Strictly: Drilling

[Old Frank P]

** THE PAPER AGE
by John Myers

In my 17th year I spent the summer working with our neighbor Mr. Lynch. Our project: to encircle a quarter section of land with rail fences.

Lionel Lynch had the best stories. He was a World War II Veteran and a self-made millionaire. He was also an old- time farmer who drove a beat-up Ford truck. Riding along in the truck he used to tell me about the landing at Normandy beach, the push through France and a German sniper's bullet that missed his heart by inches. I remember asking and then being allowed to see the scar.

One windless day in August, the sun was grueling. Mr. Lynch drove the claws of his hammer into a post and said, "Time for a break." He went to the back of his pick-up and threw-off the gunny-sack that was covering a gallon of Mrs. Lynch's homemade iced tea. We sat on the hood of the truck and old Lionel surveyed the rolling tide of ripening wheat fields that stretched to the foothills.

He dug into his greasy coveralls and reached for his zigzag papers and a pouch of tobacco. Within seconds he had fashioned a cigarette, snapped a match to life from his boot and inhaled a big drag.

"This is a wonderful land we live in," said Mr. Lynch. "And they ain't making anymore of it."

It may not have seemed that way during the 1980s when the rolling recession plowed a deep gouge into farmland prices. In Alberta a section of land that would grab $1,000 in 1980 would fetch only half of that a few years later. It was the same throughout North America where not only land, but hard assets across the board fell into steep retreat.

Metals - base, precious and strategic - dropped precipitously in the 1980s, as did grains, cotton and almost everything else from hogs to coffee. The CRB Index of commodities fell by almost a third between 1980 and 1985.

The age of paper had arrived and it seemed not only profitless, but downright stupid, to hold anything else.

Beginning with a broad rebound in the Blue Chips in the 1980s and continuing with the NASDAQ in the 1990s, the stock market was the only game in town. At silver's high in 1980, nine ounces of the white metal would buy you a single share of the Dow Industrials. By 1999 you needed a wheelbarrow to carry 2000 ounces of silver to buy one share in the Dow.

Yet, something very strange has been happening over the past couple of years. The stock market has staggered, while hard assets have been moving up slowly but surely.

So what exactly is happening? I think I have the answer, and it relates back to that summer's day with Mr. Lynch.

A few years later, economics professors in big auditoriums using fancy charts and complex names would teach it to me. But it was the same lesson, one of supply and demand. As the supply of anything grows, from apples to atom-busters, the price of it falls. Now this is where it gets interesting.

The only thing that has been really growing by gangbusters over the past 10 years is paper...money, US dollars.

In 1992 M3, a broad-based measure of dollars, stood at $4.2 trillion. Currently M3 totals about $8.1 trillion dollars, or almost double what it was a decade ago. If we take the much smaller measure of currency in circulation we see that during the same period it has grown from $267 billion to a shade under $600 billion. That's correct, there are more than twice as many greenbacks circulating in the world today as there were 10 years ago.

Now let's compare that to the amount of gold in the world. Each year miners deliver about 50 million new ounces of gold from the ground. That adds about one-half of one percent to the world's total reserve of gold. Roughly speaking, the amount of above-ground gold has grown from 9.5 billion ounces to 10 billion ounces over the last ten years. That means while the number of dollars has doubled in a decade the amount of gold has risen by only 5%!

To give you an idea of how much gold is produced each year: the entire annual harvest could be put into an 18- square-foot cube. The cold hard truth is that gold supplies are growing at less than 1/10th the rate of the U.S. money supply.

It is the same for almost every commodity. Water is in critically short supply, as is arable land. That means that repeating the Green Revolution of the 1950s and '60s is all but impossible. World grain farmland increased until 1980. It has been on a steady decline since. The reason? Take your pick - soil erosion, waterlogging and salting of irrigated land, air pollution and water shortages.

Less water, less food, and, it seems, fewer mineral deposits.

Paul van Eeden, a stockbroker at Global Resource Investments, understands the growing scarcity of hard assets. "Let's look at an example of depletion and discovery. Worldwide copper consumption is about 33 billion pounds per year," writes Paul. "To put that in perspective, the biggest copper mines in the world contain on the order of 20 to 30 billion pounds of copper, which means that our annual consumption depletes the equivalent of one major copper deposit a year."

The drawdown in global mineral reserves has resulted in mineral companies slashing their exploration budgets. According to the Metals Economics Group, total worldwide nonferrous exploration was $5.2 billion in 1997.

But mineral exploration expenditures declined by 29% in 1998, 24% in 1999 and another 7% in 2000. That brings the total exploration expenditure at the beginning of the millennium to only $2.6 billion, 50% of what it was only three years prior. Mineral exploration is not keeping up with the historical norm.

Demand for hard assets is soaring. The Developing World is bent on creating its own Industrial Revolution. That means massive amounts of raw materials are needed.

For example, if China were to pursue "an automotive economy" similar to the US as they proposed in 1994, there would be a resource boom like no other we've see in history. "If the Chinese were to drive as many per capita passenger miles as Americans currently do each year," Benjamin R. Barber in the book Jihad vs. McWorld "it would take only five years to use up all the earth's known energy reserves."

In my book, a soaring demand for natural resources of every variety in the face of dwindling supplies coupled with an avalanche of paper dollars makes up a very simple equation. And if Mr. Lynch were still around today, I believe he would come to a similar commonsense conclusion - the value of hard assets is set to soar against a sorry U.S. dollar.

Yours for opportunity,

John Myers,
for The Daily Reckoning
http://www.dailyreckoning.com/