Gold and Energy Advisor: Gold, Oil & Energy Markets Investment Research
James DiGeorgia, Mr. Macro
- Chief Editor -
Mr. Macro
Geoff Garbacz, Mr. Micro
- Chief Strategist -
Mr. Micro
Dan Hassey, Mr. Retirement
- Senior Stock Analyst -
Mr. Retirement

Gold and Energy Advisor's Real Wealth

Real Wealth #151  02/11/2008



Panic in the Platinum Market, and Grim News About Our Oil Supply

 

Dear Subscribers,

 

If you haven't been paying attention in recent weeks, Platinum has been on fire. In fact, Platinum hit another record this morning: $1,920 per ounce.

 

If you bought platinum when I recommended it in the March 06 issue of GEA, you've made a whopping 81 percent profit in just 23 months.

 

The great news about last week's price action is this. The bullish conditions in platinum haven't played themselves out—far from it. In fact, prices are currently soaring from new forces in the market.

 

South Africa is the dominant global producer of platinum. Unlike gold and silver, platinum is only found in a few concentrated places on the globe—and South Africa has most of it. That's why this nation accounts for about 70 percent of global supply.

 

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However, South Africa's power grid is woefully inadequate. At best, there's barely enough electricity to go around. When glitches of any kind occur—such as the wet weather which is currently flooding its coal mines, and interrupting coal supply to the power plants—widespread power shortages happen.

 

The precious-metal mines in South Africa are enormous—some are miles deep. The temperatures at those depths would be unbearable if the mines didn't pump vast amounts of chilled air into the mines. Plus, most mining equipment is powered by electricity. (Gas-powered machines would fill the depths with toxic exhaust fumes.)

 

http://www.reuters.com/article/goldMktRpt/idUSL116890920080211

 

As a result, the mines are voracious consumers of electricity. Plus, if there's even a possibility of a power shortage, they have to suspend operations. They can't risk the power being cut off while workers are still deep underground.

 

That's why the country's platinum producers have shut down operations. Not all the mines are closed, but the list of shuttered ones includes some of the biggest sources of platinum.

 

This is bad news for platinum consumers (e.g., car manufacturers who use platinum for catalytic converters). But it's great news for us. South Africa's electrical problems are fundamental, and won't be solved any time soon.

 

But Wall Street analysts are missing the bigger picture. The acute supply pinch in platinum due to the South Africa's electrical problems is the easy explanation. There's a more difficult reality emerging.

 

I remain convinced that the Russians and the South African's will soon recognize or have already that by limiting the supply of platinum production into the market they may well be able to sell 50% the 35% and eventually just 20% of what they currently produce each year for the same net dollars. Like DeBeers manipulation of diamond supplies over the last century and OPEC, the two major platinum producers have the ability to drive prices much higher. This in a nutshell is the reasoning behind my platinum price target of $5,000!

 

Interestingly, electricity is also playing a role in the oil markets. And the news is coming from an unexpected source...

 

Despite Soaring Oil Prices,
Saudis Decide to Slash Oil Exports

 

In less than four years, oil has almost tripled in price. So you'd expect that oil producers would be eager to provide more oil to the markets.

 

That's true for some producers—but not Saudi Arabia, the world's largest.

 

The Saudis are going to significantly damage the world's oil markets. Surprisingly, it's not from a lack of production—they're actually trying to increase their output.

 

It's doubtful they'll succeed, though. Saudi production has been relatively flat for decades. In fact, due to declining output from aging fields, the Saudis have to increase production by 600,000 barrels per day each year, just to maintain current levels.

 

But even if they do increase production, world oil markets won't see any of it. It appears that Saudi Arabia will be selling less oil to the world in the coming years. Much less, in fact.

 

The effects on crude oil prices are obvious. The Saudis are the only major producer left with any spare capacity. Everybody else is already producing flat-out. Therefore, analysts are looking to the Saudis to increase production, export more oil, and bring oil prices down.

 

Apparently, the opposite is true.

 

Stupid Decisions and Damaging Outcomes

 

The Saudis have decided to become an industrial power—a global player in chemicals, plastics, and aluminum. They're doing this in a big way—among other things, they plan to have the world's largest chemical plants for producing sulfuric acid, phosphorus, and ammonium.

 

Not only that, they're also building new railroad systems, and several new seaports. And they're constructing a whole series of industrial cities from scratch, out in the middle of the desert.

 

So why is this stupid? Because these industries are all voracious consumers of electricity. And every single house, factory, and industrial plant they're building will be powered by oil.

 

Stupidity Straight from the King

 

The Saudis are already huge consumers of electricity. The government keeps its price abnormally low, to buy the population's loyalty. As a result, the average Saudi wastes huge amounts of electrical power.

 

The average Saudi leaves his air conditioning at full blast all the time, even when he's away on vacation. Almost two-thirds of the country's electricity goes toward air conditioning alone.

 

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As a result, the power grid is groaning under the pressure. Over the next seven years, six huge power plants will be added to the grid—adding 19,000 megawatts, which is about one-third the entire power capacity of Great Britain.

 

Power plants are usually powered by coal, natural gas, or nuclear energy. The Saudis have the world's fourth-largest supply of natural gas, so it seems a no-brainer to make the new plants gas-powered. But King Abdullah has decided that all these power plants will be powered by oil instead.

 

Oil will also power all the smelters, refineries, and other new industries the Saudis are building.

 

One aluminum smelter alone will devour
 over 700,000 barrels of crude oil per day.

 

The Saudis are already the world's biggest per-capita consumers of oil, using over 32 barrels per person each year. (US consumption is only 25 barrels per person.) Thanks to the new industrial boom, that number is poised to swell rapidly.

 

Seven years ago, of every 100 barrels of oil the Saudis produced, 16 barrels were consumed at home. Today, that number has risen to 22 barrels.

 

According to US Department of Energy forecasts, it won't be much longer before the Saudis are consuming one-third of their entire production.

 

Oil prices have retreated a bit in the last month or so. Nevertheless, it's clear that...

 

Oil Will Remain a Great Investment

 

Like any other market, the price of oil will fluctuate a bit. But long-term, a peak in gold prices, a spike as high as $150 an oil is very possible in the next 12-36 months. One catalyst that could send oil prices to this kind of peak in the short term would be a conflict with ExxonMobil n President Hugo Chavez.

 

This week the little socialist bully threatened to cut oil sales to the United States if ExxonMobil succeeds in getting billions of dollars in Venezuelan assets as compensation for expropriated oil fields. Basically, any court decision that prevents Chavez from looting corporate and private assets will be considered a provocation.

 

In his weekly radio and television show on Sunday, Chavez condemned the US oil giant "bandits" and "white-collar criminals", and said the clash with the company was "the tip of an iceberg that is economic war". This is the same rhetoric that Fidel Castro spewed when he nationalized foreign assets over 47 years ago.

 

Venezuela, one of the world's top 10 oil producers, is the fourth largest US supplier of foreign oil, with daily exports of some 1.3 million barrels.

Venezuela also depends heavily on its oil exports: it gets 90 percent of its export revenue from oil, and uses oil profits to fund half of the government budget. The United States is the market for half of its oil output.

Chavez has made threats to cut off the US supply before, but this threat comes after ExxonMobil, one of the world's four largest oil companies, won international court orders freezing up to 12 billion dollars in assets of Venezuela's state oil firm Petroleos de Venezuela (PDVSA).

 

The US oil giant filed the case after Chavez nationalized foreign oil operations in the Orinoco basin in 2007, including two ExxonMobil operations. The two sides failed to agree on compensation terms.

 

ExxonMobil said it had won court orders in London, the Netherlands and Netherlands Antilles freezing PDVSA assets in those jurisdictions.

A New York court has also frozen 300 million dollars worth of the state oil firm's assets.

 

Venezuela's Energy Minister Rafael Ramirez denied on Friday that any such freeze had taken place.

 

"Never again will they rob us, these ExxonMobil bandits, they are imperialist thieves, white-collar criminals, corruptors of governments, they supported the invasion of Iraq ... and they continue to support the genocide in Iraq," Chavez said on Sunday. Imagine Chavez is trying to steal tens of billions of dollars in private corporate assets and he's calling his victims crooks. 

 

"Well, I tell the US empire because it is the master -- keep it up, and you will see that we will not send a drop of oil to the US empire.

"If you really manage to freeze (the assets), if you do us damage, we are doing to cause damage too. We are no longer going to send oil to the United States."

If this "economic war" continued against Venezuela, "the price of oil will reach US$200 " a barrel, Chavez said.

 

"More than one country is ready to join us in this economic war. We are not going to be frightened, we are not going to be dissuaded," he said.

Meanwhile, Chavez is facing an increasingly uneasy population. Food shortages and a especially menacing dose of inflation is taking its toll on the Venezuelan Presidents popularity. Socialism it seems only can feed the masses as long as there are private assets to steal.

 

Petróleos de Venezuela, the national oil company, which Mr. Chávez has purged of his political opponents and reconfigured to finance social welfare projects. The company faces steeper borrowing costs after the price of its bonds plunged by 3 percent on Friday, to 66.75 cents on the dollar. If Chavez makes good on his threats we could see these and for that matter most of the Venezuelan corporate and government bond valuations plummet in value. The consequences for Chavez could include a military coup, if not the consequences to a shaky world financial market could be substantial. A sudden big loss in foreign investments in Venezuela could trigger a pretty severe backlash.

 

David Nichols and his weekend assessment of the gold market

 

If you haven't read the guest analyst column from my good friend David Nichols you should do so as quickly as possible. He's been amazing in his calls of calls short term movements. The thing you have to keep in mind is that our Gold & Energy Service is focused on the long term.

 

David Nichol's Factal Gold Report Feb 9, 2008

 

I don't try to play the wild swings up and down day to day in gold. David's Fractal Gold Report focuses on the futures, which is the absolutely the best way to trade the kinds of wild swings we're seeing in the precious metals markets — being able to accurately play the up and down swings can be enormously profitable.

 

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TIME TO RACK UP SOME SERIOUS PROFITS TRADING GOLD:                          David Nichols Fractal Gold Report is service up some astounding profits. Profits of 1,260% & 1,055% over the Last Year.... and Even an Incredible Profit of 805% in Just Two Months. I recommend this service to every serious subscriber looking to cash in on the coming BIG move in gold. It's an amazing service — James DiGeorgia

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We could very well see even more wild up and down moves n gold i.e. $200 up and down moves as it climbs to my target price of $2,500. Using the leverage futures offer could deliver the kinds of profits that will enable you a very posh retirement. It's why I recommend David's Fractal Gold Report so enthusiastically. The man knows what he's doing.

 

Best Wishes,

James DiGeorgia

Editor and Publisher

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