they used to say in the Soviet Union: 'nothing is to be believed until it is officially denied.' Now that deflation has been officially declared not to be a problem, my guess is that it will be huge.

Russia has 60 billion barrels (Gb) of proven oil reserves, a 690-day supply for planet earth and there are no more significant quantities of oil to be discovered anywhere inside or outside of Russia . World oil discovery peaked in the 1960s and has been declining ever since. The human race now uses four barrels of oil for every barrel found and the gap is widening each year. What remains to be discovered is going to be of a lesser quality, much more expensive to obtain, and more expensive to refine.

Maps obtained from the National Energy Policy Development Group reveal that 60% of the world's recoverable oil is in a “golden” triangle running from Mosul in northern Iraq, to the Straits of Hormuz, to an oil field in Saudi Arabia 75 miles in from the coast, just west of Qatar, then back up to Mosul. Sixty per cent of all the recoverable oil on the planet is an in area no larger than the state of Indiana .

Oil and gas stocks remain cheap relative to their cash flows. Many of the stocks are in strong up trends and with higher prices would move considerably higher. About half of the oil and gas that will be needed 10 years from now will have to come from fields not currently in production – a very bullish fact for energy investors.

A major upswing commodity price pendulum is starting that could last for a decade. Past bull markets in metals were always cyclical and short term. China and India have changed all this.

Northern Orion (NNO-TSX, NTO-AMEX) has a market cap. of US$320 million and a minimum resource of 10 million oz of gold and 18 billion lbs. of copper at their Agua Rica property. That means the stock sells for $32.00 per oz of gold and the copper is free, or just 1.8 cents per pound for the copper and the 10 million ounces of gold are free. They also own 12.5% of the Alumbrera copper/gold mine (the second largest gold mine in South America) which should throw off $50-60 million cash flow this year and $35-70 million or so in cash flow annually for 6-8 more years, depending on metal prices. So, this year you pay 5-6x cash flow for the stock, and totally separate from that you also own one of the largest and richest copper-gold deposits in the world…Agua Rica…where $50 million has already been spent on the property.

Fresh water is going to become a very big deal in the next two years. Got control over any?