The Fish Wrapper By The BigFisherman

Thursday - April 6, 2006

Precious metals and their shares continue to surprise to the upside. Most forecasting models and mavens are bullish but negatively biased, forecasting too many bearish outcomes. This process is accelerating, as the trend out runs increasing numbers of bulls. The quant in me hints that the higher order moments of some underlying forcing function must all be positive. That is, the acceleration is accelerating, or surging. And while physical interpretations of the 4th, 5th, and 6th derivatives are a bit obscure, their proposed names, snap, crackle, and pop offer intriguing possibilities. Long term consistently growing physical demand is the only environment for this type of pattern. And while these elements have little practical value, it spooks me that I can not rule out such a powerful forcing function. This is rare. Thus I have recently hypothesized a gnawing primal fear is likely behind this physical demand. Greenspan supports this view. Having kyped the imperial jawbone, he attributes the recent strength in gold to geopolitical instability. But it goes much further. The acceleration patterns in the most durable stores of value and the geopolitical instability are the effects of primal fears. Primal fear demands primal action. As time progresses I expect the demand for gold and silver to become astonishingly parabolic. Pop.

But our esteemed past fed chairman believes that our central bankers can manage the situation, that they have duplicated the discipline of the gold standard, and that they have even improved risk spreading with innovative financial instruments. But should Bernanke wrest the jawbone from the maestro he will likely voice loudly his conviction that such discipline is as archaic as the metal itself. That these instruments can even be used to manage prices. He will be better to remain silent and not be thought a fool, I think. The magnitude of the fear in these markets very well may exceed any financial efforts on the part of any central authority. Central authority will, however, make all efforts to continue defying the laws of physics perhaps inducing some negative cackle, er crackle, until they can’t.

The source of this fear is resource depletion due to overpopulation. The situations vary, but throughout the world, nearly everyone is faced with scarcity and a reduced or more expensive standard of living. But for most the shortage will soon be food, thus the undercurrent of urgency in things geopolitical. I expect that these nagging fears will expand wars of conquest as cold and hunger will drive the masses to realize that civil authorities are unable to deal with physical shortages of food and energy. Concurrently, state and private financial systems will move from distorted to draconian to dysfunctional as discontinuities and irregularities occur with increasing frequency. A low intensity global civil war will evolve aligned with the ideological differences between communism and fascism. These and other populist agendas will rein supreme; however, the battles fought and structure imposed will fail to address the shortages. So institutions will continue to fracture as society reorganizes to answer the threat. Public health will suffer under the chaos and global disorder. Disease will follow hunger, and bring population levels in line with significantly reduced levels of resources and a temporary inability of society to efficiently utilize what remains. But society will recover, and magnificently so. It will do so at an unimaginably rapid pace, quite simply, because individuals and communities that have prepared will prosper and rebuild. But you will not recognize what it has become, both in its splendid accomplishments and in its reduced size.

Of course there are endless scenarios, all most fearsome unless well understood. What I have described is the general form of the fear that I get with my Delphi approach using scientific and financial mavens. I am looking forward to the day when the application of this method is less of an exercise in staring into the abyss, and more of a message of hope. But fear dissolves as likely courses of action emerge. A matrix of probable outcomes can guide our asset allocations through the next few years. And the future is very bright. I can envision a biotechnology driven agrarian revolution where there is sufficient food, and we no longer need to eat oil. Nanotech can offer solutions to many material shortages. And I believe that there will be technologies and industries yet undreamt of that will mitigate many of man’s challenges. And there is time, but unfortunately not for all. Only a minority will benefit from these technologies. So you must own biotech, but not just yet. Nanotech could make you rich, someday. And basic materials are already on a tear: anticipating shortages in the face of a global boom? Well, perhaps one might dabble in strategic minerals, especially oil. But only if this fear is unfounded will this China boom persist until a Kondratieff spring. Precious metals should perform quite well under either scenario. So that leaves them as the best core strategy for the preservation of wealth: All others being speculative for now, and all others purchased in distress with precious metals held dear, when the time is right.

Since our last publication three of my share recommendations have been acquired, two by companies that we recommend as well, and the other by a company on our watch list. Our strategic weightings are keeping our performance well ahead of the precious metals indices, but they are shifting in relative performance and some adjustments are warranted.

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