more articles by

Jon Nadler

Click to enlarge Click to enlarge


It's Just ( a Lot of) Gas

By Jon Nadler       Printer Friendly Version Bookmark and Share
Jun 18 2009 4:39PM

Good Afternoon,

An initially lackluster trading morning in precious metals gave way to more serious selling, as the afternoon hours rolled around on Thursday. Gold prices initially held up fairly well, but softened considerably after the 2 o'clock hour in New York. The dollar was climbing on the index, last seen at 80.60 - while oil rose 33 cents to $71.36 per barrel. At last check, the yellow metal was off by more than 1% per ounce, quoted at $929.70 and showing signs that maintenance of above-$935 levels is becoming problematic. This, in turn, could engender testing supports at lower levels - for the moment, those are thought to reside at or below $925 and all the way to $915 per ounce, and are expected to attract some bargain hunters.

Silver lost 12 cents to trade at $14.20 per ounce. Platinum and palladium were each off by only $2 on the day, quoted at $1201 and at $239 per ounce, respectively. Rhodium fell $12.50 to $1337.50 an ounce. If the UBS report on the metal issued a couple of days ago seemed to offer little in the way of performance promises, there are those who see good value in a metal that fell from $10K to just $1 over the space of just a few months. London's GFMS, led by our friend Paul Walker, offers the following take on the exotic (but still indispensable) metal. While still cautious for the near-term, Paul sees the following risk-reward equation playing out in the metal (mostly due to the relatively microscopic size of its market):

"The price of rhodium is like a yo-yo and you never know where it is going to end up. Within the space of this year, I would be surprised if you see any massive increase in the price of rhodium, simply because it is so tied to the automotive industry, which is looking really grim for the rest of 2009 and 2010, but the price is a function of the liquidity of these markets and rhodium is a very illiquid market, so it doesn’t take a huge amount of demand to lift the price.

For example, if an astute investor looks at this and decides that the upside ?potential for rhodium is two, three or even four times higher than the current price, and that it is worthwhile taking a long position, it won’t take a lot of buying of rhodium to start pushing that price up significantly. In the case of gold, an investor would have to invest billions of dollars, but, in the case of rhodium, the investor would have to invest only a couple of million, and it will begin to cause the price to rise. There is very little downside risk and the potential at the moment is all on the upside."

Meanwhile, the economy continues to be on everyone's mind, and its condition seems to make the news almost on a daily basis. Today, it was the turn of the Conference Board to chime in on the status quo in the US economy. Its findings? The recession 'is losing steam' and the leading economic indicators rose 1.2% in May. Seven out of ten economic indicators improved in May. Also today, we got numbers from the labor situation. Evidently, continuing jobless claims took a big dip on the week, for the first time since January. Deflation threats notwithstanding, the 'green shoots' first spotted in Q1 appear to be maturing into something viable. But, one never knows about summer storms coming out of the blue...

Over in Euroland, things are still touch-and-go. The Swiss National Bank alluded to 'firm action' (read: intervention) to curb any rise in the franc, and it left interest rates untouched in an effort to fight the deflationary pressures. Companies in Europe are facing the maturation of nearly $4 trillion of debt - a third more than America's businesses. Finally, over in the UK, the Treasury Minister laid out an arsenal of regulation which mirrors that which we learned about in the US, just yesterday.

Such proposals came complete with plans to curb the $560 trillion derivatives market and the requirement that firms playing in that murky pool hold more (much more) capital. And the aftershocks keep rolling on....and on. Behold the costs and fallout of the excesses of recent years. Why, even ritzy Monaco is feeling the pinch. Conferences, exhibitions and exhibitors have fallen off in numbers, and those events that are still being held have an unmistakable aura of austerity about them. Monaco-style 'austerity' to be sure.

Geopolitics still continue to lend some background support to these markets, and they still tend to focus mainly on Iran and N. Korea. The hundreds of thousands and maybe million-strong silent mourning march in Tehran certainly must have the country's leadership wringing its hands - and not just at prayer time. Mr. Mousavi's supporters turned into a river of humanity in the streets of the capital, following the deaths of protesters following an allegedly stolen election just a few days ago. Internal problems and strife within the conservative block are running up against total control and brute force -still in the hands of the country's Supreme Leader. Nice euphemism. Iranian-Americans are hoping for a replay of 1979. They say the time is overdue. Even if force is used to silence the opposition. Even if those who report for Western media are only allowed to do so, once per day.

But, behold the New Socialism: Twitter and Facebook are putting your average protester on Western TV screens faster and in a more direct fashion than the image of the lone man facing those tanks in Tiananmen Square years ago. This is here, and this is now. Crushing cell phone-armed throngs these days, runs the risk of immediate reprisals from the international community. Unfiltered through any reporter, the first-hand accounts from the very front lines are immensely more powerful and they propagate a light-speed. Mr. Kim, meanwhile, keeps sending ships carrying no-no nuke parts or other taboo bits (adult videos? cognac?) all over the seas in the neighborhood of his little country. At great risk, once again. And, under the constant surveillance of U.S. forces. What a guy. No shortage of guts, there.

Something else that appears to be in a no-shortage situation: natural gas. Today's Potential Gas Committee Report offers a finding to which we would like you to pay close attention. Anything that potentially impacts crude oil, its future, and -most of all- its proven inflationary effects on the global economy should merit your undivided attention. It is the wild card that could throw crude oil and related speculation for a loop from which it may never recover. Especially if brave visionaries like T.Boone Pickens has his way, eventually. President Obama's reform of the US power grid, supply situation, and transport revolution could tap into this vast pool of gas and have no worries for quite some time to come. Technology and resourcefulness (pun intended) -we feel- will be the mules that pull this global economic wagon out of the mud it is currently stuck in. It's only about time:

"The release of a major new study today that boosts estimates of U.S. natural gas resources is shaking debates over the use and regulation of a fuel that could help slow global warming but could create other environmental concerns. The report by the Potential Gas Committee, a nonprofit group that provides closely watched analyses of U.S. resources, shows a 35 percent jump in domestic gas estimates.

The United States has a total resource base of 1,836 trillion cubic feet (tcf) worth of likely and potential resources, the report says, a sharp jump from the last estimate two years ago of 1,321 tcf, and the highest in the group's 44-year history. With the addition of Energy Department estimates of proved reserves, the total U.S. future supply is 2,074 tcf, a rise of more than 35 percent from the committee's last biennial estimate. The increase is largely due to the viability of tapping gas from shale formations, such as the Barnett in Texas, the Marcellus in Appalachia, the Haynesville in Louisiana and the Rocky Mountains.

"New and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources -- especially 'unconventional' gas -- which, not all that long ago, were considered impractical or uneconomical to pursue," said John Curtis, professor of geology and geological engineering at the Colorado School of Mines, which supports the committee's work.

But the increasing use of a technique called hydraulic fracturing to access these shale plays has sparked a Capitol Hill battle over regulating the extraction method. Several Democrats have introduced legislation that would bring the technique under Safe Drinking Water Act regulation -- reversing an exemption in a 2005 energy law -- and require disclosure of chemicals used in the process. The industry and allied groups are fighting the effort. They say it would slow access to what the new report demonstrates is an abundant domestic energy source.

"Hydraulic fracturing is the Rosetta Stone of natural gas development. With it, otherworldly amounts of shale and tight-pocket gas can be found, produced and delivered to Americans who need it. Without it, those resources remain trapped underground," said Chris Tucker, a spokesman for Energy In Depth, an industry-backed group that recently launched an effort to fight the legislation. A spokesman for Rep. Diana DeGette (D-Colo.), the sponsor of the fracturing legislation, said her bill is not about preventing gas production, which she supports, but that the extraction technique must have more oversight and disclosure.

"I would definitely say that she believes it is a necessary technology for the energy market. She also believes we need to ensure the health of the public as these processes are taking place," said DeGette spokesman Kristofer Eisenla. Meanwhile, the report is also significant in light of pending congressional efforts to enact a sweeping bill to place mandatory limits on U.S. greenhouse gas emissions.

House Democratic leaders plan to bring a sweeping climate bill to the floor in the coming weeks that is sponsored by Energy and Commerce Chairman Henry Waxman (D-Calif.) and Rep. Ed Markey (D-Mass.). The greenhouse gas caps in the Waxman-Markey bill would curb U.S. emissions by 17 percent by 2020 from 2005 levels, with an 83 percent cut by 2050. Burning natural gas currently provides about a fifth of U.S. electric power, and gas produces half the greenhouse gas emissions of coal. However, switching to gas creates concerns about the costs that could accompany increased demand if supplies were tight.

Joe Romm of the Center for American Progress, a liberal think tank, has called attention in recent weeks to the higher U.S. supply estimates driven by shale gas plays. He calls increased estimates a "game changer" and very good news. Romm said the new report underscores that the 2020 emissions reduction targets in the Waxman-Markey bill are certainly achievable and may even be too weak.

That is because with ample supply, gas will remain at a moderate price -- around $5 to $6 per million British thermal units -- and will keep compliance costs down, he said. He noted that a key factor behind the cost of capping carbon is the cost to replace existing coal plants. With cheaper natural gas, that can more easily be done with idle natural gas plants built during a overbuild in the 1990s that are connected to the grid system, but the fuel has been too costly to use until now, said Romm, a former DOE official.

"I think this is a big deal," Romm said of the higher estimates. Additional gas will also encourage more utilities to build wind generation, as natural gas is currently the best backup power for the intermittent energy, he said. But others have their eye on these U.S. supplies as a way to power vehicles. Famed Texas oilman T. Boone Pickens is spending aggressively to promote his plan to transition vehicles such as heavy-duty trucks and city fleets to natural gas in order to curb demands for oil imports. Pickens also supports a major build-out of wind for electricity, which would help free up natural gas for vehicles.

He quickly seized on the new report. "Obviously, this underscores what Boone has spoken about for well over a year and gives further credibility to a key aspect of the Pickens plan, and that is using natural gas as a transportation fuel alternative to foreign oil, diesel and gasoline," said Jay Rosser, a spokesman for Pickens. "This should quiet any skeptic who is concerned about using our abundant supplies of natural gas as an important transitional fuel," he added.

Don't know about you, but when was the last time the word 'abundant' was heard being used in conjunction with a commodity? In this case, the bounty could prove to be immensely beneficial to a system running on black gold. Clear is the new black.

Until tomorrow,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.