[some_math_guy]

After reading the considerable amount of commentary that has been published in the past few years on what to do financially in the wake of peak oil, I think I have a pretty clear picture of what to do (barring a total collapse of civilization). Invest in inflation-resistant (precious metals) securities, oil companies, alternative energy companies, etc. Get rid of your debt, get rid of dollars, etc.

What is your opinion about what will happen financially to Canadian citizens as oil prices continue to rise towards the 200$ mark?

I am a young professional with considerable student loan (40,000$) and mortgage debt (150,000$). Is there any point to putting my money into the above investment vehicles and letting inflation turn my debt into nothingness? Or is this purely a strategy that applies to US citizens?

It's worth noting that as the US dollar has tanked, the Canadian dollar has gotten much stronger, so are PM really required for a 'store of value' for CDN fiat currency? Case in point: a prominant Canadian-based bullion fund holding gained like 40% over the past few years in US$, but actually lost money in CDN$. I think with Canada's large commodities and energy-based economy, following Leeb's financial advice might be ill-advised.

Comments?

[threadbear]

$this->bbcode_second_pass_quote('some_math_guy', 'A')fter reading the considerable amount of commentary that has been published in the past few years on what to do financially in the wake of peak oil, I think I have a pretty clear picture of what to do (barring a total collapse of civilization). Invest in inflation-resistant (precious metals) securities, oil companies, alternative energy companies, etc. Get rid of your debt, get rid of dollars, etc.

What is your opinion about what will happen financially to Canadian citizens as oil prices continue to rise towards the 200$ mark?

I am a young professional with considerable student loan (40,000$) and mortgage debt (150,000$). Is there any point to putting my money into the above investment vehicles and letting inflation turn my debt into nothingness? Or is this purely a strategy that applies to US citizens?

It's worth noting that as the US dollar has tanked, the Canadian dollar has gotten much stronger, so are PM really required for a 'store of value' for CDN fiat currency? Case in point: a prominant Canadian-based bullion fund holding gained like 40% over the past few years in US$, but actually lost money in CDN$. I think with Canada's large commodities and energy-based economy, following Leeb's financial advice might be ill-advised.

Comments?

[zoidberg]

I've always figured that since the vast majority of our exports head south to the US, a conspicuous drop in US consumption would drag down the Canadian economy as well. Some sectors that have ready export markets elsewhere(like oil producers) probably wouldn't notice, but they're not the whole story.

Quite frankly it would be unlike the greedy Albertans to willingly spread that oil wealth around.(It was different story when they were more dependent on an agricultural economy). So my thought is a sudden US downturn, would strongly effect some areas more than others.

I wouldnt mind having a few maple leafs from the mint lying around.

[MrBill]

$this->bbcode_second_pass_quote('zoidberg', 'I')'ve always figured that since the vast majority of our exports head south to the US, a conspicuous drop in US consumption would drag down the Canadian economy as well. Some sectors that have ready export markets elsewhere(like oil producers) probably wouldn't notice, but they're not the whole story.

Quite frankly it would be unlike the greedy Albertans to willingly spread that oil wealth around.(It was different story when they were more dependent on an agricultural economy). So my thought is a sudden US downturn, would strongly effect some areas more than others.

I wouldnt mind having a few maple leafs from the mint lying around.

[mkwin]

I disagree with MrBill on gold, if you believe PO is coming soon and you believe it will cause and continue to cause high levels of inflation, then gold is a must. From 79' to 80' gold increased in value by 300% and that was a temporary supply problem. Now, considering that the world billionaires have around $30 trillion in wealth, it is likely there will be huge demand for gold and silver causing its value to increase rapidly.

[MrBill]

$this->bbcode_second_pass_quote('mkwin', 'I') disagree with MrBill on gold, if you believe PO is coming soon and you believe it will cause and continue to cause high levels of inflation, then gold is a must. From 79' to 80' gold increased in value by 300% and that was a temporary supply problem. Now, considering that the world billionaires have around $30 trillion in wealth, it is likely there will be huge demand for gold and silver causing its value to increase rapidly.

[mkwin]

We are working with limited data, but if you look at other points where oil has rapidly increased in cost you find inflation. Given oils importance to the worlds economy, in the extraction of primary materials, transportation and production of almost all goods, inflation seems like the most likely occurrence - at least in the short-term. I agree debasement will also be inflationary.

I have suggested my opinion on a number of occasions on similar threads and that is deflation will be occurring in specific areas of the economy, but relatively inelastic areas, like energy, food, medicine, basic commodities and transport will be highly inflationary. When you factor in debasement, volatility in other asset classes and currency and bank crises, gold/silver seem like a necessary component of a portfolio.

[MrBill]

You cannot compare 'price shocks' from previous artificial supply lead interuptions of the past to permanently declining petroleum production against rising global demand.

Yes, in the past we had inflation from oil price shocks, but those were not in isolation to other external factors that were also causing inflation like paying for the Vietnam and Cold Wars while governments the world over were experimenting with various socialist and Keynesian economic policies that were also expansionary.

Declining energy makes the remaining energy more expensive in relative terms. But high prices are not by themselves inflation. High prices reflect scarcity. Inflation represents too much printed money chasing too few goods. Any finite commodity will increase in price over time if demand exceeds supply with or without manmade inflation.

Unless a substitute is found that makes that finite commodity no longer desirable or economical to extract. That is not the case with oil where $70 per barrel crude generates upwards to $700 in economic output in our current energy mix. Although its economic benefit starts to decline as it becomes more expensive to extract we still have a long way to go until the marginal cost of oil equals its marginal benefit (or EROEI=0 for you engineers out there that dislike economics).

Post peak oil resource depletion is deflationary because you have less inputs to create more outputs. Simply saying that economic growth is dependent on increasing energy consumption. You can save enegy by becoming more efficient, but those gains are limited by physics. And if you use more energy to extract minerals or look for fish, for example, there is less available for other uses and eventually costs exceed prices. Please do not forget that somewhere, someone has to generate a profit in order to pay for oil that costs $200 or $400 per barrel (in constant inflation adjusted currency units).

In my example I used 3% real inflation (ex-USD devaluation) as if you measured the price of oil (or gold) in a currency basket to strip out the US dollar's devaluation. That is still a pretty hefty rate of natural inflation. At $700 per ounce it would take 24 years to recoup the price you pay for an ounce. And this is just its store of value. Of course, if you actually have to use that gold to pay for something, like say food that has also gone up in price due to less energy, then, of course, you no longer have your gold as a hedge against future inflation. You can only spend your stash once.

So you can buy gold as a hedge against a fall in the US dollar, but I would question its effacy as an effective hedge against a basket of currencies as by definition when one currency falls it falls against another that is rising in value.

That is not to say that gold may not benefit from the buying frenzy that may occur if there is a serious financial crisis. Then it may be a case of gold at any price. However, I would suggest that many physical assets would then go up in price at the same time relative to those paper currencies and not just gold or silver.

I think this is one of those arguments where the gold bugs just like gold. Plain and simple. They like it even though it has been a losing trade for the past 27-years. You have not made money if you bought gold at $737.80 in 1980. You're not even back at break even nevermind your opportunity cost. And yet there has been positive inflation every single year since 1980. It is not even an income earning asset that pays a coupon or a dividend. Some hedge?

Yes, I know this time is different. It always is.

You mentioned trillions of dollars worth of paper wealth that is going to flow into gold and silver. That may be true, but then they had better start soon because post peak oil resource depletion is going to evaporate all those paper profits and therefore that wealth. I am not going to sell into that stampede, but I somehow doubt that when the dust settles that gold is going to be worth more relative to any other physical asset after it is over? If so, who is going to buy it? And using what as payment?

Again you have to generate a profit in order to pay for anything. All else is just debt that eventually needs to be re-paid with interest. There are a lot of posters here at peak oil dot com that will argue that principle plus interest will not be possible in a post peak oil world with falling GDP. Why would gold then rise in value if on aggregate we are all poorer? Tulip mania?

But once again if gold floats your boat. Great. As you pointed out past oil shocks have generated inflation. However, I see that mainly as a government failure to address serious problems in the economy and not because natural scarcity is necessarily inflationary, but a mechanism designed (by Mother Nature as it turns out) to limit unchecked, unbridled, unsustainable and unlimited demand.

UPDATE: here is a link to a paper called The Economic Effects of Energy Price Shocks that tries to explain just that. Cheers.

[FoxV]

well what every you do, make sure to keep your money out of the US

the USD is now down to $1.032cnd.

Go on Ben, reduce rates, I dare you.

As for gold, There's also a middle ground. Advisors say you should have 5% to 10% in gold. If you're a PO'er you should probably double that.

Personally my strategy is
25% PMs (physical only)
25% Debt
25% Equities (going towards debt, nothing worth buying yet)
25% "Efficiencies" (not just energy, but anything I can buy now that makes me pay less later, where the ROI cannot be less than the interest rate of my debt)

Also keep in mind that there are some "outstanding issues" with gold which make it a wise hedge against these issues. In particular I'm referring to the US's "Deep Storage" and the IMF's double counting rule. If it comes out that US's reserves are nothing but ore and the IMF vault reserves is nothing but IOUs, the return of $400oz gold will be as laughable as the return of the Farthing.

There is also a much more real possibility of hoarding by Asian governments and/or people. Gold will only deflate during times of slow/minimal deflation. If we have a crisis (derivatives?) and/or rapid deflation (banking freeze?), gold will skyrocket (although short term liquidation for margin calls may bring the value down a bit)

if I can offer some Equities investment advice.
Short term: Buy Nothing. Right now, non-US cash is King.
Medium term: After we have a stock meltdown, and some deflation, buy resources stocks, the BofC will eventually devalue to not lose the US market (diversify to other markets? always talked about, never happens)
Long term:Energy resources and some utilities

anyways, just my opinion. 300 words, worth about 2cents

[MOCKBA]

$this->bbcode_second_pass_quote('FoxV', 'w')ell what every you do, make sure to keep your money out of the US

the USD is now down to $1.032cnd.

Go on Ben, reduce rates, I dare you.

[threadbear]

$this->bbcode_second_pass_quote('MOCKBA', '
')Mr. Bill, great post on gold PE as always - made me once again pass on gold despite that it might break out within a year as people would flee to safety once bear trap is over which should be once Bed would make the decission next week.

[Johnvancouver]

Yes, resources stocks and gold are the places to be. When comes to gold, it's probably safer to be in physical than stocks. With oil price going up relentlessly, most gold miners, in particular those with energy intensive open pit mines, will be struggling to stay profitable unless gold to oil ratio goes to the moon, which I don’t think is likely. I won’t worry too much about gold to Canadian dollar ratio. I think gold will eventually be way up against all currencies.

[cantom]

$this->bbcode_second_pass_quote('Johnvancouver', 'Y')es, resources stocks and gold are the places to be. When comes to gold, it's probably safer to be in physical than stocks. With oil price going up relentlessly, most gold miners, in particular those with energy intensive open pit mines, will be struggling to stay profitable unless gold to oil ratio goes to the moon, which I don’t think is likely. I won’t worry too much about gold to Canadian dollar ratio. I think gold will eventually be way up against all currencies.

[Johnvancouver]

Cantom, good point about the timing issue. As to DOW keeps going up, maybe people see the inflation ahead and try to grab something which will keep up with it, same reason behind gold's rise. There is probably also some "help" from the PPT.

[cantom]

$this->bbcode_second_pass_quote('Johnvancouver', 'C')antom, good point about the timing issue. As to DOW keeps going up, maybe people see the inflation ahead and try to grab something which will keep up with it, same reason behind gold's rise. There is probably also some "help" from the PPT.

[Ferretlover]

Threadbear: “…or else we will have massive unemployment.”
We will probably need those unemployed to fill the military enlistment quotas.

MrBill: “I am just not much of a gold fan is all. It is very bad for the environment for one as well as using up tremendous amounts of energy and water to extract a metal that for intents and purposes is not very useful.”
Two questions: If the world was not using gold to back its currency (I am assuming that all nations do, please correct me if I am wrong!), is there any other commodity that could/would serve the same purpose?
I once had a history teacher who said that the only good thing Reagan did was to take the US off the gold standard (US gold trading at $30 something, the rest of the world not compelled to follow constraints.) Generally speaking, if this had not happened, what the financial status of the uS be today?

FoxV: “well what every you do, make sure to keep your money out of the US”
I agree! Save yourself! Run as fast as you can the other way!

[Johnvancouver]

Good find, Cantom. But John Mauldin is not convincing. Tens of billions is nothing for the PPT. Central banks injected hundreds of billions into the system over the last month or so. This time, they wanted us to know it because it helps to prop up the markets. My bet is they don’t always tell us. It really costs the PPT nothing to print that money. Another strategy that they seem to employ is killing the shorts. Remember the rate cut on the option expire date in August and what happened just the day before?

[MrBill]

$this->bbcode_second_pass_quote('Ferretlover', '[')i]Threadbear: “…or else we will have massive unemployment.”
We will probably need those unemployed to fill the military enlistment quotas.

MrBill: “I am just not much of a gold fan is all. It is very bad for the environment for one as well as using up tremendous amounts of energy and water to extract a metal that for intents and purposes is not very useful.”
Two questions: If the world was not using gold to back its currency (I am assuming that all nations do, please correct me if I am wrong!), is there any other commodity that could/would serve the same purpose?
I once had a history teacher who said that the only good thing Reagan did was to take the US off the gold standard (US gold trading at $30 something, the rest of the world not compelled to follow constraints.) Generally speaking, if this had not happened, what the financial status of the uS be today?

FoxV: “well what every you do, make sure to keep your money out of the US”
I agree! Save yourself! Run as fast as you can the other way!

[Ferretlover]

OOppss!! I did mean Nixon, not Reagan! Sorry about the error!

"One alternative to backing your fiat currency to a single asset, such as gold, is to 'back it by all the assets' of the country. However, if you want it to be 'as good as gold' so to speak then you need to pass laws that make it illegal for governments to borrow more than they receive in tax receipts. So-called mandatory balanced budgets."

Are there any countries that use, or have used, the alternative?

And as the overvaluation of the dollar and the undervaluation of European and Japanese hard money became increasingly evident, the dollar finally broke apart on the world markets in the panic months of February-March 1973. It became impossible for West Germany, Switzerland, France and the other hard money countries to continue to buy dollars in order to support the dollar at an overvalued rate.

Guess the above answers that... 1973? That was when the last gas shortages occurred...

That is a great site, MrBill! I will read some more.
BTW, which of the banking ...schemes?... do you favor? Bretton Woods? Keynesian? Friedmanite?

[MrBill]

I would not support any 'isms' out of hand.

I support fiscal conservatism and prudence as well as social liberalism along with responsibility.

Subsidize nothing. Tax as little as possible. Run balanced budgets. Stay out of people's lives.

People's demands on government and hence their voting would change once they realize that they could not get anything extra for free. Anyone that promised anything else would be then seen as trying to bribe the people with their own money.

Governments would change once they realized it was really a public service they were running and not a chance at the hog trough for them and their cronies.

Would governments still make mistakes? Of course, but their mistakes might be smaller in proportion to many individuals making the right decisions for them personally because they would be responsible for their actions.

Laissez faire? No. There is still a crucial important role for government to play to make the rules the same for everyone. No exceptions. A level playing field. To help organize infrastructure even though it might be paid for by consumers and producers as opposed to taxpayers. To punish rule breakers. You cannot have free and fair competition if you have monopolistic behavior of unfair trade cartels. I am speaking about smaller government, but it should have real teeth!

I still think there might be a role for a central bank as lender of last resort, for example, to smooth market gyrations and re-assure the market, but it should not be there to protect market participants from their own mistakes in risk taking. One such market mechanism might be to insist that banks sell bonds to one another in case of default as insurance. The logic being that banks would be unwilling to invest in the bonds of other banks that carried the risk of default. Why make taxpayers foot such a bill when it could just as easily be pushed back onto market participants.

In answer to your question, there is no government worthy of my blessing at this point. Some are worse than others. Switzerland's decentralized democracy may be inefficient, and less than ideal in negotiating externally as one, but it is a very good check on executive privilege by the regions.

I think that just running balanced budgets is a good step for some, while refraining from currency manipulation for others might be a decent second step in the right direction. Of course, if the IMF, OECD, BIS and others were more than talking shops they might be able to scold or cajole central banks and governments into doing the right thing, but alas they are not.