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Scarcity: The Future of Water and Gold

Scarcity: The Future of Water and Gold

January 15, 20212240 view(s)

You can tell there is a shortage of something by the number of substitutions created to fill the gap. Of course, there is nothing like the real thing, especially when it comes to water (or gold for that matter). At any given time, there are over 100 ounces of “paper gold” traded on the COMEX exchange for every ounce of physical gold available. That ratio has been as high as 542:1 in recent years. That means when push comes to shove, the only people that really own gold, are those that possess the shiny metal in a vault they can access. Everyone else with paper gold will be paid out with more paper. When thirsty, most people would prefer a glass of water instead of a stack of papers showing ownership of paper water. But fresh, usable water, like gold and silver, is getting harder to find.

Water - A Depleting Resource

While there is plenty of water on the earth, only 1% of fresh water is usable and readily available for cooking, drinking, and agriculture. Over one billion people live in households without access to safe drinking water inside the home. Half the rivers in China have disappeared since 1990, and by 2030, worldwide demand for fresh water is expected to outstrip supply by 40%. Even in the United States, the Department of Agriculture believes that the Ogallala Aquifer will be gone during the lifetimes of most reading this article. The Ogallala Aquifer is the largest freshwater aquifer in the world, providing water across the breadbasket of the United States, from South Dakota to Texas (see map). In parts of Kansas, where wells have gone dry, 30% of the aquifer is already depleted. This depletion is projected to increase to 70% in the next 20 to 30 years, at current rates.

California, which uses 9% of the fresh water in the United States, is another agricultural region facing water shortages. Today, it is possible to trade water future contracts on the Chicago Mercantile Exchange (CME), just like trading oil, gold, or other commodities. It has become a tool for farmers and municipalities alike to hedge their exposure to future price increases for water usage. The difference with these water contracts is that there is no mechanism for physical delivery. Owners know going in that contracts held to maturity will be settled for cash (paper). For many other commodities, there is at least the possibility of receipt of the underlying tangible item. But paper investment products and markets sometimes behave strangely, as we wrote about here. This strange behavior is true for oil and gold, and likely will be for water, as well.

Water Investment Index

The idea of investing in a water index started back in 2013, with the introduction of the Waterfund and the Real Cost Water Index (WCI) started by Scott Rickards (son of James Rickards, author of The New Case for Gold). In 2018, the Nasdaq Veles California Water Index (symbol NQH2O) was created. Futures contracts based on NQH2O began live trading for the public on the CME last week. A futures contract provides investors a way to hedge their bets about the future price of an index or asset. In this case, it is an index measuring the cost of water across various regions of California. This is useful not only for speculators and traders, but also for farmers who need water to grow their crops, or municipalities trying to secure water for the local population. With sufficient rain, no hedging is necessary. But when having to purchase/import water, price protection becomes important.

Most Americans do not trade futures contracts on the CME, and few are likely to be interested in trading the new water index. But the existence of this contract should make ordinary Americans take notice. Never before was a paper substitute necessary for water. At least in the United States, we usually seemed to have plenty. But now it is fast becoming a finite resource with a dwindling supply. Of course, there is plenty of water on planet earth, but the amount of readily available fresh water is relatively small. This means that what used to be free or low-cost will begin to have a higher cost. Once, when traveling across the sands of Saudi Arabia, I thought it interesting that gasoline only cost $0.03 per gallon, while water cost nearly $2.00. There are five nations where gasoline is cheaper than water.

I don’t believe we will see water cost more than fuel anytime soon here in the U.S., but it is likely we will see the cost of both fuel and water increase in the days ahead. As with any good or service, an increase in price can be viewed as a supply and demand issue, or as a currency devaluation issue. In the case of water, it will likely be both. Water is the latest commodity to be added to a list of commodities traded on the exchange. This indicates an acknowledgment of a finite supply, and of possibly volatile price changes ahead. When preparing for future shortages and price increases for any item, it makes sense to store funds in a currency that appreciates in value.

Water and Gold

Gold and silver are in a good position to benefit from the wave of commodity price growth that is just getting started. As mentioned in the 2021 Precious Metals Outlook, commodities began the year at a 50-year low in relation to stock prices, and are expected to be a leading asset class throughout this decade. Gold and silver will help lead that charge. While the new water index has been trading for less than a week, it will likely also be a part of that wave. For the average American, this means it will take more dollars in the future to purchase the same amount of water being used now. Water is a large part of life for Americans - we use more water per capita than anyone else on the planet. It might be difficult to change this liquid lifestyle.

Tally water right up there with groceries, utilities, and insurance, in terms of future increases in the cost of living. When trying to maintain our current lifestyles, we need a saving mechanism that will help preserve our purchasing power for the days ahead. It will likely be easier to do when we save in gold or silver, versus a paper currency that does not keep up with the cost of living. When thirsty, there is nothing like a cool, refreshing glass of water. The old timers used to put a silver coin in a jug of stored water, as the anti-bacterial properties would keep the water safe and available for a longer time. When trying to pay for this liquid staple in the days ahead, we will find that metal transforms into water quite nicely, at any location.

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Bill StackbyBill Stack
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