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Essay on commodities
« on: March 18, 2015, 09:47:02 AM »
The most important story in the world today… Commodities are getting crushed… Crude oil hits a six-year low… Could oil hit $30 a barrel?… A rare moment for platinum… Chinese stocks hit a new high… Visit Rancho Santana…

 The strong dollar is crushing commodities…

The U.S. dollar is at its highest level since 2003. The world's reserve currency has appreciated 25% since July 1 – an insane move for a major currency.




 Commodities are priced in dollars, so it takes more money for other countries (with their weakened currencies) to buy the goods. And we're seeing this trend play out across the board.

 Before we get to our discussion of commodities, it's important to note that the strengthening U.S. dollar has larger implications than just weighing on commodity prices.

 For example, in the January 26 Digest, we showed you the similar effect the strong dollar is having in the currency markets (the world's largest, most important market)… As with commodities, most global currencies are plunging against the dollar. In that Digest, we presented a handful of charts showing you what "currency implosions" look like.

 We'll present similar information today. But know this: The strength of the U.S. dollar is the single biggest trend in the world today.

 West Texas Intermediate crude oil (the domestic benchmark) is at a six-year low of $43.40 a barrel today. That's down from a peak of $145 a barrel in July 2008… though it's still above the December 2008 low of $30 a barrel…




Brent crude (the international benchmark) and West Texas Intermediate crude are the most inversely correlated commodities to the U.S. dollar over the past 10 years, according to a study by Standard & Poor's, meaning they fall as the dollar rises. (For cocktail party banter… feeder cattle, sugar, and lean hogs are the least correlated to the dollar.)

 In addition to a strong dollar, oil has faced another major headwind – a global supply glut. And much of that excess production is coming from the U.S. Nobody has followed the shale revolution happening today in the U.S. closer than Porter and his research team. Porter updated readers in the March 13 Digest. He predicted oil prices would fall to less than $30 per barrel…



Since bottoming in 2008, U.S. oil production has almost doubled from 5 million barrels a day to more than 9 million barrels per day. That's nearly a doubling of production in just seven years. The last time the U.S. produced this much oil was the year I was born – 1972. And the "doubling date" prior to this peak was 1944. It took the U.S. oil industry almost 30 years to double production.

But this time it only took seven years. And these numbers are a little misleading because they don't include other types of liquid hydrocarbons, demand for which has grown tremendously since the 1970s. When you put together all forms of liquid hydrocarbons, American supply is more like 14 million barrels per day – well over 100% more than we were producing seven years ago. How is this possible?

The simple answer is a little bit of technology and a whole lot of money. Spending on global oil production has increased by around 350% since the early 2000s. Back then, the global oil exploration and production industry was spending around $150 billion a year on capital investments. By 2013, that figure had grown to more than $500 billion a year. In the U.S. alone, the 50 largest oil and gas production companies in 2013 invested nearly $200 billion into new production. And guess what? Markets work. They found huge new supplies of oil and gas.
 

 Platinum is also trading at a five-year low. The precious metal traded at a high of $1,884.80 an ounce on September 2, 2011. It trades for less than $1,100 an ounce today – a fall of more than 40%…




 And today, we're seeing something rare in platinum… It's trading for less than the spot price of gold (which currently sits at $1,154 an ounce).

 Platinum is about 20 times more rare than gold. And around 80% of the metal is used in catalytic converters in cars. Because of its industrial use, platinum prices are also falling due to weak global demand.

 In addition, almost all of the world's platinum is mined in Zimbabwe, South Africa, and Russia. As we often say, going long platinum is like going long political instability in South Africa and Russia… a safe bet.

 According to Stansberry Research analyst Greg Woodward, platinum has only traded for less than the price of gold 7% of the time in the last 30 years. As you can see from the following chart – which shows the platinum-to-gold ratio – when platinum becomes cheaper than gold, it's usually a good time to buy…




 Sugar prices are also hitting a five-year low on fears in Brazil. The country is the world's largest producer of sugar, and its weakening currency (the real) could spur a flood of supply. Brazilian producers can flood the market with sugar and collect strong dollars…




 A strong dollar, coupled with slowing demand and a surplus of supply have also crushed coal prices. They're down 62% from their 2008 peak…
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