A Commodity Issue: Nat Gas, Gold Stocks, Coal, BRIC Nations and More!

Posted On Jun 16, 2009 By

by Addison Wiggin & Ian Mathias

  • Chris Mayer highlights a “super cheap” commodity
  • The “time is right” for this stock sector, says Frank Holmes
  • Greg Guenthner with a contrarian play… a hated, government-targeted sector worth investigating
  • Plus, two data points shock the street… is this “good news” worth getting excited about?

  If you have just a few seconds today — check out natgas, gold stocks and coal.

  But if you’ve got five whole minutes, we’ll tell you more… welcome to a commodity-themed issue of The 5.

  “Natural gas is more than a place to hide,” begins our value investing maestro, Chris Mayer. “It is, simply put, super cheap. As most other commodities — including oil — have rallied, natural gas remains stuck in a bog. In fact, the ratio of the price of crude oil to the price of natural gas topped 18-to-1 recently, which we have not seen since 1990, according to Barron’s.

“The price of natural gas fell because there was too much of it. We are in a recession, after all. Industrial demand for natural gas has fallen through the floor and into the basement. But mindless zombies or congressional leaders (I repeat myself…) do not run this industry.

“Producers are cutting back. And the decline rates on those gushing shale gas plays (which helped contribute so much gas to the pool) are 60-75%. Meaning that if these producers don’t drill, the flow of gas from their wells will fall by that much in the first year. And they aren’t drilling — not as much. The rig count has collapsed. It has fallen much faster than in the 1981/82 collapse, the worst since the Great Depression and one that still makes old natural gas men cringe to this day.

“Another point: The marginal cost to produce natural gas for the vast majority of the industry is probably somewhere around $6-8. This next chart gives you a good snapshot of what the U.S. gas situation looks like.

“Right now, the spot price of natural gas is under $4 and sits right on the industry’s cash costs and well below marginal costs. In short, natural gas supply is going to start to dry up here really soon. Grab your natgas ideas before the rush.”

For Chris’ finest natural gas-themed investments, be sure to check out Mayer’s Special Situations… currently available for just $1.

  Natural gas — and nearly every other commodity — has found some footing after yesterday’s swift sell-off. The Reuters-Jefferies CRB Index, which hits all the major commodities, fell 2% yesterday, its worst day since June 3. Today, the index’s components are staging a small recovery.

  Oil, for example, is back up a buck and change, to $72 a barrel, just off its 2009 high.

  That won’t help us at the pump, where gasoline prices are up for the 50th day in a row. The national average is $2.67 for a gallon of the cheap stuff today, a seven-month high. That’s up about 60% from the start of the year — according to AAA, the fastest rise ever.

Heh, as if California needed anything more to worry about… the average gas price there hit $3 a gallon today.

  Gold’s up today too, from a low of $925 an ounce yesterday to $940 as we write.

  “The time could be right for gold mining stocks,” adds our colleague Frank Holmes. “Conditions have improved for gold equities, and economic policy decisions being made in Washington could further increase the investment appeal of these mining stocks.

“The chart below clearly illustrates the relationship between gold-mining stocks and the federal budget. The top chart below compares the total-return performance of the S&P 500 (blue line) with that of the Toronto Gold & Precious Minerals Index (gold line) going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold.

“At that time, the United States was in the thick of the Vietnam War and was pumping billions of dollars into the financial system to pay for it. The dollar’s value dropped compared to other currencies, and the demand for gold and its price shot up. At the same time, the U.S. stock market was languishing, taxes were high and new regulatory entities like the EPA were being created. It was also a period of socialism, unionism and protectionism in Europe.

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“One hundred dollars invested in the S&P 500 at the start of 1971 underperformed the gold stock index essentially for a quarter century. In each of these years, the federal government engaged in deficit spending. The S&P 500 surpassed the gold stocks in 1997, in the midst of the tech boom and budget surpluses under President Clinton.

“When those surpluses reverted to widening deficits after the Sept. 11 attacks, you can see the spread between the broad market and gold equities narrowing. At the same time, another important event occurred — China began to deregulate its precious metals markets. During that period, the S&P 500 dropped before largely leveling off, while gold stocks charged forward…

“Today’s federal government, which has spent huge amounts to save the banks and stimulate the domestic economy, is expected to see a $1.8 trillion gap between revenue and expenditure… a deficit on a scale beyond what we’ve seen in the past.

“If the federal budget projections are accurate, we can expect massive deficits to continue, which will likely fan inflation fears and keep downward pressure on the dollar. These large deficits, combined with China’s growing appetite for gold, create the potential for gold stocks to remain an attractive investment relative to the broader market for some time to come.”

Frank will be one of many “can’t miss” speakers at our Investment Symposium this year. Time is running out to join us… book your trip today, here.

(BTW, if you want to learn about some of our favorite gold stocks, check out this special report.)

  The world’s fastest growing, commodity-driven countries are meeting today. So called BRIC nations (Brazil, Russia, India and China) are meeting in Moscow, their first exclusive gathering ever.

Rest assured, the meeting made waves within minutes of its outset. Just a day after Russia’s finance minister gave the dollar a pat on the back, Russian Prez Dmitry Medvedev said this morning, “No currency system can be successful if we have financial instruments denominated in just one currency. We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies."

The four BRIC nations hold 40% of the world’s currency reserves… mainstream America can’t dismiss calls like these for long.

  The dollar has given back nearly all of yesterday’s rally. After soaring a full point yesterday, the dollar index is down by nearly the same today… it goes for 80.5 as we write.

  Commodity weakness/dollar strength caused a 2.4% drop for the S&P 500 yesterday, led down by recently popular energy and materials stocks. Since commodities are back in the black, and dollar selling has resumed — the latest leg of the bear market is limping along today. Stocks opened flat at the opening bell.

  “Now is the perfect time to invest in a small-cap coal company,” suggests Greg Guenthner, with perhaps our most contrarian idea of the day.

“Despite coal’s impact on the environment, new proposals to curb coal’s carbon footprint appear extremely lenient. So while new mileage laws are set to clamp down on American autos, coal will essentially get a free pass — all thanks to a proposed ‘cap and trade’ system.

“Proposed legislation addressing carbon emissions isn’t exactly a carbon tax. Instead, the president and his allies in Congress have come up with a cap-and-trade system. Essentially, carbon emitters would have to buy permits that correspond to the amount of carbon dioxide they pump into the atmosphere. If these companies find a way to clean up their act a bit, they could sell some of their permits to more notorious polluters.

“The intention of a system like this one is clear. However, there’s no way a proposal with any teeth will ever become law. By the time the cap-and-trade proposal was watered down to potentially win enough votes, supporters were left with a bill that offered almost all of the carbon permits for free, with only 15% being auctioned. And the auctioning won’t even kick in for more than two decades.

“While stricter mileage requirements will keep automakers in line, coal (and other traditional, dirtier energy sources) will essentially be allowed to thrive unchecked for years to come.”

  We note a couple of peculiar celebrations in the world of economic data today.

First, much to Wall Street’s delight, housing starts jumped 17.2% from April to May. The Commerce Department blew expectations out of the water on this one, as the Street was hoping for a 7% climb. Permits to build new property rose as well, up 4% and also nearly double trader expectations.

“Wow” we heard a CNBC talking face beam. “Another good sign,” said The Washington Post. Maybe we’re just too thickheaded… but with a 10.1 month supply of homes already on the market, how does building more make us all better off?

Second, producer prices posted a 5% annual decline in May, its biggest yearly fall since 1949. The PPI actually inched up 0.2% from April to May, but still far less than the Street’s 0.6% estimate. Thus, as CNN declared, inflation remains “in check.” We certainly won’t argue that idea in the near term, but as you may have gathered fromyesterday’s 5, we don’t have the stomach to bet against a trend like this one:

  “I disagree that 1Q household debt fell to $13.8 trillion,” a reader writes, responding to yesterday’s issue. “That’s because I’m a lonely fiscal realist (LFR) — a nearly extinct species here in the IOUSA.

“I and the other remaining American LFR (I need to track her down so we can mate and save our species) believe that 1) households consist of taxpayers, and 2) such taxpayers are responsible for most of the federal government’s debt, which today stands at $11.4 trillion and is exploding higher each day.

“Yes, we LFRs know that today’s taxpayers are repeatedly misled — but conveniently believe — that the burden to service and repay the debt will be borne, not by them, but by our children, grandchildren, etc. But we LFRs believe that today’s taxpayers — who have repeatedly elected and re-elected weak leaders who have refused to levy sufficient taxes to match the spending they approve — must accept accountability for their era’s debt, even if the repayment responsibility falls upon future generations. Therefore, LFRs also believe that taxpayers’ pro rata share of the government’s debt should be accounted for on their household balance sheets.

“Sure, such a balance sheet practice is infeasible and will never happen. But spreading the idea might help Americans to understand that in a true macro sense, it will be generations before most households can honestly claim any savings — even if their elected leaders have restored fiscal soundness, eliminated budget deficits and begun repaying the massive debt that today’s taxpayers/voters stuck them with.”

The 5: We’ve tried to “spread the idea” more than once, our film perhaps the largest example. Best of luck with your effort… and nice usage of a Mogambo-style abbreviation (MSA).

Cheers,

Ian Mathias

The 5 Min. Forecast

P.S. Have you met Mr. X.? He’s made some of our readers a ton of money lately — as much as $34,000 in the last 30 days. We’re now offering his advice to a new wave of investors… get an introduction here.

 


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