Silver Forecast for 2008

2008 Is Silver’s Turn to Shine

Global mine production in 2006 was 663 million ounces, while total silver demand was 850 million ounces, according to analysts at GFMS and the Silver Institute. In fact, for the last decade, demand has outpaced mine supply by over 100 million ounces per year. And it’s not just investors and jewelers who are using silver. Everything from cars to flat-screen TVs to radios uses silver. And this industrial demand results in silver being used and not recycled.

Where does the silver come from to make up the difference? From above ground silver inventories – central banks and other stockpiles. But those inventories are getting very low. Take a look at this next chart …

In fact, above-ground inventories now could meet less than five months of global silver demand – down from 110 months in 1950 or 40 months as recently as 1990.

So how high is silver going in 2008? Let’s look at a chart.

The same technical analysis that gives me a target of $915 on gold gives me a target of $25.50 on silver. That’s a 70% rise from recent levels!

Now, this kind of technical analysis doesn’t give us a time frame for this move, but again, there are powerful forces lined up to push silver higher. I think this move could be sooner than Wall Street thinks.

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Gold Forecast for 2008

Gold logged big gains in 2007 – up about 30% for the year. I believe the yellow metal should do even better in 2008. In fact, gold’s big breakout could come sooner rather than later. Take a look at this chart of gold through last week.

I don’t want to get too technical, but my charts are giving me a minimum target on gold of $915 per ounce. I think we could get there a lot faster than most of Wall Street thinks possible. Indeed, I wouldn’t be surprised to see gold crack the $1,100 barrier in 2008, and probably go higher than that. Let’s look at a few reasons why …

Force #1: Tightening Supply-Demand for Gold. Gold comes from a bunch of sources – mines are just one of them. There’s also central bank selling and sales of gold scrap. Another source is hedging, or forward selling of gold production by miners – that’s different from regular production in that it locks in future sales of mine production at a set price and helps price stability.

Taken together, these make up the total supply of gold. And despite soaring prices, the total supply of gold is barely keeping up with demand.

And what this leads up to is a growing gap between supply and demand …

The numbers for 2007 are a projection using the first three quarters of data collected by the World Gold Council. Total supply could differ, as could total demand.

Helping demand along is the growing consumer populations of emerging markets including China and India. But there is also the relatively new force of investment demand.

Force #2: New Demand from Gold Investment Vehicles. Worldwide demand for gold as an investment rose to 138 metric tonnes in the third quarter, up a stunning 618% from the 19.2 tonnes in the year-earlier period.

Exchange-traded funds that hold physical gold – GLD and IAU in the US, GOLD in Australia, GLD in Johannesburg, GBS in France and Britain – hold approximately 741 metric tonnes of gold at the end of November – up from just 39.4 tonnes in 2003. The huge rush of gold buying by the ETFs is helping drive the market – the easier it is for investors to buy gold, the more they buy, and the higher the price goes.

But the big buying by gold ETFs in the industrialized world is just the beginning. The real opportunity is going to come when precious metal ETFs and mutual funds open up in China and India.

Traditionally, gold buyers in those countries accumulated gold in jewelry form. But there’s evidence that is already changing. India already has precious metal ETFs and China shouldn’t be far behind.

So now two countries with a combined population of over 2.4 BILLION people will suddenly have a much easier way to buy gold. Both China and India have middle classes (by local standards) that number more than 300 million people. The effect on gold prices could be enormous.

You can see that a large gap is starting to develop between supply and demand, and if it weren’t for Central Bank selling and de-hedging by gold producers, it would be even worse. When you look at mine supply alone, global gold production fell to a 10-year low of 2,477 metric tonnes in 2006, according to Gold Fields Mineral Service (GFMS).

In fact, there are some indications that supply could come under real pressure in the months ahead …

Force #3: Global Mine Output Is Flat or Falling. Global gold production was down 3.1% in 2006 and is nearly flat this year. What’s more, Barrick Gold CEO Gregory Wilkins recently told the press: “There’s not much gold out there.” Barrick expects gold production will fall 10-15% below market expectations over the next three to five years.

There are some places where gold production is rising. For example, China will probably overtake the United States as the world's second-biggest gold producer this year. Production could rise 8% to a record 260 tonnes this year from 240 tonnes in 2006, according to Hou Huimin, deputy head of the China Gold Association. US output should be about 250 tonnes this year.

But for every success story, there are more mines that are drying up. South Africa is the gold mining kingpin, but probably not for much longer. South African production -- 134 tons in the first six months of 2007 -- has dropped by almost a third since 2002 as mining companies have been forced to dig deeper. In fact, South Africa’s output is down to its lowest level since 1922.

One reason why production isn’t ramping up with gold prices is there are fewer mining companies. The 20-year bear market in gold forced many marginal mines to close. And over the past 15 years, a wave of mergers has created a bunch of mega-sized gold miners. While the top five each produce between 3.5 and 7 million ounces out of the ground every year, they’re more likely to concentrate on working their existing mines and buying up other mines, and focus less on new exploration.

Bottom line: I expect gold to hit $1,100 per ounce in 2008.

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Snowbound

My lovely wife -- A Florida gal through and through -- is in New Hampshire today. It snowed. She's a bit freaked out. Here's here car ...The good news is it's a rental, so if she has a snow-induced fender bender, it's Avis' insurance that bears the brunt of the damage. Oh, and she'll finally get to build a snow man. That's even better news!

Update: The snowman has landed!

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Sunday Morning Cartoon Funfest

"What's Opera Doc" was always one of my favorites ...

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The Trouble With China

Here's a story that, combined with the fact that Persian Gulf princes are rushing pell-mell out of the greenback, should give dollar bulls that nasty, "twisty snake," pre-diarrhea feeling in their pit of their stomachs …

China Lets Currency Appreciate a Bit Faster

China's currency rose steeply against the dollar this week, feeding speculation that Chinese authorities, yielding to international pressure and economic realities at home, were allowing their currency to appreciate more rapidly. The currency, known as the yuan or renminbi, rose 0.9 percent this week — faster than over any week since China stopped pegging it to the dollar on July 21, 2005. Thursday, the yuan rose 0.37 percent, the largest one-day increase since the peg ended.

Reading on, we find …

Until recently, the government worried that allowing the currency to rise would let in more imports and stifle exports, leading to deflation. But China's consumer price index was up 6.9 percent in November compared with a year earlier, led by an 18.2 percent rise in food prices.

And here's a part I find really interesting …

Until very recently, the third obstacle to a much stronger yuan has been the danger that it would lead to cheap food imports that would drive down the prices realized by China's farmers. This has been particularly important because many officials, from President Hu Jintao on down, want to narrow the gap between rural and urban incomes. Higher food prices have benefited many peasant farmers this year, increasing their incomes as they sell their crops for more money. Not all peasants have gained, however, as part of the inflation has occurred because of an epidemic among Chinese pigs as well as drought in areas of southern China.

I find that interesting because I always thought the thing holding back China on letting the renminbi appreciate is the worry that it would make their exports too expensive. It turns out that's a red herring; they're actually worried about upsetting their large rural population. So if they can keep the farmers happy, what's to stop China from letting the renminbi REALLY appreciate? That, my friends, is the million-renminbi question.

Read the WHOLE THING.

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News You Can Use for Friday

Story #1: We've been predicting this at Weiss for some time now ...

Dollar's Share of Currency Reserves Falls, IMF Says

The dollar's share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the subprime- mortgage market collapsed.

The U.S. currency accounted for 63.8 percent of reserves at the end of September, down from 65 percent at the end of June, the International Monetary Fund said today in Washington. The share of euros increased to 26.4 percent, from 25.5 percent.

The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of U.S. securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.

Also in the same article ...

Foreigners were net sellers of long-term U.S. financial assets in the third quarter, U.S. Treasury figures show. Monthly sales averaged $11.8 billion in the period, compared with average net purchases of $64 billion in the previous five years.

Read the whole thing.

Story #2: Sales of New Homes in U.S. Decline 9%, More Than Forecast, to 12-Year Low

Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hobble economic growth throughout 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised down to a 711,000 rate, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg survey.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

Story #3: Gold Rises, Heads for Biggest Annual Gain Since 1979, as Dollar Declines Gold rose, heading for the biggest annual gain since 1979, as a decline in the dollar boosts demand for the precious metal as an alternative investment.

old has gained 31 percent this year as a weaker U.S. currency, record energy costs and continuing conflict in the Middle East sparked demand for the metal. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, has climbed to a record 628 metric tons.

``Gold currently has such a strong supporting cast in the dollar, energy prices and geopolitical tensions,'' said Matt Zeman, metals trader at LaSalle Futures Group in Chicago. ``One would be hard-pressed to find a reason for gold not to continue to rally at this point.''

Story #4: Chicago Soybeans Rise to 34-Year High as Crude Oil Advances; Corn Gains Soybean futures in Chicago rose to the highest in 34 years and corn reached an 11-year high as a jump in crude oil prices may increase demand for the crops to make biofuels at a time of reduced supplies.

Chicago soybean prices have gained 82 percent this year on reduced planting in the U.S. and rising demand for soybean meal, used as livestock feed, and soybean oil, used in cooking and increasingly as a feedstock for bio-diesel.

Corn has risen 17 percent this year on record demand to produce grain-based ethanol and to feed livestock and poultry. The contract for delivery in March traded 0.2 percent higher at $4.555 a bushel at 12:21 p.m. London time.

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Charts That Will Knock Your Socks Off!

The market chattering class keeps talking about Bhutto’s assassination as a market mover. Her death is a tragedy. However, her return to Pakistan already put a lot of tension and volatility into that country. It could get worse, but it could also not get worse.

I think we should instead focus on the bullish breakout happening in gold right now, and should keep happening, no matter what happens in Pakistan. Check out this chart of the GLD …
And now let's look at silver ...Bottom line: The percentage move for silver could be much bigger than that for gold!

The latest on crude: Inventories fell by 3.3 million barrels to 293.6 million barrels in the most recent week, according to the U.S. Energy Information Administration. Analysts polled by Dow Jones Newswires were expecting a drawdown of 1.2 million barrels. OOPS!

Gasoline supplies rose by 700,000 barrels in the latest week, while distillate stocks fell by 2.8 million barrels, EIA reported.

The oil fund I added to Red Hot Resources last week already hit PT1. Gold and silver look ready to ramp up, and oil is coiling up for its next big move.

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A Cautionary eBay Tale ...

Romanian Fraudsters Are Thorn In eBay's Side

This small industrial center in the foothills of the Carpathian Mountains is not Albena Spasova's favorite destination. Driving the twisting highway makes her ill. Once she arrives, danger lurks.

U.S. Secret Service agents escort her, for her safety. Over the last two years, they have kept watch on dozens of trips, some lasting weeks, others months, as she has spent long days foraging through case files with local police and long nights holed up in one of the town's few hotels, with her windows locked.

"You don't know who to trust there. You can't use the hotel phone line. When you step outside, you can spot the local hackers in their cars, circling around," said Spasova, 33. "The Secret Service agents always book my accommodation and make sure I'm in a room next to them."

Ramnicu Valcea is an improbable capital of anything, but this obscure town is a global center of Internet and credit card fraud. And Spasova is an accomplished online fraud buster, helping to take down cyber-crime gangs across Romania. She isn't an FBI agent, though, nor a Romanian police officer.

Spasova works for EBay Inc.

Keep Reading

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China's Ravenous Hunger for Natural Resources

... is fueled by the fact that its Middle Class is already 400 million people -- larger than the population of the US -- and growing ...

China wants to boost middle class

China hopes to grow its middle-class to more than half of its population by the end of the next decade, a Communist party planner said Wednesday.

The goal is part of quadrupling China's per capita gross domestic product by 2020, said Zheng Xinli, vice-minister of the Communist party's Central Policy Research Office.

A bigger middle class will also challenge the government to provide greater social security and services and better education systems, Zheng said at a news conference.

"A growing middle-income population will ensure that more people will benefit from reform so that our reform will be endorsed and supported by more people," Zheng said.

I wonder what this will mean for consumption of oil, iron, copper, and more, don't you?

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Happy Boxing Day, Canada

Canadian Stock Markets are closed. That gives my Canadian friends more time to eat more leftovers and Christmas candy, lol!
P.S. This applies to Australia, too

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Paper Asset Bubble

Here's a chart I picked up Jack Crooks and the very smart analysts at Black Swan ...Jack adds: "it seems the explosion of paper, and the revolution of consumer finance, has added more stability, if one measures in terms of GDP. Business cycles have been sanguine for a while now and we think paper has a lot to do with it. But are there limits to this and are we, or have we, reached those limits?"

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1,000 Barrels Per Second

My latest Money and Markets column is up ...

Oil at $150 a Barrel in 2008
by Sean Brodrick
- December 26, 2007, 7:30 AM
In 2008, we're going to hit an important milestone. In the New Year the world is going to start using oil at a rate of more than 1,000 barrels PER SECOND! According to the International Energy ... [more ...]

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Merry Christmas

Here's a few holiday lolcats for you ...

This is pretty much what my kids are doing ...

And here's something to crack up even the Scrooges among you ...

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The Oil Deficit and Electric Cars

The Bush Administration's plan behind letting the US dollar devalue -- if there can be said to be any real plan -- is that it will shrink our trade deficit. Let's see how that's working ...

The United States trade deficit widened slightly in October as a record price for imported oil outweighed the export-spurring benefits of a weaker dollar, the Commerce Department reported on Wednesday.

Rising oil costs also pushed import prices 2.7 percent higher in November, the largest gain in 17 years, raising concerns about inflation, according to a report from the Labor Department.

The monthly trade gap widened 1.2 percent to $57.8 billion, as the average price for imported oil jumped nearly 6 percent to $72.49 a barrel. Minus petroleum, the deficit was its lowest since March 2004.

Now there is some good news. America’s overall trade deficit has shrunk more than 8% in the first nine months after hitting a record of $785.5 billion for 2006. However, in the big picture, it just isn't enough. Here's the big picture ...The bottom line is America is shipping about $1 trillion in wealth overseas each and every year. That's a good way to go broke.

Oil imports accounts for half the trade deficit. Well, other countries must have this problem too, right? They do, but they're also improving their railway systems and electrifying those railroads as quickly as possible. They can see Peak Oil coming, and they're preparing for it.

Meanwhile, Amtrak can't get all of the $1.53 billion it requested. President Bush wanted to cut its funding to zilch, but the House of Representatives recently agreed to boost Amtrak's federal funding to $1.4 billion while a Senate panel has endorsed spending $1.37 billion. Bush vows to veto any such spending increase.

Here's part of my energy plan to deal with the energy crisis that is bearing down on us like a runaway freight train: Refurbish and beef up railroads across the country and electrify them. Also build ahigh-speed light rail system for all medium and large cities and for inter-city travel of less than 200 miles. And do it with government money.

Railroads are alone among our transportation systems in having to pay for their own infrastructure. How many airlines do you think we'd have if they had to build their own airports? How many car manufacturers if they had to build their own highways? Build the rail infrastructure, which is incredibly efficient, and half of our trade deficit goes away.

Maybe the next President will see the real opportunities in this crisis.

But what about cars? Well, there is new breakthrough battery technology from Stanford that makes pure electric cars possible and practical. Silicon and lithium are plentiful, lightweight and cheap, so this new technology could drastically reduce the size, weight and cost of battery packs for electric vehicles. You can plug this electric car in at night and then run it all day -- hundreds of miles.

At the same time, there is other new battery technology that allows you to recharge a battery almost immediately. So, this would allow "gas stations" for electric cars.

Even without this new technology, there are electric cars rolling off the assembly line in Norway right now that have a range of 116 miles (maximum speed, 62 mph). With this new technology, we'll be able to put an electric car in every garage. And that, I believe, is the potential happy ending to the energy crisis.

In the meantime, I expect oil to soar as high as $150 per barrel. There is still plenty of money to be made from internal combustion vehicles.

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Rock On

Ozzie Osbourne and Slash do "My Life" ...

This one's dedicated to my wife, Cindy

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2008 -- Farm-ageddon?

From the CattleNetwork ...

Costs & Grain Prices Explode In 2008 Crop Budgets

Farming in 2008 is shaping up to be one for the history books. Never have both costs and grain prices been this high. Costs and grain prices are competing forces when it comes to profit. Fortunately, grain prices should prevail.

Recent history provides a perspective. Prior to 2007, it was difficult to project a positive return to labor and management for most crops. It was not uncommon to project a loss for spring wheat, North Dakota's largest crop, in nearly every region of the state. Despite higher costs, this changed in 2007 because of better crop prices and most crops projected positive returns across the state.

It looks even better for 2008. Projected returns are the best that I have seen in 17 years of preparing crop budgets. All crops should be profitable, except for oats and rye.

Read the rest HERE.

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Don't Forget the Holidays

It's December 23rd. Happy Festivus!

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It's Getting Harder and Harder to Find Oil ...

From the Energy Information Administration ...

As the figure below shows, expenditures to find and develop oil and natural gas reserves in 2006 by the major U.S. oil and gas producers that report to EIA’s Financial Reporting System (FRS) were more than 60 percent higher than in 2004, even after adjusting for general price inflation.
However, to date, the big increase in spending has not resulted in significant increases in reserves. In fact, reserve additions (measured in barrels of oil equivalent) for the FRS companies in 2006 exceeded only two of the previous 17 years.

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Worst Campaign Videos Ever

Rudy Giuliani has no one but himself to blame for a Christmas ad in which he talks about buying everyone a nice big fruitcake. Even Joe Scarborough is aghast. One of his co-hosts says maybe it's a Saturday Night Live parody. Now THAT would have been funny.

You only have to watch the first minute or so, the rest of the video is the Morning Joe team's reaction to the ad. They even call in Mike Huckabee to get his view. I don't think a Mayor who likes dressing in women's clothes should really be emphasizing fruitcakes in his Christmas message, do you? Anyway, the Giuliani campaign has taken the ad down now.

But it didn't take long for a parody of Rudy's ad to go up ...

As bad as Rudy's ad is, some Fred Thompson supporters actually came up with a worse video. This is called "I've Got a Crush on Fred Thompson's Politics" ...

The Thompson campaign linked to it at first, but pulled it down, probably after they received some feedback on just how bad this ad is. Even the website of the band that made it doesn't list it. Better luck next time, guys.

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I Do Not Think That Word Means What You Think It Means

My title is a famous line from The Princess Bride, but it also applies to this dumbass take on personal spending from the Washington Post ...

Consumer Spending Surges in November
Consumers opened their wallets wider than expected as the holiday shopping season kicked off in November, boosting retail sales by the largest monthly amount in more than three years and helping Wall Street start the day on a strong note.

Sounds pretty good, right? Well, maybe you should read a little further ...

Incomes also rose in November, by 0.4 percent, double the rate of increase in October, although that was more than offset by increased prices, the department reported. Discounting for inflation, disposable personal income — the money left to spend after taxes — fell 0.3 percent (emphasis added).

So the fact is, incomes did NOT rise in November. Real income is the only income that matters, and real income was down. That's the number that should get the attention.

And while we're at it, that 1.1% increase in consumer spending that's in the first paragraph of the story? Also not adjusted for inflation. The real number is 0.5%.

And the primary driver of that 0.5% increase in consumer spending? Since incomes were down I suppose you can guess the answer, but you have to plow through to the tenth paragraph before the Post actually tells you: "The increase in spending came because consumers either borrowed or dipped into savings. The department reported that personal savings declined by more than $48 billion in November."

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Great Stats on Mexican Oil Production

From The Economist ...

CANTARELL, in the Gulf of Mexico, was once the world's biggest offshore oilfield, holding over 35 billion barrels of the black stuff. Now, after nearly three decades, it is running out. At its peak in 2004 it produced 2.1m barrels of oil per day (b/d), making up 60% of Mexico's total output. That figure has already fallen by more than 500,000 b/d and could fall by another 200,000 b/d by the spring.
This is a worry for both Mexico and the world. Although Mexico contains less than 1% of the world's proven oil reserves, it is the sixth-largest producer. Its output of 3.1m b/d is well above that of Venezuela or Kuwait. And although oil no longer dominates the Mexican economy—even at recent high prices it provided 16% of exports in 2006, down from 68% in 1982—it lubricates the public finances, contributing nearly 40% of federal revenues.

Read the rest at ... http://www.economist.com/world/la/displaystory.cfm?story_id=10328190

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You Can't Have Too Many Enemies

That seems to be the mantra in Washington these days, where the powers that be are doing their best to irritate the Russians. Apparently nostalgic for the Cold War, we are installing anti-ballistic missiles and X-band radar in Poland and the Czech Republic. Ostensibly this is to guard against nuclear-tipped madmen in Pakistan or the Middle East (or perhaps a frontal assault by Dr. Doom). But we're doing it in a way that sends the Russians -- always a paranoid bunch -- skidding down memory lane to Cold War Central.

You think I'm kidding? Vladimir Putin equates the current situation with the Cuban missile crisis that pushed the US and the Soviet Union to the brink of nuclear war in 1962.

"Analogous actions by the Soviet Union when it deployed rockets on Cuba provoked the Cuban missile crisis," the Russian president said after an EU-Russia summit in Portugal. "For us, technologically, the situation is very similar. On our borders such threats to our country are being created."

What is this new radar? It's made of up of hundreds, perhaps thousands, of transmitter/receiver modules. The linked system can scan for targets, keep a continuous track of dozens of them, and guide missiles. Perhaps most interestingly, all the power of the radar's TR modules can be focused to jam enemy radars in a narrow frequency band. So you can see how the paranoid Russians might think it could be used to jam their early warning radar system. We know we wouldn't do that. But THEY don't know we wouldn't do that.

So then the highest ranking Russian general, Chief of Staff Yuri Baluyevsky, has this say: "The firing of an anti-missile rocket from Poland could be seen by Russia's automated system as the launch of a ballistic missile, which could provoke an answering strike," Itar-Tass news agency quoted Baluyevsky.

And then the commander of Russia's strategic missile forces, General Nikolai Solovtsov, chimed in: "If the US shield is seen to threaten Russia's nuclear capability, I do not exclude ... the missile defence shield sites in Poland and the Czech Republic being chosen as targets for some of our intercontinental ballistic missiles."

IF -- and I say IF -- the missile shield is to protect against wayward missile strikes from the Middle East, then the obvious thing to do would be to offer to make Russia part of the program -- they could help pay for it with some of that oil money they're piling up. Instead, we antagonize them.

And that brings me back to my headline. I guess Washington is nostalgic for the Cold War, when we had enemies we could respect and understand. The good news is it isn't affecting the red-hot Russian business climate (yet anyway)

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It's Not a Credit Crisis, It's a Solvency Crisis

I read this story in the Financial Times a few days ago and I keep coming back to it ...

Hold tight, the central banks have no plan

This has been the year when many deeply held beliefs have been challenged. One such belief was that central banks have the toolkit to sort out any conceivable economic or financial crisis.

Last week’s co-ordinated liquidity action by five central banks taught us that this is not the case. The idea was that a co-ordinated response would reassure the markets, but it had the opposite effect. It turned out that market participants are not infinitely stupid. They know by now that this is not a liquidity crisis at its core. If it had been, it would be over by now.

It is a fully fledged solvency crisis that has arisen because two giant and interlinked bubbles burst simultaneously – one in property, one in credit – leaving banks and investors on the brink of bankruptcy, some hanging on by their fingertips. Yet there is nothing the central banks are offering at this stage to alleviate a solvency crisis.

Go read the whole thing.

And this brings me to my point. I've said in the past week that the market is wrong if it thinks the Fed is going to stop cutting interest rates because of rising inflation. The Fed may stop cutting interest rates, but I think the folks in Washington don't want to stop inflation. Inflation is the only way they can get America out of the housing crisis.

Here in Florida, homes that were selling for $500,000 a year ago are selling for under $400,000 now. If Joe and Jill Consumer take that kind of hit, they're going to scream bloody murder.

But let's say you get inflation of 8% per year. Then the price people are willing to pay for that house has artificially inflated back to $500,000 in just three years.

You don't think inflation will run at 8%? Okay, let's say 5%. Then it will take you five years to get back to the original price of the home.

You could make a case that the powers that be in Washington are trying to encourage enough inflation in the economy generally that home prices will start inflating by 5% a year. That way, homeowners who sell their houses will feel they haven't lost money, even though, thanks to inflation, they really have.

It's just a theory, but one I'm comfortable with.

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Betting the Farm -- My Latest Money and Markets Column

Betting the Farm in 2008
by Sean Brodrick
- December 19, 2007, 7:15 AM
With 2008 fast approaching, it's time to start placing our bets for sectors that will outperform. And while I think commodities like gold, silver and oil will continue to do well, there is another ... [more ...]

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Today's Gold Chart

Gold is getting a nice bounce today, but not nice enough. There could still be more downside to come. Hang loose and I'll keep a close eye on it.

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News You Can Use

Yuan Rises After China Reduces Holdings of U.S. Treasuries for Third Month The yuan rose after a U.S. government report showed China cut its holdings of Treasuries for a third month in October, a sign the nation may be diversifying its foreign reserves.

U.A.E, Qatar May Adjust Dollar Pegs in Six Months, According to Citigroup The United Arab Emirates and Qatar may opt to change their fixed exchange rates to the U.S. currency in the next six months, according to Citigroup Inc.

Gold Rises in London, Platinum at Record on Speculation Dollar Gain Over Gold gained for the first time in four days in London on speculation a U.S. economic slowdown will halt the dollar's rally, increasing demand for the metal as an alternative asset. Platinum rose to a record on demand in China.

Global Commodities to Start New Agriculture Fund as Farm Prices Surge Global Commodities Ltd., an Australian-based commodity fund manager, plans to start a new fund investing in agricultural raw materials to meet growing investor demand as prices soar.

ECB Lends $502 Billion to Ease Crunch The European Central Bank found strong demand Tuesday for its offer to lend euro-zone banks extra money to get them through year-end, lending a whopping total of €348.6 billion ($501.7 billion) for two weeks in its bid to ease persistent money-market tensions.

An OPEC of Iron Ore? First there was Big Oil. Now comes Big Mining. For years now, mining companies have gotten rich supplying the raw materials that have fueled consumer booms from China and India to Brazil. As commodities prices soared, these companies socked away cash and snapped up rivals. Now they are embarking on another round of deals that promises a new class of juggernauts. The resulting megaminers would have great influence over the cost of raw materials like iron ore, copper and uranium -- and, by extension, the price of consumer electronics, cars and new apartment blocks.

Mine Deals May Unclog Bottlenecks BHP Billiton's $125 billion effort to acquire rival Rio Tinto isn't just about locking up more copper, coal or iron ore. That proposed deal, as well as others sweeping the mining industry, will help determine access to some of the congested ports and rail lines needed to get raw materials to the world.

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Our Warming Planet

2007 Among the Warmest Years on Record

The annual temperature for 2007 across the contiguous USA is expected to be near 54.3 degrees — making the year the 8th-warmest since records were first begun in 1895, according to preliminary data from the National Oceanic and Atmospheric Administration's National Climatic Data Center.

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Another Chart to Ponder

Here's a daily chart of the Gold Bugs Index ...

Just remember my bearish outlook on gold is short-term only. I expect the US dollar to run into more trouble down the road. And that will be a great buying opportunity.

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Charts for Monday

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And Now for Some Parodies of the Democrats

Well, how could I forget Red State Update. These guys are low-tech but brilliant. Check out this parody...

And here's another funny one ...

You can find more Red State Updates HERE

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Two Best Parodies of the 2008 Political Season ... So Far

As my long-time readers know -- all five of you -- I've been writing about the Mike Huckabee campaign for quite some time -- as far back as February. The guy's very likeable, and seems genuine. Of course, his detractors would say that he fakes genuine very well.

One of his detractors is Mitt Romney. You have to wonder if the Romney folks are behind this Mike Huckabee parody ...



But then you also might wonder if the Huckabee folks are behind this hilarious Mitt Romney parody ...

Like I said, you MIGHT wonder that, except both videos are made by the same website. I guess whoever is behind that is the one REALLY enjoying the political process. I can't wait to see who he parodies next -- Republican or Democrat, I'll post it here.

Seriously, there's only one video that Mike Huckabee has to worry about. This one ...


That one's a bit sobering, eh? Thank God (whichever one you pray to) for the parodies. That's the great the thing about politics. It gives all of us plenty to laugh about.

UPDATE: It turns out the same guy, Lee Stranahan, has made a bunch more campaign video parodies. Here's one of his Guiliani videos ...


And here's one for the Hillary Hatas out there.


You can view the rest of Stranahan's videos HERE.

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Maybe Merrill Lynch Should Trade in Its Bull Horns for a Bear Suit

The folks at Merrill now peg the chance of a recession at 100% ...
Time to update Merrill's bull logo, I think. Bring out the bear suits!

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Uranium Update

The short-term spot price of uranium has dropped slightly to $92 per pound, according to Ux Consulting. The long-term price remains stable at $95 per pound. We probably won't see any real movement in either price until after the New Year.

More info from Toll Cross Securities ...

Denison Mines has 567 million pounds of uranium in total (including historical) resources. If you divide tis market cap by the number of pounds, you can buy those pounds for $6.42.

The same math for Cameco works out to $13.76. That would seem to suggest that Denison is pretty undervalued compared to Cameco by this particular method of valuation.

Uranium One, meanwhile, works out to $5.62 by the same math -- the cheapest of the lot.

One that's a bit pricey is Paladin. With 226 million pounds in total uranium resources, you can buy that metal for 16.92. On the other hand, Paladin is just bringing its mines online now and ramping up production, so you can see why it might carry a premium.

That's just some food for thought.

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The Bear Necessities

Commodities were flattened today, largely because of a strong rally in the US dollar. When this kind of thing happens, some analysts dig in and hunker down. I like to give myself a reality check to see if maybe I should change my views. Fundamentals haven't changed much. Today we got higher-than-expected producer prices (inflationary) and higher-than-expected retail sales data (bullish for the US dollar).

These seem at odds, so let's take a closer look.

The Commerce Department said Retail sales increased by 1.2% over October 2006, and up a huge 6.3% from November 2006. However, look at rising retail sales in the context of rising prices. November gasoline-station sales increased by a whopping 6.8%, reflecting the increasing costs for energy and refined fuels. PPI release showed producer prices for energy swelled a record 14.1% last month versus October. Wholesale gasoline prices increased 34.8%. Prices of raw materials, known as crude goods, rose 8.7%. Non Gasoline sales at all retailers in November was a more modest increase of 0.6%. Bottom line: The most likely source of sales gains was INFLATION.

A dollar bear looks at that number and says that the Fed can keep cutting rates. A dollar bull looks at it and says that due to inflation, the Fed will have to hike interest rates.

Something else to consider: Rising retail sales data today have increased the chances that GDP numbers for the fourth quarter will be better than previously expected. That kind of economic strength boosts the prospects for the US dollar, helping it rally.

Here's the thing. I don't think the Fed gives a fig about inflation. I think the Fed will keep cutting rates to put as much liquidity into a sputtering financial system.

I’m not the only one who thinks this way.UBS, Deutsche Bank and Dresdner Kleinwort -- the only primary dealers of U.S. government securities to correctly forecast a year ago that the central bank would reduce its target rate for overnight loans between banks to 4.25% -- now say that the Federal Reserve will need to lower borrowing cost to 3.5% to prevent credit markets from seizing up.

However -- and this is the tricky part -- while the Fed may cut rates longer term, if the market believes the Fed is going to raise rates in the short-term, you don't want to bet against it. the market can remain irrational longer than you can remain solvent. Especially when Uncle Sam is willing to step in and throw money at problems.

So let's look at some charts. We'll start with a weekly chart of the US dollar ...
And now a weekly chart of the GLD, which tracks physical gold ...


The gold bugs index tracks leading gold miners ...


Now for a weekly chart of Jaguar Mining ...

Finally, let's look at silver miners, as represented by a weekly chart of Silver Wheaton ...I think Friday's close could be very important for both the US dollar and precious metals. Stay tuned ...

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Agricultural Investments to DOUBLE Next Year?

According to a story on Bloomberg News (sorry, no web link) ...

Agriculture investments linked to commodity indexes may climb $10 billion next year, double this year's advance, according to American International Group Inc.
About $43 billion is invested in the products, up from $20 billion in January 2006, according to Daniel Raab, managing director of AIG Financial Products Corp. Half the increase since 2006 was from higher prices and the rest from new money, he said.

XX my take -- one of the drivers is all the new agricultural ETFs that are coming on the market, so we can put that down to speculation. But most of it is the huge demand from Asia as billions of people in China, India and other countries start eating more and heartier meals.

Where have I heard that before -- oh, that's right, in my Agriculture Report. And guess what -- the downdraft we're seeing in natural resources today is sending these stocks skidding lower. They're well off their highs ...



Sure, they're still up. Sure, I think they'll go much higher. But they're relatively cheap right now. If you haven't acted on the recommendations in that report yet, stop sitting on your hands. Get it now!

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Natural Resources Are Getting Shellacked Today

Interest rates are up, therefore the US dollar is up, and gold is down about $20 right now. Ouch! This is kind of odd considering how the Fed is pumping liquidity into the system. In fact, considering the fundamentals, I'm pretty sure this is a counter-trend move.

However, it makes me all the happier that we've grabbed gains with both hands recently.

So, you know what this means -- we have a buying opportunity coming up. The question is when. Stay tuned, and I'll keep you posted.

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Why I Still Can't Find a Wii

If you're like me, you can't find a Wii for Christmas, and I doubt Santa is going to come through on this one. Part of the problem is Nintendo isn't gearing up more Wii factories. The other part of the problem is that Wii is just more popular than other game systems.

Here is a chart showing comparative sales if the Wii, PS2 and XBOX 360 were all released at the same time ...
You can make this nifty chart yourself HERE.

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Inflation Up! Consumers Charging! Go, Baby, Go!

U.S. November Producer Prices Increase 3.2%, More Than Double Estimates Prices paid to U.S. producers climbed at the fastest pace in 34 years in November, pushed up by surging costs for fuel. Excluding food and energy, prices rose the most since February.

XX My take -- this is obviously inflationary, but we can expect the Fed to ignore it. They're concentrating on bailing out bankers who made bad loans now. The Fed doesn't give a flying fig for inflation.

Retail Sales Rise Twice as Fast as Forecast, Easing Concern Over Recession Retail sales in the U.S. increased twice as much as forecast in November, easing concern near-record fuel prices and falling home values would trip up consumers.

XX my take -- Consumers are content to melt plastic. I have to admit this one surprised me. Bottom line: This should be bullish for commodities.

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More Bad News on the US Dollar

A story about how Iran no longer accepts US dollars for its oil -- and how Russia may do the same -- also dropped this little gem ...

In early 2007, China made the final decision to get rid of a sizeable share of U.S. dollars in its state reserves. As of now, the dollar part of the Chinese state reserves amounts to $800 billion, mainly in U.S. Department of Finance bonds. This year, China is expected to hold $1 trillion worth of U.S. government bonds. Even if it does not undermine the dollar's standing as the principal holding of central banks, China's new policy will shift the balance of the country's foreign-exchange reserves in favor of the currencies and bonds of neighboring countries and Europe. Analysts forecast a 15% decrease in China's dollar denominated reserves, while 1% of China's reserves amounts to $14.5 billion.

UPDATE: Yuan Rises to Highest Since Peg Ended on Final Day of China-Paulson Talks The yuan rose to the highest since a fixed exchange rate to the dollar ended in 2005 after Chinese officials told U.S. Treasury Secretary Henry Paulson they support currency appreciation as long as it isn't excessive. (Bloomberg)

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My Notes for Bloomberg Asia TV Appearance

I was on Bloomberg Asia just before 6 pm Eastern time. The subject was oil. Here are my notes ...

1) At 304.5 million barrels, U.S. crude inventories are at their lowest since March, 2005. Increasing backwardation in crude oil futures means refineries will sell down their current stocks because they know they can cover in later months at a cheaper price. Lower stockpiles should boost prices.

2) The Bush administration has been adding 50,000 barrels a day to the Strategic Petroleum Reserve since August, with plans to kick up the pace to 70,000 barrels a day by the end of January. Why are they adding to the SPR when oil is at $90 per barrel? How expensive do they expect it to get?

3) The Energy Information Administration just told the US Senate that crude should average $85 per barrel in 2008 as fundamentals tighten. Goldman Sachs one-upped with its own forecast of $95 per barrel. Remember that back in 2005, Goldman Sachs predicted oil could spike to $105 per barrel.

4) I think we could see prices spike to $150 barrel spike next year. Causes: On the supply side, trouble in the Middle East and possibility of supply disruptions in Nigeria, Russia and beyond. On the demand side, higher prices don’t seem to be dampening demand much in US. Demand in India and China is growing rapidly. China puts 14,000 more cars on the road each day.

5) The only thing that could derail higher prices is a stiff recession in the US. The Fed is working hard to prevent that, with rate cuts and cash injection this morning.

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China Eats the World

Great stats.

Here are some ....

China is ...
The world's largest consumer of coal, grain, fertilizer, cell phones, refrigerators, and televisions
The leading importer of iron ore, steel, copper, tin, zinc, aluminum, and nickel
The top producer of coal, steel, cement, and 10 kinds of metal
The No. 1 importer of illegally logged wood
The third-largest producer of cars after Japan and the United States; by 2015, it could be the world's largest car producer. By 2020, there could be 130 million cars on its roads, compared to 33 million now.

More stats -- CLICK HERE. And main article HERE.

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56 Days to Empty?

The Bush administration's decision to add more oil to the Strategic Petroleum Reserve has added as much as 10 percent to the price of crude, an oil consultant told a Senate panel Tuesday.

The Bush administration has been adding 50,000 barrels a day to the emergency oil stockpile since August, with plans to kick up the pace to 70,000 barrels a day by the end of January.

The Strategic Petroleum Reserve now contains 695 million barrels of oil — enough to keep the U.S. economy running for 56 days if imports were cut off suddenly.

The federal government has been soaking up as much as 0.3 percent of the world's supply of light sweet crude at a time when crude is over $90 per barrel.

My question -- what does the Bush administration know that would make them so eager to add to the Strategic Petroleum Reserve when prices are so high? Is bombing Iran still on the table?

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Mortgage Bailout's Silver Lining

This is just along the lines of what I predict in today's MoneyandMarkets column ...

Fed Forecasters Who Got It Right for 2007 See Funds Rate Falling to 3.5% The three most accurate forecasters of U.S. interest rates say the Federal Reserve will need to lower borrowing costs below 4 percent to prevent credit markets from seizing up.

In other news ...

India Industrial Output Grows 11.8%, Fastest Pace in 7 Months, on Incomes India's industrial production grew more than analysts predicted in October as the onset of the festival season and rising incomes spurred consumer spending.

China Retail Sales Rise at Fastest Pace in Eight Years on Higher Incomes China's retail sales increased at the quickest pace in at least eight years on rising incomes, aiding government efforts to curb the economy's dependence on exports and investment for growth.

Gold Rises in Asia on Speculation Dollar May Weaken After Rate Cut in U.S. Gold rose in Asia on speculation the dollar may extend declines after the Federal Reserve's quarter- point interest-rate cut, boosting bullion's appeal as an alternative asset. Silver also gained.

And here's a story we should all be paying attention to ...

Facing End-Times Drought Without a Plan
Residents and businesses in Durham, NC, have been told that they must cut water use by another 20% after months of cut-backs that resulted in a decrease of 31% or face the possibility of water rationing and loss of production for businesses as the city struggles with the worst water shortage in its history. Durham, part of the rapidly growing Triangle area, is reaching its growth limit.

Here in South Florida, I can tell you that our already-severe drought is not getting better. In fact, it's getting worse. I can't imagine what kind of water restrictions we'll get next (well, I can -- the paper just published the latest -- but I don't want to).

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