Month: May 2012

By MoneyMorning.com.au

The next phase of this ongoing global crisis may take place in Japan’s economy, not in Europe or the US. This may seem unlikely, given what’s still going on in Europe. Youth unemployment is over 50% in Spain. You’re seeing the limits of economic and monetary policy in Europe. People (some of whom admittedly have vested interests in keeping a cheque from the government coming) are resisting the elite’s policy changes and money shuffling.

The next stage of the European debt crisis is political. But the next stage of the world monetary crisis will probably begin in Japan’s economy. It all goes back to last year’s devastating earthquake, tsunami, and nuclear crisis. That sequence of events has turned Japan into a long term net energy importer. And that single change threatens to send Japan into a major debt crisis this year.

Here are the relevant facts about Japan’s situation:

• Fiscal deficit 10% of GDP
• Annual revenues of ¥45 trillion
• Government debt-to-GDP ratio of 230%
• First full-year trade deficit since 1980
• Interest expense will consume revenues at higher interest rates

Japan has run a huge government deficit for years. The current debt-to-GDP ratio of 230% is the highest in the developed world. Before last year’s earthquake, this wasn’t a problem. Japan was a nation of savers. And with a current account surplus, it could finance its own deficits with its own savings. Japanese savers were happy to buy government bonds, which, after all, were a lot better than stocks or real estate – especially for a large group of savers approaching retirement age.

Well, retirement age is now upon Japan. That is one complicating factor for Japan’s ability to sustain large deficits. Retirees are starting to live off their savings, instead of socking the money away with the government. But it gets worse.

The single-biggest economic consequence of last year’s three-part tragedy is that Japan is likely to run current account deficits for a long time. Why? It will now have to import energy, which means buying it at competitive prices on global markets (this is good for Australia, actually).

Japan’s fleet of nuclear power plants will stay idle for some time. It may never get back to full capacity. As you know, Japan is not a nation that’s rich in hydrocarbons. But it’s high end manufacturing industry requires tremendous amounts of electricity.

That electricity will have to come from either coal or natural gas.

It’s not hard to see where this story is going. And we’ll get their shortly. But aside from the rather bullish energy picture, the other major economic consequence is that Japan’s fiscal deficit is becoming more unstable by the day. As the figures above show, the interest on public debt has grown so large that it’s nearly consuming all of the government’s annual tax takings. Annual deficits continue to grow.

The Ponzi Finance Phase for the Japanese Economy

When you reach the point where you have to borrow more money just to pay the interest on money you’ve previously borrowed, you’ve reached what Hyman Minsky called the stage of “Ponzi Finance”. Japan is nearly there.

Now, the first consequence of reaching this point is that Japanese interest rates may start going up. That would be disaster. A rise in interest rates would consume even more of the government’s annual tax takings. You’d see a feedback loop in which debt costs quickly spiral out of control.

But that’s only if Japan must borrow in international markets. Keep in mind the Japanese government is not the only government seeking to borrow trillions of dollars (yen, euro) in the next five years.

This demand for credit will crowd out corporate borrowers. And in any event, the borrowing needs of governments exceed the amount of savings the world has accumulated. Something has to give.

What I expect to happen is that the Japanese will simply monetise new debt. Instead of selling the debt to investors, who will demand higher interest rates based on Japan’s deteriorating fiscal condition, the Bank of Japan will print money. This means Japan may be the first Western Welfare State that reaches the endgame phase of Ponzi Finance.

Dan Denning
Editor, Australian Wealth Gameplan

From the Archives…

Why China’s New Consumer Economy Won’t Give You the Trade of the Decade
2012-05-04 – Kris Sayce

Why China Could Be The Next Destination For the Financial Crisis
2012-05-03 – Merryn Somerset Webb

How Did We Get It So Wrong on Australian Housing?
2012-05-02 – Kris Sayce

This Indicator Shows the Copper Price Could Be Set to Soar
2012-05-01 – Dr. Alex Cowie

How Gold Nanoparticles Will Create A New Kind of Gold Rush
2012-04-30 – Michael Robinson

Why You Should Be Watching Japan’s Economy

By MoneyMorning.com.au

Why buy gold?

One of the problems with putting a price on gold – as gold perma-bears regularly point out – is that it doesn’t pay an income.

Generally, the starting point with valuing an investment is to work out how much income it will pay you in the future, then work out how much you are willing to pay for that.

With gold paying neither dividends nor rent, you can’t do that. So how do you value it?

I’ve just read an interesting report from Julian Jessop at Capital Economics that has a crack at it…

Three Scenarios for Gold: From $1,000 an Ounce to $5,000

Capital Economics has outlined three scenarios for gold over the coming few years. The basic assumption underlying the scenarios is that gold ultimately benefits from financial shocks. In this case, their biggest concern is the eurozone.

Jessop notes that gold has ‘moved fairly closely in line with the cost of insuring against sovereign defaults in Europe.’ In other words, as anxiety grows about the condition of Europe, the gold price tends to rise.

Their central scenario is that Europe experiences a ‘relatively orderly’ break-up, with one or more small countries leaving the eurozone. As a result, the Federal Reserve would keep monetary policy ultra-loose (even if it avoids more quantitative easing), and gold would rise to $2,200. Even at this price, it would still be lower than the inflation-adjusted all-time high of 1980 (which was $2,400 in real terms). It would also be reasonably priced compared to oil.

But what about other outcomes? There’s the disaster scenario, of course. If there’s ‘a chaotic break-up of the euro’, then this could well result in a Lehman-style financial crisis. Throw in a military conflict between the West and Iran, and you could see the gold price spike to ‘as high as $5,000’. It’s a pretty extreme, though not unthinkable outcome, and Capital Economics only assigns a 10% chance to this scenario.

The other possibility, is the more optimistic view. The global economy continues to recover. The eurozone manages to hold it together. As a result, the Fed starts to tighten monetary policy earlier than expected. In this case, Jessop reckons that ‘the downside for gold should still be limited by strong and rising demand from emerging economies, and we would not expect to see a return to the November 2008 lows [of $710 an ounce].’ But $1,000 an ounce would be a possibility.

I’d say that’s a pretty sensible range of views. But it leaves us with a very wide range of predictions – $1,000 to $5,000 an ounce. And realistically, these could be well off the mark. If the global economy went into meltdown, who knows just how high gold would go? Alternatively, if the economy recovers, and the Fed starts raising interest rates, would $1,000 really mark the bottom?

And none of this takes into account the danger of a hard landing in China. Hedge fund manager Hugh Hendry of Eclectica sees this as being an even bigger threat to the financial world than Europe. Everyone is focusing on Europe, as he notes. Very few people are really paying attention to the risks from China.

So as an investor, what does this mean for you in practical terms?

Gold’s Role in Your Portfolio

We like gold. But as we’ve also noted a number of times, you shouldn’t have all of your money in gold – and certainly not in gold mining stocks. We all have our own views on asset allocation, and what’s right for you will depend on your own circumstances. But I’d see 10% as a reasonable sort of holding.

Gold is insurance. It’s there to diversify your wealth. But it’s also there to ensure that even in a worst-case scenario, you’d still have something of value in your portfolio.

Gold is not like cash in the bank. Its nominal value can go up or down. If you’d piled all your money into gold at the 1980 peak, you’d still be sitting on a loss in real terms (ie after inflation). Just as if you’d piled into stocks at the height of the tech bubble. That should be obvious to anyone who can look at a price chart, but with descriptions like ‘safe haven’ often bandied about, it bears mentioning.

The point of gold is that it offers you some protection when most other assets are going down. Gold’s ultimate advantage over any other asset is that its value cannot fall to zero. It can’t go bankrupt. You can’t say that for any other asset.

So when people are fretting about the state of the global financial system, and the integrity of all other assets, that’s good for gold. Once confidence returns, and other assets start looking more attractive, that’ll be bad for gold.

The point is – as with any asset – to make sure that you aren’t over-exposed to gold, so that even when the bull market in gold ends, the rest of your portfolio is benefiting from the return of the good times.

However, with Europe on the edge, and China wobbling too, I suspect we’re at least one big panic away from genuine confidence being able to return to the market. So I can easily see gold hitting new highs before this bull market is over.

John Stepek

Editor, MoneyWeek (UK)

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Why China’s New Consumer Economy Won’t Give You the Trade of the Decade

2012-05-04 – Kris Sayce

Why China Could Be The Next Destination For the Financial Crisis

2012-05-03 – Merryn Somerset Webb

How Did We Get It So Wrong on Australian Housing?

2012-05-02 – Kris Sayce

This Indicator Shows the Copper Price Could Be Set to Soar

2012-05-01 – Dr. Alex Cowie

How Gold Nanoparticles Will Create A New Kind of Gold Rush

2012-04-30 – Michael Robinson

For editorial enquiries and feedback, email [email protected]

Why Buy or Invest in Gold?

By JW Jones – www.OptionsTradingSignals.com

Friday saw heavy selling pressure coming into risk assets, specifically equities and oil. However, the real driving force behind the selling pressure is likely the result of several unrelated economic/geopolitical events. Clearly the unemployment report had an impact on price action, but strangely enough it would appear to those more in tune with reality that market participants want lower prices so that the next quantitative easing program can be initiated.

Another key development in equities price action as of late has been selling pressure in Apple (AAPL). A few weeks ago we witnessed a sharp downturn after prices surged higher into a blowoff top. Earnings came out and prices jumped again and we have watched Apple’s stock price drop considerably since.

Friday saw sellers circling the wagons pushing the tech behemoth down around 2.25% as of the scribbling of this article. When AAPL was rallying it helped the Nasdaq Composite and the S&P 500 grind higher. Now that it has clearly given up the bullish leadership role, it now appears to be a drag on the price action of domestic indices.

Additionally there was a mountain of economic data released out of Europe overnight which was entirely negative. Spain, Italy, France, Germany, and the Euro-area in general saw their Service PMI readings all come in below expectations. Europe is moving into a recession which whether economists want to acknowledge it or not has implications on domestic U.S. markets. The Eurozone as a whole is the largest economy in the world. Clearly the European economy is slowing, and our exports to Europe will slow as well.

This leads me to the final data point which is still unknown. What will the outcome of the French and Greek elections over the weekend mean for the Eurozone’s geopolitical ties as well as the potential impact on the Euro currency itself?

The answer to that question will likely not be known until late Sunday evening; however by the time U.S. markets open this coming Monday the cat(s) will be out of the bag. This final question leads me to the real topic of this article. The question I want to know is what impact these elections could have on the value of the U.S. Dollar Index as well as gold?

As an option trader, I am always focused on the volatility index (VIX) as well as implied volatility on a number of underlying assets. I came across the following chart courtesy of Bloomberg which appeared in an article posted on zerohedge.com. The chart below illustrates the differential between European Union equities’ implied volatility levels and the EUR/USD currency pair.

Chart Courtesy of Bloomberg

It is rather obvious that EU stocks and the EUR/USD implied volatility levels have diverged. Generally speaking, when volatility increases it means that price action will typically move lower. The higher levels of volatility, the lower the price the underlying will move. There are exceptions to that rule such as earnings reports or key headlines which drive volatility higher, but generally speaking high volatility levels correlate with uncertainty and risk.

What is particularly troubling about the chart above is that the EUR/USD currency pair is seeing reduced implied volatility. This essentially means that the market is not expecting any major moves in the currency pair amid all of the poor economic numbers coming out of Europe.

For those not familiar, the EUR/USD currency pair reflects the value of the Euro against the Dollar. Thus, if the EUR/USD is rising, this means that the Euro is moving higher against the Dollar. The opposite is true when EUR/USD is selling off.

At present implied volatility levels are quite low by comparison to European equities. The zerohedge.com article entitled “Is EURUSD Volatility About to Explode?” shares the following statement to readers, “The last two times this has occurred (in the last year), EURUSD implied vol has rapidly caught up to equity’s risk.”

What that statement means is that it is becoming more likely that implied volatility of the EUR/USD currency pair is going to increase back in par with European stocks. If that takes place, which based on recent data is likely, the intraday volatility in the EUR/USD will increase thus intraday price ranges and sharp moves will become more prevalent.

The long story short is if implied volatility picks up in EUR/USD then it is likely going to be quite beneficial to the U.S. Dollar. The largest concern for Fed Chairman Ben Bernanke has to be the potential for a monstrous move higher in the U.S. Dollar should an unforeseen event arise in Europe. An event such as a disastrous auction or the discussion by German Parliament about leaving the Euro could both help push the Dollar much higher than anyone expects.

A higher Dollar is negative for risk assets and Mr. Bernanke does not like the word deflation at all. None of the central banks around the world like deflation because it means all of the debt they are holding and helping to prop up has a much more significant intrinsic value. If the Dollar is worth more, Dollar denominated debt is also more expensive to pay off.

The U.S. Dollar Index has languished for several weeks, but recently the greenback started to reverse higher and at this time has managed to push above major resistance levels overhead on the daily timeframe. The daily chart of the U.S. Dollar Index is shown below.

If the Dollar remains firm into the bell on Friday which appears likely, the results of the two key European elections over the weekend could provide the ammo needed to really force the U.S. Dollar higher or lower depending on market sentiment. It appears the Dollar wants to go higher currently, but a sharp reversal is not out of the question.

The key level to watch is the 80.76 price level on the U.S. Dollar Index futures. If that level gets taken out, the Dollar could extend to recent highs and beyond should the situation in Europe begin to unravel.

If the Dollar surges what will that mean for gold? Generally speaking most readers would expect gold and silver to move lower on Dollar strength. For a time, that would likely be true, but if a real currency crisis plays out gold and the Dollar might rally together as citizens would try to move their wealth into safe, liquid assets.

Under that type of scenario, gold and silver could both rally along with the Dollar. When the moment finally arrives where the Euro begins to selloff sharply, physical gold and silver will be tough to acquire in Europe.

In the short to intermediate term, gold will likely continue to drift lower searching for a critical bottom. The weekly chart of gold futures below demonstrates the key support and resistance levels that may have to be tested before a major reversal can play out.

Make no mistake, I remain a gold bull in the long term. However, in the short run the Dollar has the potential to outperform gold under the right circumstances. Ultimately it is important to recognize the distinction between selling pressure and what would likely happen in a full blown currency crisis in Europe which is possible, if not ultimately inevitable.

The price action over the weekend on Monday will likely be telling and we could see the beginning of a major move in a variety of underlying assets depending on the election results. Clearly times have changed when U.S. market participants are concerned about what is going on in Europe more so than domestic issues. Unfortunately, we live in very strange times.

Looking for a Simple ONE Trade Per Week Trading Strategy?
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Jw Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

AUDUSD breaks below 1.0225 previous low support and reaches as low as 1.0110, suggesting that the downtrend from 1.0855 (Feb 29 high) has resumed. Further decline could be expected after a minor consolidation, and next target would be at 1.0000 area. Resistance is at 1.0200, as long as this level holds, the downtrend from 1.0474 will continue.

Forex Signals

By The Sizemore Letter

Listen to Charles Sizemore discuss investing for income and more with Dean Barber, Shane Barber and Bud Kasper on America’s Wealth Management radio show.

Dean is a nationally-syndicated radio host and the principal of Barber Financial Group.

To listen, select:

Part 1

Part 2
 

By Central Bank News
Here's today's Central Bank News link list, click through if you missed the previous central bank news link list.  Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.

By MoneyMorning.com.au

In Tuesday’s Daily Reckoning we left off with the idea that a cashless society promotes tyranny. That might seem like an odd subject to begin with today, given the show-stopping 50 basis point cut in the cash rate by the Reserve Bank of Australia (RBA) yesterday. But our job is to be forward thinking. So let’s move forward and think about the future of money.

The future begins now. Actually, it began in 2010 when buses in Sweden stopped taking cash to pay fares. To catch a ride today you have to use your mobile phone. With new payment technologies, mobile phones are also becoming wallets. Sweden is now talking about going completely cashless.

In fact, 97% of all retail transactions in the country are already done electronically. That’s something, when you consider Sweden was the first country in Europe to issue banknotes back in 1661. In the US, electronic transactions account for about 93% of retail sales. We were unable to find the figure for Australia.

None of this seems like a big deal at first. Going cashless is about convenience and efficiency. No one likes carrying around a pocketful of loose change. The gradual digitalisation of money has led countries to quit minting smaller denomination coins. New Zealand stopped minting one and two cent coins in 1990. Australia followed suit in 1992.

Björn Ulvaeus — you know one of the B’s in Swedish pop sensation ABBA — says that a cashless society would reduce crime. He cites figures showing that bank robberies in Sweden are down since some banks stopped carrying cash. He’s also motivated by the fact that his son has been robbed three times. He believes eliminating cash from your pockets will leave robbers with nothing to steal.

There is some debate within the Catholic Church over whether theft is a mortal sin or venial sin. Then again, there’s a good argument to be made that sin is sin no matter what. In either case, we’re betting that people will find a way to rob one another even if there’s no cash. And that’s one of the more obvious issues about moving to a cashless society: security.

Security in a Cashless Society

Physical crime might decrease with a cashless society, but that doesn’t mean crime will decrease. It will just get more sophisticated in nature. It will include identity theft. And it will include ways of stealing your money that we haven’t even dreamed of. What’s more, moving to a cashless society increases the chance that the government and bankers can steal your money even more efficiently than ever through debasement of the currency. We’ll return to that in a second.

Efficiency vs Stability in a Cashless Society

There is an argument to be made that moving to a cashless society increases efficiency by reducing transaction costs in an economy. The example banks like to use is processing physical cheques. To clear a cheque a person has to look at it, then enter a certain number of keystrokes at a terminal and then stamp the cheque, which then has to be stored. All of that time and labour, and time is money!

It’s hard to argue with. The digitalisation of cash transactions corresponds with a huge spike in global trade and commerce. When moving money around the planet is easier, so too is moving around goods and services. Does a cashless society promote more trade and prosperity?

Well, the absence of cash in the financial world has also led to an explosion in cross-border investment and speculation. Here we’re talking about foreign exchange markets, where many trillions of dollars worth of transactions are conducted every day. And don’t forget the derivatives markets, including interest rate futures, which are also conducted on a cash-free basis. Has this made the world a better, safer, more stable place?

If anything, reducing the friction in global money flows has made the world more unstable. Money — or its digital equivalent — sloshes around the planet at lightning speed. Is this efficiency? Or does it just accelerate instability?

In the event, proponents of a cashless society seem to take it for granted that mobile phone networks will always work. What if the network goes down? What if an EMP burst renders all technology with circuit boards useless? What if someone attacks the network? How resilient, redundant, and robust is an economy that uses only electronic cash?

All these issues — efficiency, reliability, privacy, security — are practical issues about moving to a cashless society. If they were the only issues, you’d think they’d be resolved sooner or later. Once resolved, the world could move on to a glorious cash-free future. But there is one last issue left. Namely, what is money?

How Will Money Be Defined in a Cashless Society?

Is money a real thing, a commodity? Or is it an abstraction and a social construct? Normally you wouldn’t have to ask a question like this. You reach in your pocket and trade the paper there for the thing you want. It works without thinking. But it only works if everyone agrees on what money is.

If money is an abstraction it certainly makes it a lot easier to do business. But it also makes it a lot easier for the government to watch your every move. If every transaction is digital, it’s traceable, and can be produced when you’ve been audited by the tax authorities.

Every Move You Make in a Cashless Society

This may sound a little conspiratorial. After all, if you have nothing to hide, why should you worry about the government snooping around your cashless transaction history? But when people phrase the question this way, they assume that the burden of proof that you are not doing something illegal is on you.

In other words, without arguing it, they have effectively said that the government has the right to know what you do in your private life. Is that a society you want to live in? Is that a free society? Or is that a society where individual liberty is undermined through the digital payments system?

There is also a practical aspect to our paranoia. Many governments in the Western world are broke or headed that way. Keeping tabs on electronic transactions makes it easier to track down tax dodgers and tax avoiders. Governments that are desperate for any money they can get will welcome the ability to trace, track, and tax every single transaction you make.

If you’re one of the people that thinks that is a good thing, you should probably stop reading now. You should also probably unsubscribe from the Daily Reckoning. Immediately.

Control in a Cashless Society

But really it’s more than just a tax collection issue. It’s an issue about what money is. Governments and central banks use control of the money system to engineer inflation. Inflation grows GDP in nominal terms. But over time, it decreases the value of your savings. And to the extent inflation decreases purchasing power, the money system also decreases the value of your labour. The money you earn for the work that you do is worth less over time. It’s like taking a pay cut without knowing it.

Theft through inflation of the money supply would be much easier in a cashless society because there would no theoretical limit on how big the money supply could get. When money becomes a digital abstraction, you can create it with a few keystrokes, as the Federal Reserve and European Central Bank have done over the last two years. When money is electronic, the restrictions on its supply are removed.

We’d argue that a cashless society means money is fully abstract. This has one practical side effect. You will be unable to legally engage in transactions that involve cash. If you do so, you’re a criminal. Nevertheless, you’d expect to see a lively black market emerge in cashless societies.

Currency and the Cashless Society

But the real effect is that the likelihood of government tyranny is greatly increased as you move to a cashless society. It’s not just that petty bureaucrats and tax collectors and agents of the State are likely to abuse their ability to monitor what you do with your money, although all that is true. The real risk is that a completely cashless society removes any check on the debasement of the currency and thus allows the government to grow even larger and more intrusive in private life.

If you’re still reading, we assume we haven’t frightened you away with our suspicion of ever-expanding State power. But then, that’s really our point. Control of the money system is what enables the State to grow. Central banks were set up to be lenders of last resort to governments. Most central banks have a monopoly on currency creation. Removing physical currency from circulation cements that monopoly and increases the chance of even more government spending on wars, foreign and domestic.

The good news is that money is not an abstraction. It is a physical representation of value that you can exchange for something you desire. People know this intuitively. People stop using money when they realise its quantity can be increased arbitrarily, thus reducing the value of their labour and savings.

People stop using a currency when they realise it has no value because it’s being used as a tool to preserve a certain system. The move to a cashless society is another attempt to preserve the power and the privilege of that system. It’s not about convenience and efficiency. It’s about power and control.

But it’s bound to fail. For example, can you imagine Judas using BPAY for his betrayal of Jesus? Or EFTPOS? No. That kind of transaction took thirty pieces of silver. Silver is real money, as is gold. Don’t expect that to change any time soon.

Regards,
Dan Denning
Editor, The Daily Reckoning Australia

Publisher’s Note: This article originally appeared in The Daily Reckoning Australia

From the Archives…

Why Graphite is the High Tech Commodity of the Future
2012-04-27 – Dr. Alex Cowie

Why Gold is Hands-Down the Best “Money” You Can Buy
2012-04-26 – Kris Sayce

12% Compulsory Super – Get Ready for the Government’s Next Tax Grab
2012-04-25 – Kris Sayce

Westfield – The Aussie Retail Stock That Could Make You Money
2012-04-24 – Shae Smith

Why Natural Gas Is Still My Favourite Resource Opportunity
2012-04-23 – Kris Sayce

How a Cashless Society Promotes Tyranny

By MoneyMorning.com.au

Russia controls the European natural gas market. The map below shows the gas pipelines running from Russia, into Western Europe, and South and East Asia:

Click here to enlarge

For years, Europe has been at the mercy of Russian natural gas suppliers. And in 2006, Europe bore the brunt of a pricing dispute when Russia simply turned the gas off. Nothing flowed through the pipes.

Again, in 2009, Russia switched off the flow of natural gas, but this time, only to the Ukraine over another pricing dispute. Other parts of Europe received limited amounts of natural gas.

And just to prove a point, in February – in the middle of a cold snap during a mild northern winter – the Russian state-owned gas company, Gazprom decided that it would only supply the amount of natural gas it was contractually bound to.

Sergi Komlev, head of contracts and pricing at Gazprom Exports, told the Financial Times:

‘Gazprom has agreed contractual volumes that it is obliged to supply, to the month and the day. We are fulfilling these obligations but our customers want more volumes than we are obliged to supply.’

It didn’t matter if people were cold, or unable to cook. The company would only supply what was required, rather than what was needed. Chances are Gazprom could have met the extra demand if they wanted to. It was a big ‘stuff you’ to the freezing Europeans.

However, Gazprom will only have itself to blame in the future when it has one less customer.

Ukraine Open to Foreign Investment in its Natural Gas

Last July, a Russian research paper commented on how many European companies wanted to end Russian natural gas dominance:

‘The attitude in Europe towards the prospects for Russian imports seems to be periodically changing from a perceived dominance of Russian gas imports for years to come and a threat to a European energy security.’

The thing is, European countries have their own significant 639 trillion cubic feet (tcf) deposit. So why don’t they develop that?

Simply because of the cost.

Take the Ukraine for example. It has a 38 tcf reserve of natural gas. But Russia offered the Ukrainian government lower than market gas prices for use of the Ukraine pipelines.

That was up until 2008. And then the price started to climb.

Right now, the Ukraine government pays about USD$516 per 35,314 cubic feet of Russian gas. Enough to fill a full-size blimp. Funnily enough, when this price was set last year, it was almost USD$200 above the market price of Russian gas. The Ukrainians were getting stooged on the price…

And so, the Ukraine government complains about the high natural gas price. The Russians happily offered to lower the price. But, only if Ukraine handed them full control of the natural gas pipelines.

Handing over control of the pipelines is something the Ukraine wouldn’t do. Instead, they chose to develop its potential 100-year natural gas reserve.

Just last week, the country opened its borders to international bidders to explore and develop some of the vast natural gas deposits.

There’s no news on which company was successful, but Chevron Corp, Royal Dutch Shell and Exxon Mobil Corp all placed offers to secure a permit for exploration.

Why only now are these big boys moving in? Vitaliy Radchenko, an energy researcher at CMS Cameron McKenna in Kiev said,

‘Up to now most foreign investors have been cautious in embracing Ukraine. The country’s unstable political climate, excessive red tape and high corruption levels have kept foreign business away.’

What’s changed? Simply put, the government no longer wants to buy something from its neighbours when it can develop its own resource.

Radchenko said,

‘For years key policy makers in Ukraine were betting on the fact that somehow they would get the cheap Russian gas. Now it’s clear that this is over, so that puts a lot of pressure on the system to change.’

Profiting From European Natural Gas Explorers

You see, the situation in the Ukraine isn’t unique. Many European nations can no longer risk their energy future and energy security on Russia.

And the best part is, you can take advantage of this.

In fact, there are a handful of Australian listed companies with opportunities in Europe already.

Kris Sayce, editor of Australian Small-Cap Investigator has been watching these stocks for a while. And he thinks now is the time to take advantage of the opportunity in Europe:

‘I’m betting on Europe eventually getting its act together and figuring out that it can no longer rely on the Middle East and Russia for its energy supply.’

He told subscribers in the April issue:

‘…I believe Europe is due to embark on a huge re-evaluation of its energy strategy. And I believe gas will be at the forefront of that strategy.’

If you’re keen to see how Kris plans to take advantage of the growing natural gas movement in Europe click here.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

The Reserve Bank of Australia cut the interest rate this week. This was a direct attempt to take pressure off the debt-laden Aussie consumer. This might work in a small way. But what it can’t do is stop the slide of house prices in Australia. This is because the real estate market is dependent on the demand for credit, not the cost of credit. With borrowing demand dropping, house prices are following in the same direction: down.

This is the same reason why house prices in the USA have fallen to their lowest level in decades despite record-low interest rates for a record amount of time. Eventually Aussie house prices will hit a bottom. How they hit that bottom is the question. Money Morning editor Kris Sayce originally thought it would be a crash – a quick, dramatic fall. But recent data has caused him to change his view. Unfortunately, as he writes in How Did We Get It So Wrong on Australian Housing?, it’s something actually worse than the crash he previously predicted.

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As Oilprice.com embarks on its Top 5 series, we thought it expedient to begin with our take on the key figures shaping and influencing U.S. renewable energy efforts, not least because the issue of energy security is being prioritized in campaigning ahead of U.S. presidential elections.

In considering from the numerous choices for these top five slots, we take into account a number of variables, including investment in renewable energy, the ability to influence policy and shape public opinion, and advocacy efforts. This goes well beyond simply counting coin – it is about innovation, imagination, vision, risk and patience. Arguably, these people will play an important role in your life and leisure, for better or worse.

These are our picks:

Steven Chu – The China Link
Co-winner of the Nobel Prize for Physics in 1997, US Secretary of Energy Steven Chu is one of the most distinguished faces of renewable energy in the world, tasked with helping the Obama Administration invest in clean energy, reduce dependence on foreign oil, address climate change concerns and create millions of jobs while doing it. Chu has devoted a large part of his scientific career to alternative energy solutions and climate change research, in part as former director of the DoE’s Lawrence Berkeley National Lab. While the last century saw him win the Nobel Prize, this century earned him R&D Magazine’s Scientist of the Year award for 2011. In announcing his appointment as Secretary of Energy, President Obama said that the “future of our economy and national security is inextricably linked to one challenge: energy [and] Steven has blazed new trails …”. Chu’s most tangible successes have been the government’s investment in geothermal and offshore wind projects.

Indeed, Chu is one of the world’s leading authorities on renewable energy; and on a geopolitical level, his influence reaches to China. Chu is a foreign member of the Chinese Academy of Sciences, has trained prominent scientists in China and helped to establish the Bio-X Center at Jiaotong University in Shanghai – all of this gives him valuable access to Chinese politicians.

Dan Reicher – Energy Guru

Until November 2011, Dan Reicher served as Google’s director of climate change and green energy initiatives, during which time he convinced the company to invest in a number of energy projects, some of them rather eccentric and risky, others more pragmatic. He was also behind Google’s policy proposals for Washington. Prior to 2007, Reicher served in the Clinton Administration as the assistant secretary of energy for energy efficiency and renewable energy. He was also considered for the post of energy secretary in the Obama Administration, but lost out to our first pick, Steven Chu.

Today, he’s practicing his innovation at Stanford University, which chose him to lead its new $7 million center to study and advance the development and deployment of clean energy technologies through innovative policy and finance. Stanford alumni Thomas Steyer and Kat Thomas donated the $7 million and trust in Reicher to lead the university’s efforts, which they said “is uniquely positioned to change our nation’s attitudes and capabilities regarding how we make and use energy. What our university did for the information revolution, it must now do for the energy revolution.” Broadly, the Stanford center will conduct research on energy policy and finance, with a particular focus on legislative, regulatory and business tools – all intended to boost public support for funding clean energy technologies. It also hopes to produce world-class research for policymakers, the business community, and technology leaders. Reicher is influential in the renewable energy world on a number of levels, from finance to policy to advocacy. Not only does he have the ear of the government on policy, he also has the $7 million Stanford research effort at his disposal.

Elon Musk – Iron Man

Elon Musk is probably the most colorful of the figures on our Top 5 list. He has Hollywood’s eyes and ears, as well, which only adds to his public influence. Musk is the co-founder of and head of product design at Tesla Motors, the producer of electric cars, which is almost a singular focus of Musk’s current green energy efforts. Musk entrepreneurial innovation had already been demonstrated pre-Tesla, when he co-founded PayPal and SpaceX. He also chairs the board of SolarCity, a start-up focused on photovoltaics products and services aimed at climate change solutions. Most recently, Musk created the first viable electric car of the modern era, the high-end Tesla Roadster sports.

The Tesla Roadster will be followed by the four-door Model S sedan, scheduled to release in July, and the ModelX (a sort of SUV/minivan hybrid), slated for production in 2013. Musk’s vision: making electric cars affordable to mass-market consumers thereby making a huge footprint in American and global energy efficiency and security. The Roadster is a high-end vehicle that will only attract the wealthy, but that is the point: Roadster revenues can fund research and development for lower-priced electric cars.

Countless awards and honors have come Musk’s way, from the Heinlein Price for Advances in Space Commercialization in 2011 to inclusion on Forbes’ list of “America’s 20 Most Powerful CEOs 40 and Under” that same year. Incidentally, Mush designed the first privately developed rocket to reach orbit and served as the inspiration for the genius billionaire Tony Stark in the Iron Man movie series. He also made it onto TIME Magazine’s (often dubious) list of 100 most influential people in 2010.

Eddie O’Connor – Supergrid Superhero
Eddie O’Connor, the CEO and co-founder of Mainstream Renewable Energy and the original founder of Airtrcity, is one of the world’s most interesting, energetic and innovative clean energy figures. O’Connor sold Airtricity to E.on and Scottish and Southern Energy for €2.2 billion in 2008, when he launched Mainstream along with Airtricity’s former finance chief, Fintan Whelan, investing €32 million in the start-up. O’Conner, who got his start in Ireland’s electricity company, has earned energy leadership awards across Europe, and in 2003 was named World Energy Policy Leader by Scientific American Magazine. O’Connor is behind the creation of some amazing onshore and offshore wind farm projects in Europe, North America, South America and South Africa, and is perhaps best known for his promotion of the European Offshore Supergrid, which envisions electricity interconnectivity on a scale that would entirely transform the European energy scene. O’Connor’s work has been extremely influential on global policy and he has certainly earned his place among the world’s most innovative public figures. He combines ideas with advocacy and action.