We can't say for certain what might be puzzling you, dear reader, but there's one statistic and one stock chart that have been giving us pause.
Let me start by saying that often you find the truth by looking at anomalies - things that deviate or appear inconsistent from what's normal and expected.
For proof of this proposition, one only need read authors like Oliver Sacks, who is able to weave new theories of neurophysiology around individuals who have highly unusual or anomalous neurological defects. Keep in mind here that you want to be looking at true exceptions, and not just those that prove the rule.
In this case, when it comes to commodities perhaps the most puzzling and anomalous piece of data that we've seen has been the rate at which China has been mining gold.
It has already been widely reported that China is importing vast amounts of gold. But we're not talking about their imports here (which have jumped many-fold over the past year); we're talking about their own internal production. Historically, it is unusual to see countries producing on an annual basis much more than several percentage points of their proved resources in any particular commodity.
Yet China has been producing about 20 percent of its proved resources in gold. To say the least, this is an extraordinary number. The baseball metaphor would be hitting over 100 home runs in a season. With or without the aid of steroids, it would be highly unusual. And indeed, China's production of gold is equivalent to playing a sport on dangerous drugs. (Recently that country announced an aggressive campaign to shut down a large number of small mines where little attention was being paid to safety).
The question then becomes, why such desperation for gold on the part of the Asian powerhouse?
For a partial answer we turn to another anomaly.
A former recommendation of ours, Continental Resources (CLR), is probably the most successful producer of non-conventional oil in the United States. And it has started behaving in a very strange way.
We have two charts for your perusal here. The first one shows the long-term picture of Continental's performance relative to the price of oil. (And we're talking U.S. oil; though West Texas Intermediate may no longer be the world's benchmark, it is still more relevant to Continental's bottom line than the Brent price).
As you can see, from a longer-term perspective, starting at the end of 2008, thanks to rapidly increasing production from its reserves in the Bakken Shale, Continental dramatically outperformed the price of oil by almost 100 percentage points.
Now let's look at the shorter-term perspective: Since April of 2012, despite dramatic and in fact accelerating increases in production by Continental, the stock has underperformed oil by nearly 13 percentage points.
We're not going to go into detail, but suffice it to say the major reason for this shift (at least from the data available to us) appears to come from Continental's sharply increased capital expenditures on the one hand, and increasingly negative free cash flow on the other.
In other words, this is strong evidence that shale, at least when it comes to oil (and probably gas as well) is proving to be a Ponzi scheme, in that production can only increase by adding ever more rigs, where rigs turn out to be more expensive than the increased production.
So how do we tie these two big anomalies together? For help we turn to Jeremy Grantham, noted British investor and co-founder and Chief Investment Strategist of Boston-based asset management firm Grantham Mayo Van Otterloo.
You could say that Grantham, who found religion (or at least, commodity religion) a year or two ago, continues to espouse ever more aggressively the concept of increasing resource scarcity.
Grantham is not some wild-eyed fanatic in the investment world, but one of the most respected analysts around, with an exceptional record in managing hundreds of billions of dollars.
What appears to alarm him right now, and in this we agree, is record high corn prices along with a general spike in food prices. Two commodities that Grantham tends to single out are water and energy, to which we'll add that you can't have one without the other. We'll add further that it's hard to manufacture virtually any commodity without sufficient water or energy.
Grantham identifies fertilizers as necessary long-term winners as a result of this situation, and again we wholly agree. We won't be heroic here but instead draw your attention to the largest plays, Potash Corp. of Saskatchewan (POT) and Mosaic (MOS). Both have been dismal performers lately, but this is not a game you're going to win in nanoseconds, but rather over a period of a few years.
The broader point, and the point we believe that China sees, is that if resources are scarce across the board there is no way you're going to be able to ration that scarcity with paper currencies. Or as we've pointed out many times before, in a world of scarce resources, you are not going to bet on the most efficient printing presses. Is it becoming clear now how these two anomalies so closely fit together and define our world?
Evidently our recommendations would be, beyond a general preference for commodities, investments in gold and in particular the junior gold miners. For another meaning of China's desperate mining and importation efforts is that there's precious little of this precious stuff left in the ground.
The biggest bull market of our time, we believe, will probably be in junior golds. For these the Market Vectors Junior Gold Miners ETF (GDXJ) is representative.
We would also bet heavily - but again, with a long-term time horizon - on NovaGold Resources (NG), which, despite having one of the largest untapped gold deposits in the world (and a high-grade one, at that), has been pounded because of the costs of developing the necessary infrastructure.
But one consequence of resource scarcity in its relationship to gold, which has been proved since the beginning of this century when resource scarcity became apparent, is that gold must outperform other critical commodities; otherwise it would not be able to perform its irreplaceable function as a medium for resource rationing.
We believe the Chinese see this, and that it's only a matter of time before others follow suit.
Thus we regard many-fold gains in GDXJ and a 10-bagger in NovaGold as reasonable and well-measured long-term targets for investors.