Watching the "Decline Curve"

February 10, 2012

• How the “decline curve” could prove the shale naysayers wrong... and put money in your pocket
• A stock market first in 2012? An event our small-cap specialist can’t wait to get out of the way...
• What ordinary Chinese value more than furniture, appliances, even food and clothing
• A plea about the gold standard... more about $650 car payments... an ideal alternative investment... and more!

Decline rates.

Seriously.

There are not very many people outside the “Peak Oil” crowd who care — heck, even know — what “decline rates” are.

Yet the “story that isn’t being told” is often where you find the best investment narratives.

“At first,” our resident energy enthusiast kicks us off with just such a tale, “the conservative approach was to estimate that the Marcellus wells would be productive for about two-three years and then the decline curve would kick in.”

“Now, after three years of testing in some areas, that window is more like five years.”

After five years? Many operators will go back and refrack the wells. Those five-year wells might become 10-year wells.

Or 15.

“We’re finally making history,” Byron King goes on. “We’ll look back on 2012 as the best year for the energy business in Pennsylvania since Col. Drake drilled his first well. before the Civil War.”

Full disclosure: We’re still skeptical about the big claims Byron makes in his “Re-Made in America” forecast. Can a domestic energy boom really overcome decades of debt racked up at the local, state and federal levels? As with any functioning relationship, we keep an open mind.

And examine the evidence...

After 20 years of sinking deeper and deeper into dependence on foreign oil, the United States reversed that trend last year.

“Domestic oil output is the highest in eight years,” reports Bloomberg, after crunching the numbers from the Department of Energy. “The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal.

“The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.”

Ahem.

Let’s examine the numbers:

• U.S. energy self-sufficiency bottomed in 2005 at 70%. Now it’s 81%
• Domestic crude production reached 5.7 million barrels a day last year — the highest since 2003
• Natural gas output grew 10.9% between 2007-10.

“We’ve had large-scale drilling in Pennsylvania only over the past three years or so,” says Byron, putting some flesh on the bones of that last statistic. After a laborious process of leasing land, seismic work, permits, drilling the wells, testing the wells, hooking the wells up to pipelines.

“We’re finally — year 2012 — at that point where literally hundreds of new wells are coming online,” Byron says. “It’s part and parcel of the national ‘gas glut’ that’s contributing to historically low pricing — and keeping your winter heating bills down, to boot.”

Lying beneath the Marcellus is another shale bed that’s even bigger — Utica.

“This Marcellus-Utica play isn’t just big,” says Byron. “It’s massive. It’s immensely productive. It’s not some flash in the pan. It’ll last for decades, and I mean MANY decades. And that’s just in Pennsylvania, Ohio and West Virginia.

“Are there other shale plays elsewhere in the U.S.? Of course. It’s part of the rebirth of the U.S. energy industry. It’s going to change the nation, and in a very good way, I suspect.”

Already these plays are putting big money in the pockets of ordinary people — like a sheriff’s deputy in Louisiana who collected a $320,000 payday in one week. You can grab your own share of this new wealth, says Byron, but it’s best to move on it before May.

Byron lays out his case here.

[Ed note: Hmnn. We’re considering placing a wager on whether he’s right or not. But what should we wager? Send us your suggestions here.]

Major U.S. stock indexes opened down 1% this morning... and have stayed there as of this writing.

Remarkably, “If the S&P maintains its downward direction into the close,” says Greg Guenthner of our small-cap desk, “we could finally see the index’s first 1%-plus loss of 2012.”

So what does this mean?

“Well, nothing really,” Greg goes on. “I’m labeling the phenomenon as a minor irregularity. I would guess that the market’s trading range has tightened for the past six weeks due to investor uncertainty coming out of last year’s correction.”

“More than anything, I’d just like to see the market get the loss out of the way — mainly so people will stop yapping over its supposed significance.”

In search of a ready explanation, the financial media have latched onto the latest budget agreement in Greece falling apart. Which is peculiar, seeing as the market didn’t rally yesterday when the agreement was first announced...

The U.S. trade deficit widened in December to $48.8 billion — the highest in six months, according to the Commerce Department.

Exports grew, but imports grew more.

Precious metals are set to end the week lower than they began. At last check, the spot price of gold was down to $1,710. Silver’s been knocked back to $33.40

As of Monday, CME Group is lowering margin requirements for gold, silver, platinum and copper futures.

Year-end figures of Hong Kong’s gold shipments to mainland China are in... and they’re jaw-dropping.

Despite a sharp drop in December, the year-over-year figure tripled to 428 metric tons.

China does not publish official gold-trade data, so the Hong Kong numbers are the best proxy we have.

“In 2010,” explains analyst Lu Mi from CPM Group, “there were increased government measures against speculators in real estate. That helped some investors start to look to alternative assets, including gold.”

“Across the Chinese retail sector, gold, silver and jewelry demand was the strongest performing segment in 2011,” adds U.S. Global Investors chief and Vancouver stalwart Frank Holmes.

He’s been reviewing the “Hands-On China Report” from J.P. Morgan. “Growth in [the precious metals] segment far outpaced clothing and footwear, household electrical appliances and even food, beverage, tobacco and liquor, all of which experienced more modest growth.”



The report reckons much of the increase came from lower-tier cities. That’s where income levels are rising the fastest and retail stores are expanding quickly to keep pace.

“Increasing incomes coupled with government policies that support growth have been the main drivers for rising gold prices,” says Frank. “As residents in [China] acquire higher incomes, they have historically purchased more gold, driving gold prices higher.”

For the moment — with both gold and stocks taking it on the chin today — gold stocks are in retreat. The HUI index is down about 1.5% at the moment... but at around 525, it’s a darn sight better than when it started the year at 500.

[Ed. Note: Current owners of gold and silver shares will want to check out a new report from publisher Joe Schriefer — detailing how to collect cash payments on stocks already in your portfolio.

“These are cash deposits that instantly hit your account. They’re not dividends, fractional shares of stocks, credits towards future purchases... or anything else like that.”

Any of the stocks on this list are fair game...



And that list is not comprehensive. Read on to learn how you can collect payments of up to $2,345 without selling a single share.]

Looking to unload an old piece of jewelry? In Duluth, Minn., you might soon end up in a police database.

A proposed city ordinance would require jewelers, coin shops and antique dealers to notify police anytime someone sells them an item more than 1% gold, silver or platinum by weight. They’d also have to provide a color photo of the seller.

“I can’t imagine asking a little old lady customer if I could take a mug shot of her to send to the police,” says jeweler Dave Blustin.”

“Our goal is to decrease the number of burglaries and increase our success in solving cases,” says Duluth Police Sgt. Chad Nagorski. “We want to return stolen items to their rightful owners and hold the right people accountable for victimizing others.”

A noble sentiment, to be sure. God forbid they do some detective work to accomplish the task. Better to create dossiers on the law-abiding.

“Please keep harping on the gold standard,” a reader pleaded yesterday after enduring a description of our latest hobby, “for all of our sake!”

“One point neglected by many is that the current global monetary crisis is rooted in chronic imbalance of payments that’s not possible in a free-market 100%-convertible gold standard. This is a major force behind the competitiveness loss and debt accumulation of chronic trade deficit countries like Greece and the U.S.”

“A free-market 100%-convertible gold standard as assumed by Adam Smith and David Ricardo keeps debt levels limited, balances international trade and conveys the verdict of the marketplace quickly to all producers and consumers. Borrowers can borrow only the amount of actual gold that lenders wish to lend, so there is no excess leverage in the system.”

“When one country exports more in value of goods and services than it imports, it receives excess gold in payment, shooting up its gold/money supply and then its prices. When another country imports more in value than it exports, it must send gold to pay for the excess, and its own gold/money supply declines and so then do its prices. The excess exporter’s prices rise and the excess importer’s prices fall to the point that trade balances and gold flows normalize.”

“Countries and companies that are falling behind in terms of competitiveness get immediate incremental feedback from the market, and must make adjustments quickly to remain in business, and long before such differentials become excessively large.”

“Let us know how we can help!”

The 5: Hmmnnn. We’re still thinking it through...

“I figured it out,” says another reader after reading about the couple who’ve taken on a car loan at $650 a month for 72 months. “These people who believe they are at a plateau in their lives now that money is good and the economy is doing fine have really bought into TV gossip called news.”

“Just as with the gain statistics in employment from the government a few days ago, these people honestly do think their dollars are worth something. Who the hell would take on a load of an extra $650 a month in these times?”

“I’m getting the feeling that they are thinking the other way and raking in what they can (credit cards and cars are nonsecured loans), and if they go bankrupt, guess who will get screwed? That’s right, those who have a sense of obligation to pay off that which they borrowed.”

“An article about two weeks ago stated people were actually shopping last December. The numbers were great. Those people put it all on credit, and I can bet that many will default on ever paying it back.”

“Thanks for The 5, it’s always a must-read on my list.”

The 5: Ours too!

Have a great weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. We’re leaving early in the morning for a publisher’s jamboree down at the ranch in Nicaragua. In the off time, we’re hoping to finalize plans for breaking ground on a piece of property high in an undeveloped neighborhood we’ve dubbed Monte Suerte.

If you’ve been reading The 5 and have wondered about what’s going on down there in the land of Ollie North and the Sandinistas... you owe it to yourself to come down and check out our project.

“The International Monetary Fund estimates that Nicaragua’s economic growth hit 4% last year,” writes our friend Alex Green in this morning’s Investment U, “and is on the verge of accelerating.” Alex just returned from a conference on investing in emerging markets down at the ranch.

“Exports jumped 23% last year. Tourism is up. MSN Money ranked Nicaragua at the top of their list of ‘Ten Exotic Retirement Spots for 2011,’ telling readers ‘[Now] is the time to put this country at the top of your super-cheap overseas retirement list.’ CNN Money calls it ‘the next Costa Rica.’ Indeed, Rancho Santana is just 50 miles north of the Costa Rican border.”

“Good things are happening locally, too. A local business leader plans to invest $300 million next door in a world-class marina, golf and spa resort called Guacalito. Due to open in spring 2013, it’s located just 30 minutes from Rancho Santana and is already bringing increased investment and improved infrastructure to the region. And an international airport is planned for the Tola area, located less than a half hour away.”

In some ways, Alex suggested to his readers, Rancho Santana could be the perfect alternative investment.

We’re hosting a similar event to the one Alex presented at we’re calling The Rancho Santana Sessions, March 23-25, 2012. Come down. Learn how to diversify effectively — legally — out of the dollar. And enjoy our beautiful piece of the Pacific frontier. Call Kristen at 1-800-708-1020. She’ll be on duty first thing Monday morning, Eastern Time.


Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to 5minforecast@agorafinancial.com