Two Vital Stories the Media Is Ignoring

by: Dr. Stephen Leeb

Short-Term Key: Neutral Long-Term Key: -44 (Neutral)

So often, the crucial stories never make the headlines. They are relegated to the back pages precisely because no one is paying attention to the issues they raise.

One such story that was released last weekend concerns China's new five-year economic plan. Of particular note were the goals regarding energy efficiency.

China intends to reduce the amount of energy it consumes for every unit of GDP. It also plans to maintain annual GDP growth of roughly 7% a year (such goals are usually understated, so we can probably expect to see growth of 8-9%).

At the same time, we deduce that China's energy consumption will rise by 5% a year. In 2009 China consumed energy equal to 3 billion metric tons of coal each year, but it expects that figure to reach 4 billion tons within five years.

Where will all that extra energy come from? Obviously, it will have to come from virtually any place they can find it. China clearly needs more energy from all sources including coal, oil, gas, nuclear, solar, wind, etc.

Of course, many will be driving home at the end of the day to one of the 35 million new homes China expects to build over the next five years. The construction will take a lot of energy, and once built these homes will be filled with all the modern energy-consuming appliances. And all the homes and workplaces will be connected to a new electrical grid that crisscrosses hundreds of thousands of miles and will be composed of a massive amount of copper and other metals. You'd better believe China needs energy efficiency and energy, and virtually every other raw material you can name.

The report on the five-year plan doesn't make clear how much of China's new energy consumption will come from alternative energy, and perhaps that's deliberate. We suspect the answer is “as much as possible.” Reading between the lines, we think China could spend over $1 trillion on renewable energy sources over the next few years. It's really the only way to match energy supply with expected demand.

Of course, renewable energy is not cheap, and it's getting more expensive all the time as commodity prices rise. To take one example, silver prices touched $36 today – up from around $18 last summer. Since 1993, they’ve risen 10-fold. And 10-fold, incidentally, is the minimum increase we expect in China’s demand for solar energy in just the next five years.

Silver, as you know from past updates, is an industrial metal essential for building solar panels and alternative energy infrastructure. Today, it is also being treated as an investment asset, much like gold. So the more uncertain the global economy is, the more expensive silver will become, and the more difficult it will be to meet our energy needs and create worldwide growth.

Copper is another essential energy metal that has also risen strongly during the past year. But curiously (and thankfully) the one laggard so far has been oil prices. Even with the tensions in North Africa and the Middle East, silver and copper have outpaced oil since March 2009. Yet, if silver and copper use has been rising, shouldn't energy prices be rising just as strongly?

We suspect some entity has been accumulating silver and copper for future use, because they know shortages are likely to develop. We also suspect that entity is China. The only way China could hope to achieve its growth and development goals is with a massive build out of alternative energies, for which it must have sufficient supplies of raw materials like silver.

Unfortunately, because silver is both an industrial and a precious metal, it is difficult to model its supply/demand/price characteristics. What makes it harder is that the U.S. is now in the process of cutting energy research (exactly the wrong move with energy supplies becoming constrained). Nonetheless, we expect silver's longer-term trend is decidedly up, thanks to both Chinese and investment demand.

Also in the category of underreported news, we are amazed the media have not drawn more of a connection between the uprisings in the Arab world and the labor protests in Wisconsin. Clearly they both stem from the same cause: middle-class people realizing that the economic progress they've made over the past hundred years or so is in danger of being wiped out. Just as Egyptians are outraged over rising food prices, many Americans are angry about their jobs, salaries, and benefits being rolled back. No matter if you are pro or anti-union, for or against government, you cannot escape the fact that, measured in 2007 dollars, the bottom 90% of this country have an income of around $31,000 (and that's only counting those who have an income).
Add to that the fact that this 90% now have to pay over $4 a gallon for gasoline and higher home heating costs. Gasoline and food now account for 30% of all retail sales – even though food prices have stayed fairly tame for some time. With global food prices hitting new highs, Americans may experience increases as well in the near future.
We are therefore amused and dismayed to watch the current push to cut every part of the U.S. government budget. What we really need is a program like China's that is designed to create economic growth and strength – and to make it possible by transitioning to renewable energy. This kind of investment would generate the kind of high paying jobs needed to refill government coffers. Otherwise, we are destined to watch de facto taxes in the form of higher resource prices to continue to deprive us of our lifestyle.
All nations have access to the same academic literature which makes clear that conventional global oil production has peaked. Any increase in production today comes entirely from non-conventional sources. Within 10 years or so, coal production will also reach its ultimate peak (in terms of BTU content). Growth simply cannot happen in a world where energy supplies are declining. So developing renewable sources is the only option.
Instead, in the U.S. we have proposals to cut back on energy research, which is like a hungry Innuit deciding to kill and eat his sled dogs. He may survive for a few more days, but after that his death is certain.
As investors, we feel rocketing inflation will be inevitable and that you must take steps to protect yourself. Within the energy sphere, we continue to like non-conventional producers like Continental (NYSE:CLR).
We also think coal may be a worthwhile investment as Peak Coal nears. You can easily get a diversified play on the coal industry by purchasing the Market Vectors Coal ETF (NYSEARCA:KOL).
Finally, as we keep stressing, you want to own some of the best silver stocks such as Pan American (NYSE:PAA), Silver Standard (NASDAQ:SSRI), and Tahoe Resources. They should be sterling performers (pardon the pun).
Keep in mind, however, that commodities are volatile and you will see big corrections from time to time. We also must remember that the Middle East remains equally unstable. A political catastrophe in the OPEC nations could still lead to a jump in oil prices that would cause a major economic collapse.
If that happens, silver may suffer as industrial demand drops, though it may still retain some value as a precious metal. Gold, however, will remain the safest asset and the best alternative currency. So stay with our gold picks: SPDR Gold Shares (NYSEARCA:GLD), ASA Limited (NYSE:ASA), NovaGold Resources (NYSEMKT:NG), Market Vectors Gold Miners ETF (NYSEARCA:GDX), and maybe even some gold coins tucked in a safe place.
As usual, we wish we could be more optimistic. But as they say in the army, “hope” is not a battle plan. If the economy goes right or wrong, our strategy is designed to give us the best chance of coming out ahead.

Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.