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Silver Bullet – Still on the Rails?

    November 05, 2009

Silver Bullet 110509I’m often asked my view on the best way to play the current runup in gold, and typically my answer to that question includes a suggestion to look at silver.

Silver has long been called “the poor man’s gold,” and in the safe-haven trade since the start of 2009, its price has appreciated nearly 60 percent, though there have been a lot of ups and downs along the way. Over the same period, the price of gold has risen about 25 percent to an all-time high, also with a fair bit of volatility.

At the beginning of the year, the gold-silver price ratio was 79 to 1—it would take 79 ounces of silver to buy one ounce of gold. As of yesterday’s close of $1,090 per ounce for gold, that ratio was down to 62 to 1. This narrowing trend might be seen as a negative for silver, but that’s not necessarily the case.

This week, I saw a technical article from Lorimer Wilson on Financial Sense University’s Web site pointing out that, over the past five years, the gold-silver ratio has ranged from 43.6 to 1 in April 2006 to 84.4 to 1 in October 2008, and that the 28-year support line is 58 to 1.

Applying the five-year ratio range at yesterday’s closing gold price would yield a silver price range of $25 per ounce (+43 percent from yesterday’s close) to $12.91 per ounce (-26 percent). The 28-year support line suggests a silver price of $18.79 per ounce, which is 7.5 percent higher than yesterday’s close.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-777

 

Are Higher Prices the ‘New Normal’ for Oil?

    November 02, 2009

This analysis is from Evan Smith and Brian Hicks, co-managers of the Global Resources Fund (PSPFX).

Oil prices have bounced more than 150 percent off of December 2008 lows but inventory levels remain at historically high levels despite a healing global economy.
However, Goldman Sachs says robust 2010 oil demand growth will deplete these inventories over the next 12-to-18 months and diminishing production rates in key areas around the world will create a supply/demand imbalance.

New Projects Have Peaked

The above chart shows the decline in production from the world’s top 230 projects. After peaking in 2009, production from these projects is set to fall for the next several years. Excluding OPEC countries (right chart), the decline rates quadruple from 2007 to 2012 (est).
Over that time period, non-OPEC production is expected to fall by 2.5 million barrels per day. Only Brazil, Canada and the former countries of the Soviet Union are expected to see production growth.

Non-OPEC Supply Set to DeclineOne of the largest contributing factors for this is chronic decline rates from some of the world’s top mature fields. Mexico’s Cantarell field, one of the largest oil fields in the world, produced 30 percent less oil in 2008 than it did in 2007—a trend that’s expected to continue.

Norway, the world’s 11th largest oil producer in 2008, saw its oil production peak in 2001 and is down 27 percent since. Another big producer, Venezuela’s state-owned oil company PdVSA has seen annual decline rates of more than 25 percent in certain fields according to the Energy Information Administration (EIA).

Adding to the dilemma, many countries without decline-rate issues have been holding out production increases until projects become more cost effective; this is why we recently saw Russia overtake Saudi Arabia as the world’s largest oil producer.

The Saudis have been content to sit on the sidelines while awaiting the return of higher prices. The same goes for other OPEC countries; PIRA, an oil-industry consultant, says the cost of oil will have to rise above $80 per barrel in order for the cartel to increase production.

With oil prices currently hovering around that $80 level, OPEC officials have recently hinted that production increases aren’t off the table for the cartel’s upcoming December meeting.

Even if we see a production increase out of OPEC, decline rates from maturing fields and high barriers of entry to bring new fields online should keep the supply/demand balance tight for years to come.

Brian Hicks and Evan Smith will be co-hosting a free webcast event with U.S. Global Investors CEO Frank Holmes titled “What’s Driving Energy?” on Tuesday, November 3 at 12:00 PM ET. The presenters will be detailing the critical factors supporting long-term energy demand. Click Here to Register

What's Driving Energy Webcast 101609

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. #09-762

 

Commodity Insights from London

    October 13, 2009

Brian Hicks London 101309Brian Hicks, co-manager of our Global Resources Fund (PSPFX), is in London this week for the London Metal Exchange’s 2009 Metals Seminar, which kicked off the annual LME Week gathering of leading commodities analysts from around the world. Here are Brian’s notes from the seminar:

Danny Quah, professor at the London School of Economics, gave a compelling presentation that centered on China and the global recovery.  His main theme focused on the global economy's shifting center of gravity, which has been steadily moving eastward to China over the past decade.   He also mentioned that China isn't dependent upon U.S. consumption to create growth – that notion is an old paradigm from the 1970s. Exports to the U.S. only make up approximately 15 percent of total exports, versus the 40 percent of total exports going to Southeast Asia. 

Michael Jansen, director of commodities at JP Morgan, is one of a few who see a V-shaped recovery, given the rapid and unprecedented response to the financial crisis.

Jansen's Copper outlook: Imports to China may halve through the rest of the year, but should still remain at high levels.  Scrap is tight, but it has improved. Copper is the "best" way to play the developed-markets recovery given a strong rebound in industrial production.  Risks to mine supply remain – 3.7 million metric tons of production is up for contract negotiations in 2009.

Jansen's Aluminum outlook: While it is true there is too much inventory and capacity, Jansen still believes prices may go higher early in 2010 due to potentially large primary buying/restocking.  Fabrication demand should pick up due to low inventories.

Jansen's Nickel outlook: A bit of a pick-up in European stainless steel orders has been offset by a slowdown in China.  Xstrata has curtailed high cost nickel production and cut costs, bringing down its average cost to $3 per pound.  Despite a 20 percent cutback in mine supply, some people I met still think there is too much capacity and more cuts are needed. 

Jansen's Zinc outlook: Galvanized steel could pick up materially given that only 50 percent of global infrastructure projects are in place. Chinese auto sales also should be supportive for the zinc market.  We could see a 146,000 metric ton deficit in 2010.

Jeffrey Christian, managing director at CPM Group (and author of “Commodities Rising”), highlighted that the lack of credit availability is the biggest risk to the recovery near-term, while slow growth in energy supply is the biggest risk longer-term.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings in the Global Resources Fund as a percentage of net assets as of 6/30/09: Xstrata 0.00% #09-713

 

Rosy Forecast for Copper and Natural Gas

    October 12, 2009

Forecast for Copper 101209The Royal Bank of Scotland predicts that the price of copper will set a new record high, palladium will more than double, and natural gas will see a significant recovery between now and 2013.

RBS states its views in the latest edition of its Commodity Companion research report, which covers the 12 months ending September 2010 and also a longer period running to the second half of 2013.

For the 12-month period, natural gas is expected to be the best performer, with palladium and oil next. For base metals, it’s aluminum in the top slot, followed by copper.

For the longer period, palladium should do best, RBS says. Natural gas, aluminum and copper fill out the top positions.

RBS says it expects prices for these commodities to be driven by inadequate supply response to rising demand as the global economy gets back on track in 2010.

Macquarie Research came out with a similar outlook last week for copper after a major mechanical failure at an Australian mine that will limit production through the first quarter of 2010.

Copper has more than doubled in price since December 2008 to about $2.85 per pound today, and by 2013, RBS sees the metal surpassing its previous record high of just over $4 per pound set in early 2008.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

 

Making Oil from Dirt

    September 16, 2009

Oil from Dirt 091609We’ve all heard a lot about the Canadian oil sands and how a modern-day oil boom is taking place in the forests of northern Alberta.

This is oil that begins not with holes drilled deep underground, but rather as aromatic clay and sand clawed out of the ground by giant backhoes and hauled in huge dump trucks to nearby refineries.

The oil sands in the Fort McMurray region give Canada the second-largest reserves in the world after Saudi Arabia -- some estimate that more than 170 billion barrels could be recovered with existing technology.

It’s may be hard to picture this process. A series of photos from National Geographic provide a good look at the oil sands and the positive and negative impacts of their development.

The size of and demand for the resource ensure that the oil sands will be developed on a large scale. For Canada, the challenge is to strike that balance that allows the land, water and people to be protected while the valuable oil is extracted.

The story that accompanied the photos, titled “Scraping Bottom,” includes a telling line about the global influence on the oil sands boom: “The fact that we're willing to move four tons of earth for a single barrel really shows that the world is running out of easy oil”

Click *here for the oil sands photos by Peter Essick.
Click *here for the National Geographic story.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

*By clicking the link you will be redirected to the National Geographic website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

 

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