Is Silver A Bull Run?

Posted by Finance Professional on May 27, 2011 under Stock Market News | Be the First to Comment

After more than two decades, Western markets, executives and analysts are still fascinated by the data revolution. Companies and researchers in the Developed Nations spend massive sums to convert raw data into useful information; and indeed, at The Complete Investor, we participate in this work ourselves, collaborating with some of the top minds in the field. There’s no denying that it’s a useful industry that generates efficiencies and augments planning and communication; but it hasn’t helped us to focus on developing new and better uses of existing resources – the hard stuff that makes up the material world.

In other words, this emphasis on data manipulation distracts us from the true flesh and bone of our economy – the commodities and energy we consume, which grow ever scarcer, and whose acquisition becomes ever more problematic.

Just how important are these resources? At Ben Bernanke’s recent press conference – the first ever by a sitting Fed chairman – he pointed to “temporary factors” leading to higher inflation. He was talking about higher resource prices. He mentioned other factors as well, but the evidence is clear that resource prices are responsible for both our current higher inflation and for the slowdown in growth.

A quick look at first-quarter 2011 is enough to show that any statistic linked to the period’s disappointing performance is also linked to the surge in the Consumer Price Index (CPI) for commodities. The Bureau of Labor Statistics (BLS) includes several differently weighted components when generating the overall CPI. We feel that commodities are underweighted in this equation. This obscures the fact that, although the overall CPI rose at a relatively gentle 3%, and “overall inflation” was only 1%, the CPI’s commodity component rose at an annualized 12-13%.

And we would argue that, for the typical American, the commodity CPI is the figure that matters. The BLS doesn’t give the commodity CPI enough weight in the overall index – which is why genfx review inflation seems to be so well-behaved right now. But commodity prices, from fuel to food to raw materials, are fixed costs that become an ever-larger percentage of household expenses as household incomes decrease. Since the typical American household isn’t well off, with the bottom 90% of American families making about $31,000 a year, high commodity prices can be truly daunting. Factor in that $31,000 with $100 fill-ups at the gas station and rising grocery prices, and you see the point.

Most of the current economic indicators do not signify a falling economy, but they certainly imply an economy that’s slowing down dramatically. Those economists who point to the recent sell-off in commodities as the foundation for a new upsurge in growth are dreaming, unless the drop was not a correction but a true downtrend. We hope it is, and, admittedly, we were unsuccessful in predicting a silver low…but we believe that this is just a correction, and not a true long-term trend, especially for silver.

There is a subtle but powerful relationship between silver and rare earth elements. Just as rare earths are critical for wind energy, silver is vital for solar.

With that in mind, consider two recent articles in Technology genf20plus Review (a magazine published by MIT, with carefully researched articles aimed at the non-scientist). These articles (“The Rare-Earth Crisis” and “Rare Talents”) point to the scarcity of both REEs (rare earth elements) and of workers with the skills to use them.

Heavy rare earth elements (HREEs) in particular are essential to green technologies (especially hybrid cars and wind turbines), because HREEs are crucial components of the world’s most powerful magnets. Although the industrialized nations have leaped ahead in computing power, our magnet technology has remained at a virtual standstill: rare earth magnets are still the cutting edge in that arena, more than ten years after they were first introduced.

This is deeply significant, because 95% of all rare earths – and much more than 95% of HREEs – are mined in China. (Molycorp, the one REE producer in the U.S., has light REEs for the most part.) This fact alone could give China a near-monopoly on the easiest and cheapest renewable energy source: wind power, which depends on HREE magnets.

Wind power is not an answer for all the world’s energy issues, but it is crucial to any solution. Japan has retreated from nuclear power, taking countries like Germany with it. Opportunities in hydroelectric power have been almost fully utilized. Biofuel possibilities are limited. If China retains a lock on rare earths, it also retains enormous leverage on wind energy.

That means countries like Japan and the U.S. will be desperate for solar. And China will fight for that too. The Chinese know they will need every renewable they can get their hands on. Even with their potential in wind power, their solar ambitions far exceed those of any other country. Given silver’s necessity in solar-power applications, our conviction on silver – whatever its current low – remains extremely strong.

(Another conviction – but more for the parents of smart kids than for investors – is that a career in materials science or engineering, focusing on REEs, will be bright indeed. The “Rare Talents” article points to the shortage of miners, engineers and chemists equipped to work with rare earths.)

In other words, we are still very bullish on commodities, especially silver and REEs; and we’re wary of the volatility elsewhere in the markets. For the near term, we recommend relatively low-risk stocks, if they are not commodity-related. If they are commodity stocks, then make sure to check them out carefully before you invest.

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