Value Microcaps Motherboard

[roguedolphin]

Martin Weiss ....(another good read!)
Monday May 30, 2005


Dear Subscriber,

The price of oil is turning up again, surging last week by
more than 9% and blasting back over $50 per barrel.

Watch it carefully over the next few weeks. If last week's
rise is sustained, it will re-ignite recent fears of
inflation ... push long-term interest rates back up ...
light a fire under the gold market ... and put the kibosh
on the stock market rally.

No matter what, do everything you can to better understand
the powerful, fundamental forces likely to drive oil prices
higher this summer and beyond.

One person who's got his finger on the pulse of these
forces is my associate, Larry Edelson, contributing editor
to my Safe Money Report and editor of his Real Wealth
Report.

It was based primarily on Larry's fundamental insights that
we forecast $50 oil three years ago. It was also Larry who
urged me to recommend energy stocks to subscribers,
delivering stellar appreciation and high, steady yields.




MY INTERVIEW WITH LARRY EDELSON

MARTIN: Some observers are saying that last week's surge in
oil was a fluke. They say it was just an over-reaction to a
report from the U.S. Energy Department showing an
unexpected drop in the nation's oil stockpiles.

LARRY: Maybe. But anyone who gets hung up on the short-term
fluctuations in oil needs to have their brain reprogrammed.
If any market is being driven by long-term megatrends, it's
this one.

The long-term, virtually unstoppable surge in oil you see
in this oil price chart below is no fluke.

The acceleration in the price rises that began around July
of last year is no fluke.

And although nothing can be absolutely certain, last week's
surge that you see at the very right of the chart is also
consistent with the long-term, no-fluke pattern.

To view the chart, click here ...
http://www.martinonmonday.com/i/080/chart1.html

MARTIN: The long-term picture is clear. But tell us what
you think is going on right here and now.

LARRY: Let me sum up recent events: Oil jumps to $58.
There's some profit-taking and it falls back to $50, a
perfectly normal correction in a major bull market. Then,
it dips a bit below $50, and suddenly people think the
surge is all over!?

That's baseless. Right now, oil is within 10% of all-time
highs. Just a week or two more of the kind of price rises
we saw last week and you'd be back up there again ... or
beyond.

MARTIN: What's driving this?

LARRY: Exactly the same thing that's been driving it all
along -- China and India. Over two billion people. Nearly a
third of the world's population.

MARTIN: You were there recently. What did you see?

LARRY: First let me tell you what I didn't see. I didn't
see any signs whatsoever of a slowdown. And believe me, I
looked hard. I talked to central bankers, business
entrepreneurs, and people on the street. Back in the U.S.,
there's plenty of talk about threats to the Asian boom, and
there are some. But they're just not a factor right now.

China's GDP came in at 9.5% for 2004. The Chinese
authorities tried to cool it off a bit. But they failed to
do so.

MARTIN: Some people say it's a bubble. Do you agree?

LARRY: In some aspects, perhaps. But at the core of this is
the phenomenally rapid growth of the middle class in China
-- now close to 280 million people. That's almost the same
as the ENTIRE U.S. population, all classes included.

MARTIN: Why such rapid growth? And why do you think it will
continue?

LARRY: Because of the rapid diffusion of consumer
technology -- computers, cell phones, the Internet, cheap
automobiles.

You're a cultural anthropologist. So you know what I'm
talking about. When new technologies are introduced into a
relatively well-educated but low-tech society, they spread
like wildfire. The culture and the economy are transformed.
And the transformation gains a life of its own, at a
grass-roots level.

This transformation has little or nothing to do with
government edicts. The Chinese government didn't start it.
And they can't stop it.

MARTIN: Why so fast?

LARRY: Look at it this way. Just a few years ago, the
Chinese middle class -- and middle-class buying power –-
was isolated to a few pockets here and there. Now, it has
spread out and engulfed almost all major urban centers in
China.

A few years from now, it could double in size. And that
will still be only about half of the total Chinese
population. Suddenly, you'll have the equivalent of TWO
U.S. populations driving up the price of oil, industrial
metals, precious metals, and raw materials.

And that's just one country -- China. We see a similar (but
not identical) pattern in India, which is nearly as large.

This is causing huge demand for natural resources, taxing
Mother Earth to the max. Oil -- energy -- is the prime
target of that demand.

Will there be recessions and busts in Asia? Of course. But
this demand is not going away in your lifetime or mine.
It's going to be there for decades.

MARTIN: I just read about the huge shopping malls in China
in the New York Times. They say that, already, four
shopping malls in China are larger than the Mall of
America. Two are even bigger than the West Edmonton Mall in
Canada.

People are swarming into the malls. On just one day, one
mall in Southern China attracts about 600,000 people. They
come by car, by bus, by train. Isn't this the sign of an
economic bubble?

LARRY: If you told me those shopping malls were being built
here, in Europe, or in Australia -- I'd say yes, that's
another signal of a bubble in those industrialized
countries. But not in China. The living standards of an
estimated 400 million people in China have now been raised
above the poverty level, and they are just starting to
shop.

MARTIN: Are there any other signs that support your view?

LARRY: Many! Take steel production, for example. Steel is
at the core of a country's industrial machine. As long as
steel production is growing rapidly, you know that a major
industrial transformation is still underway and that its
momentum is bound to continue.

China alone has pushed world steel production up by
one-third in the last five years. Last year, China's steel
production exceeded the billion-ton threshold for the first
time. Overall, China now produces a whopping 27% of the
world's steel.

But even that's not enough steel to meet Chinese demand!
That's why China's now cutting deals with Australia,
Argentina, Brazil and many more countries -- they need
those countries' iron ore to make steel.

According to Vital Signs, the source of this chart below,
China's rise is as if all of Europe, Russia, and North and
South America were simultaneously to undertake a century's
worth of economic development in a few decades. Add in India
and Southeast Asia -- and you're talking double that!


MARTIN: So you've got massive growth in China and India.
Assuming that continues unabated, what does it mean for
oil?

LARRY: At the very minimum, it means you've established
firm underpinnings for a solid floor under the price of
oil.

MARTIN: At what level?

LARRY: Close to $50, give or take a few dollars in either
direction.

MARTIN: $50? A floor? That's quite amazing. For years, you
and I talked about $50 as the next major upside target for
a barrel of oil. Now, $50 is emerging as the floor for a
barrel of oil? Unbelievable ... and yet, at the same time,
very logical. But suppose it dips to the low $40s like some
people are saying.

LARRY: That won't change a thing. The key is: How long will
it stay there? A temporary dip means very little. This is a
classic "buy-the-dip" market.

MARTIN: You've talked about the demand. What about supply?

LARRY: We're running out! The world is running out of oil.

MARTIN: What about alternate energy?

LARRY: Still decades away from being a viable substitute.
The world was complacently coasting along with fossil fuels
for decades. Now we're going to pay the price -- a very
HIGH price.

MARTIN: Which alternate technology is closest?

LARRY: There are two -- solar and nuclear.

MARTIN: And windmills?

LARRY: A distant third. But the real sin of the supply
situation is that in the late 1990s, when everyone was
enamored with high tech, when investment bankers and
venture capital firms were throwing good money at the
dot-bomb companies, they ignored the basics, especially the
energy infrastructure. So capital was diverted from
necessity to greed.

Right now, China is trying to rectify that by mandating 10%
reliance on solar for all energy needs by 2008. That's just
a short three years away. So to the degree they can make
the mandate stick, it's going to drive up the demand for
solar technology.

MARTIN: Who's going to fulfill that demand?

LARRY: I'm looking at two companies right now. They'll be
in an upcoming issue of my Real Wealth Report.


NEAR-TERM OUTLOOK

MARTIN: Let's refocus on the near term. What's going to
happen this summer?

LARRY: The summer travel season is going to be bigger than
expected. We can already see preliminary signs of that –-
with an upsurge in airline travel. Higher fuel prices are
still not making a dent in travel. They have to go a lot
higher before that's going to happen.

But despite all the talk about big shortfalls in refining
capacity in this country, we still don't see hardly any
movement to add capacity. No new refineries have been built
in 25 years! Can you believe that? All those new autos on
the road, all those new SUVs and trucks, all that growth
over a 25-year time span ... and not one new gasoline
refinery!? It's crazy.

MARTIN: Supply is tight. We know that. But what could
change it?

LARRY: What could change it is a series of unexpected
events that make supply even tighter -- that throw us into
a panic. Panic shortages. Panic buying. Panicky energy
markets driving prices through the roof.


WORLD'S HOT SPOTS

MARTIN: I know you can't predict this, but name a few. If
it doesn't happen, we won't hold it against you.

LARRY: Start in the most obvious place -- Iraq. Oil
production in Iraq is still far below projections. Their
drilling and refining facilities are falling apart.
Dilapidated. Dangerous. In disarray.

But their oil ministry is between a rock and a hard place.
If they want to rebuild the oil industry infrastructure,
they have to stop oil production. But if they stop
production, they don't earn the money they need to rebuild
infrastructure.

MARTIN: So what are they doing?

LARRY: Nothing. Just pumping whatever they can. They need
the money NOW. So they're pumping oil now -- despite huge
waste. But it's not nearly enough because of the decaying
facilities. Besides, why invest big bucks in new rigs or
refineries if they could be blown up by insurgents at any
moment? It just doesn't make sense right now.

MARTIN: And beyond Iraq?

LARRY: Iran! I don't think you can rule out an attack by
the United States. But if Iran moves forward with nuclear
weapons development, which I suspect they will, you should
also keep your eyes open for a possible pre-emptive strike
by Israel.

Internally, Iran also has serious problems. The country is
boiling up toward a confrontation between the
fundamentalists and the reformists, which could be almost
as disruptive as the fall of the Shah.

Beyond Iran, nearly all of Central Asia is a tinderbox, on
the verge of a fundamentalist revolution. I'm talking about
former Soviet republics that are major sources of the
world's natural resources.

MARTIN: Bring that home to us. What does that mean for the
oil markets? What does that mean for gold and other
commodities?

LARRY: Even if there is no blow-up, it means more support
for the floor I told you about earlier -- not only a floor
near $50 for oil, but also a floor in the low $400s for
gold.

MARTIN: Please explain.

LARRY: Oil traders are afraid they could wake one morning
to the news of a major attack on an oil facility somewhere
in the world, driving crude up by $5, $10, even more.
Short-sellers are even more antsy. So that gives the market
buying support on any dips. No one wants to be out of the
market -- let alone short the market -- for any length of
time.

MARTIN: What else are you worried about?

LARRY: I'm worried about oil production in Venezuela, now
careening toward a confrontation with the United States.
I'm worried about production in Nigeria, on the verge of
another ethnic civil war. I'm worried about the Soviet
Union which, unlike Poland, the Czech Republic, or Hungary,
has had a very choppy transition to capitalism, a
transition that is now getting a lot choppier.

Plus, I'm watching the Spratly Islands in the South China
Sea. These islands encompass the third largest oil reserves
in the world -- under the ocean floor. But the entire
territory is in dispute.

It's claimed by China, Taiwan, and Vietnam. Parts are also
claimed by Malaysia and the Philippines. Japan and the U.S.
also have a big stake because the islands are smack in the
middle of the biggest oil shipping route in the world –-
the one through which oil flows from the Persian Gulf to
Japan and the West Coast of the Americas.

MARTIN: What could be the outcome?

LARRY: The area could be blocked off due to territorial
disputes, causing shipping delays. If world supplies were
abundant, no big deal. They'd work around it. But with
world supplies so tight, the impact could be dramatic.

MARTIN: This all sounds very volatile and a source of some
major windfalls for aggressive investors. But if you're
more conservative, what would you be buying right now?

LARRY: I like the Canadian royalty trusts, like Enerplus. A
nice 9% dividend yield. Great potential for capital
appreciation. Nothing is guaranteed. But this stock is like
an ATM machine. All they do is buy interests in solid
properties, collect royalties, and pay it out in dividends.

MARTIN: One final question. Where is oil headed? Ultimately.

LARRY: Go back to basics. When oil fell to $10 a barrel in
1998, it was the steal of a lifetime. That was less than 24
cents a gallon for oil and the equivalent of 51 cents for a
gallon of gas. Those prices hadn't been seen since 1973,
and the dollar has lost 95% of its purchasing power since
then.

It was artificially depressed because almost everyone was
investing in the stock market and technology and no one
cared about oil.

But a market that's depressed that much doesn't stay that
way for long. Soon, it explodes higher and makes up for
lost time very quickly.

Now, sure enough, the price of oil has jumped from $10 to
over $50. And even that's cheap. Fully adjusting the price
of oil for the depreciation in the dollar since 1973 means
oil should be close to $100.

MARTIN: Thank you for your insights.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc


Rogue