Mark Anthony's  Instablog

In the last part of the article I discussed the reason why the collapse of the US dollar is all but inevitable, but the US economy itself will be strong enough to survive. Let me say it again, collapse of the US dollar does not equal to collapse of the US economy. If the dollar becomes worthless, Microsoft (MSFT) or Intel can sell their hardware or software products for gold or coins. They can still manage to make a profit, because the world still want their products.

How do investors protect themselves during a currency collapse?

First, the majority of investors and the majority of average American people will be wiped out financially. That is a FACT of mathematical statistics when a country's currency collapses. Majority of people will be wiped out, but a selective few in the minority will be able to rip huge profit from the crisis. If you want to protect yourself, you can not be with the majority. You must be with the minority group of people. Do NOT let other people do the thinking for you.

So are you listening to the most popular economic analyst or the most popular financial TV host? If you do, you are in danger because you are together with the biggest group of fools! You find safety when you are forced to jump from a big boat to a small boat, not the other way around. Just ask Titanic survivors how they survived. They jumped onto very small boats instead of wait for something bigger than Titanic to come to their resque. Safe havens must necessarily be small and can not accomodate too many people.

Commodities are the only safe haven. As Jim Rogers said, commodities are the only asset class with fundamentals impaired, but improved. But there are lots of myths in the commodity investments. Even Jim Rogers himself had also spreaded some incorrect myths regarding commodities investment. Most people do not know how to invest in commodities because they have not even once laid their fingers on any physical commodity. The only thing they have ever touches is a computer keyboard and mouse. A computer and a brokage account is all you need to invest in commodities, right? Wrong!

The door for commodities investment is extremely narrow. Let me tell you a small story. I am a big fan of tellurium investment and hoard actual physical tellurium. The price low of tellurium a few years ago was about $10 per pound, recent high was about $140 per pound. I predicted tellurium price could go to multiples of gold price once phase change memory goes into wide application. Almost every one laughed at me. Some, a few, did take me up seriously but they ask me NOT where to buy the physical tellurium, but rather, where to buy paper future contracts of tellurium, or what mining stock they can buy. When they hear that these two investment instruments do not exist for palladium, they left with disappointment. Most market traders do not know what to do with physical asset. They would rather prefer the convenience of pushing a computer button to instantly buy and sell something. Till this day, I think there are far fewer tellurium investors than people who understand Einstein's Relativity.

I believe that pure computer trading is the wrong way to invest in commodities. To invest in commodities you HAVE to get your hands dirty and lay your hands on the physical things. Let me explain using the example of the United States Natural Gas (UNG) fund.

Recent dismay performance of UNG gave me pause to think about how to invest in commodities. Natural gas spot price recovered from the low of about $1.84 to now nearly $5, almost a triple, but the share price of UNG still struggles around $10. Why is UNG not tracking the price of the natural gas itself? The simple answer is it's killed by contango. But there is a deeper reason.

UNG does not hold the physical natural gas. Instead they hold futures contracts. In theory, when natural gas price goes up, the asset value of these futures contract also go up. But in reality such methodology is flawed. You are holding future contracts that you never intend to take delivery. So near the expiration of the future contracts, you are forced to sell them, at any low price. Mean while you must buy the next month's future contracts, at whatever high price they are offered. As a result, in each round of the roll-over, UNG loses positions and loses money.

More over, the more investors are interested in UNG, the worse a situation UNG finds itself in. (Remember, the bigger crowd is always the loser!!!) During each roll-over, UNG could be purchasing more future contracts than producers have products available to write those contracts, hence it bids up price on the buying end. Then it turn around to sell the future contracts to industry consumers, it has more to sell than the industry consumers can buy, hence it pushes the price down on the selling end. How could you not lose money? It's like two mechants compete with each other. They bid the price up purchasing produces from the same farm, and then cut each other's throat to sell to customers at super low prices. Both lose.

Since UNG purchases future contracts that it never intend to take delivery, conceiveably on the other end of trade could be some one who write future contracts that he never intended to deliver, as he does not have the product to deliver. As no delivery is ever demanded, such paper future contracts can be created out of thing air in unlimited quantity to "meet" investment demand. Basically one side provides empty promises of supply, the other side provides false demand that never materializes. This is nothing but a zero sum game. One party's loss is exactly the other party's gain.

Therefore it is flawed to believe that trading future contracts is investing in cmmodities. It is NOT. Future contracts are derivatives with which the two sides gamble against each other. The commodity may be bullish, but you have a 50/50 chance to beat your counter party to win.

If you are interested in commodity investment, do NOT buy paper derivatives, whose supply is unlimited. Buy the physical thing, which is limited, and take delivery.

Now from a fundamental point of view, every investor needs to ask: If I invest in something and I gain, WHO pays for my profit? You are not the FED so you can't create money out of thin air. If you make a profit, then some one or something must be paying you that profit. If you buy a stock and make money, it's because the business of the company generates revenue and income, or because another investor pays you more than your original cost. I invested in physical tellurium because I know some years down the line, First Solar (FSLR) or Intel (INTC) will pay me gold price to buy my tellurium hoard.

But who pays for your profit when you invest in a commodity? Do your fellow investors pay you? If so it sounds like a Ponzi scheme. It has to be industry users of the commodity that pays you the profit. The only way for you to get paid by industry users, is for you to participate in the supply and demand of the commodity, for you to become a physical demand and then a physical supply. That means the only sensible way of investing in commodities, is for you to take physical delivery, hold for long term, until the price is higher, then you sell to the industry users.

Once again, The door for commodities investment is extremely narrow. Most of supply and demand have been directly negotiated between industry suppliers and industry users, leaving you no opportunity to participate in the market. Natural gas is a good example. The opportunity to store natural gas is virtually non-existant for outsider investors. Any gain or loss is likely directly settles between industry suppliers and users, and that leaves investors out of the natural gas business and unable to rip profit from the price appreciation.

So if you think investing in commodities is as easy as pushing a computer button, and you do not have to deal with the huzzle of buying/selling, transporting and storing the actual physical stuff. Please pause and think again. WHO PAYS YOUR PROFIT if you are not taking all the huzzles?

For this reason I am inheritly suspicious about all sorts of commodity ETFs, like GLD and SLV. Particularly SLV. Read my previous Instablog regarding some red flags in the SLV fund. What troubles me is that these nice folks help you to take care of all the sweating and laboring to handle the physical stuff, and allow you comfortably making profit sitting in front of a computer. It just sounds too good to be true.

(to be continued...)

Full Disclosure: The author is long precious metal palladium and silver, hold big positions in palladium mines SWC and PAL, as well as SSRI and CDE. I hold shipping stocks like EXM, EGLE, TBSI, DRYS, and small positions in natural gas fund UNG. I short the US dollar by holding some long positions in margin brokage account.

The collapse of the US dollar has passed the point of no return. An abrupt US currency collapse is now very possible. I hope we can see a gradual and orderly decline of the US dollar. But this best case scenario, as Peter Schiff hoped for, is now not likely. Peter Schiff still believes that there is still something that the FED or the US Government can do, to save the dollar. I disagree with him. Peter Schiff obviously does not understand how free market economy works, nor does Ron Paul, nor does Roubini. Jim Rogers is one of the few who understands and how free market capitalism works, and practices it by moving his family and assets to Asia. (President Obama: You still have two jobs to do: Buy the first lady an Iridium ring; and bring Jim Rogers home using Air Force One. That's all you need to have a strong family, a strong presidency and a strong nation. No kidding!)

This brings to me the Hot Money problem that China and other countries face. China has a gigantic foreign currency reserve that is composed mostly of US dollar assets, amid a looming prospect of ever falling dollar; China doesn't want to accumulate more dollars. But hot money keeps flowing in from the outside, smuggled in through Hong Kong, forcing China to print more RMB yuans to absorb the inflow of US dollars. China is not alone. Brazil recently slapped a 2% tax on foreign capital entering the nation's stock and exchange market. Australia is worried, too. Read how China's Commodity Carry Trade strategy of divesting the dollar: part 1 and part 2.

The Hot Money "problem" that China and the world worry about is actually free market principles working at their best. Basic Darwinism dictates that market capital will always go where it wants to go, not where the governments want it to go. Capital wants to get away from the soil that suffocates its growth, and move to fertile lands where it can thrive. Hot money flows out of the developed nations and into developing nations and nations with rich natural resources, because that's where opportunities of grow are.

Government interventions to stop the free flow of money are futile, fruitless and counter-productive; Government interventions to manipulate currencies and commodity prices are equally futile, fruitless, and counter-productive. Free market capitalism always works.

Recently Julian Robert thinks that the US faces Armageddon if the Chinese or Japanese stop buying the US debts, and that both countries maybe forced to sell US debts, due to domestic needs. He was right, except for the Norwegian part. The journalist asked: All the rich Norwegians have moved their money out of the country, so why do you invest there?

Good question! Capital money has its own mind. It wants to escape from hostile environments, and move to lands where it can grow and prosper. Rich Norwegians move their money out of the country because they are taxed to death. There are places where the taxation is less and the opportunity to grow is bigger. Again, government interventions are futile. China's effort to crack down on hot money inflow hardly made a dent. Equally futile was US government's tax cracking down on rich Americans who have foreign bank accounts. Such crack down is futile. If Americans want to move their money out of the country, there are plenty of ways to do it. Voting with feet is more powerful than voting with a paper ballot. But if that's not enough, one could cast the ultimate vote with the US passport as the ballot ticket, at an overseas US consulate.

Instead of the futile crack down, the US government needs to exam itself in retrospect and ask why Americans are moving money to foreign soil, and what it can do to attract foreign money to come back to US soil. This is the key: When the money is leaving the US soil for foreign land, so are the job opportunities, so are our best investors, our best innovators and our best technical professionals, and so are our nation's future. So what do we have left? A dying US dollar and millions of jobless and hopeless hungry and angry people either sit at home waiting for the government to feed them, or else take to the street.

Peter Schiff believes that to save the dollar, all we need is the FED dramatically hike up the rate, stop money printing, and the US government massively cut spending and raise tax. The basic ideas are right. But if he believes those are realistic or possible, he really doesn't understand how free market works. What works is not what a government does, but rather what a government does NOT do. In China's history, every dynasty that prospered was only because the emperor taxed little and asserted little control of the society.

Great Chinese philosopher Lao Tzu said that governing a great nation is like cooking a small delicacy: You cook just enough so all the original flavors are preserved. If you over-cook then what comes out is anything but a delicacy. Sure America is a melting pot. But President Obama is cooking this melting pot way too hard that not only there is lots of capital spill over, but the melting pot itself is melting!!! Just ask the first lady how to cook!

Peter Schiff believes the FED can still dramatically hike up the rate and stop money printing, and the government can dramatically cut spending and hike tax, in order to save the US dollar. If it was that easy, if a government has the power to salvage its own currency, then why didn't Zimbabwe's President Mugabe do it? Did he not raise interest rate of Z$ dramatically? He has the money printer so he can afford to pay any high interest, right? Higher interest is meaningless if the principal itself, the value of one dollar drops even faster. The FED stops printing money? Who is going to buy our mountains of new issue US treasury bonds, if the FED doesn't print money out of thin air to buy our own debt?

How about the US government dramatically cut spending and hike up tax rate? You can't collect more tax from business that are not profitable, and hence has no tax to pay. Higher tax will force the profitable businesses to move to overseas, reducing, instead of increasing tax revenue. Cut spending? Which part do we cut? I think we should first cut the all the bailouts to the big banks and let them fail? But then do we want a nationwide bank runs and bank failures, and watch FDIC to go bankrupt? How about cut welfare and cut unemployment benefits. Then all the desperate people deprived of livelihoods probably will siege the White House, bringing their empty pots alone, banging and singing, until the resident has to get away on a helicopter.

Let's face reality, Mr. Peter Schiff. When you see the melting pot itself is melting and there's lots of boiling spill over, you are going to tell people that we can still have a great dinner if we do the right thing? NO! You should honestly tell the people that there is no more delicacy for dinner. The people HAVE to go to sleep with an empty stomach. What we can still do, is not to try save the delicacy, but to save the pot, so we can still cook a good meal tomorrow. Of course, Peter, you can not win votes by telling people they will be hungry. But that's the reality.

There is no salvation of the US dollar. But the US economy itself can survive and prosper. There are certain elements of the US economy, no, not the banks, not the Wall Street, but the real productive sections of the US economy, that will survive and prosper. American farmers will continue to produce food that the world needs. Intel (INTC), AMD and Microsoft (MSFT) will continue to produce computer hardware and software that the world needs. Catepillar (CAT) will continue to produce great construction machineries that China and the rest of the world wants. My most favorite mining company, Montana's Stillwater Mining Company (SWC), one of the world's only two primary palladium producers, will continue to produce palladium because the rest of the world still needs palladium, even though the bankrupt GM doesn't want to buy from SWC. Not to mention we have so many of America's world class science and technology products that the world needs from us. Not to mention our best treasure, the US constitution, one of the most beautiful constitution and the envy of the world's poor, tired, suppressed and desperate people.

Yes, the US dollar, a fiat currency, will collapse; No, the US economy itself will not collapse. A good historical precedence is hyperinflation Weimar Germany did not destroy Germany: It still had enough economic and military power to allow Hitler to launch World War Two.

Yes, the US Federal government is bankrupt, as is the FED; But No, the American nation, as well as individual states, will not go bankrupt. California will not go bankrupt. It has a constitution mandated balanced budget until recent years, and it is trying very hard to return to balanced budget, amid the difficult environment of tax revenue short fall and spending needs. It's heart breaking to see people start to talk about the possibility of session of individual states from the nation. But unless the federal government realize its own limit, and live within its limit, I think as we raise to the USSA we could well become the next USSR one day. The US government itself needs a bailout, not just the dollar.

I will discuss in the next part of this article how individual investors can protect themselves and make profit from the downfall of the dollar. Specifically I will talk about equities, commodities and US dollar carry trades, as well as how to use leverage to increase your gain.

 Full Disclosure: The author is long precious metal palladium and silver, hold big positions in palladium mines SWC and PAL, as well as SSRI and CDE. I hold shipping stocks like EXM, EGLE, TBSI, DRYS, and natural gas fund UNG. I short the US dollar by holding some long positions in margin brokage account.

I believe we have reached a critical point that it is no longer possible to salvage the US dollar as a fiat currency. A sudden and abrupt collapse of the US dollar is now just a matter of time. Mean while, the US economy itself will be able to survive the collapse of the dollar. There has been heated debate on inflation versus deflation, but there is one aspect that neither side of the debate has talked about. That one aspect that is not being talked about is the one thing that sealed the doomed fate of the dollar. Let me explain.

I grew up in a Marxism view of what a beautiful and perfect social model socialism, and the communism is: Eevery one works hard; no one will be left hungry or sick; technology will be so advanced and the material supply will be infinitely abundant that every one will get everything he/she needs, so greed becomes unnecessary. I was also taught that the universe is infinitely large, so of course there could be infinite material supply. But I began to question the infinite world view once I learned how to crunch numbers.

Now I know, the universe is finite, the world is finite. Everything has a limit.

Those of you grew up in the western world was taught similar fairytales of a world where all the animals live together in harmony, and there was a Santa Clause with enough toys for every children of the world, and that Darwin was wrong.

You should know, Darwin was right. The world is a finite place. Animals eat each other. Only the fittest will survive. And no there is no Santa Clause. This coming Christmas a lot of children will not receive their toys. Many will go to bed hungry.

President Obama: Socialism does not work. How I wish every American can enjoy the best health care, the best education, and the best quality of living standard, and that the government takes care of every one and gives every one a job. But that is impossible, because the world is a limited place with limited resources.

Everything has a limit!

That limit includes a government's ability to collect taxes, provide services, and borrow money from the society. The US government can print an infinite amount of money. But that does not mean you have an infinitely amount of money to spend or to borrow. The more you print, the less the money is worth.

The government, is a hired sheriff in town. The people in town decided they need a sheriff to maintain social order. So they pull together some money to hire a sheriff to patrol the streets. This is what a government does: collect taxation and then use the money to provide security and social services and defend against external invations. The government can only govern with the people's consent. The people consent being governed when they feel the tax they pay is well worth the protection and service they receive from the government.

For the past year, the US government spend more than $1.4 trillion than the tax revenue. So what service did we the people receive from Uncle Sam, for the price tag of $1.4T: Any road expanded? Any bridge built? Any new school opened? Any new park built? Nope, $1.4T simply gone, without as much as a splash of the water.

When people are upset with the government, it's shown in the votes. Fear not the votes on paper, fear instead the votes on feet. Jim Rogers has voted with his feet. Rich Americans have voted with their feet and their money. Why should they stay in America when the tax they pay is not worth the social services they received?

The money is flowing away from American soil, to seek better opportunities in overseas market. Capital money has its own mind. It always want to flee hostile soil and go to the land of opportunity. This is how free market capitalism works. When the capital money is gone, job opportunities are also gone, and professionals, engineers and scientists with the most creative minds could also be gone.

Which makes the government's budget deficit worse, forcing the government to hike tax rate, which in turn forces more capital money and skilled professionals to escape American soil to seek better opportunities some where else. This is a vicious cycle of spiraling downfall.

Even worse, individual states could also vote with their feet, when they feel that the heavy federal tax they pay, is not worth the benefit of staying in the union. For example, Californians gets only 80 censt back for each $1 federal tax they pay. Not only that, 30M Californians collectively owe a share of $1.2 trillion in federal debts. The 30M Californians could collectively walk away from $1.2 trillion worth of debt liability, which instantly gives each person $40,000!!!

The US dollar is a debt based fiat currency. It's value, backed by the full faith of credit of the US government, is based on the credibility of the US government's ability to collect tax and pay off the debt. The world is losing faith in the credibility of the US government to generate a high enough tax surplus to pay off the debt. Because massive taxation could only trigger massive exodus of market capital from the USA, collapsing the economy. Therefore, the collapse of the dollar is all but inevitable now.

What about the US economy? The economy will suffer pain from a collapsing currency. But had Weimar Republic destroyed Germany? The country survived hyperinflation, survived the complete defeat and total ruin from World War II, and survived the split into two for 45 years. It is still today one of the strongest economy in the world. The country survived because there were some good German people left.

I believe the US economy will survive and prosper, because America still has something the world want from us. We have the best technology, the best computer companies, best aviation products, best agriculture, best medical technology. The country has the highest number of Nobel Prize winners and best education institutions which attracts some of the best minds from all over the worlds. More importantly, we still have our best treasury, the US Constitution.

The dollar is doomed, but not the nation.

A number of sources claim that we have hundreds of years worth of natural gas reserves remaining in the USA. Is it really so?

The most authoric natural gas information is available from EIA:
http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html

Based on data from EIA, the annual US consumption of natural gas is about 23 TCF (23 trillion cubic feet). The proven natural gas reserve, as shown at the link below, is 237.726 TCF:

http://tonto.eia.doe.gov/dnav/ng/NG_ENR_DRY_A_EPG0_R11_BCF_A.htm

So that's roughly 10 years worth of natural gas left in the USA.

Where did the claims of hundreds of years worth natural gas come from? One such claim is from NaturalGas.org:

http://www.naturalgas.org/overview/resources.asp

They claim, based on EIA data, the US natural gas reserve estimate is 1747.47 TCF. So if you devide that number by annual usage of 23 TCF, you have 76 years worth of natural gas.

Funny I just came back from the EIA web site. All I saw was 237.726 TCF proven reserve, as of end of 2007. Where did the 1747.47 TCF number come from? Let's scrutinize the NaturalGas.org number a little bit closer:

Natural Gas Technically Recoverable Resources
Natural Gas Resource Category (Trillion Cubic Feet)	As of January 1, 2007
Nonassociated Gas
Undiscovered	373.20
Onshore	113.61
Offshore	259.59
Inferred Reserves	220.14
Onshore	171.05
Offshore	49.09
Unconventional Gas Recovery	644.92
Tight Gas	309.58
Shale Gas	267.26
Coalbed Methane	68.09
Associated-Dissolved Gas	128.69
Total Lower 48 Unproved	1366.96
Alaska	169.43
Total U.S. Unproved	1536.38
Proved Reserves	211.09
Total Natural Gas	1747.47
Source: Energy Information Administration - Annual Energy Outlook 2009

Notice the last three lines? Total natural gas reserve is 1747.47 TCF. But only 211.09 TCF is proven reserve. The other 1536.38 TCF is unproven and undiscovered natural gas.

How do you even know that part of undiscovered natural gas reserve even actually exist in the first place? Even if it does exist, which could be a long stretch, undiscovered natural gas reserve is irrelevent until it is actually discovered and actually produced.

I believe we are facing a looming North American natural gas crisis. The currently known reserve is going to run out in 10 years. The "undiscovered" natural gas, assuming they do exist, have not been discovered in more than half a century of North American natural gas exploration activities. What is the odd that they could be discovered in the next 10 years? The odd is not looking very good. Look at the pace of new natural gas field discoveries in recent years, it surely does not look encouraging at all:

http://tonto.eia.doe.gov/dnav/ng/hist/rngr18nus_1a.htm

Full Disclosure:
I hold significant long positions in UNG, which is relevant to the discussion here. I hold other positions unrelated to natural gas.

The whole point of investing in precious metals is that they are physical assets and they have no counter party risks. Paper assets have counter party risks, physical metals have no such counter party risk.

So what's the point of buying precious metal ETFs such as GLD, SLV, CEF,which are supposed to be backed up by physical metals. But you are not in physical control of the metals, and you just have to trust the sponsors of these ETFs.

Counter party risk, any one? DIND DING DING DING!

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I wonder what the market's big fuzz was all about regarding the 0.4% drop in April retail sales?

People have short memories. Just a few weeks ago a small bug causes such panic that it seems the world is coming to an end. And today people have totally forgotten about that small bug, and the panic it caused. It was initially called the Swine Flu Virus, and later renamed to H1N1 virus before it was quickly forgotten. I commented on it that the market over-reacted to the panic:

http://stockology.blog...

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