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The Global Financial Market took a big hit in 2015 and most investors have no idea why. The U.S. and global financial system both sit on a foundation that continues to erode each year. While the disintegration of the global financial substructure has been going on for many years, last year was a BIG ONE.
How big? Well, lets say.... the worst in 60 years. So, what am I referring to here? Well, I imagine some of you who have been reading my work for several years probably have an idea. However, before I share this information, I wanted to say a few things about the precious metals.
Last week I listened to the Future Money Trends, EPIC Silver Debate! Bull vs Bear: Gary Christenson & David Trungale. The silver bull was Gary and the silver bear was David. Basically, Gary provided technical and some fundamental data why he saw the price of silver moving much higher over the next two years, while David said the market would continue to see low silver prices for quite some time.
David Trungale stated that someone who bought silver in 1980 (at the top) would have to wait several decades to get the return on one's investment (I am paraphrasing here). Mr. Trungale believes that it could be quite some time before silver investors saw higher prices. I gather David is gauging his silver forecast by low inflationary forces and a similar silver washout timeline from 1980-2005.
While both individuals put out interesting information to prove their opinion on the future price move in silver, I think a few points need to be added to the debate.
1) The reason we had nearly three decades of floundering silver (and gold) prices, is that the world was busy funneling their hard-earned funds into every single paper asset under the sun. I have written and spoke about this in many articles and interviews. Thus, the funneling of investors funds into paper assets kept them from going into physical assets such as gold and silver. I discuss this in my recent article The Historic Dow Jones-Silver Ratio Points To $300 Silver.
2) The U.S. financial system continued to function on the back of the fiat U.S. Dollar due to a different bubble economy each following decade and the Petro-Dollar system. As I mentioned in the article linked above, the U.S. had the 1980's Military Spending Bubble, the 1990's Tech Bubble, the 2000's Housing Bubble, and the current Auto, Housing, College, HealthCare, Stock Market, Retirement and U.S. Treasury Bubble. This along with the recycling of U.S. Treasuries for oil kept Americans buying everything under the sun especially each new gadget, trinket and gizmo they could get their hands on.
3) The world enjoyed a growing oil (energy) supply for the past 3+ decades. However, the Peak of cheap energy is NOW here. David Trungale believes silver will continue to languish for years, if not decades, because he doesn't understand the ENERGY PREDICAMENT the world is in. Remember this... Rising energy production drove the value of paper asset prices higher, while falling energy supply will destroy them. Thus, the place to store wealth in the future will be in physical gold and silver, not declining paper assets.
Okay, that last point is a good segue into the eroding foundation of the financial system.
Why The Foundation Of The Financial System Took A Big Hit In 2015
The global financial system gets its power from burning energy. Yes, that's right... another article on energy. While some of my precious metals readers are rolling their eyes, the following charts and information are vital in understanding the future value of gold and silver.
According to the data put out by the IHS Company published in a recent article from EconomicCalendar.com, the world spent a lot of capital and found 2.8 billion new barrels of oil (and associated liquids) in 2015. This was nice, however the world also consumed a whopping 29 billion barrels that year:
This is a very bad sign indeed. The world oil industry replaced less than 10% of the oil it consumed in 2015. The EconomicCalender.com article, Crude Oil Exploration Drops To A 60 Year Low In 2015, stated the following:
Most of the newly discovered crude deposits are deepwater. It takes seven years, on average, to develop such deposits and begin producing oil from them, therefore, current exploration results could lead to a supply shortage in the mid-2020’s.
A steep fall in oil prices, that began in 2014, led many producers to cut their expenses. Exploration took the biggest hit, as this type of expense isn’t expected to cause an immediate effect. ConocoPhillips, for example, has rejected exploration altogether, while Chevron and a number of other companies substantially curbed their operations.
The article states that most of the new oil discoveries came from deepwater. Furthermore, ConocoPhillips has rejected oil exploration altogether. We must remember, ConocoPhillips is one of the three major oil companies in the United States.
So, why are most of the new oil discoveries in deepwater?? Because most of the less expensive inland oil discoveries have been found already. This is why we move to looking for more expensive oil offshore.
This next chart shows the declining worldwide petroleum discoveries. Unfortunately, the data in this chart only goes up until 2005. However, it provides a troubling trend:
If we take a close look at the chart, there are several points worth discussing. First, world oil demand (Black line) is only about 24 billion barrels a year. In 2015, global oil demand was 29 billion barrels. Secondly, the future discoveries (Blue bars) suggest approximately 5 billion barrels was forecasted to be discovered in 2015.
The world didn't find anywhere near 5 billion barrels of new oil in 2015... it was only 2.8 billion barrels. Lastly, the oil we are discovering now has a much lower EROI - Energy Returned On Invested than the oil we found 60 years ago. This is a very important aspect that isn't factored into the future energy equation.
Here is an excellent chart by energy analyst Art Berman from his article, The Crude Oil Export Ban--What? Me Worry About Peak Oil?
As Art shows, conventional oil production peaked back in 2011. What has continued to grow is unconventional oil production. This is the extremely expensive stuff. This expensive oil was extracted and supplied to the market with the help of the Fed and Central Bank zero interest rate and easy monetary polices. These are policies that will not continue indefinitely.
Unfortunately, we are living on past cheap-low EROI oil discoveries. I believe the world will not be able to afford the expensive future oil discoveries we are currently finding due to the massive amount of debt in the system.
This is precisely the reason I disagree with the analysts who are bearish on silver. There will not be another 20+ years of a silver price washout as their was from 1981 to the early 2000's. Again, this is due to the peak and decline of cheap oil production.
As I have stated in several interviews and articles, U.S. oil production is likely to decline 30-40% by 2020 and 70-75% by 2025. The United States will be in a world of hurt as domestic oil production drops like a rock. This will put severe stress on most paper assets (debts)
This is the precisely the reason silver will not suffer the same trend as it did from 1981-2005. The global financial system took a big hit last year as the world added the least amount of new oil discoveries in 60 years. Investors or analysts who believe we will see a return to higher oil prices and production will be sorely mistaken. Again, this is due to the massive debt that overhangs the system.
Lastly, if you haven't checked out our new PRECIOUS METALS INVESTING page, I highly recommend you do.
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