As debt weakens dollar, commodities get boost

By the end of this year, the U.S. government is going to be $11 trillion in debt. That’s a lot of cabbage. And while it wasn’t cabbage that inspired Newton, it is his other, lesser known, natural law that comes to mind–the more thou borrows, the higher thy borrowing costs shall be.

Soon, our government is going to be paying more than $500 billion a year just in interest expenses. Total income for the government is $2 trillion a year. About 25 percent of that will be dedicated to servicing the debt.

Based on the previously mentioned law of nature, we should expect to see the interest rate the government has to pay move higher. And that is exactly what is happening. At the beginning of this year, the yield on the 10-year Treasury bill was 2.2 percent. It is currently 3.2 percent, which represents a huge increase in borrowing costs to our government.

This rate will continue to work its way higher over the long term and that will translate to consistently lower prices in the bond market for many years to come. This, my friends, is the definition of a bear market.

Federal Reserve Chairman Ben Bernanke, like Alan Greenspan before him, is filled with this most loathsome stuff called hubris. He actually believes he can control an economy as large as ours. Bringing interest rates down to zero was a foolish attempt to save his friends and shareholders at the large banks. (You do know that the Federal Reserve is not beholden to the American government or the American people, but a select group of private shareholders the Fed does not disclose, right?)

This maneuver has encouraged our government to borrow and print wads of cash, and all this borrowing and printing is driving up interest rates. Higher rates are putting downward pressure on the U.S. dollar. A weak dollar is driving up commodity prices. Higher commodity prices point to a profit potential for you and me.

A few weeks ago, I mentioned that silver had recently broken out and was therefore worth a look. iShare Silver Trust (SLV) was $13.50 at the time and is now trading at $14.10. Oil just hit $60 a barrel, which is a 70-percent move from its late-February low. Gold prices have been slowly inching higher, and agricultural pieces like wheat and soybeans are gaining upside momentum.

There is one commodity, however, that may have more potential over the next several years than all the other stuff they like to trade up in Chicago. You can’t see it or touch it, but it definitely has explosive potential. The product is natural gas.

Natural gas is trading at about $3.84 per 1,000 cubic feet. It has traded as low as $3.50 in the last few weeks, which represented a multiyear low.

Over the last 100 years, oil has typically traded for seven times the price of natural gas. The spread today is more than double that amount. Anyway you slice it, natural gas has been pounded. It’s cheap and I think it is poised for a long-term move higher.

Natural gas has some political forces behind it as well. The greenies love it because it is a much cleaner-burning fuel than either oil or coal. In addition, this cap-and-trade fiasco Washington is about to foist on us will serve as a long-term boost to natural gas prices.

All said, it might just be time to turn on the gas.
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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer¹s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.