A Melman Minute
| By | Leonard Melman |
|---|
Aside from oil considerations which have so dominated headlines of late, another facet of our overall precious metals influences is long term interest rates and the 25-year chart of U.S. Treasury 30-year Bond quotes provides us with interesting information.
Many precious metals observers believe that one of the triggers which could lead to a resounding, full-scale metals bull market would be a decisive turn higher in important interest rates, given that the impact of a raise of that nature on a world where both industry and governments are literally buried under astonishing levels of debt could be traumatic and perhaps even uncontrollable.
However, what the chart shows us is that despite momentary reversals in bonds - and therefore higher rates - the trend since 2000 has been consistently toward higher bond quotes and, therefore, lower long term rates., with the movement throughout 2014 being particularly strong in that direction, thereby indicating the Fed is determined to hold rates down at virtually any cost.
Looking at the chart, the last serious break to the downside in bonds took place in late 1999 to the beginning of 2000 when Fed Chairman Greenspan attempted to control "irrational exuberance" by driving interest rates higher. His actions were immediately followed by a dramatic bear market for general securities during 2000-01 - and I believe the Fed learned a lesson from that debacle which it has since been determined never to repeat.
One facet of interest rate movements is that they do not have a true correlative impact on the price of the precious metals. Please Note that from 2000 through 2011, bonds rallied and interest rates moved generally lower while gold rose higher along with silver. Since 2011, interest rates have continued their downward trend, but the trend in precious metals quotes has been markedly to the downside.
However, despite the past three years 'evidence', I continue to believe that a dramatic move upward in long term rates will raise the level of general economic concern to the point where the precious metals will benefit in a substantial manner. From my personal point of view, the first evidence indicating a possible major change in direction would be a drop in the bonds to below '125' and an important, perhaps vital change would take place if those bonds fell below important long-term chart support in the area of '105'.
Until then, we wait and watch.
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Oil's decline continues to garner a major portion of the world's financial headlines, with many facets of the problem being explored, seemingly on an hourly basis.
We noted a particularly interesting article written over the weekend by Michael McKerracher, an energy and natural resource analyst at major accounting firm KPMJ. He first notes that, "…Oil and gas producers will be hit as well, with most looking for ways to rein in their capital costs and rework their budgets to account for the lost revenue. We are seeing reductions in capital spending and a slowdown in the construction of new projects…"
He also goes on to describe the negative impact of oil price declines on governments of various oil-producing regions and looks at the oil-rich Province of Alberta as a prime example, noting, "…according to the Alberta government, every $1 drop in oil prices produces a corresponding $215 million reduction in provincial revenue." (Our emphasis)
I would add that with Crude Oil down by approximately $50 from its peak near $108 per barrel to its present price near $58, if McKerracher is correct, that means oil revenues for the Province of Alberta will have declined so far this year by over $10 billion - and that would be sufficient to substantially crimp government operations.
However, he also points out there is a positive side to the oil price equation. Not only is there a substantial increase in the net disposable income of average Albertans due to lower gasoline and heating oil expenditures, but a host of other major industries such as air transportation, trucking, shipping, electric energy generation and others will allow for reduction in costs and, therefore, higher profits for those companies thereby allowing for greater job creation and rewards for shareholders.
At the moment, I believe these two contrasting influences are roughly equally balanced and, therefore, the impact on precious metals has been muted. However, I would suggest that if Crude Oil prices do not rebound swiftly, the resultant decrease in government revenues will begin to become the dominant impact and, therefore, a major concern for the investment community.
I have read several writers who point to the long term oil chart - see below - and note that in 2008 we saw an oil decline of ever greater severity, but it was quickly reversed by a powerful move to the upside - and they suggest this time will be no different, that a powerful reversal awaits us in the near future. My own observations differ.
During 2008, virtually no one ever spoke of oversupply of petroleum. Most analysts simply observed that the rapid decline in petroleum prices was due to a sudden slowdown in demand brought about by the economic collapse of 2008 and matters would right themselves when economic performance improved - and they turned out to be correct.
But information regarding oil production in recent years has changed the outlook, at least in my opinion. Production in four important oil producing areas in Canada and the USA has altered matters dramatically with the four being Alberta's oil sands, the Permian Basin, the Eagle Ford area and the massive Baaken oil fields of North Dakota and Saskatchewan. In fact, production in the USA alone has exploded upward from barely four million barrels per day (BPD) in 2008 to around NINE billion BPD at present while production in Alberta has grown at an equal or even more rapid pace. When it is also noted that petroleum production during the past six years has also increased in Iraq, Brazil, China, Russia and Saudi Arabia, it is almost beginning to appear as if the world was floating on oceans of petroleum - and production increases of such size appear to leave little room for upward price spikes.
Looking forward, in my personal opinion the resultant decreases in inflationary potentials will be negative for the precious metals in the short run, but the structural financial damage incurred by government bodies in the longer term could create the kind of uncertainty which will accrue to the precious metals' advantage.
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(NOTE: A dramatic election just took place in Japan and the results of that event could play out to the metals' benefit. I plan to review that election on Wednesday.)
EARLY MONDAY DATA as of 7:45 AM PDT
Dow Industrials, 17,303, + 23
TSX Index, 13,751, + 20
Gold, $1,214, - $8
Silver, $16.89, - $0.16
Base metals, (average), - 0.3%
Mining share indexes (avg.), - 0.4%
US Dollar Index, 88.78, + 18 basis points
TYX Index (30-year bond rates), 2.755 - 01 basis point