May 29, 2007 by Addison Wiggin & Ian Mathias

• Home sales drop… inventory rises… look out below!
• Gold’s rough Memorial Day weekend… and why a new run-up is approaching
• The epic “Ethanol Bust of 2007” draws ever closer… a report from the front lines
• China trade talks “not such a disaster,” responds the Free Market Investor
• Chinese binge on credit and uranium
• Irradiated dog poop? Grassy wetlands? Readers of The 5 respond

Existing home sales dropped 2.6% in April, says a report released by the National Association of Realtors on Friday. Housing inventory rose over 10%. These numbers continue to be bearish for the housing market.

Never fear, you can now charge your mortgage on your American Express card. Heh. We’re sure that will help a few middle-class homes stay afloat… for just one more month… ugh.

“I continue to expect that gold will soon exceed US$700,” wrote GoldMoney.com’s James Turk. The yellow metal suffered a rough Memorial Day weekend, dipping as low as $652.

In the last 10 weeks, European central banks have sold 120 tons of gold.

“Clearly, central bankers are lining up to keep gold from climbing higher,” says Turk. “But they’re only buying time. They’re fighting a tidal wave of money fleeing from fiat currency into the safety and security of gold. Gold is the only money not dependent on a government or central bank's promise.”

“It’s like a game of agricultural musical chairs, but the music is so good no one wants to sit down,” Kevin Kerr told The 5 in an exclusive dispatch from his Midwest tour. Corn farmers are telling Kevin that they already feel a coming glut in ethanol supply. But they’re milking corn prices while they are still high. (Mixed metaphor aside.)

In Minnesota alone, 2007 ethanol production is projected to top 620 million gallons -- about 10% of the national production of 6 billion gallons. “It’s likely that as the number goes beyond 7-8 billion gallons,” said Kevin, “margins will decrease and prices will plummet.”

“The building boom in ethanol plants is likely to go bust by the end of 2007,” Kevin told us. “Some analysts estimate that returns on these investments will be zero or negative by 2008.”

There are currently 78 new plants under construction nationwide.

“Americans are obsessed with instant gratification,” writes Christopher Hancock, nimble editor of the Free Market Investor. “You said last week in The 5 that the trade talks between the U.S. and China ended in ‘disaster.’ Truth is, the meeting may have been a very positive step forward in our financial relationship with China, but you have to understand the way the Chinese do business.

“They think about future generations when they make economic decisions. You can’t expect them to take on the U.S. ‘I want it my way and I want it right now’ mentality just because they are meeting in Washington.

“The three most important words to Chinese officials are, and always will be, stability, stability, stability. The currency and trade situation plays an enormous role in providing domestic stability. I ignore any projections that forecast the Yuan floating anytime soon… my guess would be 2013-2015. That’s not far away by Chinese standards.

“In China, changes tend to happen at a snail’s pace.”

Meanwhile, the Chinese are binging on credit. The Industrial and Commercial Bank of China, the country's biggest lender, expects to issue 20 million credit cards by the end of this year -- DOUBLE the 10 million cards it printed in 2006.

The bank also announced that it expects a 50% rise in credit spending in 2007.

They’re also going nuclear… driving up the price of uranium.

Over the weekend, power shortages in the Guangdong province closed factories for a time, slowing production of geegaws and walligags for the U.S. market. The culprits? “Rising demand against low water levels in hydropower dams, a shortage of natural gas and the closure of some coal-fueled plants,” says Chris Mayer, keeping an eye on this developing crisis.

As part of the solution, China wants to boost its reliance on nuclear power.

“Under plans already announced,” reports The Washington Post, “China intends to spend $50 billion to build 32 nuclear plants by 2020. Some analysts say the country will build 300 more by the middle of the century. That’s not much less than the generating power of all nuclear plants in the world today.”

The price of uranium has already skyrocketed from $14.50 per pound in January 2004 to $120 per pound today.

And more from our favorite South American dictator:

Hugo Chavez’s recent overtaking of RCTV -- one of Venezuela’s most popular broadcasters -- went into effect over the weekend. The TV channel was replaced with the government-sponsored network TVES. Programming began with pro-Chavez music and government ads proclaiming, “Now Venezuela belongs to everyone.” Heh heh.

“Hugo Chavez is a full-blown paranoid,” comments Dan Amoss of Strategic Investment. We seem to recall saying something similar about Chavez last week, but far less sophisticated. Ah yes… he’s a “nut job.”

“Chavez now controls the legislature and the courts,” Dan Amoss reminded us upon hearing the news, “so it looks like nothing can stop this dictator from accomplishing his next goal -- reshaping Venezuela into a replica of Cuba.”

“Irradiated dog poop is still dog poop,” a reader reminded us over the weekend. “Would you like to eat it? Irradiation just kills the bacteria on the food, it DOES NOT CLEAN the food.
 
“Also, radiation destroys normal bonds between molecules and allows them to create other ‘nonnatural’ bonds. We don't have a clue as to what we are eating nor how harmful it can be to us when food is radiated. 

“BEWARE! This food should never be allowed for food for human consumption!
 
“I predict that within a few months, we will have another Chinese food-related disaster, only next time it will be 8,000 people dying, instead of 8,000 pets! Buy organic, buy locally grown foods. Let your grocer know that is what you want. Read labels.”
 
Hmm… so our plan to find a company that makes irradiation equipment is not such a good one?

“As you may know,” writes another reader, responding to our comment about the most expensive real estate purchase in the nation’s history -- $103 million for 40 acres of grass seems like a lot of money, especially given this fact: “40 acres of grass in East Hampton is either wetlands or very close to it. I hope he obtained independent advice. Depending on the location, even on the backside of the island, it could be inundated by even a Category 1 or 2 storm.

“Thanks for The 5 Minute Forecast. It is useful and fun.”

His last point seems to be the general consensus among readers we’ve heard from. If you have thoughts, ideas, requests, doubts, misgivings, alternate theories, paranoid delusions, song lyrics, typing samples or critical praise of your own… let’s hear from you: 5minforecast@agorafinancial.com.

Thank you for reading,

Addison Wiggin
The 5 Min. Forecast