Rob Kirby: The Genesis of the Gold-Tungsten – The Rest of the Story

By Rob Kirby

Abstract: Back in October, 2009 I penned an article titled, A Blight on Humanity, where I reported that, in an Asian depository there had been found 60 metric tonnes of “Good Delivery” gold bricks that had been gutted and filled with tungsten. That article was followed up with, On Doing God’s Work, where additional information on the fake gold bricks was presented. This lengthy report has been written to provide the background and genesis of who was involved, why the fake gold was produced and how it was fed into the international gold market.

Background of the London Gold Pool: Cause and Effect

According to Wapedia:

The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.
The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years when the system became no longer workable because the world’s supply of gold was insufficient, runs on gold, the British pound, and the US dollar occurred, and France decided to withdraw from the pool. The pool collapsed in March 1968.

The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window closed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980

So the London Gold Pool was an amalgamation of 8 countries “pooling” their gold reserves so that coordinated sales could be undertaken to defend a global gold price of US$35 per ounce. The problem with selling ANY physical asset to maintain an artificial price is preserving an adequate physical supply of the asset to continue the price fixing. The London Gold Pool failed because the U.S. Federal Reserve was printing too much fiat money – which informed individuals were redeeming for increasing amounts of sovereign U.S. gold bullion. In August 1971, President Nixon finally told the rest of the world, NO MORE GOLD BULLION FOR DOLLARS. The point to take away from this is that price-capping creates a constant drain or stress on supply of the commodity being suppressed in price.

Observable or Believable Physical Supply Must Back Paper Promises
That issues are emerging regarding the sanctity of the global gold bullion supply should not surprise anyone and, in fact, make intuitive sense. As the chart below supplied by the St. Louis Federal Reserve attests – a MASSIVE amount of fiat money has been printed in recent years. Using history of the London Gold Pool as our guide, we know from experience that physical supply of gold is MATERIALLY impacted when money is printed in excess. In this light, it makes a ton of sense that ANY deficiency or abnormality in the underlying physical stock of gold would be more susceptible or likely of being discovered during such time of monetary stress.

Tungsten Genesis

Got Gold Report – Natural Gas Cheap Again

ATLANTA — The natural gas producers in North America have done such a good job at telling us how plentiful the clean-burning resource is that NatGas has become one of the cheapest of energy sources around again. We intend to focus on that exclusively in this one-time special report, but first here’s this week’s closing table:

April 2, 2010

Got Gold Report Indicator Comparison
This WeekPrior Week Changew/w Chg % Gold Weekly Close (USD)
$1,126.80 $1,107.10 $19.70 1.8%Silver Weekly Close (USD)
$17.93 $16.91 $1.02 6.0%GLD Metal Holdings (Tonnes)
1,129.821,124.655.18 0.5%SLV Metal Holdings (Tonnes)
9,217.179,278.18(61.01)-0.7%Gold Close COT Date
$1,103.76 $1,105.49 ($1.73)-0.2%Silver Close COT Date
$17.30 $17.03 $0.27 1.6%Gold LCNS (Contracts Net Short)
207,691223,823(16,132)-7.2%Silver LCNS (Contracts Net Short)
46,31745,698619 1.4%HUI EOW Close
428.04401.4826.56 6.6%US Dollar Index Weekly Close
80.7181.59(0.88)-1.1%ICE Commercial Net $ Pos. (Contracts)
(39,311)(35,125)(4,186)11.9%Gold:Silver Ratio Weekly Close
62.8465.47(2.63)-4.0%Gold Intra-week High
$1,127.93 $1,109.65 $18.28 1.6%Gold Intra-week Low
$1,102.57 $1,085.54 $17.03 1.6%Silver Intra-week High
$17.98$17.13$0.85 5.0%Silver Intra-week Low
$16.86$16.57$0.29 1.8%Gold High/Low Spread
$25.36 $24.11 $1.25 5.2%Silver High/Low Spread
$1.12$0.56$0.56 100.0%
The big news this week in the gold patch is that the largest of the largest gold futures hedgers and short sellers in New York were still “getting out of Dodge” as of Tuesday, March 30, according to the latest COT reports. The details of that gold short seller exodus can be found in the linked charts for gold below. We will undoubtedly have more about that in our next full Got Gold Report, but for now, we’ll take another look at what we think is an imbalance opportunity developing in natural gas, just as it did last year about this time.

Cooking With Gas

Even though there is not really all that much more NatGas in storage right now than there was this time last year, the price of natural gas, at near $4 per MMBtu, is cheap by historical standards. How cheap? Well, even though “natty” is within the extremely wide range of pricing as shown in the long-term NatGas chart below, we thought it might be interesting for our readers to see it compared to a suite of other commodities.

Here’s the NatGas story in pictures from Got Gold Report’s Comparisonville.

First, just the dollar price of NatGas over the past decade:

Notice that NatGas peaked in January around $6 per MMBtu and has since corrected about 62% of the Aug-Jan price increase. Fibonacci theory aficionados are many, and we probably don’t have to point out to our readers that 50% to 61.8% retraces are not only common, they are commonly traded.

Looking at that log-scale chart alone we can see that NatGas is near the lower end of the 10-year price range. However, that kind of view ignores what has happened with the dollar over the last decade.

What would a chart like that look like if we take out the logarithmic smoothing you ask? It looks a lot different, doesn’t it, see below.

When we give each dollar level equal weight on the value axis, it tends to do two things (at least). First, it tends to better define when the graph is approaching historic support in absolute dollar amounts, and second it tends to exaggerate previous extreme advances. Both can be valuable to a short or medium term trader from time to time.

We like things simple here at Got Gold Report. And what could be simpler than looking at the no-log chart above? Straight-away we can see that the natural gas market is getting pretty close to the low side again. We can also see that natural gas is “uncomfortable” above about $9, because whenever it gets up above there it tends to get back below that level pretty fast.

Just last year, with the world reeling from the 2008 collapse and a glut of natural gas, NatGas edged to a high $2 handle very briefly, but we think it was equally “uncomfortable” down there too. So, let’s say the broad trading range we can identify is something more like $3 to $7 to be conservative.

NatGas actually traded below $2 a decade ago, but dollars certainly went a lot farther in 2001 than they do today and it sure didn’t stay down there very long.

With NatGas probing just under $4 last week, we are close enough to the bottom of the range to begin thinking about positioning again. But, aren’t we constantly hearing there are literally oceans of natural gas now compared to then? Hasn’t that become the popular view today?

Not a Natural Gas Glut, but Natural Gas is Priced for One

Well, actually, according to the U.S. Energy Information Agency (EIA), as of this past week (report for March 26) there was about 1.63 trillion cubic feet (tcf) in the various NatGas storage facilities in the lower 48 states. That compares to 1.65 tcf in storage for the same reporting week in 2009 or about 1% less gas in storage than then. (Incidentally analysts were looking for an injection into storage this past reporting week of 20 billion cubic feet (bcf), but the EIA reported a smaller injection of 12 bcf. )

There is currently about 10.8% more NatGas in storage today than the 5-year average (1.63 tcf vs 1.48 tcf), so there is more NatGas available, but that is hardly a glut of gas. With that in mind, how can we judge just how inexpensive NatGas is today?

All we want to accomplish with this Got Gold Report offering is to get an idea of just how inexpensive NatGas is or isn’t. To see perhaps if it has gotten “too cheap” again, and maybe if it’s time to begin positioning in vehicles that track it again, like we did successfully last year at this time.

Why don’t we start with the most obvious comparison and chart NatGas relative to West Texas Intermediate Crude Oil. See the chart just below.

According to that chart NatGas is once again exceedingly cheap relative to oil. Either oil has become too expensive, or NatGas has become too cheap. By itself that doesn’t mean oil can’t rise further or that NatGas can’t fall lower. They can and they might, but as of right now that chart is screaming that an imbalance in the market is currently underway.

We Bargain Vultures just love imbalances because they represent opportunity.

Comparisons of just one commodity to another can be helpful, but oil and NatGas are in the same basket, so to speak. In order to better understand relative price or value it helps to look at other commodities and benchmarks. So let’s do so right now.

Take, for instance, something we know well, like NatGas in terms of gold metal:

Yep, according to that comparison chart, either gold has become exceedingly expensive or NatGas has become very, very cheap, or both.

What about silver?

Sure enough, it’s the same story with silver. Remember these are very long-term charts. NatGas is nearly at the cheapest it has been relative to silver in 15 years.

How about copper?

Yes, relative to copper NatGas has gotten really cheap, hasn’t it? Or, has copper just gotten really expensive relative to natural gas?

Okay, by now we are becoming comfortable that NatGas really is cheap on a historic basis, so cheap in fact that it pegs some of our other comparisons. NatGas is dirt cheap by most any measuring stick one wants to use.

So one might think given the historically cheap price for the commodity that the companies that produce natty might be getting trounced these days, right?

Let’s compare the XNG index, which tracks a basket of natural gas producers to NatGas itself and see what it shows:

What’s this? The price of natural gas is filthy cheap and yet the companies that produce it are actually expensive relatively speaking? How can this be?

It is simple, really. The NatGas producers also produce oil, which is expensive relative to NatGas right now, so producers benefit from that. However, we still think the chart above is useful because it shows that the natural gas producers are priced near their all-time 2009 highs relative to the price of natural gas. We think that if fund and portfolio managers were convinced that natural gas was going to stay this low, it would start to show up in the producers in the form of lower, not higher relative prices for them.

Are the Fundamentals Really all that Bearish?

The producers are not discounting the currently low natural gas prices, so what is keeping the NatGas price so close to the basement?

Well, with the price of oil so dang high, there must be a bazillion rigs out there drilling for both oil and natural gas, right?

Unfortunately for NatGas bulls, the onshore rig rate has risen for 13 consecutive weeks and as of March 26 there were 941 rigs turning in the U.S. looking for more NatGas according to data supplied the EIA by Baker Hughes.

Certainly the analysts we affectionately call the “Big-Gass-Bears” who are often seen on the televised business cable channels (they know who they are) have been out in force just lately to hammer the point that the drilling rig rate is going up. If you watch the T.V. business channels you’ve seen them. The Negative Nancy’s of Natty have also been pounding the table with comical statements like, “We have so much natural gas right now we don’t know where to put it!”

We can’t hold it against the usual suspects that they are consistently net short NatGas when they are motivated to appear on T.V. or send in dire notes via Blackberry to the microphone holders, but we do wish they would do a better job of disclosing their positioning when they do.

Rig Rates Have Risen To a Low Level

While the idea that the rig rate is climbing may sound imminently bearish, the price of NatGas is relatively low already, so it might help to consider the recent increase in drilling in some kind of context. Luckily, the EIA just happens to provide us a graph showing the U.S. drilling activity specifically for NatGas in the lower 48 states. Presto:

While we have to admit that the rig rate drilling for natural gas has increased for seven consecutive months, when we compare today’s 941 rigs to the previous, say three years of activity, drilling for NatGas is still on the low side. That is likely because we are still digesting all the new shale gas wells brought on line the previous several years.

Rotary rigs reported drilling for natural gas bottomed in June of 2009 at 691. After seven months of increases to 941 rigs now turning, the 2008-2009 historic plunge in NatGas drilling appears to have ended. That’s the last little “hook” on the graph above.

However, one year prior to June of 2009, in June of 2008, there were still 1,510 rigs exploring for natural gas. That shows the power of very high prices. (Ed note: In June of 2008 NatGas had just peaked near a ridiculous $13 per MMBtu, proving the “cure” for high prices is high prices.) In June of 2007 ( a year earlier) there were 1,483 rigs turning and in June of 2006 there were 1,376. We have to look all the way back to June of 2000 (677 rigs with NatGas near $4.50) to find a month with fewer rotary rigs that were looking specifically for natural gas than June of 2009.

Sometimes eyes just glaze over when there are a bunch of figures in a paragraph, so the upshot of that statement just above is that yes, the rig rate is moving higher, but it is still well below where it has been in recent years.

If we compare last week’s Baker Hughes report of 941 rigs to all the months from January of 2009 prior, we have to go back to September of 2003 (6 years) to find a month which shows fewer than 941 rigs looking for the cleanest, most fuel efficient domestic energy source available in North America.

Production Not Keeping Pace?

The natural gas producers have done an admirable job of finding new sources of natural gas and perfecting the technology necessary to produce it. That’s the good news. However, what is lost in the discussion is that these new “tight” shale gas plays are both very expensive to drill and they tend to come in strong, then decline in production rapidly.

We borrowed this graph of first-year decline rates of gas wells in Texas from TheOilDrum.com .

The graph is self-explanatory. In 1971 a new gas well could be expected to drop about 10% in production after the first year. There were no horizontal “tight” gas wells drilled in Texas in 1971. The technology hadn’t been invented yet and really wouldn’t come into wide use until the middle 1990s. As of 2005, the first year decline rate was over 60%, meaning that production from new wells declines very quickly in the first year of production with newer, horizontal “tight formation” gas wells.

Some sources say the year-1 decline rates are approaching 70% today when all shale wells are factored in.

Not all shale wells are the same and production declines vary from field to field, but we think that graph tells a compelling story for the entire shale gas patch. The most obvious point is that it takes more wells and more drilling now to maintain the same level of natural gas production. Perhaps less obvious, but just as important, the effects of high or low prices should show up and be felt a lot faster these days than in decades past. If our unscientific, back-of-envelope analysis is correct, about six times faster. (Y-1 decline of 10% versus 60%+).

When we consider that the depletion rate of new “tight” gas wells is very high in the first 12 months of production, and we add that to the fact that the rig rate bottomed in 2009 at less than half of the 2008 peak, we just might be moving into a period when we are seeing rapidly declining production from existing wells at the same time we have fewer new wells coming on line to replace that production for a little while until the price returns to a level which sparks another drilling rush.

Open the Vulture Opportunity window.

Summation

Here’s the quick conclusion of this gaseous trip to “Comparisonville.”

·Natural Gas is cheap any way one wants to look at it.

·Contrary to conventional wisdom and to recent “Big-Gass-Bear” T.V. talking points, there is not really all that much more gas in storage than normal, about 10% more than the 5-year average.

·Drilling for NatGas has picked up, but remains at a relatively low level compared to recent years.

·Much of the new NatGas production is from “tight” shale gas plays, which have very high depletion rates, so it takes more wells to keep the gas flowing.

We could be wrong, but while we could see natural gas futures trading to even lower levels soon, we plan to try to take advantage of any further weakness, as good Vultures sometimes do. We just don’t think NatGas can stay so strongly underpriced in the current environment.

We would normally rather play it through the natural gas heavy royalty trusts, like San Juan Basin Royalty Trust or Permian Basin Royalty Trust, but compared to where they were this time last year price wise, they are definitely not as interesting as then. We’ve already booked our dandy profits on them from last year’s foray into the gas space. Still they both pay handsome monthly distributions, and that’s a lot better than paying margin rates to brokers.

The CME futures are a dangerous and expensive place to try to play it given the still too-wide contangos there, so perhaps it is time to once again consider the NatGas ETNs, such as the IPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (GAZ) or the more popular ETFs, such as United States Natural Gas Fund (UNG). They have recently been trading at much closer to their NAVs as compared to last year at this time when the CFTC was first rattling investor cages in the energy markets and overly wide premiums had developed on them.

The premiums are gone now, and both tend to track short term moves in the daily price of NatGas, but with the wide contangos in futures they will likely continue to see “slippage,” just not as much as last year.

For short periods of time, say a few weeks or months, we can see taking a shot at a natural gas “imbalance conversion” with an ETN or an ETF and maybe both in the very near future. Not without well-placed trading stops, as always, and not without a well-defined entry/exit strategy going forward.

Lest we forget to mention it, we will remind ourselves and everyone reading that just because something is “cheap” that doesn’t necessarily mean it’s a “buy.” Imbalances tend to get strangely and wildly a kilter before they come crashing back to reality in this biz, so easy does it. By looking at a range of comparisons and the historical averages we can reduce some of the guesswork; maybe even gain enough confidence to trade it, but no one can see the future and all we ever have is probabilities to work with.

Full disclosure, we added a first tranche of both GAZ and UNG this past week. We did so thinking we just might be a little early in the game this time, willing to add once, but only once at lower prices for an entry average play, but we’ll see. We may add more in the very near future, if the “Big-Gass-Bears” get really, really frisky on the T.V. in April.

It has been our experience that they tend to show up aggressively just before the market puts in one of its signature high percentage reversals. And of course we Vultures just love those too.

Got Gold Report Coming to a Website Near You

We remain on the hunt for special situations and “vulture opportunities” via “stink bids” for obvious lack-of-liquidity, non-news-related, over-reaction sell-downs on the miners via our Vulture Bargain Hunter Method. Companies we believe have been sold down too far with longer-term high-percentage recovery possibilities, like the candidates Brien Lundin covers in his highly acclaimed Gold Newsletter.

Please note: This special issue of the Got Gold Report was filed Sunday, April 4, and delivered to Gold Newsletter Alert subscribers shortly afterward.

Before long, unless a wheel comes off our Texas-Georgia chariot, Got Gold Report will have its own web home, to be located appropriately at GotGoldReport.com. (Nothing there yet, so please wait for an announcement.) We expect to announce details of the new web site and blog in our next official report next weekend, but the situation is “fluid,” as they say, so don’t hold us to a tight schedule on that.

The plan is to invite sponsors for the new blog initially, then, if there is enough reader support, we plan on moving to an exclusive subscription-based model.

Our valued readers will find much more technical and fundamental commentary in the linked charts just below. Remember, the links to the charts just below will be changing in the near future, but will remain “live” for now and through at least April 14.

Got Gold Report Charts

· 1-year daily gold
· 2-year weekly gold
· 1-year daily silver
· 2-year weekly silver
· 1-year daily HUI
· 3-year weekly HUI
· 1-year daily HUI:gold ratio
· 2-year weekly HUI:gold ratio
· 2-year weekly U.S. dollar index
· 3-year weekly CDNX index
· 2-year weekly CDNX:HUI ratio
· 2-year weekly CDNX:gold ratio
· 6-month gold:silver ratio

That’s it for this special one-time report from Atlanta this week. Until next time, good luck, good trading and , as always, MIND YOUR STOPS.

The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a long position in SPDR Gold Shares, long iShares Silver Trust, long United States Natural Gas Fund (UNG), long iPath Dow-Jones Natural Gas Subindex ETN (GAZ), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last year: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Gold Port Resources (GPO.V), Bravo Venture (BVG.V), Millrock Resources (MRO.V), Atna Resources (ATN.T), Riverstone Resources (RVS.V), Premium Exploration (PEM.V), Constantine Metal Resources (CEM.V), Canadian Shield Resources (EXP.V), Rye Patch Minerals (RPM.V) (new) and currently holds various (approximately 15) other long (and occasionally short) positions in mining and exploration companies. The author has received no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).

A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets. In 2000 Gene started sharing his own market research with fellow traders and fund managers. Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web.

For the past fourteen months Gene’s more in-depth market reports, insights and trading ideas have been an added service for subscribers of the very popular Gold Newsletter (GNL). For more information visit GoldNewsletter.com. Got Gold Report is currently transitioning to its own new web home. Watch for an official announcement shortly as we launch GotGoldReport.com in the very near future. We hope to see you there.

Got Gold Report
Gene Arensberg

Daily Dispatch: More Political Math

April 02, 2010 | www.CaseyResearch.com More Political Math

Dear Reader,

Back in February, we poked fun at President Obama’s math because he implied his 3.83 trillion budget for fiscal 2011 will somehow put the federal government back on the track to fiscal sanity and shrink budget deficits. We noted that the budget calls for nearly a 9% increase in spending over the FY 2009 level, and that the only way not to have another record deficit in FY 2011 would be if tax revenues (which had grown by an average annual rate of less than one percent over the last decade) grow by almost 15%. We then joked that only a politician could get behind the math that plans to shrink budget deficits by increasing the budget deficit. Well, wait until you hear this next bit of political math.
On March 15 in Strongville, Ohio in a final push to win public support for Obamacare, the president uttered the following: How many people are getting insurance through their jobs right now? Raise your hands. All right. Well, a lot of those folks, your employer, it’s estimated, would see premiums fall by as much as 3,000 percent, which means they could give you a raiseLet me reiterate. The President of these United States said that his health care plan will cause employer health insurance premiums to fall by 3,000 percent.
Here’s a funny little YouTube video

explaining that math. President Bush said some pretty stupid things while he was in office, but this gaffe by Obama beats most “Bushisms” hands down. And I don’t know what’s worse, the fact that the president said it or the idiots in the crowd cheered.

Census Workers Boost Payrolls

According to the new jobs report from the Bureau of Labor Statistics, nonfarm payroll employment increased by 162,000 in March.

It’s not quite as good as it sounds. The increase in jobs includes the hiring of 48,000 temporary workers to conduct the Census. And the unemployment rate remained unchanged at 9.7%. Plus, long-term unemployment got worse. Of the 15 million people officially classified as unemployed, a record 6.5 million, or 44.1%, have been out of work longer than six months. Lastly, the U6 alternative gauge of the unemployment rate, which includes discouraged workers and those forced to work part-time, rose to 16.9% from 16.8%.

After the Bureau of Economic Analysis (BEA) recently released its monthly personal income and outlays report, the major media cherry picked the data boasting the headline “Consumer Spending Rises Again in February” or some variant on this theme. What wasn’t widely reported was the fall in personal disposal income together with a rise in personal consumption over this same period. The only way to balance that ledger is by taking on debt. Old habits die hard.

To get a better handle on a trend, we need a wide-angle lens. As today’s chart shows, personal income in the U.S. fell last year for the first time since 1969, the year the BEA began publishing the data. If a sustainable U.S. economic recovery hinges on an upturn in housing, neither is likely to happen if incomes in America continue falling, especially in the states most challenged by the crash in home prices.

Still getting your financial news from the biased Big Media? We can help. At Casey Research, we monitor all the trends that impact your life and your money. Start getting the objective and independent analysis needed to position your portfolio to profit from the unfolding trends by accepting a no-risk, no-hassle, 100% satisfaction-guaranteed subscription to The Casey Report. Get started now by clicking here.

Shale by the Pail: Europe Shakes Its Fist at Russian Hegemony
By Casey Research Energy Division

The latest buzzword on investors’ lips is shale and it’s everywhere. Shale gas production is rapidly growing and the domino effect of unconventional gas development on the global energy market is staggering. North America has already seen the stampede of companies staking their territories and is now in the next phase: consolidation. However, buying into the American industry giants now, where even a major strike creates only a blip in share price, is like catching a ship that’s left the harbor. But at Casey Research, we wouldn’t advise you to despair just yet, because the next big opportunity is just over the horizon. Coming up next the basins of Europe.

The new techniques in drilling and well completion have transformed this formerly unprofitable source into a gold mine. Add that to the success that shale gas has enjoyed in North America and you see why shale gas is creating a stir and intrigue throughout Europe. Possibilities for shale gas production in Europe are endless the American Association for Petroleum Geologists estimate a total resource of 510 trillion cubic feet (enough to power 27 European countries for over 30 years) of unconventional gas for Western Europe alone and the rewards for investors in the right place could be huge.
In addition, unlike the United States, where major gas companies started snatching up land and smaller companies as shale gas became more popular, Europe’s shale market is still in infancy. This puts the junior and smaller companies on the same playing field as the biggest players. If commercial amounts of gas are found on a junior company’s land, it’s not inconceivable that its share price will multiply by ten. At the very least.

Taking on the Bear

But the main attraction of shale gas in Europe, and what gives it government support across the board, is the increasing urge to break the stranglehold of the Russian gas giant Gazprom. Almost all of Europe is heavily dependent on the state-controlled Gazprom for the majority of their gas supply. Gazprom’s tap-twisting of Ukraine’s prices, through which flows almost 80% of Europe’s gas, has made it clear that Russia has a big stick and it is not afraid to use it.

With the installation of a pro-Moscow president in Kiev, Europe’s interest in a non-Russian source of gas has escalated, and should a U.S.-style shale phenomenon turn up in Europe, the energy landscape could drastically change.

Knowing Your Enemy: The Other Side of the Story

That is not to say that there aren’t any challenges facing the companies. The lack of equipment in Europe 20 fracturing sets vs. 2000 in North America is a major obstacle and at millions of dollars each, companies aren’t exactly falling over fracturing sets. Then there is the chance that the rush for land will lead to over-staking of territories, with more than one company claiming a piece of land. This will invariably lead to quarrels, even legal battles, which would delay exploration and create a mess for companies and shareholders alike. And after all this, no two shale basins are the same and techniques that work on one may not translate to the other. So companies looking for shale gas in Europe in largely unexplored regions face significant risks the initial production rate, its sustainability and costs of the well are all unknowns…and that’s precisely what makes it so exciting.

What Would You Do With A 670% Return? Shale gas is the hot topic in Europe today and we knew this would happen back in 2007. Our subscribers bought one .25 cent stock, then sold it at $1.80, netting a quick gain of almost 700%.

With the huge potential just waiting to be explored, investors need to have their ears on the ground to know about the “me too” companies, the ones that will hit the payload. For now, the watchwords are “oil shale in new markets.”[Ed. Note: Casey’s Energy Report has its finger on the pulse of the world’s most exciting energy plays… and its readers are the first to know which companies have the equipment, the management, the property and the expertise needed to make the big returns in oil shale.
At Casey Research, we know the sector better than others and we know who is strong and who is weak. Don’t miss out on the incredible opportunities that await investors in oil shale subscribe to the Casey’s Energy Report today with a generous three-month no risk, money back guarantee. Details here.]

Energy Independence: A False Goal
By Vedran Vuk

Energy independence is the new American sacred cow. For many, it’s already up there with supporting the troops, the virtue of high school teachers, and the holiness of fire fighters. Hardly anyone disagrees with the new national goal. The only disagreements now are between drilling for oil and producing other alternatives.

Well reader, since no one else will do it, I must attack this concept. First, there is the myth that energy independence will make us safer and lead to peace without our reliance on the Middle East. A quick look back into U.S. history dispels this myth instantly. Natural resources have little to do with our foreign escapades just look at Vietnam and Korea. There’s absolutely no reason to believe that our aggressive foreign policy will change with energy independence.

In fact, things would likely get worse. Imagine how the post September 11th world would have turned out with nothing holding the U.S. back in the Middle East. The younger members of Casey Research such as me, Chris Wood, and Jake Weber, wouldn’t be analyzing stocks right now. Instead, we’d be analyzing roadside bombs and kicking down doors in Saudi Arabia as part of WWIII. If anything, energy dependence kept the worst war hawks at bay.

The world is a safer place because countries have grown more interdependent. A militaristic supergiant with a violent history and without dependence on others is a frightening prospect. Look at the difference between China and North Korea. Which country is a bigger threat? China has absolutely no reason to attack us because of our interdependence. On the other hand, North Korea is much more threatening not because they’re developing nuclear weapons, but because they’re not dependent on us. This makes them a loose cannon.

War and security are only the peripheral problems. The real problem with energy independence is the economics behind it. The idea necessarily implies price controls or nationalization of energy companies somewhere down the road unless the entire economy is transformed by wind mills and solar panels.

For an example, let’s say that the U.S. becomes 100 percent energy independent. We don’t get a single drop of oil from the Middle East. Suppose OPEC goes crazy and pulls back the oil supply more than ever. A barrel of oil skyrockets from $80 to $300 on the world market.

So, we’re safe, right? Not exactly. The idea of energy independence assumes that our oil companies will continue to sell domestically for $80 a barrel while the rest of the world sells at $300. Domestic oil companies would have to be insane to do this. By refusing the market price, they would forego $220 in extra profit per barrel.

The only way to maintain the $80 price would be either through nationalization of the oil companies or export restrictions with price controls. Naturally, price controls always create shortages exactly what energy independence tries to avoid. Nationalization would be even worse. The government might as well tax the oil companies for the $220 profit and redistribute it to the public in the form of gas vouchers. The result would be crushing one industry for lower gas prices nationwide. Rather than energy independence being a new concept, this sounds like the same old tax and redistribute.

The obsession with energy independence can be a dangerous vice. Just look to WWII Nazi Germany. Instead of continuing to trade with Russia for oil, the Germans were obsessed with controlling Russian oil fields. The opening of Operation Barbarossa against Russia easily marked the biggest mistake of the German command. In a sense, World War II was won thanks to German economic ignorance on energy independence. If they had continued to buy oil from Russia and had fought on only one front as a result, history could have turned out much differently.

Energy independence is just a back-door entrance for redistribution and price controls. Without government intervention, oil companies could not be stopped from selling at world prices. It’s just supply and demand as always. The location of the oil does not change the world market price.

Friday Funnies

Heaven or Hell?

While walking down the street one day, a “Member of Parliament” (or Congress) is tragically hit by a truck and dies.

His soul arrives in heaven and is met by St. Peter at the entrance.

“Welcome to heaven,” says St. Peter. “Before you settle in, it seems there is a problem. We seldom see a high official around these parts, you see, so we’re not sure what to do with you.”

“No problem, just let me in,” says the man.

“Well, I’d like to, but I have orders from higher up. What we’ll do is have you spend one day in hell and one in heaven. Then you can choose where to spend eternity.”

“Really, I’ve made up my mind. I want to be in heaven,” says the MP.

“I’m sorry, but we have our rules.”

And with that, St. Peter escorts him to the elevator and he goes down, down, down to hell. The doors open and he finds himself in the middle of a green golf course. In the distance is a clubhouse and standing in front of it are all his friends and other politicians who had worked with him.

Everyone is very happy and in evening dress. They run to greet him, shake his hand, and reminisce about the good times they had while getting rich at the expense of the people.
They play a friendly game of golf and then dine on lobster, caviar and champagne.
Also present is the devil, who really is a very friendly & nice guy who has a good time dancing and telling jokes. They are having such a good time that before he realizes it, it is time to go.

Everyone gives him a hearty farewell and waves while the elevator rises…
The elevator goes up, up, up and the door reopens on heaven where St. Peter is waiting for him.

“Now it’s time to visit heaven.”

So, 24 hours pass with the MP joining a group of contented souls moving from cloud to cloud, playing the harp and singing. They have a good time and, before he realizes it, the 24 hours have gone by and St. Peter returns.

“Well, then, you’ve spent a day in hell and another in heaven. Now choose your eternity.”
The MP reflects for a minute, then he answers: “Well, I would never have said it before, I mean heaven has been delightful, but I think I would be better off in hell.”
So St. Peter escorts him to the elevator and he goes down, down, down to hell.
Now the doors of the elevator open and he’s in the middle of a barren land covered with waste and garbage.

He sees all his friends, dressed in rags, picking up the trash and putting it in black bags as more trash falls from above.

The devil comes over to him and puts his arm around his shoulder. “I don’t understand,” stammers the MP. “Yesterday I was here and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there’s just a wasteland full of garbage and my friends look miserable. What happened?”
The devil looks at him, smiles and says, “Yesterday we were campaigning… Today you voted.”

Congressional Tipping Point

This video is just down right shocking. I thought it was one of the funniest things ever until I read that the guy is ill. But sick or not, this guy certainly shouldn’t be allowed to hold a position in Congress if he’s that far detached from reality.

The Second Amendment

The Age We Live In

MiscellanyA new Casey phyle in Uruguay. Ron Y. has volunteered to organize a monthly meeting located anywhere between Montevideo and Punta del Este depending on where interested parties are located. Drop us a note at Phyles@CaseyResearch.com and we’ll connect you.
And that, dear reader, is that for today… and for this week. David will be back with you on Monday. Until then, thank you for reading and for subscribing to a Casey Research service. Have a great weekend!

Chris Wood
Casey Research, LLC