Today one of the top money managers in the world told King World News that the Chinese will unveil a gold-backed currency as this major market surges…

Stephen Leeb:  “As we approach the end of July, gold has eked out a 2 percent gain for the month. Not bad, but considerably below the 8 percent gains in commodities like oil and copper. The point, however, is that trends in all commodities are linked to each other and to gold (which is both a commodity and a currency-in-waiting). I like all commodities here, and that’s a big reason for liking gold – which, as I said in last week’s interview, has likely bottomed as China’s financial markets have become more open and transparent…


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Let’s unwrap the above thoughts in more detail. The reason to like commodities here is one I can’t stress too strongly or too often: the part of the world that is developing the fastest – i.e., developing countries – constitutes the biggest part of the world’s economy by relevant measures such as international dollars. In other words, fast-growing developing economies are now a big enough part of the global economy to count more than the developed world in setting global trends. Their rapid growth will translate into strong and rising demand for commodities, everything from cobalt to copper to oil to zinc and more.

It also will lead to the need for a currency that can be trusted, which means gold. As commodities grow scarcer, producers will become unwilling to hand them over for paper currency that can be debased by firing up a printing press.

King World News - Stunning Facts About China, Russia & End Of Gold Bear MarketRenminbi/Gold Currency To Be Unveiled
As I also said in my last interview, I believe that while gold already has bottomed, the real marker – the sign it’s ready to embark on an explosive uptrend – will come once the Chinese start trading oil based on an Eastern benchmark – perhaps initially denominated in renminbi and then in some combination of renminbi and gold. 

The Chinese, burned in 2008 by the West-engendered financial crisis, view the dollar with abiding distrust, and in conjunction with ever scarcer oil see relying on it as a recipe for disaster. If oil starts spiking, they will stop it by making sure oil trading no longer is done solely in dollars, and that the bulk of it is backed by other currencies, especially gold. I don’t think this is imminent, but I also think an oil spike could happen a lot faster than most people think.

So the statistic I’m watching most closely is the price of oil. If black gold starts running, I want to own yellow gold, lots of it, as the currency that will be able to buy oil. Here is a quick recap of why I am starting to think oil could turn the world upside down in the not-too-distant future.

You may have been reading recently about so-called “peak demand” for oil, a trendy concept that has supplanted the older talk of peak supply. But I find it singularly unconvincing. 

First, as we noted above, more than half the world is developing and per capita income in the developing world is around one-fifth – or less – that of the developed world. Compared to the U.S., it’s around one-tenth. To reach income levels even 50 percent of those enjoyed by the developed world will require enormous quantities of resources, including energy, most of it in the form of oil, with renewables not playing a bigger role until later.

China offers a case in point. Its demand for oil continues to grow at about half the rate of its GDP, even though China also, by a wide and growing margin, not only uses more renewable energies than any other country but also is their largest manufacturer.

The Reality About Oil & Electric Cars
Some of the arguments made for peak oil demand are based on projections of rising sales of electric vehicles. But even if these projections are accurate, oil is used for far more than gasoline, particularly in emerging countries. Even in China, one of most advanced of the developing countries, transportation accounts for about a third of oil use compared to about 50 percent in the U.S.

In the developing world, the bulk of oil use goes to industry, infrastructure, and mining. After all, you need roads before you can drive. So while there is no doubt that someday oil demand will peak, it won’t be until there are enough material goods in the developing world to allow for a decent standard of living.

Those – including myself – who believe the real threat is peak oil supply, not demand, clearly have been on the defensive in the past few years as supply has increased faster than demand and oil prices have crumbled, at least relative to their highs of the last decade, though they’re still two-and-a-half times their price in the 1990s. And before you suggest that doesn’t take inflation into account, you can bet that oil eats up a bigger share of income of Americans at median-income levels or below than in the 1990s.

No one in the peak oil supply camp has ever argued we’d get to where we’ve literally used up the last drop of oil. The salient point, rather, as I’ve been saying for years, is that there’s a big difference between peak oil and peak affordable oil. After all, there could be oil on the moon or elsewhere in the solar system. The question is how much it would cost to get it, and the answer is that the cost would be far higher than the oil ever would be worth. Even more important, retrieving that very expensive oil would require using up more oil than we’d obtain.

When fracking came along, it supposedly had breakeven points with oil in the 30 to 50 area, numbers that probably would not have worked in the 1990s but are generally believed to work in the present. Fracking has added enormous amounts of oil to the U.S. energy supply. Oil production, which averaged about 5.5 million barrels a day in 2012, today exceeds 9 million barrels.

US Demand For Oil Increasing!
But a funny thing is happening in the oil patch that has received little or no attention. U.S. demand for oil has been growing, in contrast to other developed countries where demand has declined over the past five years. Okay, you might say, the U.S. economy has been performing a bit better than other developed high- income countries. Yes, that’s largely true, but the difference in growth rates isn’t enough to account for the difference in oil demand.

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The chart shows weekly U.S. oil demand along with two moving averages, one for 52 weeks and one for four weeks. The four-week moving average is at a 10-year high, while the 52-week moving average has topped 20 million barrels a day for most of the past 10 months. You have to go back to 2008 before the economy started collapsing to find comparable numbers. In late June, when oil demand reached an all-time weekly high, most analysts dismissed it as a fluke. But looking at both the short- and longer-term trends, I’d say June’s very high number is more indicative of steadily rising demand than of being some sort of outlier.

Even more striking is the 1.2 percent rate of growth in oil consumption in the U.S. in the five and a half years since 2012. This rate, which far surpasses that of other developed high-income countries, is only a touch lower than the 1.3 percent rate between 1996 and 2005, a 10-year period in which annualized growth averaged 3.4 percent. Since 2012, annualized GDP growth has been 2.1 percent. 

These figures fly in the face of two fundamental observations about oil demand. First, over time, oil demand tends to rise more slowly relative to GDP. That’s because as countries develop, the service sector, which consumes much less oil than other sectors, becomes an increasingly large part of the economic mix. About 80 percent of the U.S. economy is services. For China the percentage is a bit above 50 percent, while overall for the developing world it’s below 50 percent.

Second, regardless of how developed an economy is, there is a direct relationship between economic growth and oil consumption. If growth slows, so does oil consumption. Indeed, over time thanks to a greater focus on services plus conservation, demand for oil can actually decline when economic growth is tepid. 

Oil consumption in the U.S. has been violating these strong observational relationships in spades. Especially remarkable is that in the 10-year period ending in 2005, oil demand increased 38 percent as fast as economic growth, while in the most recent period energy demand increased 57 percent as fast as economic growth. That is even faster than China’s recent growth in oil demand relative to GDP.

What gives? Fracking is becoming the here-and-now version of getting oil from some spot in the solar system – the idea that you can get oil if you’re willing to invest more oil than you obtain. I’m not saying we’re at that point yet (though we might be). But with so many of fracking’s sweet spots already drilled, and with rapid depletion rates making it necessary to keep drilling ever more new wells, fracking’s call on oil, along with other resources, will only increase. 

Gold & Oil Will Both Soar
Sometime in the not-too-distant future investors will wake up to a world in which oil demand is rising, supply at best is stuck in neutral, inventories are falling, and excess capacity is skimpy and getting skimpier. It will be a world in which oil prices trend sharply higher – and gold takes off.”

***KWN has just released the remarkable KWN audio interview with Bill Fleckenstein and you can listen to it by CLICK HERE OR ON THE IMAGE BELOW.

kwn-fleckenstein-mp3-7292017

***ALSO JUST RELEASED: A Brilliant Piece From DiMartino-Booth, Plus A Note On Consumer Super-Confidence In Stocks CLICK HERE.

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