Gas Production Increases

North American Production Even

With the supply of Natgas in the US increasing for the week, the bears are yelping. But in Canada, the supply decreased by more than the increase in the US. The net result for the integrated market was near zero. The low prices of natgas are having a dramatic impact on production----in Canada. But the US and Canadian markets are one market. WIth the large pipelines from Canada, the production in Canada can be sold in New York City. But Canadian production is both important (large) and decreasing. The real story is the shift of production from Canada to the US Shale plays.

If price continues at the current level, the production of conventional natgas in Canada will continue to fall. Right now the impact of the fall is being moderated by the large storage overhang in both the US and Canada. When the Canadian storage overhang is eaten through, the full impact of the lower production will be felt. The bears may face a severe shock at the magnitude of the problem.

Robry's Supply Numbers BACK!

They show that production has clearly bounced off a low. The question is will the production start falling after the new year?
Why? Because there is always a STRONG seasonal bounce of production in Nov/Dec and with the shut-ins it would be very strong this year. In other words, the low of production was overstated since some of the decrease of production was voluntary. Likewise the current rebound in production, while real, is also overstated because of the shut-ins (Usually you get a higher rate of production for a short period of time after a well is shut-in).

The results for early Jan should be a good measure to see if production has really started to climb or if this rise is temporary.

Bank Lending and the Economy

Without a doubt bank lending has a huge impact on the overall economy. When bank lending becomes difficult, then any expansion of economic activity is difficult and slow. When you have a contraction of lending, no economy can grow. This is the reason for TARP and several government programs. The goal was to increase lending of banks. Recently we have seen the Obama Administration allow banks to repay TARP under terms that will hurt the overall economy. For example, BOA has been allowed to use bank capital to repay the TARP and this decreases the amount of capital they have for lending. The other large banks are following suit as soon as they can. When the banks are allowed to use bank capital to repay TARP there should be a DECREASE in overall lending. Sure enough the following chart shows the decrease starting just as some of the banks starting paying back TARP.


Let's look closer at the chart:

Notice we are now below 2008 in total commercial lending at large banks. As the TARP continues to be repaid, expect lending to continue to fall. If you look at the economic history of any country, when bank lending falls like this a recession will follow.
So far TARP has kept the banks lending and kept a total wipeout of the economy. But with bank lending now falling like a rock, it is hard to see how the economy can grow in 2010.

What's more the bank lending to consumers has also started a trend down. Note that the first banks to repay TARP were large commercial lenders (few consumers bank with Goldman or Morgan Stanley). But they do bank with BOA and Citibank. As these banks pay back TARP with bank capital, their consumer lending will also fall. Notice in the following chart the fall in consumer lending in the past month or so:


So as several consumer banks repay TARP, the expectation would be for the decline in consumer lending to continue. With consumers borrowing less, the economy is going to have a hard time rebounding. Thus, forecasts of an 2010 recovery may be too optimistic. While a double dip is hard to predict, with the repaying of TARP by consumer banks, it becomes more of a risk.

Robry's Supply Numbers still under review.

When he posts his revised numbers, I will resume the graphs.

Central Bank's Demand for Gold

Demand from Central Banks for Gold
I want to look at JUST the members of the IMF (that means several countries that recently bought gold are not counted) and see how much gold they need to buy to get their gold percentage of foreign currency reserves to a reasonable level. So any central bank that had reserves above the level is assumed to do nothing.
For 5% gold reserves they would have to buy 133.83 million ounces.
For 7.5% gold reserves they would have to buy 253.62 million ounces
For 10% gold reserves they would have to buy 372.32 million ounces
For 15% gold reserves they would have to buy 620.25 million ounces.

This shows the central banks for even low levels of gold as a percentage of foreign reserves have to buy HUGE amounts of gold. And this is just the 65 countries of the IMF (+China). WOW.
Put another way, if everyone wanted just 7.5% gold, they would have to buy the equivalent of all the gold reserves of the US.

There is an additional factor. These results mean almost all the reserves of the Central Banks are made up of other currency holdings (mostly dollars). As these currencies loose value, the reserves of the Central Banks are going to loose value. At what point are the Central Banks going to HAVE to take action to protect their reserves?

Lastly, I just noticed that an article shows that the world produces 80 million ounces a year. If the Central Banks all decided to buy to get to at least 5% gold reserves, they would buy almost 2 years of current production. That assumes near ZERO private purchases of gold. If they want to get to 7.5% of reserves as gold, they would buy the next 3 and a half years of production.

Note: I got the foreign reserves and gold holdings from the IMF website. Then in a spread sheet calculated the required purchases of gold. I assumed no Central Bank sold any gold. If the US, Germany and others sold enough gold to get to 15% then the numbers would about balance. But the US would give China roughly 206 million ounces of our 261 million ounces of gold.