The following is an excerpt from an article written by Clyde C. Harrison of Brookshire Raw Materials. The reason I am sending this out, is because I have been yammering on about these trends for a while now, and Mr. Harrison has done an incredible job of stating more simply and eloquently what I have been blathering on about, but not quite so eloquently.
Summary of this of course is: The future is commodities, energy, and GOLD and SILVER. I just saw a Youtube of Ron Paul on CNBC saying we should abolish the Fed and shift back to a gold standard. I am not sure how realistic abolishing the Fed really is, although I do kind of like the idea. Shifting to a gold standard, well now we are talking. Do you realize that if you take the current M3 money supply, and divide it into the number of reported gold ounces the US Treasury owns, that it would make the price of gold $51,470 per ounce?
The worlds economies and societies have shifted back and forth from Fiat money to real money (gold and silver) in a cycle that repeats itself through history over and over, with no exceptions. The world is currently realizing (again), that Fiat isn’t all that wonderful. Whichever government shifts to a gold standard first, will end up with the worlds next reserve currency. Totally my opinion.
Here is an excerpt, my own emphasis added in bolds.
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The Financial Center of Gravity is Shifting
Don’t just look at the stars - be one
Clyde Harrison
Mar 24, 2008
Excerpt:
As the US moved from capitalism to socialism, many third world countries were moving toward capitalism.
Today, 1 billion people in the world, G-7, use two thirds of the world’s raw materials. Over 5 billion use the other third. Many are pursuing capitalism; China, India, Russia, Brazil and Vietnam. In China, to be rich is glorious. In the US, if you’re rich, you’re attacked. In China there is no capital gains tax and no corporate tax. Money and talent go where it’s treated well.
Today, it’s easier and cheaper to start and operate a business in China than in the land of the free, where we are free to pay tremendous federal, state and local taxes, free except for the mountains of regulations; like who you employ, how you pay them, how you operate your business all the way to what you do in your own home with your own children. Regulations are destroying jobs and creativity.
Is it any wonder that China is growing at 12% and America at 2%?
In my opinion, the raw material market, energy, agricultural and base metals are only in the second inning of a nine inning bull market.
30 years of restrained and neglected natural resource supply is being overwhelmed by demand. The lead times to create more supply are measured in years. Three billion people in emerging nations have discovered capitalism.
Capitalism is easy to understand, it’s nature with a balance sheet.
The difference is in nature. If you fail, you are eaten. Under capitalism you go broke. I like capitalism better.
Today, China is booming. They have declared the national bird to be the construction crane. In the last five years China went from exporting oil to the second largest importer in the world. The emerging market countries will go from walking, to bikes, to motorcycles, and to autos. They will need oil and gas, chemicals, forest products and metals. At $1.00 per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.
China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.
In 1900, the US started to industrialize. We were using one barrel of oil per person per year. By 1970, we were using 27 barrels per person. In 1950, Japan started to industrialize, they were using 1 barrel per person. By 1970, they were using 17. In 1965, South Korea started to industrialize. They were using one barrel per person per year. By 2000 they were using 17. Today, China uses 1.3 barrel per person per year and India uses .7.
In 1950, Japan per capita income was 18% of the US, today it’s 96%. In 1965, South Korea’s per capita income was 16% of the US, today it’s 56%. India and China have 2.5 billion consumers, 9 times the US. The US uses 25% of the world’s energy, China and India use 8%. India and China have 280 people per car. The US has 2 people per car. Last year, China produced and sold the same number of autos as the US. Eighty percent were purchased with cash.
Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan’s urban population increased 70%. Personal consumption increased 600%.
What is occurring today in China, which contains just over 1/3 of the citizens of the emerging nations: China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural. China has 20% of the world’s population and 7% of the world’s land. China’s grain imports will grow from 14 million tones today to 57 million tones in 2020.
China was the largest economy during 27 of the past 30 centuries. China currently consumes 47% iron ore, 32% aluminum and 25% of the copper. China currently consumes 6 million barrels of oil per day. The US consumes 25 million barrels per day. China has almost five times the population of the US and will some day consume more oil than the US.
To date most of China’s growth has been on the east coast. 800 million Chinese live in rural China today and 40 million a year are moving to the city for the better life.
China wants to halt this migration by bringing the better life to the whole country. To accelerate this, they have a number of infrastructure construction projects in effect. All the projects are scheduled to be completed in 5 years.
$200 billion dollars for 500 power plants. They are currently completing 4 power plants per day.
$200 billion dollars for railroads to the west.
$30 billion for a 300 mph bullet trail between Shanghai and Beijing.
$65 billion for 97 new air ports.
$40 billion for subways in 15 major cities.
$300 billion for 10,000 miles of new expressways.
The $900 billion in construction in China will be paid for by US taxpayers, not out of their kindness to strangers, but in interest on the money we have borrowed from China. Now add Egypt, Russia, Brazil, Vietnam and you begin to understand why I started a raw materials fund.
The mergers of the giant producers today do not create one more ounce of supply. It won’t be long and they will be merging the junior mining companies. Years into this bull market, and still the cheapest place to drill for oil and mine metals is the stock exchange.
Today, 1 billion people consume two thirds of the world’s raw materials. 5.6 billion people consume the other third and they are becoming more successful. The industrial revolution involved 300 million people. The emerging nation revolution involves 3 billion.
There is no need to connect the dots, they over lap.
Lead times to create raw materials are measured in years. In Canada $80 billion in infrastructure has been committed to production of the tar sands. The goal is to produce 3 million barrels a day by 2015. At $85, oil is a bargain liquid. It costs 10% less than bottled water, it’s one third the cost of milk, one fifth the cost of beer and only 2% of the cost of Jack Daniels. TaTa, the Indian car company has produced a $2,500 automobile. Hundreds of thousands will be sold in the 3rd world. That demand will increase the price of a gallon of gas one dollar in the next three years because of increased demand.
Phelps Dodge is opening a new copper mine. It took 12 years of paper work to receive federal approval.
In China:
Company: “We found copper.”
Government: “Start digging. What can we do to help?”
Company: “We need a road.”
Government: “You got it.”
China’s growing at 12%, the US at 2%. Money goes where it’s treated well.
Currently oil companies who search for oil at great risk earn 9 cents per gallon. The US Government, at no risk, takes 51 cents per gallon.
The political systems of G-7 are at a great disadvantage, stuck with unfunded liabilities and debt. Current politicians are unwilling to cut spending growth. The Chinese have a 30 percent savings rate and 1.4 trillion US dollars to purchase real assets.
Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.
I believe we are only at the start of the largest bull market in history for raw materials.
By the end of this bull market, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a coal mine in Al Gore’s yard.
As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.
Clyde C. Harrison
Brookshire Raw Materials
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Tokyo, Japan
Jim Rogers - co-founder of the Quantum Fund with George Soros, just told 750 global fund managers that, America is “completely out of control”. He also says we are looking at a 20-year bull market in commodities, in addition to claiming that it “made sense” if global competition for resources ended in armed conflict.
Mr Rogers told delegates to the CLSA investment forum that the prices of all agricultural products would “explode” in coming years and that the price of gold, which hit an all-time high of $964 an ounce yesterday, will continue its surge to as much as $3,500 an ounce.
Analyst Christopher Wood told fund managers that gold would continue to rise because, “because it is the exact opposite of a structured finance product”.
In a blistering attack on US monetary policy and the “helicopter cash drop” responses of the Federal Reserve, Mr Rogers described the American dollar as a “terribly flawed currency”.
He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up the money-printing machines and run them until we run out of trees” had exposed America’s weakest point to her rivals and enemies.
The dollar may have declined recently, he added, “but you ain’t seen nothing yet”.
Talking to a room almost exclusively populated with Japan-focused equity investors, Mr Rogers recommended an immediate language course in Mandarin and a switch into commodities — the second-biggest market in the world behind foreign exchange.
Mr Rogers said that historic drains on wheat, corn and other soft commodity inventories have created market dynamics that could lead to severe food shortages.
The outlook over the next two decades would see prices of everything from cotton and sugar to lead and nickel “going through the roof”.
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Calpers to Boost Commodity Investments Through 2010
By Saijel Kishan
Feb. 28 (Bloomberg) — The California Public Employees’ Retirement System, the largest U.S. pension fund, may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records.
Calpers, which has about $240 billion in assets, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, spokesman Clark McKinley said. The Sacramento, California-based fund last year put $450 million into commodities, its first such investment.
The agreement is the fruit of Chief Investment Officer Russell Read’s efforts since joining in 2006 to boost returns by shifting funds into raw materials and markets such as China and India. Oil has soared above $100 a barrel, wheat breached $13 a bushel for the first time, and gold and platinum climbed to the highest ever since Calpers began investing in commodities.
“We plan on ramping up the program by hiring additional staff,” McKinley said by phone yesterday. “We are excited about commodities, which have performed exceptionally well for us.”
The fund’s commodity investments have so far tracked the Standard & Poor’s GSCI index of 24 commodities, which returned 10 percent this year, adding to a 33 percent gain in 2007. In comparison, the Standard & Poor’s 500 Index of stocks has fallen 6 percent in 2008, while U.S. Treasuries returned 2 percent, according to Merrill Lynch & Co. indexes.
20 Years of Growth
“Strength in commodity markets will be something we should see generally over the next 10 to 20 years,” Read, 44, said in an interview in April, a year after he moved to Calpers from Deutsche Asset Management. “The actual importance of the energy and materials sector we believe is going to explode.”
Investors from hedge funds to housewives have been putting their money into commodities such as gold, silver, copper, wheat and energy to help cover losses on stock investments and make up for historically low Treasury yields. Public pension plans in the U.S. hold on average about 81 percent of the funds they need for future retiree benefits, down from 100 percent in 2000, according to a study by Standard & Poor’s.
Money managers plan to boost investments in commodities over the next three years, according to a survey by Barclays Capital published in December. About half of the 150 investors surveyed in New York aimed to expand commodities to more than 10 percent of their total assets, up from less than a fifth of respondents in 2005, Barclays said.
Read’s Strategy
Calpers, under Read’s strategy to change the way it parcels out funds, said in December it planned to switch about 11 percent of its portfolio from stocks and bonds into assets including investments linked to inflation.
The fund, also facing pressure from state and local governments to boost returns, would reduce its fixed-income investments to 19 percent from 26 percent. The yield on the 30- year U.S. Treasury bond last month fell to the lowest since regular sales of the debt began in 1977.
The fund’s commodity program will come under the inflation- linked asset class, McKinley said. Calpers will decide on the proportion of assets invested in commodities “depending on market opportunities,” he added.
Calpers plans to allow its staff to actively manage some of the commodity investments this year, McKinley said
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aps_cctZFFP0
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BMO strategist Don Coxe is singing the praises of “the music of the metals markets,” whose final movement will be “the longest and loveliest performance of metals music in history.”
In his latest “Basic Points” report, BMO Commodity Portfolio Strategist Don Coxe declared “platinum is the current commodity star” as prices have soared due to South African power failures.
“Ominously, the South African government’s repeated failures to implement a program of strengthening the state-owned electricity system mean that such production cutbacks will last for years. At some point, the catalytic converter in a scrapped car could be worth more than the rest of the wreck,” Coxe asserted.
“Although gold stocks have not, as a group, performed as well as gold in recent months (largely because of perceived political risks), shares of many junior, speculative gold and/or silver companies have produced rich rewards for their backers,” he said. “It is paradoxical that the collective market value of the hundreds of gold exploration companies that trade in Canada, Britain and Australia has risen so sharply, while the value of the companies that collectively produce most of the world’s new-mined gold has increased so moderately.”
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