Tuesday, May 24, 2011

Strategic Resources - Precious Metals

The world will soon become familiar with three words: money, production, and efficiency. Here I'll discuss production as it pertains to strategic resources. So the immediate question becomes: what is a 'strategic resource?' I'll personally define it this way:
Strategic Resource: A raw material that is essential for economic growth, is located or produced in geographically limited areas, is sought after the world over, and can theoretically be monopolized by a government, corporation, or individual.
I'll address several classes of strategic resources beginning with precious metal and continuing in subsequent posts with agricultural chemistry (N, K2O, P, H2O etc.), industrial metals (copper, steel, aluminum etc.), energy metals (uranium, lithium, etc.), energy sources (crude oil, natural gas, etc.), and strategic entities (ports, railways, shipping routes, etc.). In my opinion, the world will shift to sound money and raw production, but with slightly different timing. There is still the potential for large scale demand destruction before consumption based commodities really take off, but that's a discussion for another day...

Precious Metals
  • Gold - With global currency debasement continuing unchecked, either the market or governments around the world will have no choice but to establish an asset-backed currency. This will almost certainly involve gold being adopted as money. Such an event would be something like Bretton Woods 2.0, where the initial Bretton Woods Agreement was unilaterally terminated by the United States in 1971. Curiously, termination of the agreement was marked by surging debt levels and the prospect of gold outflows as countries began to lose confidence in the dollar and began to migrate to gold. Sound familiar? Prior to 1971 gold was fixed at $35/oz, once allowed to float against the dollar, it rose to $850/oz in 1980. A 24x increase! It later retreated from bubble territory and settled between $300-$500/oz during the 80's and 90's, which even then, accounted for a 8.5-14x increase or 850-1400%. Fast forward, and in 2001 gold reached a multi-decade low of roughly $250/oz once growth in the United States was terminated by the dot-com bust. This set into motion government efforts to stimulate the economy by implementing artificially low interest rates, stimulus, and overall money printing. Since 2001, gold has risen to roughly $1500/oz (as of May 2011), being called a bubble all the way up. Note that this marks a 6x increase over the course of a decade, which is nowhere near the 24x increase seen in 1971 when the US economy was on firmer footing and households actually saved...but I digress. Overall, gold will officially become money making it a strategic resource that will be sought after by every major economy.
  • Silver - Though gold and silver are often lumped together, they are in fact very different. Silver is very much an industrial metal that is used in electronics, biomedical devices, solar panels, batteries, film, mirrors, and catalysts to name a few. It also has the highest thermal conductivity, electrical conductivity, and highest reflectivity of any metal. In addition to its ever increasing industrial uses, it is historically a monetary metal to Muslims (Pop. 1.5 billion), Chinese (Pop. 1.3 billion), and Indians (Pop. 1.1 billion). That's 3.73 billion unique individuals when the Muslim population is not double counted in India and China. Again, that's 55% of the entire world population. The Chinese economy is estimated to surpass the United States by 2016 and with that will come increased industrial demand for silver as well as monetary demand as currency debasement continues. Something interesting to note, in Chinese the literal translation of 'bank' is silver  shop/profession 行. Telling isn't it? A quick video detailing some of silver's attributes can be found hereIn summary, the industrial and monetary vectors for silver will position it to be a strategic resource for decades to come, especially in emerging economies.
Additional Information Sources:

Kitco - Current and historical quotes for Gold, Silver, Palladium, Platinum and Rhodium
Rationale for Investing in Physical Gold - Passport Capital LLC, California (pdf)

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