The world will shortly reach an important milestone, if it hasn’t been already, according to the World Bank. Measured on purchasing power, the organization estimates that China will be the world’s largest economy sometime this year. It eclipses the United States. We held that title for more than 130 years. No one should be surprised. For more than 1,500 years, through the late 18th century, the Middle Kingdom was by most counts the largest economy in the world.

More interesting than the story were the reactions to it. In China, the response was that the numbers are flawed, and are moreover largely meaningless since the country’s per-capita income is only in the middle of the pack, roughly equivalent to that of Albania, Ecuador or Tunisia. Of course, students of China know that displaying weakness rather than strength is a strategy that China has tested over millennia.

In the United States, the story failed to make the front page of many papers, while most commentary on the matter could be summed up by part of a headline on several blogs and editorials—“So What?” And, perhaps best articulated by Financial Times columnist, Martin Wolf, much of the “so what” argument is based on the massive differences in per-capita income, the challenges China faces in curbing its credit boom, the military might of the U.S., China’s productivity being 1/5th that of the U.S., and that the U.S. holds a major lead in technology.

We can’t quarrel with the numbers—either from the World Bank or from the many “so what” commentators. But as an investor if you believe the U.S. will not have to eat that two-word summary then you should be betting heavily on all things infrastructure—especially energy infrastructure.

The basis of our argument comes from statistics that have eluded so many. The first category in which China will likely surpass the U.S. on a per-capita basis is one where per capita matters much more than in most—electrical transmission cable. By the end of next year China is likely to have installed nearly four times as much electrical transmission cable than the U.S. Indeed, in the five years through 2015, China will augment its transmission cable network by adding the equivalent of America’s entire transmission grid. Moreover, as with rare earths, China is no slouch in such technology. The heart of the transmission network is ultra-high voltage wire, where China was first to introduce 1,000kV wire, putting it far ahead of the U.S.

Ultra-high voltage wire is the guts of a smart transmission grid as it connects different parts of the grid to one another, allowing the seamless integration of multiple electricity sources ranging from fossil fuels (coal and natural gas) to renewables (wind and solar). It’s no surprise then that China has leapt past America and the rest of the world to become the largest manufacturer and user of renewable energies. The country’s drive to become the largest producer of electric cars, smart meters and charging technologies, among other things, is part of a plan that will leave the rest of the world in the dust relative to construction of a 21st century energy infrastructure. The 10-year cost to the country by the end of the current decade will be measured in trillions and in today’s dollars will probably exceed what America spent to win World War II.

China’s detractors will contend the country is “wasting” more money on unneeded infrastructure than we spent on wars in Iraq and Afghanistan. So some might argue that we’re essentially even on this score. But why is China channeling its money in this direction or, more precisely, why should we care? After all, these China bears assert, American ingenuity and free markets have created an unprecedented boom in the kind of energy that does not require such fancy infrastructure. In a ham-handed attempt to imitate clever British headlines, Foreign Affairs called its most recent cover story “Big Fracking Deal: Shale and the Future of Energy.”

Once you realize that there’s no intended irony in the introduction in several of its articles on obtaining hydrocarbons from shale and related formations, you find to your horror why China is so intent on hiding its undeniable strengths. We’re not taking anything away from fracking qua fracking. If anything we’ve been surprised that oil and gas production in America has grown so fast for so long. We had expected the plateau to begin as early as next year. Now, we have to admit that oil and gas production growth could last to the end of the decade. But in contrast to what the fierce proponents claim, these new sources of hydrocarbons are not the backbone of America’s future energy supplies.

But even assuming the U.S. eventually produces 11 million barrels of oil per day—far more than even the most optimistic forecasts—we’ll still need to import at least several million barrels a day to meet our needs. More importantly, unless we’re willing to repeal the laws of physics—never mind supply and demand—hydrocarbons (regardless of how they’re obtained) are finite and their production will peak. And the more we use the sooner the peak will occur.

We’ve written about fracking many times before. What’s important to keep in mind is that it presents a potential vicious circle. Fracking produces “light” oil, which is usually most desired as it requires less refining than “heavy” oil. However, we don’t have excess light oil refining capacity. That’s the major reason oil prices in the U.S. are less than in other parts of the world. America by law prohibits oil exports. Of course low crude prices are a boon to American refiners, but a scrooge to fracking producers whose costs continue to rise and therefore need high oil prices to pursue their lofty goals. The solution for producers is to allow exporting—but that could spell big trouble for refiners, and, of course, the American public.

If, as we so fervently hope, America’s goal is to buy time to transition to new energies, we see no signs of it. According to the American Society of Civil Engineers (ASCE), a 160-year old organization with a reputation for integrity, our electric transmission infrastructure is in serious disrepair. In order to bring current infrastructure to a point where critical failures are not a problem we’ll need an additional $100 billion in funding by 2020, and nearly $750 billion by 2040. And these projections exclude almost all spending related to a smart grid.

The country needs to get on the right horse very quickly, if it’s not too late already. Yet the hydrocarbons on which we increasingly rely come with an ever greater cost. Indeed, fracking requires more energy per unit of energy produced than does than either solar, hydro, or wind. One way to summarize the entire ASCE study on infrastructure is that we know how to make the rails run, but that’s about it.

Returning to our bets on infrastructure, we would add one industry that is clearly succeeding – railroads. The rails are necessary for fracking—not only for transporting oil from place to place but also for delivering the liquids necessary to get the oil out of the ground. Two favorites in this area remain Union Pacific (UNP) and Wabtec (WAB)—the latter, perhaps the company most responsible for keeping the railroads in stellar condition.

As a final note, with so much of the world relying on energy and so much of America’s continued hegemony in many areas—even including defense—relying on a successful American energy transition, we have to ruefully recommend aggressive hedges to serve as insurance if America does fall further and further behind. In the hedge category are precious metals—especially gold (a potential alternative to the U.S. greenback) and silver (which also plays a critical role in solar energy). The SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) ETFs make owning these metals a synch.
__________________________________________________________

The Largest Un-Mined Gold Deposit in the World

China’s gold demand is off the charts, they’re on track to buy the world’s entire mine production... and then some.  Plus they are now "secretly" bringing it in via Beijing - off the books.

Gold reserves at the COMEX warehouse recently dipped to an all-time low in inventory and the Gold Forward indicator has gone negative... indicating a rally on the horizon... a big one.

This miner is undervalued and ready to dig up massive profits.  It's permitting it's latest, remarkable discovery that is geopolitically safe.  It could be the play of the century.

You need to hear about this one, here.
__________________________________________________________