Eric Sprott: Smart Investors Are Flocking to Silver

Sprott Asset Management published their monthly newsletter Market at Glance (December 2012) entitled "Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?"

Eric Sprott explains that demand for Silver relative to Gold has dramatically changed since 2008. The table below shows the US Mint gold and silver sales in ounces over the last few years:

Each year there's about 130 million Gold ounces and 1 Billion Silver ounces available per year, but due to use for industrial applications, the annual availability for investment purpose is respectively 120 million and 350 million ounces. Therefore, the ratio of physical silver availability to gold availability is roughly 3:1.

Investors are choosing to buy silver at a ratio to gold that is well above what is available. The silver price is currently mainly set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces, and the current price is most probably where it is because of market manipulation.

Sprott believes the current investment trend into silver is likely to continue.

The full version of the newsletters is available at http://sprottasset.com/markets-at-a-glance/why-are-%28smart%29-investors-buying-50-times-more-physical-silver-than-gold/

Eric Sprott: The Real Banking Crisis is Back

Sprott Asset Management published their monthly newsletter Market at Glance (May 2012) entitled "The Real Banking Crisis, Part II" and I'll give a summary below.

Back in July 2011,  Eric Sprott and David Baker wrote an article entitled "The Real Banking Crisis" where they discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Even after numerous bailouts, the Euro Stoxx Banks Index have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the events unfolding in Greece and Spain.

They explain that bank runs have started in several countries

In Greece,  1.2 billion Euros withdrawn have been withdrawn on May 14-15, 2012 and now up to 3 billions euros have left the banking systems since the May 6 elections. Greece is now €21 billion away from a complete banking collapse, unless the European Central Bank (ECB) provide an even bigger bailout.

Bank depositors have been pulling money out of banks in Spain, especially the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.

Deny, deny some more… panic, inject capital - this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain make foreign investors nervous and according to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past 9 months, representing more than 10% of each market.

Eric Sprott explains further that no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run, because they can spiral out of control faster than governments can react to stop them. Bank runs also prompt banks to liquidate whatever assets they can, revealing the truth about what their "assets" are actually worth. But banks don't want to show the true value of their assets so for example, many Spanish banks are avoiding property sales so they don't have to "mark to market" valuations.

We're now at the point where a bank run in one Eurozone country could quickly seize up the entire system - not just in Greece or Spain, but throughout the entire Eurozone and beyond, because banks are leveraged. For this reason, we'll likely see another ECB-induced printing program announced (with a new fancy name) before a broader bank run can take root.

However, nothing is really being solved here, everyone knows it, and we're essentially in the same place we were when the crisis erupted back in 2010, except there is now more total debt outstanding.

With increasing level of debt and interest payment, there is no way the bond market keeps pretending everything is ok in Europe, like it currently does with the UK, US and Japan… for now. Greece and Spain Minsky moment (when you realize the debt load can't be repaid) has arrived and is coming to the whole of Europe.

Eric Sprott then says that without a doubt, the most counter-intuitive aspect of the Greece/Eurozone debacle has been its impact on the price of Gold. The selling pressure in Gold once again appears to be expressed primarily through the futures markets (and not physical sales), which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further. He further notes that China posted another record Hong Kong gold import number in March of 62.9 tonnes, for a total of 135.5 metric tonnes between in Q1 2012, representing a 600% increase over the same period last year.

The full version of the newsletters is available at http://sprott.com/markets-at-a-glance/the-real-banking-crisis,-part-ii/

Eric Sprott: When (Gold) Fundamentals No Longer Apply, Review the Fundamentals

Sprott Asset Management published their monthly newsletter Market at Glance (April 2012) entitled "When Fundamentals No Longer Apply, Review the Fundamentals".

Eric Sprott and David Baker explain they still don't see a recovery:

• US housing situation is still a bust with both existing and new home sales well below the highs reached in 2006.
• Unemployment is still high, and despite all the news cheer-leading, the most recent numbers show week data. and the same is true for jobless claims numbers.
• US tax receipts are only up 2% over a year (lower than inflation at 2.7%)
• ECRI Weekly Leading Indicator (WLI) has started to trend down again in April
• US Durable Goods Orders have dropped 4.2% in March, representing the largest decline since January 2009.
• China's most recent Purchasing Managers Index (PMI) indicates that China's manufacturing activity has now been in contraction for six months in a row.
• The situation in Europe continues to worsen: Spain is a complete disaster, Italy prospects do not look good either, and German PMI shows a decline in economic activity with the fastest rate of contraction since July 2009.

All those bad numbers guarantee that central banks will print money again, and the IMF most recently secured $430 billion worth of new "pledges" from various G20 member countries to increase its potential lending capacity to $700 billion in the event of further problems in the Eurozone. BRIC countries are irritated by these actions and their lack of voting power in this institution.

Possibly to counter this issue, BRICs have planned to start their own financial institution at the last BRIC summit and reports seem to indicate a BRICS central bank - an institution that could facilitate their ability to "do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations" might be created.

China has also been importing a lot of Gold via Hong Kong recently. In February, China imported 40 tons of Gold via Hong Kong, 13 times more compared to the same month last year and other emerging countries also follow suite, with 12 countries increasing their Gold reserves by more than 58 tons in March (that's 696 tons annualized). There is so much Gold bought by central banks, that Merk and Baker wonder where they'll find that Gold for delivery.

Eric Sprott concludes as follows:

We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum - there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

The full version of the newsletter is available at  http://sprott.com/markets-at-a-glance/when-fundamentals-no-longer-apply,-review-the-fundamentals/

Eric Sprott: The Recovery Has No Clothes

Sprott Asset Management published their monthly newsletter Market at Glance (March 2012) entitled "The [Recovery] Has No Clothes".

Eric Sprott and David Baker explain that although Greece has been papered over, and many people are now bullish, very little has actually changed for the better, and it's too early to declare a new bull market has started.

Among all the cheer-leading with "good" indicators, they give some counter examples of not so good indicators:

1. Although the BLS announced an unemployment rate of 8.3%, the Gallup survey showed unemployment increasing to 9.1% in February (8.6% after seasonal adjustments) versus 8.6% in January.
2. US food stamp participation has reached an all-time record of 46,514,238 in December 2011, up 227,922.
3. Europe's 9.7% year-over-year decrease in auto sales
4. 100bp drop in the March consumer confidence index
5. 5 consecutive months of manufacturing contraction in China
6. 0.9% drop in US February existing home sales.
7. In February 2012, the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011.

They also commented on the Federal Reserve stress test on large US banks:

The test used an almost apocalyptic hypothetical 2013 scenario defined by 13% unemployment, a 50% decline in stock prices and a further 21% decline in US home prices. The stress tests tested where major US banks' Tier 1 capital would be if such a scenario came to pass. Anyone who still had 5% Tier 1 capital and above was safe, anyone below would fail. So essentially, in a scenario where the stock market is cut in half, any bank who had 5 cents supporting their "dollar" worth of assets (which are not marked-to-market and therefore likely not worth anywhere close to $1), would somehow survive an otherwise miserable financial environment. The market clearly doesn't see the ridiculousness of such a test, and the meaninglessness of having 5 cents of capital support $1 of assets in an environment where that $1 is likely to be almost completely illiquid.

They also mentioned that Dexia, a Belgian bank, passed the European stress test, only to fail 3 months later.

Then Eric Sprott and David Baker turned to their specialty: Precious metals.

Our skepticism would be supported if not for one thing - the recent weakness in gold and silver prices. Given our view of the market, the recent sell-offs have not made sense given the considerable central bank intervention we highlighted in February.

After the good performance of Gold and Silver in January and February, both markets were hammered on the 29th of February, as Ben Bernanke gave a speech (QE3 not needed) and the European central bank flooded the market with another €529.5 billion with the second part of Long-Term Refinancing Operation (LTRO).

QE3 is not off the table, just delayed, and Gold and Silver price drop was exclusively due to a sell-off on the paper market with the equivalent of 173 million ounces of physical silver exchanged between 10:30 am and 11:30 am. Compared that to the yearly production of Silver (730 million ounces), almost 24% yearly silver production exchanged in 1 hour.

An analysis of the paper-silver market shows that Silver is  traded 143 times higher in the paper markets versus what is produced by mine supply compare that to crude oil (14.3 X), Aluminum (46.8 X), Gold (69.4 X) and Copper (75.1 X) and they conclude:

The prevalence of paper trading in the silver market is what makes the drastic price declines possible by allowing non-physical holders to sell massive size into a relatively small market. It's not as if real owners of 160 million ounces of physical silver dumped it on the market on February 29th, and yet the futures market allows the silver spot price to respond as if they had.

The Gold market also looked suspicious with $3 billion of physical gold dumped into the market in a short time, and this was probably not done by speculators or investors.

They conclude as follows:

If we are right about gold and silver as currencies, and if they we are right about the continuation of central bank printing, both gold and silver will continue to appreciate in various fiat currencies over time. If there is indeed some sort of manipulation in the futures market that is designed to suppress the prices for both metals so as to detract from the mainstream investor's interest in them as alternative currencies, then both metals are likely trading at suppressed prices today.

...

The equity market rally that began in late December appears to be generated more by excess government-induced liquidity than it does by any raw fundamentals. We continue to scour the data for signs of a true recovery and we are simply not seeing it.

...

We would also expect the precious metals complex to enjoy renewed strength as the year continues. One bad month does not change a long-term trend that has been building over 10 years. Gold and silver will both have an important role to play as the central bank-induced printing continues, and we expect more on that front in short order.

The full version of the newsletters is available at http://sprott.com/markets-at-a-glance/the-%5Brecovery%5D-has-no-clothes/

Eric Sprott: The Financial System is a Farce

Sprott Asset Management published their monthly newsletter Market at Glance (January 2012) entitled "The Financial System is a Farce: Part Three".

This month, the newsletter is shorter than usual with 3 pages. Eric Sprott and David Baker explain that 2011 was a year with more bailouts, more kicking the can down the road and more denial.

Eurozone is not fixable,  there’s too much debt and the politicians don’t know what’s going on. Nothing has structurally changed. There’s more global debt than there was a year ago, and it’s the same old song: extend
and pretend, extend and pretend,…

After October 2007 and September 2008, its' the 3rd time Sprott Management says the Financial System is a Farce (hence the title) and they re-affirmed their bearish views on the economy and markets.

In 2011, they found four farcical (but not funny) events:

• MF Global bankruptcy with  US$1.2 billion of missing customer funds and the CME did not act as a backstop.
• Dodd-Frank financial reform aka "Too Big to Fail" regulations signed in 2010 has barely been implemented in 2011 (e.g. CFTC positions limits)
• Europe and the European Central Bank (ECB) with another bailout (LTRO) and the states who lend to banks with the banks lending back to states.
• National Defense Authorization Act (NDAA), not directly a financial issue, but when you make investments 'Political risk’ should also apply  in the US (and other developed countries)  and not only in developing or third world countries.

The full version of the newsletters is available at http://www.sprott.com/Docs/MarketsataGlance/2012/January-2012.pdf

8 Investment Ideas for 2012

2012 is coming soon, and we can start to consider some investments ides for next year.
2012 is likely to be cursed with the same problem as 2011 with western debt crisis in Europe, the US, Great Britain and possibly Japan. As now, there will be a "fight" between market forces which want to liquidate the debt and the central banks & governments who want to print money to avoid deflation at all cost. There are also talks about a debt bubble in China, but their citizen and government have savings and reserve, so although they will suffer as well, they should be OK.

We know that the US, UK and Japanese central banks have done quantitative easing, and will probably do it again, although there is political pressure not to do so. The ECB has not (officially) done quantitative easing yet. The US and UK are in the worst possible position since both their government and citizens are heavily indebted and have trade deficits. The Japanese government has a lot of debt, but has a current account surplus and not much private debt. Europeans are in the middle.

In the next few years, peak oil (and peak everything) will also have a serious impact on your investment, so I'll also give some longer term investments ideas to try to preserve capital.

Here are eight investment ideas I have for 2012 in no particular order:

1. Rice and agricultural commodities:

   I like rice for 2012 as last year, it has not performed very well and there is currently a global glut due to Indian rice production that largely offsets the issues due to the floods in south east Asia. For individuals investors, it relatively tricky to invest in Rice. For people who have access to the French stock market, you can buy RICEF PI OPENN (FR0010606509 - 1377N). Read Investing in Rice for other options and more details.

   Longer term, agricultural commodities should perform well due to rising global population, aging of farmers worldwide, reduction of arable land and possibly massive money printing by central banks.

   The good news is that there are plenty of options to invest in agricultural commodities via ETF such as DBA, RJA and ELEMENTS Rogers Intl Commodity Agri ETN (RJA), PowerShares DB Agriculture (DBA) and iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA). If you prefer agricultural stocks, you could invest in Market Vectors Agribusiness ETF (MOO)

2. Crude Oil

   This is both a short term and long term investment. Many pundits explain that today, oil costs around 70 USD per barrel to produce. For 2012, if you see crude oil (WTI) go below 70 USD, you can consider investing massively in the commodity, even though it may go much lower. In that case, production will slow considerably until prices go above 70 USD (and more) again.

   Since peak oil is inevitable and the IEA says reserves are declining by above 6% per year, so we'll have a supply problem even if the economy is in recession and demand collapses. A US military report also says that surplus may disappear in 2012, which serious shortage occurring in 2015.

   First, I'll explain how not to invest in crude oil namely United States Oil (USO), iPath S&P GSCI Crude Oil TR Index ETN (OIL) and the likes as they have an horrific decay and their target is zero after numerous reverse splits. I'm not kidding. If you invest in a commodity linked ETF always try to compare it with the tracked commodity for a period of at least 2 or 3 years. Actually, it does not hurt to do it for any ETF you plan to buy.
   

   Unless you have access to oil futures, it also difficult to invest in crude oil for individual investors and you cannot easily store the thing like you do with Gold and Silver. You invest in Crude oil (WTI and Brent) via ETF such as ELEMENTS Rogers Intl Commodity ETN (RJI) or a fund like Barclays Capital Funds - Global Commodities Deltafor Singapore/ Hong Kong investors. Those follow Jim Rogers commodity index, so they are composed of a basket of commodities and only 40% is actually invested in crude oil. If you have better alternative that do not involve buying an oil tanker, I'd appreciate.

   An alternative way to invest in commodities is to buy stocks in the middle east, for example via Market Vectors Gulf States Index ETF (MES).

3. Gold and Silver Bullion and/or Coins

   Gold and Silver have had a tremendous run for the last 10 years, but as long as we have negative real interest over the world they should perform relatively well. Having said that, an 11 year bull market, with no negative year (for Gold) is not very common, so I would not be surprised if we have 1, 2 or 3 years where Gold does nothing. I would also not be surprised, if Gold and Silver become bubbles as the central banks print money to try to save the system. You can invest in gold via GLD or PHYS ETF and silver via SLV or PSLV. PHYS and PSLV are managed by Eric Sprott, so I'd trust those more than GLD and SLV. If you are afraid of default risk by third party, then simply buy physical Gold and Silver and store them at home. If you are a US citizen and are not afraid of default by your bank, google "celente mf global".

   Finally, gold stocks are cheap relative to gold bullion on an historical basis. You can read The case for Gold Miners vs Gold and Eric Sprott: Time to Buy Gold Stocks for details. Hong Kong investors may have to make their own Gold stock portfolio, see Hong Kong Gold Mining Stocks and Gold ETFs for a list of Gold stocks in the Hang Seng.
   

4. US Natural Gas

   Over the last 5 years, US natural gas is down 39% (Source: Indexmundi) at 128.30 USD per 1000 m3 and at the same time, Russian natural gas is up 20% at 435 USD per 1000 m3 and Indonesian natural gas is up a whopping 160% at 377.22 USD per 1000 m3.
   

   Usually, commodities trade similarly over the world, but natural gas is different since it is difficult to transport. The reason for the decrease in the US is fracking, a technology breakthrough, which dramatically increased recoverable natural gas reserve in North America.
   

   This may not be an investment that rewards investors by 2012, but with such a large price difference between the US and the rest of the world, there will certainly be people who will work on liquified natural gas (LNG) and terminals are planned in the US.

   Once again commodity investing is difficult, and products such as UNG should be avoided like the plague. Actually, I could not find a proper way to invest in natural gas, except by buying natural gas stocks, please read Investing in Natural Gas for details. If you have ideas, let me know.
   

5. Short long dated US Treasury Bonds

   If has been tried unsuccessfully over the years, so the timing is uncertain, but the fact that long dated US treasuries bonds will be much higher at some point in the future is a certainty.

   The US is the worst offender in term of debt: high government debt, high private debt, low saving rate and massive trade deficits. It can't get worse than that.
   

   The federal reserve is also committed to print money to avoid deflation at all cost, this means the US dollar will lose value and investors will sell their low yielding treasury bonds (10-year to 30-year) and find assets with better value.

   If you can't short treasury bonds directly, you can invest in TBF ETF, although it decays a bit you may be able to keep it a few years, contrary to TBT or TMV. Read How to short US treasuries for more information.

6. Alternative Energies

   With peak oil and pressure against coal use due to climate change, alternative energy will have to be developed if we may to keep living a good life. Investments in solar, wind, (alternative) nuclear, cold fusion and more will be made and there will be a lot of failures, but it's likely some companies will have an amazing success. Alternative energy stocks are very depressed at those levels after the 2008 bubble.
   

   This is a long term investment (5 to 10 years) and 2012 may not be the right time, but who knows. Avoid investing directly in alternative energy stocks, as you are more likely to lose a lot of money and invest with ETF or mutual funds instead. Since we don't know which technology will prevail, I'd also avoid investing in Solar fund or Wind ETF independently, but rather find a funds that covers a broad range of alternative source. If I had a gun on my head, I'd rather invest in wind energy rather than solar energy, as the former has a better EROEI.

   Based on the comments above, you could invest in ETFs such as Market Vectors Glb Alternatve Energy ETF (GEX) or First Trust NASDAQ Cln Edge Smrt Grd Inf (GRID) as well as mutual funds such as BGF NEW ENERGY.

7. Water

   Companies related to water such as water treatment, pipes and valves manufacturers... will benefit of the water issues around the world. For example, I can feel some investments are needed in the water infrastructure in Thailand and with climate change and rising population, better water management is needed for agriculture.

   This is also a long term investment and unlikely to pay off immediatly in 2012 but you can invest with PowerShares Water Resources (PHO) and PowerShares Global Water (PIO) , read Invest in Water with ETF for details.

8. Buy the Euro
   

   This may seem counter-intuitive with all the bad press and talks about the end of the Euro, but the truth is Europe is trying to take care of its debt problem now and the ECB is reluctant to print more money to further help the indebted countries thanks to pressure from Germany.

   The US and UK central banks seem to be happy to print as needed, and the Japanese Yen seems overvalued as investors take refuge in this currency.
   So if you are a holder of US dollar, British pound or Japanese Yen you may consider buying Euros, especially if it seems the debt crisis is resolved, European government keep implementing austerity measures, private investors take their losses on bad investments and the European central bank is not involved in printing currency.

   The best way to safely (without leverage) invest in the Euro would be to open a fixed deposit in Euro if your bank/country allows it. If it is not possible, you could also invest in a currency ETF/ETN such as CurrencyShares Euro Trust (FXE) or iPath EUR/USD Exchange Rate ETN (ERO).
   

That's it for 2012 investment ideas. Do you agree with my choices? Do you have a different opinion? Please let me know in the comment section.

Eric Sprott: Oil Price Must be over 75 USD for Production to Occur

Sprott Asset Management published their monthly newsletter Market at Glance (October 2011) entitled "Oil or Not, Here They Come".

First, they explain that oil has been mostly absent from recent financial headlines, but availability and price of crude oil remains a key factor in world growth:

While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today
...
By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.

Then then mainly focus on the lack of oil production growth:

Global oil production has grown very little (since 2005), appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.

and that the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) have had to consistently reduce their production forecasts over the years as you can see in the chart below with forecast for 2015 and 2020:

They also shows other charts with price forecast made in 2002 with price ranging between 15 to 30 USD (high price scenario) between 2002 and 2025, in 2009 they revised this with a price range of 50 to 200 USD. (2008 USD).

In the next section, they look at the causes of high oil price namely supply constraints, high production cost, middle east export are riskier and costlier and increased demand from emerging countries:

Supply Constraints.

First, and most importantly, global supply is struggling to grow because we are not finding and bringing into production any new "super giant" oilfields. This reality was well documented by the EIA in a study it published in 2008.³

The EIA study revealed that the largest 1% of oilfields (798 total fields) in the world account for over 50% of global production.

What has been discovered and brought into production in the past few decades are smaller fields, which normally have higher decline rates. As these new smaller fields replace production from larger fields, and older larger fields age, we can expect the global observed decline rate to increase from the current estimated rate of 6.7% (or 4.7 million barrels per day annually).　

High Production Costs.

Oil prices are also high due to rising production costs, and it’s worth noting that new production sources, such as offshore, tar sands and other unconventional sources are amongst the highest cost producers today... As a result, it is becoming clear to many industry analysts that current oil production cannot be sustained under $75 a barrel and the price required to sustain production seems destined to continually rise.

Middle East Exports are Increasing in Cost and Risk.

The so-called "Arab Spring" uprisings in countries such as Egypt and Libya are forcing these and other major oil producing nations to spend more of their oil revenue on social assistance programs. For example, as a result of newly announced social spending in Saudi Arabia, it is forecasted by The Institute of International Finance, Inc. that the budget balancing price of Saudi oil will jump from $68 per barrel in 2010 to $85 per barrel in 2011 and then continue to rise, but at a slower pace, to $110 per barrel by 2015.

Increased Demand from Emerging Markets.

As globalization continues, we can expect job growth to be higher in countries where the citizenry are willing to work harder for less. This roughly characterizes the emerging market countries which for the most part are also large exporters of goods and services, run significant trade surpluses and have strengthening currencies. These factors enable them to continue to increase their per capita and total oil consumption. Conversely, higher wage Western nations are fighting rising unemployment, trade deficits, weakening currencies and, consequently, are being forced to reduce their oil consumption.

They also spend a large part of the letter comparing the US and China in terms of economic growth and oil consumption.

To conclude, they recommend that western investors hedge themselves against declining purchasing power and oil consumption by buying oil producer and service companies:

For North American workers and investors, one way to hedge against a decline in living standards is to use your current relative advantage in oil purchasing power to accumulate oil reserves that will be developed in the future. This purchasing power advantage, currently evident in the time a worker in the West must work to earn a barrel of oil, will eventually dissipate, as world labour markets recalibrate and shift wealth from West to East....

The recent market decline and ongoing volatility is affording investors with an opportunity to invest in oil producers and service companies, in particular junior and mid-cap companies, at attractive valuations. Equities are pricing in much lower oil prices over the long-term. Our view is that while there may be additional volatility in the crude oil price in the short-term, long-term pricing will remain high and equity prices will rise to correct this disconnect.

You can subscribe to Sprott Asset management's Market at Glance newsletter free of charge or download the PDF version.

My take is that you although you can invest in oil producer such as Exxon, BP and the like, you could also invest in Oil Producing countries via Market Vectors Gulf States Index ETF (MES) for example. However, since supply will go down overtime, that means reserve of oil companies will also go down so this is a negative for such companies although crude oil price is likely to increase. Another way would be to invest in Crude Oil directly either buy buying commodities futures or ETF, but be careful which one you choose (e.g. avoid USO at all cost).