Unstoppable Bull Market

Addison Wiggin – May 3, 2011

  • Two rare commodities that quadrupled in 2010 double again in 2011… three reasons they're just getting started…
  • "Commodities" as a whole beat stocks and bonds for fifth straight month… why even more like that is in store
  • Behind silver's slide… One easy way to follow the precious metal's shrewdest investor…
  • David Walker on a bigger danger than some "person hiding in a cave": then… and now
  • Demand for food stamps keeps pace, demand for home mortgages slumps, demand for fryer grease off the charts… a reader demands explanation for cost-of-living adjustments (COLAs)… and gets one…

In the midst of the longest commodity boom since 1997 (see below), the hottest commodities right now are, alas, without a corresponding ETF.

Nor can sophisticated investors trade it in the futures market. But there is a way you can still make money in what appears to be an aggressive uptrend:

The blue line represents the price of neodymium — used in everything from portable headphones to hybrid cars. The red is samarium — an essential metal for precision-guided missiles.

Both are rare earth elements — under the tidy production grip of our friends in China. You'll recall China slashed rare earth export quotas 35% at the start of this year… on top of a 40% cut six months earlier. World prices for many of these minerals have doubled in 2011… on top of a fourfold increase last year.

New developments make it look as if this trend is with us to stay…

As we've been detailing, one after another, attempts to break the Chinese stranglehold are smacking head-on into obstacle

  • Lynas, an Australian firm, and a former Byron King favorite, attempted to open the world's largest rare earth refinery in Malaysia but ran headlong into stubborn regulators. An operating permit is being withheld as protesters raise alarms about the rare earth ore's radioactive contamination — which is naturally occurring, and low level. Approval has been delayed six months
  • Toyota's running into its own regulatory roadblocks trying to partner up with companies to mine and refine rare earths in Vietnam. The deal was announced last fall, but now production won't get under way till 2013
  • In Japan, Dowa Holding's attempts to recycle rare earths from old electronics is proving more difficult than first thought. Its factory is up and running, recycling 19 metals — but no rare earths.

The Chinese have even upped the ante again too. As of April 1, new taxes on rare earth miners were imposed. What used to cost producer 50 cents per kilogram of refined product now costs $8.

So the scramble to bring rare earths into production outside China moves into higher gear. Industry darling Molycorp — which is gearing up to reopen a rare earth mine in California — recently made investors do a double take when it bought a 90% stake in a rare earths producer in Estonia.

"Does this mean," wonders our Byron King, "that Molycorp is hedging its bets? Things might not go as well as planned with the California schedule? It's possible."

Readers of Byron's premium advisory Energy & Scarcity Investor have already made hay with Molycorp, collecting 178% in a scant four months. They collected 109% in two months on another of the sector's "usual suspects"… and they have open gains of 93% and 147% on other rare earth developers.

But for the biggest potential gains, Byron remains focused the big question — who will be the first outside China to go into production?

Mr. King is still eyeing a "dark horse" candidate whose shares can still be had for under $2.00 — but not for long. Let Byron tell you why this company has all the pieces in place to stun the market only months — maybe weeks — from now.

Commodities in general turned out to be the strongest asset class of all during April. The Standard & Poor's GSCI Total Return Index of 24 commodities climbed 4.4% last month, the eighth straight monthly rise.

Meanwhile the MSCI All-Country World Index of stocks rose 3.9%, and Bank of America Merrill Lynch's Global Broad Market Index of bonds inched up 0.9%.

This is the fifth consecutive month that commodities have outperformed the stock market — their longest streak since 1997.

"The key reason commodities outperformed stocks and bonds is the weak dollar," says Evan Smith, who's part of Frank Holmes' team at U.S. Global Investors in San Antonio. "Commodities will continue to outperform stocks and bonds. Over the next three-six months, we don't see a backstop for the dollar."

[Ed. Note: EverBank's exclusive commodity CD offering expires on Thursday. The CD gives you exposure to a basket of 10 commodities: crude oil, precious metals, base metals, grains, livestock — it's all here. And like all of EverBank's MarketSafe CDs, it's 100% principal protected — you gain all of the upside, with none of the downside. Details here.]

Stocks are flatter than a Victoria's Secret model this morning. (Is that better?) The gains they picked up on bin Laden's purported demise yesterday vaporized by day's end. But the Dow is still holding above 12,800.

Gold is holding its own this morning; it got another $30 beatdown after we put together yesterday's issue. Talk about volatility.

Still, at $1,546, the gold price is higher than at any other time in history before a week ago today.

Gold coin collectors are drooling over the prospect of something they haven't seen since 2008 — uncirculated-grade U.S. Gold Eagles.

Under current law, the U.S. Mint is required to meet demand for bullion coins first — only then can it supply uncirculated and proof coins. Proofs have been available sporadically since the Panic of 2008 drove buyers into physical gold, but the Mint hasn't even tried to put out the uncirculated variety, until now.

We can't say with certainty this is the result of Rep. Ron Paul's hearings last month — in which the Mint was taken to task for failing to secure sufficient supplies of gold blanks. But the timing is interesting.

In other collector coin news, we see intense demand for 1/10th-ounce Gold Pandas from China. They're still available exclusively to Agora Financial readers via our friends at First Federal… but only through midnight this Thursday. Full disclosure: We may be compensated if you buy these beauts.

Silver is on the down slope of its own roller-coaster ride this morning… down to $43.58 as we write. We figured it was due for a rest. But now it's down to a two-week low.

Cause? The Chicago Mercantile Exchange upped margin requirements again yesterday — for the third time in a week. That got things going… then traders got spooked when word got out that Eric Sprott sold $34 million worth of his Sprott Physical Silver Trust.

Never mind that his funds and his charitable foundation still own 25% of the shares. And never mind that "Every dollar of money that was raised by selling shares of [the Trust]… was reinvested in silver or silver equities," he tells the Toronto Globe and Mail.

The news was more than enough to shake out some weak hands.

For our part, we tip our hat to Mr. Sprott for taking profits in the metal and putting them in silver stocks that have lagged of late. You might want to consider a similar strategy yourself.

We look forward to seeing Mr. Sprott in Vancouver as well this summer, now that he's in business with our old friend Rick Rule.

The greenback appears to have found a floor, at least for the time being. The dollar index has recovered to 73.13, after slipping below 73 for a good chunk of yesterday.

"The greatest threat to America is not a person hiding in a cave in Afghanistan or Pakistan. It is our own fiscal irresponsibility," said our old friend David Walker, to 60 Minutes in 2007 and more famously in I.O.U.S.A in 2008.

"That statement was true then, and it is even more true now," Mr. Walker said yesterday reflecting on Osama bin Laden's demise, albeit not in a cave. "It's now time for the President and the Congress to work together and address the fiscal debt bomb that represents a much greater threat to our country's and families' futures."

(David has been a frequent speaker and attendee at our event in Vancouver. This year's theme is among our most provocative in the 12-year history of the event. We're bringing in 12 new speakers… and a host of new investment opportunities. If you've never been, you owe it to yourself to join us July 26-29 at the Fairmont Vancouver.)

Accordingly, we can look forward to three whole months of preening and posturing on the debt ceiling in Washington, D.C. Treasury Secretary Tim Geithner informed Congress yesterday that even though we'll bump up against the $14.29 trillion debt ceiling on May 16, he'll pull some accounting tricks out of his sleeve and keep things going until Aug. 2.

Meanwhile, the number of Americans hooked on food stamps finally appears to be leveling. According to the Agriculture Department, a record 44.199 million Americans received an allotment of stamps to buy groceries in February. That's 12% higher than a year earlier, but only a tiny increase from the previous month.

One in seven Americans takes advantage of federal aid for food.

Demand for new home mortgages remains weak. Forty-five percent of "senior loan officers" surveyed by the Federal Reserve reported falling demand during the last three months. Only 11% reported an increase.

You can't blame it on tighter lending standards, however — more than 90% of banks report no change during the last quarter.

At this rate, look for the Case-Shiller home price index to fall below its April 2009 trough — maybe as early as this month.

To our list of commodities that have once again become targets of thieves — copper manhole covers, lead roofs of Anglican churches — we add fryer grease.

No kidding.

Thieves recently made off with 4,200 pounds of fryer grease from six fast-food joints in Lincoln, Neb.

"Fryer grease has become gold," this pizzeria owner told The New York Times during the last round of greasy capers in 2008. We'd rather have real gold.

Typically, grease renderers buy the stuff for 18 cents a pound and turn it around for as much as 45 cents. The price of this yellow gold tends to rise when gasoline and ethanol go up too.

Thieves, of course, snag an even better margin.

"The price [of yellow grease] is real good right now," says Tom Cook, president of the National Renderers Association, whose members buy waste grease from restaurants to turn into biofuels and other products, "and those who steal it are really getting a good deal because they're not paying for it.

"I have one member who told me it's costing his business $1 million a year," Mr. Cook (heh) said. Our only question: How do you go about finding a fence for your "hot" grease?

"I remember when I was in my formative education years," a reader writes, "we were told by our fearless leaders that the reason to stay in school was 'to get a good job and earn a good living.' The alternative was 'to work for the government.'

"Unfortunately, now it seems like the only jobs are government jobs. The disaster has come full circle. I would like to say, 'Wake me up when this cruel experiment is over,' but the sane side of me says, 'Start the revolution without me'

"If I knew then what I know now, I may have taken Doug Casey's advice and left for greener pastures first."

"Can the government 'prove' Osama bin Laden is dead?" comes the inevitable question from another reader. "There's something fishy about burying him at sea. Why not just hide the story and bring it out in the election year?

"It's gross, anyway. The whole thing… tit for tat. I didn't feel any better this morning. I would never chant or celebrate around the new 'Freedom Tower' site in Manhattan over this death. It seems uncivilized."

"I am 75 years old," writes a third, on another more pertinent tangent, "and my Social Security payments have been the same for the past three years.

"I have not seen anything written on this subject, and perhaps I am a bit skeptical of what our government does these days, but could the new CPI formula have been constructed to avoid paying increased Social Security benefits?

"I do know that everything I buy costs much more than it used to. I don't know the numbers, but the government has to save a very large amount of money through this scam. Any thoughts?"

The 5: Absolutely. While filming I.O.U.S.A., we sat in on a Senate Finance Committee hearing on reforming the Social Security program. If you've seen the movie, you'll recall one of our two protagonists, Bob Bixby, was testifying.

Jason Furman who was then a chief economic advisor to "candidate" Barack Obama, was also testifying. Furman's argument to the Senators who bothered to attend was that by rejigging the way economists account for the "substitution effect" (if steak becomes too expensive, you'll buy hamburger), they could contain CPI even more effectively, thereby limiting cost-of-living adjustments (COLA) to Social Security recipients.

The Bureau of Labor Statistics (BLS) started playing games with CPI back in the early 1980s when the Greenspan Commission first "overhauled" Social Security. Our friend John Williams from ShadowStats.com now estimates that without the changes to CPI, the typical Social Security check would be twice the size it is today.

That's provided of course the Trust could come up with the money… which is precisely the trouble and the root cause of the statistical mirage the BLS has been experimenting with for the last 30 years. For an alternative source of retirement income, we recommend Jim Nelson's Lifetime Income Report.


Addison Wiggin
The 5 Min. Forecast

P.S. Oil has pulled back today to $112.38.

But a 1% move down won't dissuade President Obama from a witch hunt for "speculators" responsible for the run-up in price.

Last week, Obama ordered Attorney General Eric Holder to launch an investigation… no, not into the Fed's strategy for debasing the dollar, silly… he wants someone to get those dastardly speculators, with their penchant for making quick money at the expense of others!

Of course, "nobody cared when speculators pushed prices down to $30 a barrel," said Resource Trader Alert editor Alan Knuckman during a freewheeling panel discussion. "Speculators can make money in up and down markets. They're there just to make money, that's their role.

"I'm a capitalist," Alan asserted.

Who knew?

Mr. Knuckman mixed it up yesterday during the Midday program on Baltimore's NPR affiliate, part of a week-long exploration of energy and where we're going to find more of it. Later this week, Chris Mayer, Patrick Cox and Byron King take part. You can listen live or check out the archived programs here.

P.P.S. Only two days remain if you want to try Strategic Currency Trader at the charter-member rate. Early traders have already had the chance to bag 135% gains on the euro last week… 108% on gold the week before… 50% on the Canadian dollar the week before that… and 104% on the pound the week before that.

Yes, of course, there were some losers too. But with his "in on Monday, out by Friday" mantra, the risk is easy to assess, making the trades all the more fun. Charter-rate doors close Thursday at midnight. Get in today… start trading on Monday.


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