It's All About Commodities, Jack!

When the Mogambo asked some of the greatest financial minds in the United States what the best investment for the next ten years would be, their answers were simple. Gold. Silver. Soybeans. Wheat. In other words…

I have been reminded that I have been somewhat remiss in pointing out the anomaly in the price of silver, and why that makes silver so undervalued that it is a screaming buy. But I was spared the trouble of getting up off of my fat butt to correct that mistake when I read an essay, "Copper, Oil, & Silver" by Jason Hommel.

He writes, "Not all commodities move up at the same time, so this means there is the opportunity to invest in those that have lagged behind, such as silver and/or copper. It is important to look at charts of ratios between commodities."

The first one out of his mouth is about silver! "In 1980, at the prior peak prices for both silver and oil, oil hit about $43/barrel, and silver hit $50/oz. In other words, an ounce of silver was worth more than a barrel of oil."

Even at the recent low prices of silver and oil "silver languished at $5/oz., and oil bottomed out at $10/barrel, maintaining the 2:1 ratio."

The upshot? "Using those high/low prices as guides, and given the price of oil today, silver should be somewhere between $30 to $60 per ounce! Either that, or oil should be worth between $7 and $14/barrel. But which is more realistic?"

Invest in Commodities: Silver. And Corn. And Soybeans. And . . .

His point: "If you are bullish on oil, you should invest in silver instead, because in the long run, silver will surely outperform oil prices as the ratios return to historic ratios of 2:1 or 1:1."

So silver, currently selling at seven bucks (and change) per ounce, should be, by historical precedent, selling at somewhere between $30 and $60 per freaking ounce, you say? Which works out to (at $7.30 per ounce) a gain of 411% and 822%? Wow! A home run! Let me at it! There are not many guarantees in this world, but the dead-bang certainty that silver will rise in price faster than the rate of inflation seems to be one of them!

Even by its rough historical average ratio of 16:1 against gold, it should be selling higher than twenty-five bucks an ounce right freaking now!

And don’t get me started on the shortage of physical silver in the world, or the blatant corruption and fraud that is apparently rampant on the COMEX exchange, which is so bullish for silver in its OWN right that you don’t even NEED any of this ratio-to-oil or ratio-to-gold crap! And so here is another Mogambo Tip O’ The Day (MTOTD), where I reach out my arm and put my hand on your shoulder, and look into your eyes and say, "Buy silver."

And then you say, "What the hell are you talking about? A minute ago you were telling me to buy corn. Now you are telling me to buy silver! I am confused and your smell is making it really unpleasant to be here!"

I smile at the reference to the olfactory sense, and make a mental note to put into your Permanent Record how you are a rude little bastard, which will make it harder for you to enroll in the Mogambo University, where everybody gets straight A’s by just sitting around bitching and whining about the idiots in charge of things, and how they are screwing it ALL up. But I smile inscrutably, and I look into your eyes, and say only, "Okay. Buy corn AND silver."

As you turn around to stomp out of the room in justified disgust, I suddenly grow angry at your insolence, and I grab your shoulder and spin you around, and start yelling into your face "And gold! And soybeans! And wheat! And pork! And manganese! The one underlying theme, in case you ain’t noticed, is commodities, Jack! Commodities! Now, go make a fortune in commodities and make us all proud of you!"

Invest in Commodities: The Cheapest Ever

And it is not just me, Mr. Fry and a lot of other people who have an opinion about this, but also Puru Saxena, who was asked specifically what he thought would be "the best investment for the next ten years?" Without missing a beat, we get the reply, "Commodities. Why have I chosen commodities out of all the assets? For the simple reason that in 2001, commodities were the cheapest they had ever been in the history or capitalism."

The cheapest they have ever been! Ever!

He continues, "Let us take a look at the most important commodity – oil. Over the past 35 years, there has not been a single major oil discovery anywhere in the world! Global production is peaking and there is no additional supply. Meanwhile, demand for oil continues to rise especially in the emerging world where populations are huge and per-capita consumption of oil is still extremely low. As global demand rises and supply remains tight, oil prices will continue to surge."

I jump to my feet and excitedly exclaim, "See? I told you that oil was going to keep going up!" As everyone appears irritated at my rude interruption, I hurriedly sit back down, chastised. Now that I am no longer "creating a disturbance," the class now learns that some commodities are already in a bull market, as "So far, industrial commodities such as metals and energy have done exceptionally well." The best part (from an investor’s perspective) and the worse part (from a consumer’s perspective) is that "agricultural commodities such as sugar, corn, wheat and orange juice haven’t gone up as much and are still close to their all-time lows adjusted for inflation."

Invest in Commodities: Our Old Friend Gold

But once again, our old friend gold is alluded to, as we read, "Furthermore, I expect gold and silver to outperform industrial metals over the coming years. We now live in an era where inflation is the norm. Fed Governor ‘Helicopter’ Bernanke comes to mind. Despite what the mainstream media says the ‘deflation threat’ is not a real concern, but only a smokescreen, which allows central bankers to continue printing more money for their own benefit. In today’s world, where paper currencies are only empty promises backed by nothing, I expect all of them to keep losing value against time-honored wealth – gold."

And speaking of gold, from BFIConsulting.com we learn, "The World Gold Council recently released supply-and-demand statistics for the first quarter of 2005. Demand for gold in the first three months of 2005 is up 32%, year-on-year. According to the Silver Institute, statistics for 2004 show that a boom in investor activity was largely responsible for a 36% rise in the silver price to 17-year highs."

Further, the Japanese are apparently lifting the bank deposit guarantee, and that "banks are in trouble in Japan, and the government is removing the safety net that protected Japanese deposit holders." BFI sees this as triggering "increased demand for precious metals."

And these BFI people are big believers in silver, as they note, "If the gold price doubled from current levels, it would be at all-time highs of $850 per ounce. However, if the silver price doubles from current levels, it would on be a one-third of all-time highs of $50." A third! Wow!

To add more urgency to their argument, they note, "Silver production has not been able to keep pace with demand for 16 straight years. The result is a dwindling of above-ground supplies to alarmingly low levels."

Perhaps in a similar commodities vein, George Ure at Urban Survival got a letter that said, "Just a note to update you on my conversation with a longshoreman from the Port of Seattle last night.

"The ratio of full (30%) vs. empty (70%) cargo ships leaving the US has stayed the same. We are still buying more than selling (except for scrap and food). What is more important is that beginning in June this year, when the cargo trade usually starts to significantly increase at a seasonal level, trade is slowing. This year, cargo ships are not coming into the port as they did in past years and the work load has been down for those on the docks."

So, if the workload on the docks is down, then that means there is less stuff going to retailers, which means that retailers are not buying as much stuff, which means that consumers are not buying as much stuff. Hey! I thought the economy was supposed to be booming!

The longshoreman said they are the first to know of an upturn or downturn in business. They are now saying that with the downturn of imports, a slowdown in the economy "could happen in 6 months or less." Then they also bring up a little history. "If you remember, last year," they said, "the ships were coming in so fast that a waiting line occurred at all the West Coast ports. That line is not happening this year."

Regards,

The Mogambo Guru
for The Daily Reckoning

August 08, 2005

The Mogambo Sez: This is a dangerous market to go short, as there is something so manipulative about it. I am pretty sure that it has something to do with Alan Greenspan, John Snow and that whole idiotic, war-mongering Bush administration, which could be properly characterized as Comanche, which other Indian tribes defined as "Somebody who wants to fight me all the time."

And although I do not know where all the money went, in the first 29 days of July alone , the national debt went up by $60 billion dollars! More than two freaking billion dollars a day!

If you don’t think that this is a reason to buy gold and silver, then nothing is.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

We came to this little town on the edge of Lake Nicaragua because we were hungry.So we came to the seaside shack of an enormously fat woman named Ena.

The morning was spent the morning on ATVs – 4 wheel drive runabouts the size of a jet-ski – exploring what is coming to be known as the Pacific Riviera.The name is hopeful thinking on the part of the local developers; so far, there’s not much that is like the French Riviera here.In natural beauty, this area easily surpasses the Mediterranean coast in France or Italy.It is more dramatic – with higher hills, steeper cliffs, bigger coves, and wider beaches.In climate, too, this area has an edge over its Old World namesake; it is always warm and usually sunny here.There are no cold winds in winter because there is no winter.Just a rainy season and a dry one.We are in the rainy season now.Still, the sun usually shines much of the time, as it did yesterday.

Where the area falls short of the real Riviera is not in the works of nature but those of man.Men have been here for a very long time – at least since the there have been men in the Americas, which is to say, at least 10,000 years.But for the first 9,500 years, the men who lived here did little more than graze off the natural fruits of the earth.It was only after the arrival of the Spanish conquistadors that they began to build what we call civilized culture…and only in the last 3 years that such building has reached the southwestern coast – that part of the country now known as the ‘Pacific Riviera’ — in substantial form.

What brought modern civilization to the coast – and here we write as much in apology as pride – was your own editor.More than a quarter of a century earlier he put balls in motion.He had no idea that they would end up rolling over a primitive section of Latin American.But that is what happens.One thing leads to another, and before you know it, you’re no longer a young man…and you find yourself in places you never expected to go.

One of the places we never expected to go was Dona Ena’s on the lake.Dona Ena’s restaurant is the sort of place for which the word ‘unpretentious’ seems like flattery.It is housed in the sort of building you might keep chickens – if you were lazy.It is like a chicken house on a derelict farm.Made of planks and rusty tin, the whole thing is surrounded by a heavy wire mesh – either to hold it up or keep patrons from leaving.Light shines through the holes in the tin roof, itself held up by patched up pieces of wood that looked as though they had been recycled from a previous chicken house.

The restaurant is known locally as ‘Balliena’s’ [check spelling…whale in spanish].Dona Ena does not appreciate the name.How she got it is part of local lore.An American tourist is said to have taken his leave of the restaurant by saying, ‘Bye, Ena.’At this, the other diners burst out laughing.‘Balliena’ means ‘whale’ in Spanish.Ever since, people have called the place ‘Balliena’s.’

Yesterday, we sat at Balliena’s, looking out, through the wire, at the beach.A few people were swimming.One young man kept driving his bicycle into the waves.Standing in waist-deep water, he repeatedly tried to fix the handlebars.

"He must be drunk," said one of our group.

"No, he’s just crazy," said another.

Cars drove on the sand.One of them raced along and then suddenly spun around, as though practicing for a police movie.A beachcomber with a white beard picked up pieces of trash…a group of European tourists stopped to have their photos taken.

We only mention the scene at Dona Ena’s because it brought on a new thought.We’re determined to think new thoughts in this fine Fin de Bubble summer.Not that we no longer liked the old ones; we just thought it was time to try something new.So, we try the new thoughts as though we were trying on news clothes; we just want to see how they look on us.

A new thought arose when we sat down at Ena’s.At least, we thought it was a new thought; it turned out to be an old one:

‘What a monumental humbug it all is,’ we thought to ourselves.The ‘all’ referred to the urge that brought civilization to Nicaragua in the first place, and development to the Pacific Riviera.A few years, there was nothing in the area – just a few fishing huts and shacks.Now, people are building expensive house; bars and restaurants are opening up.In one restaurant, on the site of a farmhouse that was washed away by a tidal wave in the 1990s, you can now dine on lobster, served with wines that came all the way from the other Riviera.

All this development plays a vital role in the world of money that we describe in these daily reckonings; it allows some to get and more to get rid of.

More news, from our Editor-in-Chief…

————–

Addison Wiggin, reporting from Baltimore…

"A recession is a retreat, a decline in GDP, employment, and trade. People think of such economic forces in terms of lost jobs; only one aspect of the bigger picture. Just as recession has an expanded meaning, so does recovery."

For the rest of this story, see The Daily Reckoning’s site:

————–

Bill Bonner, with more views:

*** "Money really is a burden," we remarked to a colleague as we were having lunch at Dona Ena’s."But not in the way people think.It’s not a burden because you have to work so hard to hold onto it.It’s a burden because you have to work so hard to spend it."

People spend much of their lives trying to make money…and much of the rest of it trying to get rid of it.Somehow, the money has to disappear.No man can take it with him.And nature hates exceptions.As a man make an exceptional amount of money (which is to say, more than an ordinary man), he must then find a way to return it whence it came.So, when a man gets some of it, the money comes with ideas attached.He begins to think he needs to learn to play golf…or distinguish a cheap wine from an expensive one.When he dines out, he can no longer duck into a local dive; now he has to consult the Michelin guide…and read reviews.

We recalled a meal taken recently at one of Paris’s finest restaurant – Lucas Carton on the Place de la Madeleine.It was not a bad meal; maybe a little prissy.But we had to read the guidebooks to find it…reserve well in advance…find a parking garage…and pay $300 a head for the meal.Here on the shores of Lake Nicaragua, by contrast, we drove up and sat down.Dona Ena rocked herself forward in her chair, once…twice…and when she had built up enough forward momentum she managed to rise onto her two legs.There was no menu; there was no need for one.She serves only beef…straight.After a brief wait, out came a platter of meat that looked as though it were destined to feed a busload of sumo wrestlers.But we were the only diners in the place.

The only condiment was salt.And for drinks, you could have beer or coca-cola.We had to shoo away the flies as we ate.But we can’t remember enjoying any meal more…nor paying so little for one.

*** More from our old friend, Martin Spring:

"Did you see that General Motors, whose bonds are on the verge being classed as "junk," now has to pay more than $5 billion a year for the healthcare costs of its retired employees? In addition the three Detroit carmakers, under commitments to the labour union made decades ago, have to pay about $1 billion a year to redundant workers on full pay and benefits. No wonder they’re having such difficulty competing with the relatively new union-free Japanese plants down south.

"Who were more stupid – the executives who originally agreed to such crippling burdens, or the labour leaders who demanded them? The consequences for the auto companies, their owners, their workers and their pensioners could be financially catastrophic unless these commitments are radically restructured, and soon."