Puru Saxena

[winston]

Transfer of Wealth

After decades of excess credit and over-consumption, the developed world is finally being forced to deal with private-sector deleveraging. However, the governments seem to have other plans and they’ve decided to fight these deflationary forces tooth and nail. Their solution - even more credit and consumption!

Rather than accept a painful adjustment period, policymakers are desperately trying to revive the party. And in the process, they are making the situation much worse. All over the world, governments are spending trillions of dollars in order to clean up the mess. Unfortunately, the stark reality is that these governments have no money. So, in most instances, these glorious state-sponsored spending programs are being financed by borrowing and money printing.

Most people seem to forget that these fiscal spending programs aren’t creating any real wealth and are simply transferring wealth from the savers to the debtors. Essentially, governments are taking money from the solvent and re-distributing these funds amongst the insolvent.

Needless to say, by bailing out the incompetent and buying their toxic assets, the governments are cleaning up the private-sector balance sheets but at a huge cost. In the process of saving a few ‘too big to fail’ corporations and their bondholders, policymakers are greatly increasing the risk of sovereign defaults. In a nutshell, policymakers are erroneously transferring private-sector risk to the state.

So far in the ongoing credit crisis, we haven’t really seen many sovereign bankruptcies but I suspect they will follow. And you can bet your bottom dollar that policymakers will not hesitate to use the printing presses if it results in escaping sovereign default. As a result of the world’s banking system being a multiple of world GDP, the sad truth is that politicians don’t have very many options.

What we’ve witnessed over the past few months is that governments around the world have decided to maintain the stability of their banking systems in order to preserve the trust of their populace. Basically, policymakers have opted to save the banks even if it means putting entire nations at a great risk. And the most likely outcome is that the politicians will continue on this inflationary road to nowhere.

In my opinion, as the private sector continues to pay back debt, the use of the printing press won’t result in immediate inflation. However, over the medium-term, all these needless bailouts are going to create a massive inflation problem.

Amidst all this economic uncertainty and rampant money printing, confidence in governments will plummet and people will turn to ‘old fashioned’ stores of value - those assets which represented money long before pieces of paper backed by empty promises became fashionable. Indeed, the investment community has already begun moving towards precious metals and I expect this trend to continue.

It is interesting to note that only 160,000 tons of gold has ever been mined from the face of this planet and at US$950 per ounce, it is worth US$4.9 trillion. Now, consider that the total amount of paper money in circulation (currencies, savings, deposits, money-markets and CDs) is worth US$60 trillion or approximately twelve times the value of the gold in existence. Now, there is no doubt in my mind that as world governments debase their currencies, many people will begin to question the viability of paper money as a store of value and they will turn to gold, silver and platinum. Even if a small fraction of paper money rushes towards the small gold and silver markets, what do you think will happen to their prices? No question, precious metals’ prices will explode!

Accordingly,I sincerely recommend that investors allocate at least 10% of their wealth to physical bullion. Over the next few days, it is likely that precious metals will correct and this may be the final opportunity to buy gold and silver at these levels. Those looking for extra leverage should invest money in the precious metals mining stocks. So far in the precious metals bull market, we’ve had massive rallies every two years. If this trend remains intact, after the usual summer correction, we should see an explosive move until spring next year.

Source: The Daily Reckoning, June 24, 2009.

* Puru Saxena is the founder of Puru Saxena Wealth Management. He is a registered investment advisor and money manager with the SFC of Hong Kong. Saxena conducts in-depth macro-economic research, formulates his firm’s investment strategy and manages discretionary investment portfolios. He is also the editor and publisher of Money Matters - a monthly economic report he has been writing since 2000.

[winston]

Inflation is Our Future By Puru Saxena

09/29/09 Hong Kong, China

On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyperinflation.

In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyperinflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation.

http://dailyreckoning.com/inflation-is-our-future/

[winston]

BUY GOLD!

Two day ago, the price of gold broke out to a new high and we are delighted with this result. As you will recall, we were expecting an upward breakout in gold and it looks as though its price will now surge over the following months.

It is noteworthy that since the breakout occurred, gold has managed to stay above the previous high. The longer the price of gold stays above US$1,030, the greater the probability that the yellow metal will stage a spectacular rally until spring next year.

It is our contention that this breakout is the real deal and the pathetic action of the US Dollar Index supports our view. Rather than rally, the American currency has embarked on another southbound journey and this is extremely bullish for gold.

Furthermore, the recent zoom in silver and the precious metals mining stocks is additional evidence that this breakout is not a head fake. Figure 1 highlights the recent breakout in gold. As you will observe, gold's bull-market has been punctuated by lengthy consolidations and this is the third time gold has broken out towards the end of the third calendar quarter.

Figure 1: Gold is about to shine!

If history is any guide and the trend consistency is intact, this rally will continue until spring next year and we could see a 40-50% advance! Should this rally materialise, the mining stocks will go ballistic and silver will rocket above its previous bull-market high.

In light of the recent breakout, we suggest that you hold on to your positions in the precious metals sector and add more capital.

The long wait is finally over and precious metals bulls are about to get rewarded! We plan to hold on to our positions for several months and will consider booking profits when we see an epic blow-off early next year.

http://kingworldnews.com/kingworldnews/ ... ena_2.html

[winston]

The Truth About Energy by Puru Saxena

After oscillating within a trading range for several weeks, the price of crude oil has recently broken out to a new recovery high. Now, you will recall that we have been firm believers of ‘Peak Oil’ since 2003 and we were expecting this bullish resolution.

Look. Skeptics can say what they want; it does not change the fact that our world is struggling to maintain daily flow-rates. Whether you agree with us or not, the energy reality is that the supply of conventional crude oil is very close to its peak and no other fuel source can easily fill the supply gap.

Yes, various governments are now promoting alternative sources of energy and over the following years, we expect this drive to intensify. But those sources will provide too little, too late. So there remains, today, an unbelievable degree of denial when it comes to ‘Peak Oil.’ Most people simply dismiss it as a conspiracy. Others gleefully point to alternative sources of energy, whereas some believe that the vast improvements in oil drilling technology will save the day. Do not be seduced by these delusional hopes.

Remember, crude oil is the lifeblood of the global economy and roughly 70% of it is used to power transportation. Moreover, a vast amount of crude oil is also used up by agriculture (production of fertilizers, pesticides and irrigation systems). In fact, modern-day agriculture can be best described as a process of converting hydrocarbons into calories. Without cheap energy, the world would certainly have trouble producing half of the current food supply and the result could be far worse.

Thus, crude oil is a key ingredient in two of the most critical processes which make modern life possible – transportation and agriculture. And shortages of this vital natural resource will result in extreme pain. In the initial stages, the price of crude oil will rise remorselessly and eventually, we will face rationing.

Now that we have established the importance of crude oil, we will explain why new drilling technology and alternative sources of energy will not make this problem go away.

First, as far as drilling technology is concerned, it is worth noting that America is home to the best oilfield technology on this planet. However, its oil production peaked in the early 1970s and has been in a relentless decline. Furthermore, apart from America, other technologically advanced nations in the world have also failed in maintaining their daily flow-rates.

For instance, after exporting crude oil for over two decades, Britain is now a net importer and its production is in a state of permanent decline. Hard data confirms that two of the most advanced countries in the world now live in a post ‘Peak Oil’ era, so what are the odds that other less fortunate nations will succeed in averting ‘Peak Oil’?

Secondly, as far as alternative sources of energy are concerned, they represent a drop in the energy ocean and will not be able to offset the depletion in crude oil. Despite all the euphoria surrounding renewable energy, the ‘sources’ like ethanol and solar panels are net energy losers. In other words, it takes more energy to produce ethanol and solar panels than the energy you obtain from them.

For sure, hybrid and electric cars will help us to some degree but you must keep in mind the fact that electricity is not a source of energy; it is a carrier of energy. Even if electric cars become popular, how will we generate sufficient electricity?

Elsewhere in the alternative energy patch, a lot of hopes currently rest on unconventional sources of oil (especially tar sands and shale oil). Once again, this optimism is misplaced, as the increased supply from the unconventional sources will not even make a dent in the overall energy picture.

The nearby chart confirms that our world currently produces roughly 85 million barrels per day of total liquids and out of this gigantic sum, only 13 million barrels per day of oil is derived from unconventional sources. So, when the production of conventional crude oil finally declines due to ‘Peak Oil’, it is extremely improbable that unconventional supply will be able to rise to the challenge.

Source: Oilwatch Monthly, IEA and EIA

As far as Canada’s tar sands are concerned, Alberta currently produces roughly 1.4 million barrels of oil per day and under the best case scenario, this figure is expected to rise to just 3.5 million barrels per day by 2020. To complicate matters even further, the tar sands require huge amounts of water and natural gas.

In addition to this, the mining procedure is extremely polluting. For example, the process of extracting ‘oil’ from bitumen releases at least three times the amount of carbon dioxide emissions as regular oil production. Accordingly, we have no doubt in our minds that Canada’s tar is not the Holy Grail.

Finally, the new oil shale discoveries in America are not going to help us either because the ‘oil’ trapped in the shale is in fact kerogen – a precursor to oil. So far, all major oil companies have struggled to convert the kerogen into usable oil and it will be interesting to see whether any of them succeeds in the future.

In any case, this conversion process is extremely expensive and we can assure you that shale will not be producing any oil at today’s prices. Recent studies reveal that the price of oil will have to rise to several hundred dollars per barrel to make this process economically feasible.

Well, now that we have covered the supply side, let us briefly discuss the demand side of the equation. According to the IEA, global oil usage in 2009 will amount to 84.4 million barrels per day and it will rise to 85.7 million barrels per day in 2010. This means that oil demand will rise by 1.5% over the next twelve months which is in line with the growth rate over the past two decades. If this growth rate continues over the next 4-5 years, there is no way our world will be able to ramp up production.

Unfortunately, positive thoughts and wishful thinking will not change the equation. Precious time has been wasted and we have no margin of safety. We must prepare ourselves for sky-high commodity prices and periods of acute shortages, which will make wartime conditions seem rosy. In fact, we believe we are already a decade into this painful transition but let us warn you that we have seen nothing yet.

If our assessment is correct, it seems prudent to make a sizeable allocation to the energy sector. However, given the realities of ‘Peak Oil’, we do not recommend exposure to the oil majors, as their reserves and production are in decline. On the contrary, we urge you to invest your capital in quality upstream oil/gas companies and businesses involved in the energy services sector.

Source: Daily Reckoning

[winston]

Inflation 101 By Puru Saxena

Inflation is a hidden tax, an insidious crime against the public. It is the easiest way for any government to confiscate the savings of the public and for generations, wealth has been transferred in this manner.

Remember, money is supposed to be a store of value, however due to reckless central bank-sponsored inflation, it can no longer fulfill this critical role. Unfortunately, nobody questions the inexplicable loss of the purchasing power of their savings, thus, central banks get away with financial murder.

Inflation distorts the economy, it brings great harm to the public and it encourages speculation and mindless risk-taking. In fact, inflation acts as a poison for retired people since they are no longer able to earn more money in order to maintain their standard of living. So, thanks to inflation, most senior citizens are unable to enjoy the fruits of their labor.

Before we delve further, we want to make it absolutely clear that inflation is defined as the increase in the quantity of money and debt within an economy. And contrary to what the governments want you to believe, inflation is certainly not an increase in the general price level within an economy. Instead, an increase in the general price level within an economy is a consequence of inflation. Allow us to explain this subtle yet critical difference:

For the sake of simplicity, let us assume that America's money-supply is US$100 and this is the amount available to buy the five oranges its economy produces. Common-sense dictates that under this situation, each orange will cost US$20. Now, let us introduce a banking-cartel called the Federal Reserve, which is able to extend credit (via its debt-based fractional reserve banking system); thereby inflating the supply of money within America to US$1,000.

Under this scenario, with a 10-fold increase in money available to purchase the same amount of produce, each of the five oranges will now cost a whopping US$200! An orange is still an orange; it does not change. What changes is the purchasing power of the paper money that is used to buy that orange.

Hopefully, you can see from the above-simplified example, how an inflation in the supply of money and debt causes prices to increase within an economy.

Furthermore, in its attempt to manipulate the masses, the establishment does everything in its power to suppress the official 'inflation barometer'. Governments achieve this goal by shamelessly doctoring their Consumer Price Index (CPI) and Producer Price Index (PPI) calculations via various seasonal and hedonistic adjustments.

The chart below highlights the discrepancy between the CPI-U published by America's Bureau of Labor Statistics and the SGS Alternate CPI, which is calculated by Shadow Government Statistics using the old methodology. As you can see, over the past 20 years, prices have been rising much faster than the officials would have you believe.

Understating Inflation

Let there be no doubt, inflation is a total disaster and our world will be a better place without this reckless money-creation. Contrary to official dogma, our world experienced tremendous progress during the 19th century, and there was no inflation during that period. The chart below shows the changes in America's Consumer Price Index (CPI) over the past two centuries.

As you will observe, the CPI fell for most of the 19th century as the purchasing power of the American currency rose. However, since the formation of the Federal Reserve in 1913, the CPI has exploded causing the purchasing power of the US dollar to spiral downwards.

CPI Since 1800

Given the fiat-based monetary system and banks' vested interest in expanding credit, we have no doubt that most nations will experience very high inflation over the coming decade. Accordingly, we suggest that long-term investors protect their purchasing power by allocating capital to precious metals, commodity producers and fast-growing businesses in the developing world.

Source: Daily Reckoning