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Friday, 31 August 2012

The Effect of War on Silver

Posted on 11:32 by Unknown
Silver (PSLV, SLV) is one of the most thermally and electrically conductive materials on this world. Silver is also the best light reflecting element. Silver is being used for war equipment like aircraft and tank engines, automobiles,electrical connections, guns, torpedoes, radiator connections, rockets,warheads, submarines. In fact, silver is essential during wartime periods.

Silver-Investor.com points out:

"Notice that in a wartime period, silver use increases dramatically. In the nearly 63 years since that review was issued, no substitute has been found in nature for silver and its fantastic characteristics. Many revolutionary uses for silver were discovered as a consequence of war industry research, and what was true in 1942 is truer still today. A modern war machine MUST have silver to function at peak efficiency. Aerospace and jet aircraft technology could not exist without silver, nor could missiles and satellites. Countries which don't have adequate silver supplies are at serious strategic disadvantage in wartime, most likely to the point of being on the losing side."

It's no surprise that silver will go up during wartime.

The question is, how much will it go up?

First you need to understand that globally, the U.S. is the king in waging war (Figure 1). This is why I'll only focus on defense spending in the U.S.
Figure 1: Top 5 military spenders

The first big war started in 1860 and ended in 1865 (Civil War). Defense spending went up to 12% of GDP. The silver price went up dramatically from 1.292 $US/ounce to 2.939 $US/ounce. That's a 130% increase.

Next on, the two biggest World Wars of the 20th century were WWI and WWII. Defense spending during this wartime period similarly spiked upwards.

During WWI, we had a peak of 18% defense spending as a % of GDP. That caused the silver price to rise from 0.5 $US/ounce to 1.34 $US/ounce. That's a 170% increase. During WWII, which started in 1939 and ended in 1945, caused defense spending to go to 37% of GDP (Chart 2). As a result of this, the silver price went from 0.35 $US/ounce to 0.81 $US/ounce (Chart 1). That's a 130% increase.
(click to enlarge)
Chart 1: Silver Price During WWI and WWII
Chart 2: Defense Spending during WWI and WWII

After these three big wars, there hasn't been much activity other than the Vietnamese war from 1955 to 1975, which is of a much smaller magnitude (10 times smaller). To have a significant increase in the silver price though (specifically due to war), annual defense spending would need to at least go above 10% of GDP, or $US 1.5 trillion/annum.

Today, U.S. defense spending is at 6%, of which the war in Iraq and Afghanistan are the most costly. To date the U.S. already spent $US 1.4 trillion on these two wars. Liveleak is estimating the cost of the Iraq-Afghanistan war in the amount of $US 4 trillion. The Iraq-Afghanistan war is coming to an end though, as the U.S. has announced plans to reduce its presence in Iraq and Afghanistan.

The next significant war coming up would undoubtedly be the Iranian war, which could cost trillions of dollars. This war could start as early as in November 2012 as Michael Pento pointed out on his weekly Pento Portfolios Strategies update on 30 August 2012. Israel is likely to strike Iran's nuclear sites before the November elections. Trend forecasters like Gerald Celente have said just recently how this Iranian war could lead to the start of WWIII. The reason is that China and Russia are in support of Iran. China especially depends on oil imports from Iran (11% of Chinese oil is imported from Iran) and is defying the U.S. sanctions on Iran. These events have already create geopolitical tensions. In June 2012, the four countries: Syria, Russia, China and Iran were rallying troops along the Syrian coast, preparing for war-games in the Middle East. Today, several Iranian and Chinese warships/submarines are settled along the Syrian coast, ready to protect Assad's forces in Syria against any NATO intervention. Russia has already abandoned Syria to avoid getting caught up in the escalating crisis.

If this WWIII were to happen, the next significant spike in U.S. defense spending could eventually come to fruition. Investors can speculate on this outcome by buying Proshares Ultra Silver (AGQ).
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Posted in correlation, Iran, Israel, silver, War | No comments

Wednesday, 29 August 2012

Another Correlation: What is China's Real Growth Rate?

Posted on 11:13 by Unknown
In the last week of August, Marc Faber gave a signal that all is not well in China. He points out that the Chinese statistics of 7% growth are inflated to the upside. There is a big chance for a hard landing to come in China because many statistics point to a significant slowing of the Chinese economy. For example, in July, industrial production declined sharply (Chart 1).

Chart 1: China Industrial Production (yoy)
It is very important to know that commodity prices are completely dependent on the growth of China as China is the biggest consumer of commodities in the world. If for example, the U.S. slows down 10%, it would be completely meaningless and wouldn't have any influence on the price of commodities. The reason is that the U.S. GDP consists for 80% of services, which don't use any commodities (Figure 1), while China's GDP consists only for 44% of services (Figure 2). So all eyes should be on China for the commodity investor.

Figure 1: Composition of U.S. GDP
Figure 2: Composition of GDP
So what is the best way to find the real growth of China?

Find out in the full version of this article.
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Posted in China, consumption, correlation, electricity, gdp, production | No comments

Tuesday, 28 August 2012

Got Gold Report August 26: Gold/Silver moving upwards

Posted on 10:13 by Unknown
Got Gold Report has put out another report: http://www.youtube.com/watch?v=PjkDiavXLTg

Interesting to know is that the LCNS for gold is moving upwards again, indicating a higher price for gold (and silver) in the future.

Chart 1: Gold LCNS (Got Gold Report)


Silver is doing even better (Chart 2).

Chart 2: Silver LCNS (Got Gold Report)

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Posted in got gold report, LCNS, silver | No comments

Monday, 27 August 2012

Correlation: Australian Dollar Vs. Iron Ore

Posted on 09:26 by Unknown
Another correlation to add to our list:

Positive correlation between AUD/USD Vs. Iron Ore price.

=> http://brazilianbubble.com/chart-the-correlation-between-iron-ore-price-and-the-australian-dollar/

Very important correlation to trade on. If you see a disparity like this:


You can bet that either iron ore prices will go up, or the Australian dollar will go down. So you can just put your money in both bets, you always win.

Reasoning? If you bet the iron ore price goes up and you bet the Australian dollar goes down you will at least get it right for one of the two. It can't be that the gap widens in the correlation, the gap always narrows to the equilibrium point. If iron ore prices do go down, you will at least make money on the Australian dollar plunging.

I call this the power of trading on correlation disparity.
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Posted in AUD, Australian dollar, correlation, Iron, Iron ore | No comments

Sunday, 26 August 2012

Gold: Supply and Demand

Posted on 11:28 by Unknown
Just a note to myself. Eric Sprott has got supply and demand numbers for gold out:
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/24_Sprott_-_We_Are_Staring_At_Chaos_%26_Collapse_In_Front_Of_Us.html

Gold Supply = 4000 tons/annum
Gold Demand = 6500 tons/annum
Gold Lease = 2500 tons/annum

We'll just have to find out what these numbers mean...
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Posted in Demand, Eric, Gold, Sprott, supply | No comments

Keith Fitz-Gerald and Chris Martenson on Japan

Posted on 05:20 by Unknown
Keith Fitz-Gerald talks about Japan in this interview with Chris Martenson.



The problem in Japan is its enormous government debt, which is 250% of GDP. Its population is very old, 30% of the population is going to die by 2050 and there are very few newborns.

He expects the yen to fall due to these dire prospects (200 USD/yen), but notes that the only reason why the yen (and the dollar) are so strong these days is because these two currency markets are the only markets big enough to absorb all this safety haven liquidity (listen at 28:00). More so, Europe has been the event that made investors flee in Japan and the U.S., giving them a little more time to kick the can.
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Posted in Japan | No comments

Saturday, 25 August 2012

Euro Vs. USD: Take Two

Posted on 05:57 by Unknown
5 months after I wrote the article about the Euro Vs. the USD, it looks like the USD has won the match against the euro. Since April 2012, the euro has lost 5% against the USD. Let's look at what has changed in those months.

Following list gives the most important indicators for the future of a currency:
  • Current account balance of the country
  • Total national debt of the country
  • Inflation rate
  • Interest rate
If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy the currency. There is no incentive to save money. The consequence is a lower currency value.

Let's look at the current statistics:

1) Current account
5 months ago, the current account deficit of the US was in the order of $US 110 billion per quarter, which amounted to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

Today, the eurozone is posting a current account surplus of 14.9 billion euro in June, while the U.S. is increasing its quarterly deficits to $US 137 billion in the latest quarter.

So in this case, the eurozone is still the winner.

Europe VS USA: 1-0.
Euro Area Current Account (Million euro)


U.S. Current Account (Billion USD)
2) Total National Debt
Total US national debt is $US 16 trillion. Total eurozone national debt to GDP is 88.6%, the GDP is $US 17.578 trillion in 2011, which translates to $US 15.6 trillion in Eurozone debt. So again, Europe wins by a small margin.

Europe VS USA: 2-0

3) Inflation Rate
5 months ago, the inflation rate in the Eurozone was 2.6%, while the inflation rate in the U.S. was 2.9%. Today the inflation rate in the Eurozone is 2.4%, while the inflation rate in the U.S. is 1.4%. This is a significant and surprising decline in inflation rate in the U.S Vs. Europe.

Europe VS USA: 2-1.
Euro Area Inflation Rate
U.S. Inflation Rate


4) Interest Rate
5 months ago, the interest rate in the Eurozone was 1%, while the interest rate in the US was essentially zero. As we already know, Mario Draghi lowered interest rates to 0.75%, but this is still higher than the interest rate in the U.S. (0.25%). Europe VS USA: 3-1
Euro Area Interest Rate

U.S. Interest Rate
     

Conclusion: Europe still wins by 3-1 against the USA, but is losing ground through inflation. Though I think the current account surplus of Europe is the most important positive indicator of the strength of the euro in the future.

Read More
Posted in account, current, Debt, euro, gdp, inflation, Interest, rate, USD | No comments
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