Currency

The Soaring US Dollar!

Posted by David Chapman

on Friday, 3 October 2014 13:59

The US$ has been soaring. Since making a low in May 2014 just under 79 the US$ Index has jumped almost 9% to over 86. If the US$ is rising other currencies must be falling. The Euro has lost almost 10%, the Japanese Yen has fallen 7%, and, the British Pound has lost about 6%. Those three make up 57.6%, 13.6% and 11.9% respectively of the US$ Index. The Cdn$ makes up 9.1% of the US$ Index and has lost 5%. Oh yes, gold has fallen about 10% in the same period. Gold may not be a part of the US$ Index, but many consider it to be an alternative currency.

When one looks at a very long-term chart of the US$ Index it doesn’t appear as if the US$ is soaring. What it does show is that the US$ Index could be breaking out of seven point bottom pattern. The US$ Index has done this before. The last time was following the long 1987-1997 bottom pattern. The breakout occurred in February 1997 and had an objective up to 121. The high was made at 120.80 in January 2002.

chapman100214-1

The current long bottom has been forming since 2004. Once again, the breakout appears to be occurring ten years later. The

potential objective is up to 104.75. There is potential significant resistance at 92 based on the long downtrend line from the 1985 top that aligns with the 2002 top.

 

If this is correct it has potential negative ramifications for the currencies that make up the US$ Index and for gold. Gold has tended to top or bottom inversely to tops or bottoms for the US$ Index. The Volker squeeze of pushing interest rates to 20% got underway in December 1979. Gold topped in January 1980 at around $850. The Plaza Accord was formed in September 1985 in order to combat the sharp rise in the US$. Gold bottomed in February 1985 near $280.

The next most important event for the US$ was the Louvre Accord in February 1987. The Louvre Accord’s goal was to stabilize international currency markets and halt the sharp decline of the US$ at the time. Gold topped in December 1987 at around $500. The Reverse Plaza Accord of 1995 was to bail out the Japanese economy that was under extreme pressure because of a huge rise in the Japanese Yen. Gold topped in February 1996 at about $418.

Gold made its major bottom in February 2001 which was about a year before the top seen in the US$ Index in January 2002. There was no particular accord at the time but the Euro came into existence in 1999 but it wasn’t until 2002 that notes and coins began to circulate. The rise in the Euro coincided with a long decline for the US$. Gold topped in September 2011 not long after the US$ Index made what thus far is its final bottom in February 2011 near 73.

So what is driving the US$ to new heights? Well it is not so much a strong US$ but a weak Euro. The EU economy is showing signs of falling into a recession even as the US economy appears to be holding with low growth. Japan is also falling once again into recession. There has been constant chatter of the US raising interest rates. That is not the case in the EU where there are now negative interest rates nor in Japan where interest rates remain at record lows. Longer-term interest rates in the US remain above those in both the EU and Japan. Tensions in Ukraine between Russia and Ukraine are negatively impacting the EU because of sanctions placed on Russia. Tensions in the South China and East China seas between Japan and China are negatively impacting Japan.

Is this the scenario often outlined by Goldman Sachs and others that gold is to collapse to $1,050? It is possible. The EU and Japan are entering an important deflationary cycle and the US$ has become the major recipient. The concern in a deflationary cycle is insolvency. While US Treasuries have been the major beneficiary of the rush into US$ it is noteworthy that weaker credits are actually falling in value even as US Treasuries rise in value. There are numerous concerns of insolvency in the Euro zone and in Japan. Sanctions against Russia are triggering trade wars. As everyone supposedly learned during the Great Depression trade wars are a lose-lose situation. Maybe they didn’t really learn anything.

Debt is fine as long as it can be serviced. But the debt levels in the western economies has reached potentially catastrophic proportions. The US has a total debt to GDP ratio of about 350%. Officially reported US debt levels according the Federal Reserve Board is about $58 trillion against a GDP of $16.6 trillion. The US also has unfunded liabilities of about $116 trillion. Japan’s total debt to GDP is around 650%, the Euro zone is at 450% as is Great Britain. For all OECD countries, the total is north of 400%. Back in 1990, total debt to GDP for the OECD countries was generally no higher than 200%. It is with the debt where the seeds of the next collapse lie especially given low savings rates in most of the OECD countries.

While the US$ appears to be rallying now it could set up the next US$ collapse. The US$ is under attack from both China and Russia in particular. Gold is cheap right now but everyone is reminded that during the deflationary 1930’s gold rose both officially when FDR raised the price of gold in 1933 and gold stocks rose over 400% even as the Dow Jones Industrials (DJI) was losing almost 90%. Gold is driven by fear. Fear of monetary collapse. Right now it is the US$ that is benefitting but when the US$ turns as it has in the past in 1985 and 2002 gold prices rose sharply. The previous sharp rises for the US$ played out over five/six years. This time the cycle is liable to be considerably shorter given the growing pressure on the US$ from the sanctions against Russia.

According to Michael Kosares China believes that gold is the buy of the century (Michael J. Kosares – Why China thinks gold is the buy of the century – USA Gold Publications). China wants to hold as much gold reserves as the US holds. The US holds 8,133.5 metric tonnes of gold or 261.5 million ounces of gold. China has roughly $4 trillion of foreign reserves. China could buy all of the gold reserves of the US with gold at $1,225 for the small sum of $320 billion. That is apparently only about 8% of China’s foreign reserves. China could buy all of the central banks gold and use only 32% of its foreign reserves. All of the gold held in the ETF’s could be purchased by China with only 2% of its reserves. By these measurements gold would be appear to be a grossly undervalued asset.

The current rise in the US$ has been almost straight up with little or no correction. A violent up move could be met with a violent correction and possibly soon. How gold responds during that correction should be watched carefully.

 

CHART OF THE WEEK

Charts and commentary by David Chapman

26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557

david@davidchapman.com

dchapman@mgisecurities.com

www.davidchapman.com

The Fracking Revolution & Companies Poised to Gain

Posted by Oil and Gas Investor Editor Leslie Haines: The Energy Report

on Friday, 3 October 2014 13:30

We Will Never Stop Importing Oil, but We May Start Exporting

Screen Shot 2014-10-03 at 6.10.39 AMHorizontal drilling and fracking have opened new opportunities for investing in domestic energy, whether for pure-play explorers in developing shales, producers in mature areas, or service companies opening up the monster wells. Oil and Gas Investor Editor-in-Chief Leslie Haines has been following the revolution for nine years, and agreed to share with readers of The Energy Report the names of some beneficiaries of new technology’s multiplier effect.

Companies Below: Concho Resources: Emerge Energy Services: Hi-Crush Partners: Marathon Oil Corp.: Oasis Petroleum: Pioneer Natural Resources: Sanchez Energy: US Silica

 

The Energy Report: As editor-in-chief of Oil and Gas Investor, based in Houston, you follow the development of U.S. shale closely. Is the U.S. really on track to energy independence, or will depletion rates cut this boom short? What are the production numbers telling you?

Leslie Haines: I have been covering shale development since 2005, and it looks like we are on track for energy independence by 2020 or so. However, we’re never going to stop importing oil because supply diversity is prudent.

Depletion rates are significant in every shale play. Some of the depletion rates are quite steep in the early years of a play, but wells tend to produce for 20 years or so at a lower rate, so overall production rates are still growing.

Screen Shot 2014-10-03 at 6.18.14 AMThe monthly U.S. Energy Information Administration (EIA) reports show that in H1/14, U.S. gas natural production alone increased by more than 4 billion cubic feet a day (4 Bcf/d). The bulk is coming from the Northeast, from the Marcellus and Utica plays in Pennsylvania, Ohio and West Virginia. Also, a lot of new natural gas is coming on, in association with oil production in West Texas, in the Permian Basin, and in south Texas, in the Eagle Ford play. While some gas areas might be declining, we’re getting enough new natural gas to offset that decline. In fact, both oil and natural gas production in this country are the highest they’ve been in about 35 years.

 

Natural gas in storage was down last year, and now we’re refilling. Every summer and fall, you refill storage to prepare for winter. It looks like we’re going to have a lot of gas in storage. We’ve had a fairly mild summer and haven’t had a huge call for natural gas for air conditioning, compared to what it could have been. Between the production and the weather factors, it looks like we’ll have plenty of gas in storage for the fall.

 

TER: How will the development of monster wells, as they’re being called, impact that balance?

LH: When we say monster well, we are referring to an above-average initial flow. We’re seeing this happen in the Utica play in West Virginia and southern Ohio. Some very large dry-gas wells are being reported with initial flows of 20–25 million cubic feet of gas a day (20–25 MMcf/d). That’s a huge gas well by anybody’s measure. It is just one more example of U.S. production surging due to horizontal drilling and fracking. Those two techniques combined have revolutionized everything in this country and allowed us to recover a lot more of the underground reservoir.

TER: The techniques continue to develop as more environmentally friendly and efficient methods are discovered. What are some new techniques you are seeing?

LH: The size of the average frack is getting quite a bit bigger. It used to be that the horizontal leg might only go out 1,000–2,000 feet (1,000–2,000 ft). Now, it’s going out as far as 5,000–7,000 ft horizontally, so the well bore is exposed to more of the reservoir. The size of the fracks has also gotten bigger, with 20 or 30 frack stages along a lateral. That has increased production.

Screen Shot 2014-10-03 at 6.18.23 AMIn one basin, you may find the number of formations that can be tapped is quite numerous. In the Permian Basin of West Texas, for example, more than 5,000 vertical feet of pay can be tapped. If you sink three horizontal legs into that well, three different horizons can be fracked and produce from one well. It triples the effect of that well and acreage.

TER: What’s an example of a company taking advantage of that multiplier effect?

LH: Two good examples are Pioneer Natural Resources Co. (PXD:NYSE) and Concho Resources Inc. (CXO:NYSE) in the Permian Basin. Production is soaring. In fact, Pioneer is one of the companies that recently received special permission from the government to export a little bit of condensate as a test case. Pioneer is a very active proponent of exporting crude.

TER: Is the company testing price impact, or market demand, or something else?

LH: All of the above. The company is trying to prove to the government that we need to be able to export crude oil in addition to refined products like gasoline. It is very controversial.

TER: In the absence of exporting, are we producing too much? The EIA’s Weekly Natural Gas Storage Report showed 2,801 Bcf at the beginning of September. Is oversupply keeping the price of natural gas down?

LH: A lot of Wall Street analysts have reduced their outlooks for oil and gas pricing—and company earnings projections—through the rest of this year and into next year. For example, Bernstein Research just came out with a report in which it is bringing down its natural gas price estimate for 2015 from $4.50/thousand cubic feet ($4.50/Mcf) to $4/Mcf. It plans to leave the price there through 2016.

We are seeing such an incredible surge in supply of both oil and gas that producers, analysts and investors are starting to get a little bit worried. We had very high natural gas prices a few years ago, and then the surge of new production, combined with a mild winter, made the price of natural gas go right back down. At one point, natural gas was below $4/Mcf. It’s come back a little this year, but there is still quite a bit of concern.

TER: Are today’s prices less than what it costs to pull the oil out of the ground?

LH: Producers are still making money, but the prices for drilling and fracking are inching up because there’s so much demand for wells to be drilled and fracked.

TER: You sat on a panel at the Stansberry Society conference in Dallas with S&A Resource Report newsletter writer Matt Badiali earlier this year to talk about the future of shale. He divides the shales into mature (the Bakken and the Eagle Ford), and developing (the Tuscaloosa, Utica and Cline areas). Are investors rewarding companies with shale play diversity, or is it considered smarter to master one shale type?

LH: The stock market used to reward companies for diversity. Investors wanted to see a balance between oil and gas, and two, three or four different project areas. However, that has changed. Now investors favor pure-play companies. A company like Oasis Petroleum Inc. (OAS:NYSE), which is in just one play, the Bakken, has done very well in the last year.

Screen Shot 2014-10-03 at 6.18.31 AMSanchez Energy Corp. (SN:NYSE), which is in the Eagle Ford and Tuscaloosa Marine Shale, is not being rewarded for the Mississippi project yet. The Tuscaloosa play is still developing, and hasn’t proven to be economic yet. The company has some expensive wells with downhole technical challenges. The players in that area are still working on solving the geology. In the Eagle Ford, however, Sanchez is very experienced and successful. That part of its business is well recognized.

But, in general, I would say that diversity is not being rewarded in the market at this time. It’s better for companies to focus on two or three plays at the most, and in well-established areas like the Bakken, the Eagle Ford and the Marcellus.

TER: Are there still upside opportunities in the established shales?

LH: The Marcellus Formation is considered the second largest gas field in the world. Production keeps growing every quarter. It’s difficult for a company to get in there now. Most of the lease positions are already carved out. Companies have gone beyond finding the sweet spots, and are focusing on two things. One is how to drill a more efficient well faster, while reducing costs. The other is infrastructure. The Marcellus and Utica plays are constrained because there is not enough pipeline to get all the gas to market. A ton of midstream projects have been proposed and are underway. Billions of dollars are being spent to build pipeline infrastructure to move the gas not only to the population centers in the northeast, but also to eastern Canada. Some of the gas is going to be piped down to the petrochemical plants on the Gulf Coast. Some of the gas is even being piped to the West, to Chicago and beyond.

TER: This sounds like more of a manufacturing operation, now that companies don’t seem to be drilling dry holes anymore. Who are the main players?

LH: Companies like Cabot Oil & Gas Corp. (COG:NYSE), Range Resources Corp. (RRC:NYSE), Chesapeake Energy Corp. (CHK:NYSE), Petroleum Development Corp. (PETD:NASDAQ) and EQT Corp. (EQT:NYSE) are doing quite well in the Marcellus. The same thing is true in the Bakken, the Eagle Ford and the Permian Basin. Some 20 companies may drill a play, but a handful do most of the work. And they are the bigger companies.

TER: Do you envision mergers and acquisitions in that space, as some of these companies mature?

LH: It’s really about the play maturing. We see a similar pattern in every shale play. Companies decide that a play is relatively mature, and that they can make a higher return somewhere else. They put their assets on the market, sell to somebody else in that play or to a master limited partnership (MLP), and then redeploy their money into another play that might have a faster growth trajectory.

TER: What is a recent example of that?

LH: Marathon Oil Corp. (MRO:NYSE) sold its North Sea assets to redeploy more capital to the Eagle Ford, which has much higher returns.

TER: You wrote a September cover story on service and supply companies, which is one way investors are leveraging the oil and gas industry. Are margins increasing in that business?

LH: It looks like they’re about to, yes. Almost 1,900 rigs are drilling in this country at any given time. I’d say 90% of those wells will need to be fracked. That is an enormous demand for rig crews, frack crews and all the associated equipment and materials. Last year, about 17 million hydraulic horsepower was installed. The amount of horsepower available for fracking has probably doubled in the last five years. Everything is bigger, longer, higher pressure—more, more, more. Service companies have pricing power because there is such a frenzy of activity right now.

TER: There are many types of service companies. Is there one part of that industry that’s growing faster than the others?

LH: One bright spot is in companies that provide sand for fracking. They’ve been doing extremely well in the marketplace. Their stocks are way up, and they keep adding new capacity, to deliver yet more sand to the marketplace for fracking. The oil field service index, PHLX Oil Service Sector (OSX:NASDAQ), has risen steadily since January, and the hottest subsector seems to be the frack sand providers. Some of them have tripled in the past 12 months.

TER: What are some examples of solid frack sand providers?

LH: US Silica Holdings (SLCA:NYSE), Hi-Crush Partners LP (HCLP:NYSE) and Emerge Energy Services LP (EMES:NYSE) are three. Their revenues mirror the increase in drilling activity, which could be 14% in the next year. That is why analysts are telling us that it looks like profit margins have come off their lows, and service prices are starting to rise again.

TER: Thank you for taking the time to talk to us.

LH: Thank you.

Leslie Haines is editor-in-chief of Oil and Gas Investor magazine. She began her journalism career in 1980 in Williston, North Dakota, at the Williston Daily Herald. She was the energy and business reporter for the Midland Reporter-Telegram in Midland, Texas, in 1982 and 1983. She joined Hart Energy Publishing in Denver in late 1983 as a copy editor. Soon thereafter she began writing for Western Oil and Gas World. In 1985, she joined the staff of Oil and Gas Investormagazine. She was named managing editor two years later, and became editor in January 1992. In November 1992, the Independent Petroleum Association of America awarded Haines with the 2nd Annual Lloyd Unsell Award for Excellence in Petroleum Journalism. She is a former president of the Houston Producers’ Forum, and is on the board of the Houston Energy Finance Discussion Group.

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DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. She owns, or his family owns, shares of the following companies mentioned in this interview: None. 
2) Leslie Haines: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
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“Money Bubble” Part 1 – Stock Market Volatility Surges

Posted by John Rubino - DollarCollapse.com

on Friday, 3 October 2014 13:28

In The Money Bubble: What To Do Before It Pops, James Turk and I climb out on a some very long limbs with a series of extreme predictions. This series of posts will track the ones that are (or seem to be) working out, beginning with increasingly wild swings in US equities:

Chapter 26, page 294:
For a sense of how an over-indebted financial system enters a catastrophic collapse, imagine a spinning top. For a while after being set in motion, the top stays in one place, spinning smoothly. But then a slight wobble creeps into its rotation, gradually becoming more pronounced until it turns violent. The unstable top then shoots off in a random direction to crash against whatever is nearby. That’s how the financial markets will behave when the Money Bubble bursts.

As this is written in late 2013, our imagined top is spinning smoothly again after a huge, near-catastrophic wobble in 2008. With US stock prices at record highs, interest rates still historically low and daily fluctuations in major markets reasonably muted, all looks well. But soon, probably in 2014 but almost certainly by 2015, the fluctuations will begin to increase until the system spins out of control.

Now consider the US stock market over the past two weeks. The following table lists the daily fluctuations of the Dow Jones Industrial Average where in the space of ten trading days there have been seven triple-digit moves, for an average swing of 132 points. Mr. Market’s mood swings are getting more and more violent.

Stock-volatility-table-2014

A useful indicator of where the markets are in this process is the VIX index of volatility in the S&P 500 options market, which

predicts month-ahead fluctuations in the stock market. Figure 26.3 shows how placid the US stock market, as depicted by its low volatility, was while the housing bubble was inflating in the mid-2000s. But notice what happened in 2007 and early 2008: First came some wobbles, as the early indications of a bursting housing bubble hit the markets. Then in 2008 the bubble burst and the banking system began to implode. The markets were terrified and capital was pouring in and out (mostly out) of stocks and pretty much every other financial asset class, causing wild fluctuations. The VIX soared from 20 to 80 in a matter of months.

 

VIX-2005-2009

In late 2013 the top was once again spinning smoothly. But under the surface, all the imbalances that nearly destroyed the global financial system in 2008 were not only still resent, they were being amplified by governments around the world borrowing aggressively, printing, and intervening. By late 2013 the system was once again primed to start wobbling. Which means a spectacular trade is just waiting to be placed.

So the follow-on prediction is that today’s volatility, like that of 2007, will be resolved to the downside via a market crash and possibly a full-blown financial crisis sometime in the coming year. Stay tuned.

 

TheMoneyBubble-300x300

In 1324, Mansa Musa, the tenth emperor of the Mali Empire, set off from Western Africa on his pilgrimage to Mecca.

This was no Spartan journey. He was accompanied on his way by a procession of 60,000 men and 12,000 slaves, each of whom carried up to four pounds in gold bars.

Musa is might just have been the richest person of all time, with an accumulated wealth estimated at $400 billion valued in today’s increasingly worthless dollars.

But it wasn’t just kings and emperors who held gold. Gold has been the most widely-used medium of exchange in world history… across all points of the globe.

Ibn Battuta was a 14th century traveler and explorer whose famous grand adventure spanned 75,000 miles over the course of 24 years, much like Marco Polo’s.

Everywhere he traveled– North Africa, Middle East, Central Asia, India, Southeast Asia, China – gold was either the dominant currency or an easily accepted medium of exchange.

This barbarous relic has stood the test of time across cultures around the world for millennia as a form of wealth.

Most people in the West have completely lost sight of this.

They view the value of gold through the lens of paper currency, i.e. an ounce of gold is ‘worth’ 1,215 US dollars.

This is a deeply flawed perspective.

Looking at the gold price moving up and down in US dollars is something like sitting in a rowboat on choppy waters believing that it’s the beach that’s moving up and down.

Einstein might say that it’s all relative, but only one has any real stability.

But perspectives can and do change.

There once was a time when most people believed that the entire universe revolved around the Earth.

This was flawed (and arrogant) view, and it was eventually corrected.

Thinking that the global economy revolves around the US dollar is just as flawed and arrogant. And it will soon be discredited just the same.

History tells us that dominant monetary systems invariably have an expiration date.

From the Byzantine solidus to the British pound, this is especially true when a superpower enters into decline and plays destructive games with its currency.

Today’s system where an unelected central banking elite conjures trillions of dollars and euros out of thin air is no different. It has an expiration date too.

Change is never easy. People don’t like it, and will resist change even if their current situations are terrible. Inertia is the most powerful force in the universe after all.

Desirable or not, it’s happening. The US dollar’s days are numbered.

Now, gold, with its millennia-long history is making a comeback. We’re not just talking about it as a store of wealth or a speculation, but as a regular form of currency.

Moving us back in this direction, Singapore Exchange launched a new arrangement this week where institutional-sized gold contracts will settled not in cash, but in 1kg bars of gold.

This means that each of these contracts is intended to deliver and store gold in Singapore on behalf of large financial institutions, central banks, and even governments.

Sure, Singapore wants to advance itself as THE gold hub of Asia. We’ve been writing to our premium members about this for years

But more importantly, it’s quite telling that major insiders within the financial system itself are pursuing this contract.

They’re effectively setting up a new system, in Asia, to afford governments and central bankers the opportunity to trade in their US dollars for something real.

Just like yesterday’s post about the renminbi / euro convertibility, this is truly a canary in the coalmine moment for the future of the US dollar… as well as gold’s emerging role in the financial system of tomorrow.

  

 
Until tomorrow, 
Signature 
Simon Black 
Senior Editor, SovereignMan.com

Silver: “Buy when the blood is running in the streets”

Posted by Gary Christenson - The Deviant Investor

on Thursday, 2 October 2014 20:23

Gold to Silver Ratio – Sentiment

A disaster or an opportunity? Remember the admonitions:

  1. Buy when the blood is running in the streets.
  2. Buy when everyone is selling.
  3. Buy when nobody wants it.
  4. Buy low and sell high.

Consider these additional comments on current gold sentiment:

Hathaway continued: “The Ned Davis research index of gold sentiment is the lowest it’s been in 30 years of data. They have data going back to December 30, 1994. Their chart of sentiment right now is basically at zero.”

“The other thing worth mentioning is that Mark Hulbert’s gold sentiment index is now at the second-lowest level ever. Hulbert said, ‘There has only been one time in the last 30 years when the HGNSI got any lower than it is today. That came in June 2013 when it fell to minus 56. Today it’s at minus 46.9.’”

Examine the GSR for the past decade and compare the extremes in the ratio to the bottoms and tops in the price of silver.

1

The current GSR is approximately 70 – very high and the price of silver is at a 4.5 year low. I have circled other times when the ratio was either quite high or quite low.Those extreme readings usually marked highs or lows in the prices for silver and gold.

Other Ratios….continue reading HERE

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