Of Soybeans and Silver

First up, Chris Mayer:

China is buying soybeans…lots of them.

The US trade deficit ballooned by almost 10% to $36.4 billion in November. Here’s one very important highlight of that report: Chinese demand for American goods climbed to a record $7.3 billion, led by – of all things – soybeans. Drought in Argentina was partly to blame, but there’s a trend under there that can’t be denied:

One of the more certain ideas on China hinges on its appetite for something very basic: food. We’ve talked a lot about the world’s growing appetite for food and China’s role in that. The shifting diets…the straining of water resources…the diminishing acreage of arable land…

All of these things put pressure on the food supply. We’ve got a few ideas that answer the bell here, but I want to focus for a minute on just one – Saskatchewan, Canada.

We took note of this rich prairie to the north in a couple of letters in 2008. Half of all the arable land in Canada is here. It has one quarter of the world’s uranium production and one third of its potash reserves. It produced 160 million barrels of crude oil last year.

Some of the growth in output here is astonishing. This from The Globe and Mail:

“On the farm front, the surprise is that much of the new prosperity comes from pulses, crops that were hardly known in the Prairies two or three generations ago – peas, beans, chickpeas, lentils. In 1981, 85,000 acres of lentils were planted; this year, there were 2.3 million acres. In 1976, 15,000 acres of peas were planted; this year, 2.8 million acres. Canada is now the leading exporter in the world of both foods, almost all of it from Saskatchewan.”

We own one company that is in the heart of all this earthy goodness. We’ve owned it since August of 2006. It’s given us an 11% annualized return since – which is one hell of a good return considering what the broader market has done over that time. I view it is a core Special Situations holding, and it still trades for just above book value.

Next up, James Turk:

Silver jumped out of the gate to begin 2010 with a flying start. It climbed a remarkable 9.7% in this year’s first week of trading to end the week at $18.45. From its $8.79 low barely fourteen months ago after the de-leveraging and mass liquidation of assets resulting from the Lehman Brothers collapse, silver has climbed an astounding 110%. But the upside fireworks have hardly begun.

2009 Silver Eagle Sales

I believe there exists the real possibility of a short squeeze in silver this year or in 2011. That short squeeze will propel silver to – and probably over – its January 1980 record high of $50 per ounce. That event will mark an important step in silver’s bull market. Everything that has occurred in silver over the last thirty years is simply base- building, as can be seen in the following chart.

Silver Price Since 1975

The base-building is marked by the two long-term gold lines that look like a “huge smile,” as one of my readers remarked.

From 1980 to the 1991 low, silver was being ‘distributed’. In other words, silver sellers were more aggressive than silver buyers. Eventually, those circumstances changed, and silver’s price stopped falling. The so-called smart money started recognizing silver’s extraordinary undervaluation. Buying power began to exceed selling pressure. Its price began to rise and has been working its way higher ever since. Silver has been rising this decade within the uptrend channel marked by the two [red] parallel lines.

Silver’s rise from $3.51 in February 1991 to $18.45 at present – approximately a 9.1% annual rate of appreciation over this 19-year period – pales in comparison to what lies ahead. Silver is still in stage-1 of its bull market; the big price gains don’t start occurring until widespread participation by the public begins in stage-2, but that will not begin until silver breaks out of its base when $50 is eventually hurdled. With that event silver will start garnering worldwide attention just like gold started doing when gold entered stage-2 of its bull market by hurdling above $1,000.

The speculative stage-3 for silver, which will be marked by extraordinary price gains like those of silver’s last stage-3 in 1979- 1980, is still far in the future.

Chris Mayer and James Turk
for Markets and Money

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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Tom Sugar

I hope you are right about $40 silver this year!

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