The Sky's The Limit For Oil and Gold war peace money currency trade

Never has the threat of world war been more imminent than right now.
Most of the world's infrastructure continues to rely on outdated technology powered by oil and gas.
History proves no country is immune to the devastating effects war has on currency reevaluation.
This makes hard assets highly desirable - gold and oil being the two most coveted.  more demand means more liquid (easier to trade).

Take into account the widespread demand, as well as the scarcity of these commodities - and you have the perfect storm.

Still Bullish On Gold & Coal, Alpha Natural Resources ANR Seabridge Gold SA Undervalued Radar Stocks Commodities

Alpha Natural Resources nyse:ANR - I made the mistake of not recommending this stock in my last post.  ANR is up 15% since October 11th.  Though the company's balance sheet still needs some tweaking, it's already showing signs of improvement (good quick ratio (short term equity to debt ratio), quarterly earnings losses not as bad as they used to be, metallurgical coal market is picking up / ANR is the leading producer of this type).

A third of company revenue comes from outside the US where demand will continue to be strong (doesn't have to deal with the Environmental Protection Agency EPA).

On reserves alone, the company's valuation is in the billions.  In 2011 after acquiring Massey Coal, the company was worth more than $10 billion - it is now a measly $434 million.  So what went wrong ?  the debt it absorbed when it acquired Massey was substantial and just after making the deal the company was faced with a series of write-downs which took away its profitability and damaged its reputation.  Some of that stems from an overall decline in the coal price, but not all of it ;

Rumors of an Obama war on coal have been rampant but have yet to come to fruition - in some states coal is just too important to simply phase out.  ANR is a major producer of thermal coal (used in electricity generation) and it relies heavily on sales of this in states like Kentucky - Obama recently mandated a 30% cut in carbon emissions by fuel burning power plants by 2030.  The easiest way for the states to accomplish this is to completely overhaul the way power plants generate electricity in states like Kentucky where thermal coal is the number one source of electricity.

However, given that public opinion is against it (full implementation will cost a quarter of a million jobs) and that democrats have a strong interest in winning Kentucky, it seems unlikely that those radical changes will be implemented anytime soon.  Add to that the higher costs associated with using natural gas (9c per kWh) and renewables (23c per kWh vs 4c for coal) to make electricity and you have a lot of reasons to invest in undervalued coal stocks like ANR.

The Gold Price Fell 5.4% In September Then Another 4.6% In October = Down US $126 In Just 61 Days !  

It's not just equities and the dollar that are pressuring the price of gold.

gold: not as popular among hedge funds

Total holdings by gold exchange traded funds (ETP) is now at the lowest level since 2009.
SPDR Gold Trust GLD is the largest physically backed gold ETF (two-fifths of industry holdings) - SPDR net holdings are at their lowest level since 2008.

It doesn't matter whether it's for jewellery or bullion, gold demand worldwide has been down for the better part of this year.
In the first and second quarters it was probably the price that turned consumers off (remained in a tight range between $1250 and $1310 after hitting $1385 in late March 2014), and with currencies such as the Indian Rupee and Canadian Dollar nearing four year lows against the greenback, the price may have just been too high.  In Q1 demand fell -26%, Q2 -16%.

A Reason To Be Bullish - India

The Indian festival of Diwali is a big reason India is the world's largest market for gold (#2 in 2013 but #1 in 2Q2014).  Last year, demand for gold during Diwali was down -33%, but this year jewelry sales are up +20% !

2014 Diwali : the price for 10 grams of gold averaged 27.5th rupees which is 15% less than in the previous year (32.5th).

Gold Price In US Dollars                                        
sept 2013 1392.25 -> 1326.50  -4.7%         sept 2014 1286.50 -> 1216.50 -5.4%
oct   2013 1290.75 -> 1324.00 +2.6%         oct  2014 1216.50 -> 1160.40 -4.6%

I'm Still Bullish

Though recent trends point to a bear market I remain somewhat bullish, at least for the long run.  US dollar, though up has been unsteady.  It appears to be stronger versus the key reserve currencies yuan, yen, Canadian $, Australian $, Euro, but I don't consider the current level to be sustainable.
US economic growth forecasts remain subdued, the effects of a strong dollar can wreak havoc on exports of US products since prices get more expensive in other currencies (why China has long maintained a low yuan policy).  Also, less exports tip the US trade imbalance even more in China's favor - this will stunt jobs growth as companies would rather pay employees in a cheaper currency. With QE3 down to only $15 billion a month from a high of $85 billion a year ago, any growth the US experienced earlier this year could disappear just as quickly as it appeared (less stimulus / harder for small businesses to borrow).

Coal: US, China take different position on coal, Israeli technology making waves in China

Thanks to increasingly hostile coal related US environmental regulation and an oversupply of coal in Asia as well as low natural gas prices, coal prices are near rock bottom. These factors have worked together to not only affect the price of coal but also demand from one of its main customers, utility plants; Traditionally over 45%, coal's share of power generation was at 39% in November 2011, the lowest level since March 1978. What's worrisome about that drop is this, the other main sources of popwer generation were all up (natural gas 22%-->26%, nuclear 20%-->22%, hydro 6%-->7%). What this also suggests is that the growth in renewables ARE NOT making any meaningful contribution to overall production (unsurprising given that their associated total costs of production exceed 20c per kWh, that compares to under 4c/kWh for coal) - not much incentive to shift over if you ask me.

Some are suggesting that it's the low price of natural gas that's causing companies to abandon coal but I say not so fast ! Even with the 49% drop in price (gas) between January and April 2012, per kWh gas there's still not much difference in cost when choosing it over coal. In Canada analysts expect natural gas prices to more than double over the next 1-2 years which would certainly take away any price incentive fueling the shift from coal to gas. (from $2.1/mmBTU April 22 --> $4.5 by 2014); Also keep in mind that while analysts almost unanimously agree that the price of natural gas will rise, the same can't be said of coal.
Natural gas averaged $4.00/mmBTU in 2011 but ended the year at only $2.75, it then fell further down to $1.40/mmBTU by April 19, 2012. Also to consider: The outlook for coal prices is not as good as it is for natural gas.

Greater access to cheap energy is something the United States should be striving for. Cheap energy has become the cornerstone to China's growth model. China's long term demand for coal is growing at around 5-8%/yr meaning that demand from that country will double within a decade (in 2010 China accounted for 48% of global thermal/metallurgical coal demand). Non-OECD Asian countries will account for 95% of the 55% global rise in coal demand by 2035. That trend is in stark contrast to the United States where demand for thermal coal is expected to drop by 5% to 884 million tons (lowest level in 17 years) and where 106 coal-fired plants have shut down in just the last two years directly translating into a 13% loss in terms of MW capacity). Thermal coal accounts for about 60% of US-China coal exports. The major drawback to China's reliance on cheap, nonrenwable energy sources? Well for starters, it is home to 16 of the world's 20 most polluted cities.
Though US coal exports were up +31.3% in 2011 to 107,258,561 tons total US coal production was up only +0.9% to 1,094,336,000 tons. Major contributors to that change were Latvia (142-->163 thousand tons), Japan (3164,098-->6911,539 tons) South Korea (5722,599-->10448,751 tons), India (2722,677-->4500,105 tons), Netherlands (7306,376-->10785,421 tons). Demand from Canada was down -40.0% to 6845,316 tons (in 2010 Canada lone demanded more than all of South America but because of changes in 2011, Brazil now demands about 1.8Mt more than Canada.

Israel and China

Although many renewable sources of energy require technology that's very expensive to build and with less desirable results, a new form of clean energy with relatively low operating costs (1c/kWh) is one that harnesses energy from naturally occurring sea waves. The production costs being only a quarter as much as it is for wind or solar, have attracted Chinese investors keen on bringing it to China. In 2010 the first of a number of Chinese sea wave plants was constructed in Guangzhou by Israeli company SDE. Though it has a capacity of only 1MW it ushers in the first of many such plants (Guangzhou alone will be home to 10000 MW capacity by the time the project is completed).

Facts

-Rock bottom shipping prices (freight) is making it easier for US coal producers to access Asian markets; In 2012 US coal exports to China are expected to double to 12M tonnes.
-Today, freight from the US Gulf of Mexico to China is around $50/tonnes, that compares to the bid price for coal of $102-104.

Risks Assosicated With Gold Exchange Traded Funds & The Benefits of Direct Ownership (physical gold)

   Gold ETF's are index traded commodity funds with a total net worth that's tied to the value of its holdings of physical gold (for example SPDR's (ETF) market value on August 26 was $75.07B about the same as the total value of its 39.6M ounces of gold). The physical gold is stored in vaults/warehouses operated either by groups of institutions (London Precious Metals Clearing Limited made up of six entities) or individual ones that have been granted a vault license (as in the case with JP Morgan). Shares are issued, giving individual private investors exposure to commodity price movements. In general, ETF's have low tax costs in addition to other cost efficiencies, making them increasingly popular among investors. The first successful ETF ever launched was the Toronto Index Participation Shares (tracked the TSX exchange's 35 biggest stocks) which began trading in 1990.

Gold exchange-traded funds trade on stock exchanges like any other fund however their portfolio consists of only one asset, physical gold. Two of the most actively traded American ones are IShares COMEX Gold Trust (IAU, large cap) and SPDR Gold Trust (GLD, one of the largest in the world, started in 2004). Jewelry is also an important source of the physical gold supply, in 2007 it accounted for 25% of total supply. In terms of bullion, Kruggerands issued since 1967 and gold bars (some vaults require the stored bars to be a specific size, usually between 350 and 400 ounces) have traditionally been the most widely used. Alternatively, gold mutual funds aren't as dependent on physical gold; Their asset types include a range of gold stocks/companies (gold companies, for the most part have wide profit margins, making them attractive to all types of investors).

In many cases Gold ETF's have management and accountability issues. Since their early beginnings, there has been substantial growth in the size of Gold ETF's (10 largest American ones hold about 2,200 tons (2,000 tonnes/70.4M ounces) of pure gold in the form of bullion bars, other countries like China have launched their own gold trading platforms). (China's Gold Intake:like Sending Oil to Saudis) making the accountability issue an even greater concern. There is also growing angst over just how much gold is actually in the world's vaults; in March 2008 90 kg of fake gold was discovered in the vaults of Ethiopia's National Bank (replaced with gold plated steel), that happened even though gold sold to the central bank is required to undergo certification by the Geological Survey. (BBC News: Fake fears over Ethiopia's gold) In Europe, gold plated Tungsten was found at Germany's largest private gold refinery, though alarming that doesn't necessarily mean the government certified any of it.

There's also risk in the US where SPDR, the world's biggest physically-backed gold trust states in its list of risk factors:
"Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust." and "Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss."

Owning physical gold eliminates those risks, removing concerns regarding delivery of the asset however the new costs makes it much more expensive to do especially if you're in it as a short term investor (dealer fees can range from a couple dollars to more than ten dollars an ounce over spot, ensuring secure storage of the physical asset is costly as well as time consuming).

Countries are taking more interest in gold; 10% of all foreign exchange reserves are in gold. (World Gold Council) South Korea purchased 25 tonnes of gold in the summer of 2011 for $1.24 billion, making its total reserves 17 times larger (39.4 tonnes) and ranking 45th among all countries. In 2011 Russia (41.8 tonnes), Thailand (9.3 tonnes) and Mexico (99.2 tonnes) also increased their reserves of gold. China's massive holdings only equal about 1.6% of their currency reserves. (S Korea buys gold as safe haven, first time since '98)

Because the prices of gold ETF's is more closely linked to the price of gold than other investment options (individual mining companies, mutual funds), risk also comes from spot price volatility (some companies actually hedge against that by fixing the price at which they agree to sell their gold in the near future). There is also slightly more risk than with mutual funds because like stocks, ETF's trade all day long (like their underlying commodities which also vary in price throughout the day, for mutual funds trading in the underlying stocks ends at the conclusion of the trading day and so they do as well).

Some other notes:
-If any widely used currency ever failed a new gold standard could be implemented as a temporary fix until the situation is resolved.
-Tungsten has nearly the same density as gold but differs in its color and hardness. Thermal conduction of gold (atomic number 79) is about two times that of tungsten (atomic number 74), the ratio of boiling points is also two.

Trends In The Gold to Silver Ratio Point To Lower Ratio In Bull Markets (gold & silver standard)

   The gold to silver ratio was 16 in 1980 when silver reached $50/oz but it was only there momentarily, for most of the next two decades it was over 65 (when gold ranged in price from $250 to $500), between 2000 and 2003 it was 60 to 80 before falling to 47 to 55 in 2005-2008 which is notable since that coincided with gold's rise from $425/oz to $1000/oz. In the ensuing years (2008-2010) the ratio nudged higher, remaining between 50 and 70 at the same time gold went from $800/oz to $1250-$1300 per ounce (about 4X greater than it was during any of the previous 25 years);

However following that period the ratio experienced one of its biggest declines to date going from 70 in February 2010 to 33 in April 2011, subsequently gold broke into new territory, gold was $1540/oz in April 2011 when silver reached $49/oz (end of month) signifying that over the long term, the ratio decreases when gold prices reach higher support levels. In February 2011 in the midst of a commodities bull market the gold:silver ratio reached its lowest level in 13 years,

Meanwhile gold reached parity with platinum on August 8, 2011, an unusual occurrence but not surprising given that concerns over platinum demand coincided with gold investment peaking due to economic uncertainty. Prior to that, the 20 year high was 0.93, attained in October 1992. Platinum was worth 24% more than gold at the start of 2011, by August 23, 2011 the difference fell to only 1.8% even though Jan-Aug platinum production was 12X less than gold production. (Long-Term Decline In Gold/Silver Ratio To Favor Silver) 2nd Graph: Gold to Platinum Ratio 2007-2011

The gold to silver ratio averaged 59 from 1976 through February 2011 but the average in the earlier years was much lower, the ratio average was 49.1 in the 1980's, 31.3 in the 1970's, 78.5 from 1990-1997 then 53.8 from 1998-2000; the current average of 44.5 (January through August 2011, update: as of Nov 19 the ratio is 53.2 which is about at the 1 year high of 54.24, average Jan-Nov is about 47) is still a lot higher than the 16:1 ratio that held up for more than 160 years from 1700 until the 1860's (was 16 during the US Coinage Act of 1873), in the 1930's was when things started to change but there was a new driving force there: China stopped using the silver standard spilling a lot of excess silver onto the open market, much more than industrial demand. In 19th century Britain, numismatically (coins were predominantly made of gold and silver) the gold to silver ratio was 14.29 as per the monetary law established in 1816 (20 schillings (silver) equaled 1 sovereign (gold). In France the ratio was set at 15.5 in 1803 the same ratio used the United States to determine the monetary relationship between gold and silver coins. Then, around 1870 the gold standard slowly replaced the gold-silver standard (silver was still used but fewer countries linked a coin's monetary value to the amount of silver it had (silver supply skyrocketed with higher US production rates while Germany and Scandanavian countries dumped silver onto the markets due to their abandonment of the silver standard). The ratio rose to a high of 30 by 1894. (Energy & Mining: The ratio gold and silver from 1800 to 1900)

Presently, the lower long term ratio has numerous causes: gold has few alternatives especially with regards to its biggest consumer (jewelery) and silver being much more affordable becomes a more attractive option. The price difference also makes silver a more attractive investment option (in January 2011 the US Mint recorded a one month silver coin sales record of 6.422 million ounces). Alternatively, the short term rise in the ratio is because the biggest investors in bullion (countries, banks, billionaires) favor gold and because a short term price correction always happens when silver rises too fast due to traders erring on the side of caution (if silver rises too fast traders begin to put more emphasis on technical data). In the year leading up to September 2010, gold soared 28% while silver grew only 4%, but in 2011 silver grew at a slightly faster pace showing once again that there's a time lag between silver and gold at the beginning of a commodities bull market. Production of silver is only about 9.5X greater than that of gold, another reason to consider the current price ratio of 43 to be too high.

Even Amidst Record Breaking Gold Prices, Not All Gold Investments Are Good Investments

On August 11, 2011 it was announced that four Ireland-based gold funds (London Aliquot Commodity, Agriculture, Precious Metals and Intelligent Portfolio Asset Allocation, operating under Castlestone Investments of London) will be terminated, with the parent company blaming the volatile economic environment since 2008 for their demise. (Gold and commodities bull run fails to avoid $50m funds' closure)

It is alleged that inconsistent financial returns have kept them from maintaining solvency on their own (they required consistent cash from the parent company); combined, they have allocated holdings worth $50 million (in gold stocks) which is relatively small but significant for its handful of investors. This comes a month after the Financial Services Authority used search warrants to conduct an investigation into Castestone's business, suggesting that mismanagement and other flawed business practices are to blame.

So you see, even in bulls markets where the one main factor influencing valuations (the price of gold) is skyrocketing, investors are not always guaranteed a safe haven for their money. Due dilligance is one of the most important aspects of investing. Funds closing during the gold rush is ludicrous however that doesn't mean every fund is going to experience gains of mammoth proportion: many gold stocks haven't risen much (so far) during the commodity boom (Gold related equity funds in Canada haven't experienced the type of rise one would expect, though some stocks like Yamana Gold are up, Yamana up over 13% in July); Some base metals stocks like Taseko Mines (copper) have declined at an out of control rate; reasons for that include a market still overrepresented by people skeptical of the West's approach to its debt problems, they remain unconvinced that the United States has avoided a future default. The government of Canada has also been a problem for many companies, in November 2010 it declined to grant Taseko Mines a key mine license citing environmental effets. (globeandmail: Gold-related equity funds left in bullion’s dust)

The funds account for 13% of Castlestone's total assets under management (total without the 4 funds is $330 million/£205 million).

In other news on the day (Thursday August 11, 2011):

Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later after buying them back at a different price) after it was rumored that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the EU's lack of authority to enforce it. Turkey has also curbed short selling.

Canada's trade deficit rises to $1.6 billion in June (all countries) or $5.2 billion with countries other than the United States (US-Canada trade surplus is at $3.63 billion down from $3.73 billion in May), making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June up 4.4%, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin. In May, Canada's trade deficit was only C$814 million (US$840 million).