Market Observations with Rob Kirby

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Getting Real

by Rob Kirby, Kirby Analytics. , 2008

Last week saw China renew a contract with Potash Corp. of Toronto which calls for shipment of 1 million metric tons of potash at $576 per metric ton, which appears to be a $400 per metric ton increase over the 2007 price:

Chinese agree to pay extra $400 U.S. per tonne for fertilizer

Apr 17, 2008 04:30 AM

Dana Flavelle
Business Reporter

In another sign that global demand for food is going through the roof, the Chinese have agreed to pay three times as much for fertilizer this year to boost crops.

Shares in the world's largest fertilizer supplier, Potash Corp. of Saskatchewan, jumped 5.5 per cent to $198.50 a share on the news, helping take the Toronto Stock Exchange higher yesterday.

Potash Corp. is now the second largest publicly traded company in Canada, after Research In Motion and ahead of the Royal Bank of Canada and Manulife Financial, with a market value of $62 billion. Its stock has gained nearly 1,000 per cent in value over five years.

Potash Corp. announced yesterday the Chinese had agreed to pay $400 (U.S.) per tonne more for potash as supplies tightened. That's on top of the $176 they paid last year.

And there are few signs this trend is likely to reverse any time soon.

"Significantly higher potash prices and extraordinarily tight supply have become much more firmly entrenched since China's previous contract was signed 14 months ago," said Potash Corp. CEO Bill Doyle.

Perhaps China's willingness to pay has something to do with the dollar growth in their international reserve account:

Recent Growth/China $ Reserves

Aug 2006972.0
Sep 2006987.9
Oct 20061,009.6
Nov 20061,038.8
Dec 20061,066.3
Jan 20071,104.7
Feb 20071,157.4
Mar 20071,202.0
Apr 20071,246.6
May 20071,292.7
Jun 20071,332.6
Jul 20071,385.2
Aug 20071,408.6
Sep 20071,433.6
Oct 20071,454.9
Nov 20071,497.0
Dec 20071,528.2

It's not just the Chinese. It seems that the Central Bank of Russia is intent on bolstering their gold reserves in favor of ever increasing amounts of fiat money also:

11:23 GMT, Apr 18, 2008

For first time, Central Bank buys gold from producers

MOSCOW. April 18 (Interfax) - For the first time, the Central Bank of Russia purchased gold for its international reserves from gold producers, a source in banking circles told Interfax.

Previously the Central Bank had always purchased gold on the interbank market.

What's Reality?

Mr. Matthew Simmons, a renowned "peak-oiler" and frequent quest of Jim's steadfastly maintains that discovery of "replacement" crude oil reserves has severely lagged consumption.

Based on most published accounts, from officialdom, of "announced" discovered reserves - I would concur.

However, I have articulated in the past, my disbelief in the "apparent" geographical dispersion of the world's crude oil reserves – strictly from a fundamental or "common sense" point of view.

As a result of my own research, I do believe that the western world has encountered "peak production from existing infrastructure and known reserves" but I question whether or not we have actually achieved "peak reserves".

There are dissenters:

Lindsey Williams, who has been an ordained Baptist minister for 28 years, went to Alaska in 1971 as a missionary. The Transalaska oil pipeline began its construction phase in 1974, and because of Mr. Williams' love for his country and concern for the spiritual welfare of the "pipeliners," he volunteered to serve as Chaplain on the pipeline, with the subsequent full support of the Alyeska Pipeline Company. Because of the executive status accorded to him as Chaplain, he was given access to information documented in his eye opening book, The Energy Non-Crisis.

Williams argues that the price of oil is actually a tax we pay for our national debt. He states that OPEC purchases of American securities is actually by agreement, in order to fund the national debt. He asserts that Arab purchases of U.S. Treasury securities is how they have agreed to participate in a scheme to maintain the Federal Reserve debt. Iran and Iraq were the only countries which refused to participate. As of this year, Iran is now selling oil in Euros instead of dollars.

Williams states that the World bank and IMF act as middle men in the transfer of oil to the developed world, but provides few details of this discussion. He does point out that increases in oil prices translate to massive increases in wealth transfer to OPEC, implying that this has recently been used to account for IMF/World Bank debt forgiveness to the third world.

Lindsey alleges that he discovered from top oil company executives in the early 1970s, that there is enough oil under Gull Island alone (Prudhoe Bay, Alasaka) to meet all of the energy needs of the United States for the next 200 years. American oil companies had drilled and tapped Gull Island in 1973, yet they have not pumped one drop of oil out of those vast oil fields to send down the Alaskan pipeline to American consumers. He claims that it is one of the best kept secrets in the oil industry.

Interesting, even if it’s fiction, eh?

Of course, if Williams' claims were known to be true – oil would be cheap. The notion of the existence of crude being "withheld" from the market just after the U.S. abandoned the gold standard, and began printing money with reckless abandon, would constitute one of the greatest deceptions ever perpetrated on humanity, no?

Important points to remember about fiat money:

Speaking of fiction and deceptions – let us now consider officialdom's pronouncements on inflation; that it’s low or virtually non-existent and is always on the wane. With crude oil going for 116 bucks a barrel we're constantly reminded how cheap it is to buy a flat screen T.V. All of this, of course, with money supply growth in excess of 20 %:

4/4/2008 - As of 3/19/2008, we have added the results of the new Fed TAF, TSLF and PDCF "tools" to our M3 reconstruction, since they are quite similar to temporary repos (repurchase agreements). Temp repos are part of the original definition of M3.

Here is our article on M3b, which details our work and notes the sources for the data. Note that as of Nov. 10, 2006 the Eurodollar estimation formula has changed – see the article for details.

John William's monthly reconstruction of M3 is here. Ours tends to be more volatile and averages slightly higher than his, partly because it's weekly and partly because of our minor differences in calculating the Eurodollar component of M3 and repos.

M3, longer term chart

chart compliments of:

Conclusion: Money growth is rampant. Our "inverted pyramid" fiat money system is acting in a VERY predictable manner – it’s long-in-its-life-cycle's-tooth and growing more unstable by the day. Historically, owning tangibles such as precious metals has helped preserve purchasing power and insulated folks from the debasement of currency.

Have you adequately protected your assets?

Today's Market

Overseas equity markets got the week off to a solid start with Japan's Nikkei Index gaining 220 points to close at 13,696. North American markets didn't fare as well with the DOW losing 24.30 to 12,825.0, the NASDAQ gaining 5.07 to 2,408.04 and the S & P giving up 2.15 points to close at 1,388.20. NYMEX crude oil futures gained .66 to finish the day at 116.82 per barrel.

On foreign exchange markets the U.S. Dollar Index lost .35 to close at 71.62

In the interest rate complex - 5 yr. government bonds finished the day 2.93 % while 10 yr. bonds ended at 3.71 %.

Precious metals ended the day somewhat mixed with COMEX gold futures losing .10 to 916.90 per ounce while COMEX silver futures were trounced .44 to finish the day at 17.43 per ounce. The XAU lost 2.15 to 186.36 while the HUI gave up 7.99 to end the day at 448.18.

On tap for tomorrow, at 10:00 a.m. March Existing Home Sales data is due – expected 4.90 M vs. prior 5.03 M.

Wishing you all happy thoughts, good luck and a pleasant April evening!

Rob Kirby

© 2008 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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