A primary thesis of the past two books I’ve written, "Game Over" and the recently released "Red Alert," is that you cannot analyze commodities apart from their relationship to other commodities.
It’s a simple mathematical truism: say you have a closed system, for example, an island, with fixed amounts of critical resources such as food, energy, base metals, even labor. And each of those resources is used in some way to obtain, refine or simply process all other resources. In that case, you can never really talk about peak oil, peak zinc or peak anything as a separate, unitary factor; you’re really talking about peak resources.
For when one resource that’s critical becomes increasingly scarce, that resource by virtue of its relationship to all other resources will in turn make all those other resources scarce as well.
Again, the idea is that each resource is necessary, but not sufficient, to produce any other resource.
Obviously, this is an outline of a trivial mathematical proof concerning commodities.
We make the point in light of a recent report issued by Goldman Sachs, with which we agree (see "Red Alert"), that was summarized by Bloomberg on October 28th as follows:
Copper prices may be ‘unimaginably’ high in three years with China growth spurring consumption.
This is a truly frightening statement concerning an issue that has been keeping me awake at night long before Goldman Sachs issued its statement last week. For those of you who have read "Red Alert," copper is one of the metals that I single out. Indeed, in terms of probable or potential scarcity, I think it may even surpass rare earth elements, oil and many other commodities.
Maybe it’s worth mentioning that about two years ago, I looked through a BHP Billiton presentation which listed the number of years remaining for particular commodities. It was not an analysis of “peak” commodities as such, just a report on when various commodities would be completely, 100% depleted based on current usage rates and reserve assumptions. Copper in that report was determined to be scarcer than oil.
Copper grades, i.e., the amount of copper you get from every ton of ore mined, as well as grades for almost every other base metal and precious metals such as gold and silver, look like a scary playground slide. They continue to fall, and fall dramatically quickly.
A so-called “unimaginably high” price for copper, to return to the Goldman Sachs description, would imply unimaginably high prices for our electric grid, building homes, and perhaps for drilling oil.
Clearly other commodities would become ever scarcer, in a vicious circle to end all vicious circles.
Our government seems wholly oblivious to this. Somehow they must be praying to, or simply have an abiding faith in a technology god somewhere out there – one who will come down and rescue us from the threat of resource depletion. Yes, there could possibly be technologies in development now or in the future that will come on stream and provide such a rescue. But to be sure of such a possibility? That can hardly be the basis of sound policy. And to have no credible alternative solutions or coping strategies in place is irresponsible – or sheer madness.
(The Latin phrase deus ex machina comes to mind, from the plot device in Greek and Roman drama whereby a god is suddenly lowered by stage machinery into the action of a play to extricate the protagonist from a seemingly unsolvable problem or situation.)
We know that China doesn’t believe in such a solution. We know that because, while we’re fighting a shooting war in Afghanistan, China is spending comparable amounts of money in the same place – mining copper. Indeed, China seems desperate to get all the copper it possibly can – not necessarily for tomorrow or even next year, but to ensure their standard of living into the next decade and beyond.
The real war here is an economic war. It’s the war China is fighting to assure that its civilization continues, and it should be the one we’re fighting to save our own civilization.
I use the word ‘war’ because I think it transcends political distinctions. Once it is recognized as a war, presumably liberals, conservatives, and even most libertarians (i.e., those who allow for at least some legitimate role for government) can come together.
And we are being attacked – at least implicitly, as our standard of living is under attack. Fighting this war should be the biggest and most important priority we have. To say more, China is not only spending tons of money in Afghanistan, but whatever they’re spending there is merely a drop in the proverbial bucket, as they will be spending 2 ½ trillion dollars between now and 2015 to find, acquire and process commodities. That’s a comparable amount to what the U.S. spent during the Second World War.
We could go on with example after example, but the bottom line is that for our civilization to have any chance of survival we’re also going to have to spend massive amounts of money. How can we, given our debt crisis and associated problems right now? Then again, how can we not do so, given what’s at stake?
It’s worth remembering that at the end of World War II government debt as a percentage of GDP was considerably higher than it is today. The huge difference is that the Second World War had created a massive infrastructure that was the foundation for growth for the next 20 years in this country. All of us know that debt has to be measured relative to income and growth.
You’ll have a hard time convincing me that any of the spending we’ve done so far in the context of this so-called Great Recession has laid the foundation for anything resembling long-term growth.
Getting back to copper, I recall giving a keynote address at a J.P. Morgan energy conference earlier this year. The audience consisted of extremely knowledgeable utility executives, presidents, financial officers, etc. I asked them “How many of you consider copper to be a potentially scarce metal?”
Not one of them answered affirmatively.
You can be sure that at the moment I was posing this question China was busily mining copper in the midst of that war-torn country where our own troops go on fighting and dying for what appear to be the most nebulous political and strategic objectives.
Ours is a great country, the greatest the world has ever seen. And I think we all love it. So I do believe that if we can wake up to the fact that the current situation in terms of risks to this country easily rises to the level of a full-scale war, then we’ll have a chance. But as the situation with copper shows (and don’t just take it from me, listen to what Goldman Sachs is saying), time is running out very, very quickly. As far as awakening America, I can only do so much. My latest book, "Red Alert," is my best shot.
As someone who advises people about investments, clearly the copper stocks stand out. The best of the major copper companies is clearly Freeport-McMoRan (NYSE:FCX) and for those of you who want to swing for a home run, we continue to like NovaGold (NYSEMKT:NG). Neither of these stocks, despite the longer term prospects for profound copper scarcity, is going to be for the faint of heart. Freeport, I think, could trade as low as $10 and as high as $150 and over; NovaGold, perhaps could move between $4 to $50 or more.
Obviously in the context of severe resource scarcity, paper currency makes no sense for anyone, for reasons I’ve talked about before. Pricing resources cannot be a battle of printing presses; that just won’t do it as a rationing device. Rather, we are going to need something for this purpose that is constant or close to it.
Gold is the clear first choice. Silver also stands out because of its history as a monetary metal. But silver, from what I know now, could become nearly as scarce as copper in the years ahead, which would likewise pose a major threat to everything else.
We would also look into holding gold bullion itself. And while we’re not ready to recommend fallout shelters or anything else that draconian at present, we do believe these are worrisome times. Ironically, we owe it to the future to stay optimistic, and to do as much as we can in order to wake people up and get this great country going again.