You Need the TRUTH to Make Informed Decisions — Part Two |
Tuesday, 25 October 2022 — Gold Coast | By Vern Gowdie | Editor, The Daily Reckoning Australia |
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[11 min read] In today’s Daily Reckoning Australia, Netball Australia’s refusal to accept Gina Rinehart’s generous donation is a classic example of commercial naivety meeting commercial reality. It should be a sign to all to get a grip on the truth of all matters, including the push to renewable energy, and where true value is in the market right now. Read on… |
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Dear Reader, My Daily Reckoning Australia column last week ended with…‘what will be our lived truth?’. The lived truth came as a bit of shock for some young ladies being paid to travel and play netball. Netball Australia is bleeding money and in debt to the tune of $4 million. In spite of the game’s far-from-healthy financial position, the professional players want a pay rise. Fair enough. If you don’t ask, you don’t get. While the players have their hand out, Gina Rinehart (Australia’s richest person) puts her hand in her pocket to sponsor the sport to the tune of $15 million. Due to something Gina’s father, Lang Hancock, said 40 years ago, the players decide to stand as one on a matter of principle…biting down hard on Gina’s hand. Commercial naivety meets commercial reality…the players talk and Gina walks. The public statement released by Hancock Prospecting (Gina Rinehart’s company) announcing the withdrawal of its sponsorship, included a reference to neglected truth (emphasis added): ‘Mining is critical to securing the minerals essential for everyday life… ‘An often conveniently neglected truth when activists talk emotively about mining is that most, if not all, of the primary products required for the equipment, production, distribution and delivery of renewable energy depend on resources that need to be mined.’ Every fair-minded Aussie should applaud Gina Rinehart’s decision to remind activists, with their cherry-picked principles, to get a grip on the truth. Crude awakening Virtue signalling on selective ideologies by lily-livered politicians, corporate sycophants, and so-called celebrities and sporting ‘stars’ is collectively biting the hand of the very industry that’s given them their privileged lives. Energy sources powered by fossil fuels have enabled us to enjoy a far better quality of life than our ancestors could have ever imagined. Demonising these critical resources is beyond stupid…it’s reckless and, quite frankly, sickening. The idiocy of green policies is forcing too many people to choose between heating or eating. But who cares when you’re sitting in the comfort of a first-class cabin! The truths being lived by lower socioeconomic groups are deemed inconvenient. No amount of reason or common sense can deter the woke denialists from their zealous pursuit of this concerted propaganda campaign…one that’s based on ignorance, half-truths, and outright lies. Capitalising on this movement to rid the world of CO2 has been the focus of attention by my good mate and fellow Editor, Greg Canavan. For several months now, Greg has been forensically searching for the truth on what we all know is coming…a looming energy crisis. Commercial naivety is (once more) destined to meet commercial reality. How has this energy crisis evolved? Just how bad could it get? Will oil go from US$100/barrel to US$300, or US$400, or even higher? Where are the opportunities to profit from the growing imbalance between (lack of) supply and (increased) demand for traditional forms of energy? I’ve read Greg’s well-researched and aptly titled report…‘Crude Awakening’. It is, in a word…brilliant. If you would like to access Greg’s detailed report, outlining the truth of what’s ahead of us and the companies poised to profit from the ‘Champagne Socialists’ blindingly stupid pursuit of carbon neutrality, please keep an eye on your inbox tomorrow for an email from Greg. In search of the truth for the Dow/Gold ratio The challenge with the investment business — if you take it seriously — is the ongoing search for value. In a booming market, almost everything gets valued on a ‘relative to’ basis. If X is worth $1, then relative to X, Y must be worth $1.50. But, what if, in less speculative conditions, X is really only worth cents on the dollar? When it comes to investing in precious metals (hard money), there’s a host of ‘relative to’ ratios. Are these valuation methodologies valid? In an effort to identify whether an allocation into precious metals was warranted, the September 2022 issue of The Gowdie Letter went in search of the truth. Here’s some of what we found: ‘When it comes to the world of Gold, there are a myriad of ratios. ‘Gold-to-Oil ratio. ‘Dow-to-Gold ratio. ‘Gold-to-Platinum ratio. ‘Gold-to-Decent Suit ratio…I kid you not. ‘And the Gold-to-Silver ratio. ‘The ancient store of wealth is an often-used anchor by which the value of other assets, commodities, and consumables are measured…vis-à-vis, is one over, under or fairly valued. ‘These ratios all widely accepted benchmarks of comparative value. ‘Are the various Gold ratios valid? ‘Why would I have such doubts? ‘Because of this gold price table dating back to 1833…prior to the late 1960s/early 1970s, the gold price had been fixed for more than 250 years. ‘To quote from the NMA site (emphasis added)… “The price of gold remained remarkably stable for long periods of time. For example, Sir Isaac Newton, as master of the U.K. Mint, set the gold price at L3.17s. 10d. per troy ounce in 1717, and it remained effectively the same for two hundred years until 1914. The only exception was during the Napoleonic wars from 1797 to 1821. The official U.S. Government gold price has changed only four times from 1792 to the present. Starting at $19.75 per troy ounce, raised to $20.67 in 1834, and $35 in 1934. In 1972, the price was raised to $38 and then to $42.22 in 1973. A two-tiered pricing system was created in 1968, and the market price for gold has been free to fluctuate since then...” ‘The story of gold’s evolution from fixed to floating market (I prefer this to “free” market, as markets are rarely free) is told by Reuters: “1968: London Gold Market closes for two weeks after a sudden surge in the demand for gold. The governors in the gold pool announce they will no longer buy and sell gold in the private market. “A two-tier pricing system emerges: official transactions between monetary authorities are to be conducted at an unchanged price of $35 per fine troy ounce and other transactions are to be conducted at a fluctuating free-market price. “1971: ‘Nixon Shock’ U.S. President Nixon ends dollar’s link to gold established under Bretton Woods Agreement. Dollar became the sole backing of currencies and a reserve currency for the member states. “1973: On February 13, the United States, devalues the dollar again and announces it will raise the official dollar price of gold to $42.22 per fine troy ounce. Dollar-selling continues and finally all currencies are allowed to ‘float’ freely without regard to the price of gold. “By June, the market price for gold in London has risen to more than $120 per ounce. Japan lifts prohibition on imports of gold. “1974: Americans permitted to own gold, other than just jewellery. “1975: Trading in gold for future delivery begins on New York’s Commodity Exchange and on Chicago’s International Monetary Market and Board of Trade. “1978: The weak U.S. dollar propels interest in gold. By act of Congress, the U.S. abolishes the official price of gold. Member governments are free to buy and sell gold in private markets.” ‘Why is this relevant? ‘How is it possible to properly gauge the value of a floating market (Dow Jones, the handiwork of a tailor et al) against a fixed market? ‘It’s an apples with oranges comparison. ‘For the purpose of illustration, let’s bring back this chart: ‘The Dow was the same level in 1929 as it was in 1954…around 380 points. ‘Here’s what the Dow-to-Gold ratio did over this 25-year period: ‘The maths is very straightforward: ‘What if, in 1934, the US Government had decided to fix the price of gold at US$100? ‘The Dow-to-Gold ratio would have been 3.8 ($380 divided by $100). ‘In theory, the lower ratio would have meant the Dow (vis-à-vis gold) was a real bargain. ‘But how can this be a meaningful gauge of value when one price is arbitrarily decided by bureaucrats and not market participants? ‘How is it possible to measure a market that operates in this fashion from early 1900 to mid-1970s: ‘Against an asset whose price (due to government dictate) virtually flatlines for the same period? ‘In my opinion, any reliable and informative view on comparative value can only be formed AFTER the US Government removed its heavy hand from the gold price scale.’ What happened AFTER the US Government turned the pricing of gold AND silver prices over to the market? More on this next week. In the meantime, be sure to keep an eye on your inbox tomorrow for access to Greg’s excellent report…‘Crude Awakening’. Regards, Vern Gowdie, Editor, The Daily Reckoning Australia Advertisement: Burry Issues ‘2023 Recession’ Warning ‘No, we have not hit bottom yet.’ Michael Burry’s sombre prediction tells us that the worst is yet to come. Award-winning Australian financial planner Vern Gowdie has a more specific forecast: A severe recession is coming in early 2023. Here’s what you need to do now. |
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| By Bill Bonner | Editor, The Daily Reckoning Australia |
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A news item from Tuesday. OilPrice.com reports: ‘Diesel Crisis Deepens As Inventories Fall To Dangerous Levels’: ‘U.S. buyers are snapping up diesel cargos originally planned for Europe as the crisis deepens. ‘Reuters reported earlier this month that at least three tankers carrying diesel from the Middle East had changed their course mid-journey and were now traveling to the United States. And this new competition is about to intensify. ‘…Europe is in for a major diesel supply shock because of low inventories and strong demand. And the level of inventories had a lot to do with the unplanned outages at European refineries before maintenance season, including the four-week drop in French fuel output amid the workers’ strike.’ Why are supplies running short? Because of the US’s proxy war against Russia? Because virtual-signalling investors have taken their money out of the energy sector? Because oil and gas companies are not investing in new refineries, new wells, or new pipelines? Because governments are declaring war on fossil fuels, and pledging to exterminate them? Because inflation has made long-term investing (the kind you need in the energy sector) too uncertain and too risky for most investors? Of course, it is all those things. A real ‘cluster’, says a friend. This is not the first ‘cluster’ for mankind. Many have come and gone. But this threatens to be the biggest ‘cluster’ ever seen. One giant step backward Perhaps it will turn out like China’s Great Leap Forward…a giant step backward for those involved. But this time, the disaster won’t be confined to a single country; it will be worldwide. Of course, Mao probably didn’t intend to kill 30–50 million people. It was an ‘accident’, said some historians (others regard it as cold-blooded murder). ‘Collateral damage’, might be a better description. Mao and his henchmen were right. In 1961, China needed to industrialise. But after a few years of Mao’s policies, Deng Xiaoping, who had barely avoided torture and execution, realised that instead of catching up with Japan and the West, China was falling further behind. He saw the secret, too — that real wealth cannot be created by politicians and bureaucrats…and real prosperity cannot be led by central planners and central bankers. It has to arise, naturally, from the bottom up. A real, successful economy is vernacular, in other words. Not anti-vernacular. A prosperous economy only needs the government to allow it to exist, by recognising and protecting private property (including savings and capital wealth) and by giving people the freedom to innovate and do deals with each other. Otherwise, it should stay out of the way. ‘To get rich is glorious’, said Deng in 1979. Thereafter, a lot of Chinese did get rich. It was the largest, fastest build-up of wealth the world had ever seen. No one was tortured to make it happen. No one was killed. No one starved to death. No decrees from the government told people to make steel or to build skyscrapers. Businesses were created. They paid wages. People from the countryside moved to the city for jobs and income. Chinese earnings soared. Average wages went from almost zero in 1979 to more than 100,000 Chinese yuan per year (about $14,000). That’s the difference between an organic, bottom-up economy…and one where the people in charge make the important decisions. The first works; the latter doesn’t. Theory versus practice Which brings us to the point of this series. The idea of the Green Revolution is to move us quickly into the future — at least as some people see it — whether we want to go there or not. And the people behind it have their ‘scientific’ studies, their theories, and their PhDs to prove that it is the way to go. Whether they are throwing virgins into a volcano, outlawing alcohol, or invading Iraq, the know-it-all busybodies are always on board. Each time, they’re wrong. And each time there’s collateral damage. And this time, we risk collateral damage on an epic scale. China’s Great Leap Forward gives us an idea of what could happen. Trying to move the country, by force, into a new kind of economy, things soon got out of hand. ‘Mistakes were made’, said the communists later. But that’s the story of all major government crusades. They attempt to replace something that works in practice, with something that only works in theory. Today, Europe is leading the way. Germany has put up windmills and solar panels all over the place. It’s also decommissioned its nuclear power generators. This left the country dependent on Russian energy. Then, it joined the US’s proxy war against Russia in Ukraine, hitting Russians with ‘sanctions’ designed to cripple the economy and force Russian troops out of the Russian-speaking areas of Ukraine. That might work in theory too, but not in practice. The Conversation: ‘Sanctions on Russia are increasing, not decreasing, its revenue’: ‘The European Union has just approved new sanctions against Russia, including a price cap on oil sales, following the United States’ Sept. 30 announcement of new economic sanctions. Both announcements are in response to Russia’s annexation of four regions of Ukraine. ‘[But] there are still countries willing to purchase Russia’s petroleum products, sanctions are increasing Russia’s revenue, not decreasing it. ‘Worse yet, the sanctions are driving up global oil and natural gas prices, causing spikes in inflation worldwide and, ironically, reducing the world’s access to the metals and minerals necessary for the transition away from oil and natural gas.’ Virtue shivering In Europe, already, streetlights have already been turned off. Thermostats have been turned down. People have been urged to bathe in cold water. Supplies of firewood are running low. This is just the beginning. To the hearty Teuton householder, so far, it’s little more than a nuisance…or even an adventure in virtue. Germans can feel good about themselves; they’re ‘saving the planet’ even as they shiver. In the US, too, rising energy prices have yet to cause a crisis. But diesel fuel is already running low. Energy is food; Food is energy. When you eat, you are eating energy. The Sun’s energy produces fruits, grains, and vegetables. These are fed to animals to produce meat. But even before a single sprout appears in a field, energy has already contributed to the production. Soil has been tilled, usually by giant diesel-fed tractors…it has been raked…it has often also been treated with herbicide, insecticide, and fertiliser, made, delivered, and applied using oil and gas. In Saturday’s news is the following headline: ‘A Bill Gates fund invested $50 million in a startup that's building a massive refinery to turn alcohol into jet fuel’. Where do they get the alcohol? From corn and sugarcane, produced and distributed by diesel fuel. But what a feeling of satisfaction it must give Bill Gates. Now, he can fly over the heads of millions of desperately poor people, with great peace of mind. His jet will not be powered by evil fossil fuels — but by the food of the hungry people beneath him. Without fossil fuels, crop yields collapse. In 1850, in the UK, harvests of oats, barley and wheat averaged about two tonnes per acre. Now, they’re three times as much. Corn yields per acre in the US have increased, too, by about two bushels per acre since the 1950s. And since the 1960s, yields for sugar-beets and potatoes have approximately doubled. There’s no need for complicated maths. Today’s harvests, at today’s prices, achieved with all of today’s fossil fuel inputs, feed eight billion people. Take away any of the inputs — fertiliser, herbicide, fuel for tractors and delivery trucks, refrigeration — and food output will go down. How much? We don’t know. But since output and consumption now match up, when you reduce yields, someone is going to go hungry. In Germany, one of the most prosperous countries in the world, there are now three million children living in poverty. In Italy, shopkeepers put their gas and electricity bills in their windows to let customers know how much they pay to keep the lights on. In France, fights are breaking out in long lines of people waiting to buy gasoline. People in Prague are demonstrating to force the government to subsidise their energy bills. And the Poles are loading ‘brown’ coal in the trunks of their cars…building up a stock for the winter ahead. The world burns about 100 million barrels of oil per day. That’s what powers our economy…puts food on the table…and electricity in our sockets. Could it be reduced? Of course, it could. But at what price? And who will pay it? Forward…into the past In 1973, war broke out between Israel, Syria, and Egypt. The US took the Israeli side. The Arabs were the Russians back then, and they cut back on oil production by 5%. The Nixon Administration nevertheless authorised US$2.2 billion in aid to Israel. This further annoyed the Arabs who retaliated with a total embargo of oil exports to the US. Prices soared. The US economy went into recession. We recall those days. The gas stations would run out of fuel in the morning. The only way to make sure you could fill your tank was to line up in front of the pumps early. We got up at 4:00am, hoping to be the first in line when the station opened at 7:00am. But there was already a long line. What else could we do? We got into line, curled up on the seat and went back to sleep. The embargo was lifted in March 1974. It was this experience that led to the Strategic Petroleum Reserve in 1975. We pumped huge quantities of oil into vast salt caverns, where it would be available in an emergency. It was into that reserve that Joe Biden dipped his straw earlier this year. Biden feared that high gas prices would cause his approval ratings to sink even lower and Democratic candidates would suffer losses in the November midterm elections. Even without a real emergency, in other words, our reserves have been depleted of about 300 million barrels — or nearly half the total. And what will happen in a real emergency? If oil production were suddenly halted altogether, our SPR would last about two-and-a-half weeks. That’s why the production of new oil is essential. But the US Government is systematically strangling the industry that makes our standards of living possible. Spending in the old and gas sector dropped more than 60% from 2010 to 2020. Investment in the shale sector fell by more than 70%. The total cutback in capital spending was more than US$1 trillion. Why? The answer is another question: Would you want to invest your money in an industry the government wants to put out of business? And not just your government — almost all governments are gunning for it. Globally, oil and gas investment has been cut in half since the 2014 peak. Meanwhile, existing wells run dry — at the rate of about 8% of output per year. Since the US uses 18 million barrels per day, that means it needs to find an additional 525 million barrels of oil each year. If not…we’ll soon be sleeping in our cars waiting for gas stations to open. In other words, the elite in Europe and the US are preparing another Great Leap Forward. They will stifle the vernacular, energy-based economy and replace it with their own centrally controlled system. Europe has already made clear that it intends to ‘correct market mechanisms’. Yes, they will correct the choices made by millions of their citizens with choices of their own. What will that mean? Hang on…we’ll come to that next week. Regards, Bill Bonner, For The Daily Reckoning Australia Advertisement: Could this new digital currency replace the Aussie dollar? It’s being trialled by the RBA over the next 12 months. And it could give the State the ability to track, control, and even punish people for doing the ‘wrong’ thing…all with the touch of a button. If that worries you as much as us… Then here are four things you can do to prepare. |
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