Precisely when Wall Street pundits were beginning to convince investors that the natural resource boom was “over,†a new wave of exploding prices has now emerged.
On Monday, I showed you how silver, copper and gasoline were jumping … and how other key markets, like gold and oil, would soon follow.
Sure enough, just yesterday, the price of crude oil surged by more than $2, hitting $64 per barrel …
The Oil Service HOLDRs (OIH) jumped almost 3 full points, and …
Virtually all energy markets are sending the message that a major upturn is in the making.
Some observers said yesterday’s oil price surge was due to an unexpected drop in U.S. oil inventories. Others said it was because of major shipment delays from Nigeria caused by more terror attacks this week.
But these are just the immediate trigger events.
The real reason for the continuing boom in natural resources is a convergence of sustainable, high-powered engines driving prices higher:
Engine #1. Government spending out of control. The world’s starter engine that drives demand is right here in the United States, in Washington, D.C.
Washington sets the example — not only for American consumers, but also for government policymakers in Europe, Asia and Latin America.
And right now, our government has gone wild, raising the nation’s debt ceiling to $9 trillion and promptly padding the budget with a new round of spending — for wars … hurricane relief … Medicare … and election-year pork barrel.
According to the New York Times, “forced to choose between calls for renewed austerity and demands for more money, many Republicans joined Democrats in reaching deeper into the Treasury, leaving the party’s push for new fiscal restraint in tatters.â€
Indeed, even before this last spending binge in Washington, the U.S. government debt had surged to $8.17 trillion — a leap from the $5.9 trillion it had reached just five years ago.
Our view: With interest rates rising and with lenders bound to balk, there’s only one way the U.S. government will be able to cover all this debt: By printing money … sacrificing the purchasing power of the U.S. dollar … and driving up the price of the world’s ever-scarcer natural resources.
Engine #2. Largest trade deficit in history. If Washington and Wall Street are losing their marbles about the danger of spending too much money, then they’re certifiably insane with regards to the danger of borrowing that money from overseas to finance our trade deficit.
In 2001, the U.S. trade deficit was $363 billion, already a new record that should have shocked any self-respecting politician or analyst. Last year, after just five years, it had doubled to $726 billion. And now, based on the latest data, it looks like it’s going to balloon beyond $800 billion.
Sure, as long as foreign investors continue to pour that money back into the United States, they will help support the value of the dollar, and we can continue to live high on the hog a while longer.
But that’s like playing a game of chicken with Attila the Hun. If we push foreign investors just one inch beyond their threshold of tolerance, we could transform them — virtually overnight — from benevolent lenders into vicious sellers.
Consequences: A plunge in the U.S. dollar and yet another powerful force that makes surging natural resources inevitable.
Think about it. If each ounce of gold is worth over 550 of today’s dollars, and each barrel of crude oil is worth over $60, how much will they be worth if the value of each dollar plunges in half?
Answer: Double, or more than $1,100 for gold and over $120 for oil. And that’s assuming no increase in demand and no disruption of supplies, which leads me to …
Engine #3. The threat of large supply disruptions. Don’t be fooled by recent efforts to calm the explosive crisis in the Middle East and Persian Gulf.
As I told you in my Money and Markets of March 13, Iran’s President Ahmadinejad is marching ahead with a master plan to effectively take control of Iraq. Hamas, a terrorist organization, has just chosen a purely Hamas government for Palestine, dashing any hopes of a compromise with the West.
Everywhere — even in countries closely allied to the U.S. like Dubai and Saudi Arabia — we see a marked deterioration in East-West relations.
Engine #4. Unbridled surge in demand from Asia. Tony Sagami was in Asia last week for a reason, and he’ll tell you more about it in a moment, zeroing in on their high-tech companies.
Larry Edelson just left for Asia this week for a similar reason, focusing on natural resource companies. His article is also below.
And with Larry’s support, Sean is taking a very close look at small- and medium-sized companies that feed the Asian boom, the subject of his article today.
The underlying reason to look at Asia: While the U.S. Congress is spending money on wars, hurricanes and their own personal potpourri of pork … Asian countries are spending most of theirs on superhighways and infrastructure.
Here’s Tony’s report …
On-Site Report
From the Silicon
Valley of Asia
by Tony Sagami
Asia is bursting at the seams with the most exciting opportunities I have seen in my 22-year investment career. So two weeks ago, I decided to go check it out for myself.
The primary destination of my trip: Taiwan’s Hsinchu City, the Silicon Valley of Asia.
My primary focus: the Hsinchu Science Park — a government-sponsored technology mecca spread out over 1,500 acres and costing $1.7 billion just in the initial investment.
This is the epicenter of Taiwan’s great transformation — from a maker of cheap, low-margin shoes, apparel, and toys into a leading technological innovator.
Is Hsinchu’s talent and research better than Silicon Valley’s? No, but it’s sure a heck of a lot cheaper. Wages in Taiwan average $1,283 per month, a fraction of the U.S. equivalent. And that’s despite science and math educations that significantly surpass most U.S. education systems.
End result: The tech companies of Taiwan — and of Hsinchu in particular — are getting far more science and engineering bang for their buck.
All told, more than 400 vibrant, fast-growing companies call Hsinchu City home, easily the largest concentration of high-tech companies anywhere outside of the sprawling Silicon Valley itself.
Consider Faraday Technology, for example, one of the fastest growing ASIC chip design companies in the world.
ASIC stands for “Application Specific Integrated Circuit,†a fancy way of saying custom-designed chips. Companies come to Faraday with very specific needs and ask Faraday to design a chip exactly to their specifications.
Like a custom-tailored suit or custom-built house, custom chips aren’t exactly cheap. But if you’re good at your craft, customers will beat a path to your door. And they are beating a steady path to Faraday.
The company has grown its revenues from practically nothing nine years ago to $175 million in 2005, about a 35% sales growth rate.
Sales in 2006 should be even better. I say that because Faraday itself told me their win rate (chip speak for new business in the bag) has been soaring.
And Faraday’s stock is selling for peanuts compared to what you’d have to pay for that type of growth with a U.S. chip company. In the last 12 months, Faraday earned $5.09 of profits, which means that it’s selling for roughly 10 times earnings, compared to 20 times for America’s Synopsis and 17 for our Fairchild Semiconductor.
But Faraday Technology is just one example of the dozens of great opportunities I uncovered during my trip. I haven’t ranked them yet, and I don’t know if Faraday will be at the exact top of my list. But it’s certainly the type of company tech investors should start thinking about.
As an American, it pains me to say that the land of opportunity for tech investors has moved across the Pacific Ocean. But the world is changing, and what investors should be doing is changing along with it.
For tech investors, that means moving out of high-valuation, slow-growth U.S. tech stocks to their low-valuation, fast-growing Asian counterparts. (I’ll give you more details in the weeks ahead.)
Plus, for natural resource investors, this means you should go for the companies that are best able to feed the Asian boom.
Look. Taiwan, despite its small size, is an economic powerhouse. It consumes huge amounts of energy and natural resources to feed its industrial juggernauts. But China is over 274 times larger. So what will happen to the demand for resources if China’s industrial development catches up even half way to Taiwan’s?
Sean and Larry provide some good answers …
Red Hot
Down Under
by Sean Brodrick
Australia is very close to signing a deal to sell uranium to China, and the impact could ripple all around the world.
An opportunity for investors? Heck, yeah!
Total global uranium consumption was estimated at 176.3 million pounds in 2005. Of that, only 92.6 million pounds, or 47%, was supplied directly from mining. The rest came from stockpiles, and those stockpiles are dwindling fast.
And now, according to a report by the International Atomic Energy Agency (IAEA), 130 new nuclear power plants are either being built or are in the planning stages. As a result, by 2015, demand for uranium will likely hit an astounding 212 million pounds per year.
Add it all up, and you’re looking at uranium shortages for at least the next decade.
So is it any wonder I’m so psyched about uranium stocks? Heck, the price of uranium jumped 76% last year. It’s already up by another 8% this year.
And, according to Bloomberg, it’s poised to jump 27% to $50 a pound just in the next six months. What do you think that will do to stocks leveraged to the price of uranium? Zoom, that’s what!
And if you thought China demand for oil was insatiable, wait till you see their demand for uranium!
China’s target is to more than quintuple its nuclear capacity — by 36,000 megawatts — by 2020. And still, nuclear power would only cover 4% of China’s needs!
Result: China’s annual uranium needs will jump from 3 million pounds per year now … to 10 million pounds per year by 2010 … then 18 million pounds per year by 2020.
Where is China going to get all the uranium? Mostly from Australia! Resource-rich Australia has far and away the largest reserves of uranium on the planet.
And Australia’s uranium resources will likely be expanded through exploration. Indeed, right now, its uranium industry is far from fully developed. Despite the fact that it has nearly one-third of the world’s reserves, it currently supplies only about one-fifth of the world demand, selling to customers in the U.S., Japan, South Korea and Europe.
If Australia starts exporting uranium to energy-hungry China, guess what! You’re going to see a veritable gold rush in Australia’s uranium fields.
Uranium Is Red Hot.
But Australian Uranium
Companies Are Still Cheap
A key reason: Traditionally, anti-nuclear activism has kept the Australian uranium industry in a straightjacket … and helped keep their uranium shares down.
What most people don’t seem to realize, though, is that the regulatory climate is now changing rapidly in Australia.
Last year, for example, when a state government tried to block new uranium mines, it was overruled by the federal government — a major victory for the industry.
And as the price of uranium keeps rising, the desire of politicians to open up the industry is rising in tandem.
This gives you the best of both worlds: Cheap prices for uranium companies plus the prospect of an explosive rise as the shackles of old regulations are unlocked.
Meanwhile, we have a massive race for uranium shaping up among China, India and Russia. Miners and mining companies are fanning out all over the globe to every backwater and dirt-patch with a whiff of uranium on it.
My conclusion: The great 2006 uranium rush is now under way!
Natural Resources
Getting Ready to
Soar Again!
by Larry Edelson
As hard as I try, I can’t find fault with my analysis of the markets: Gold, oil, and most other natural resources are about to start soaring. I see the clues everywhere …
First, bonds are falling.
The typical 30-year U.S. Treasury bond has lost as much as 4% of its value since the middle of January. That means $100,000 worth of bonds in January is now worth about $96,000.
This is typical of what happens when investors start to smell easy money policies and more inflation down the road. So in my book, the recent plunge in Treasury bonds is a big clue that more inflation is coming.
Second, Iraq is in trouble, and Iran is pressing ahead with its nuclear program, thumbing its nose at the world.
That uncertainty is inevitably going to put upward pressure on oil and gas prices — on top of the supply-and-demand fundamentals that are already driving those prices higher.
Third, copper just hit another all-time high, with the May futures contract trading as high as $2.40 a pound this week.
And copper is a leading indicator. So its surge indicates demand is cooking for other resources as well.
Plus, there’s another force that most ivory-tower Wall Street analysts consistently underestimate: China.
You’ve heard a lot about China lately. But let me tell you about two major changes that few people are talking about — that can only add momentum to the demand for scarce resources.
First, the 2008 Beijing Olympics is a big growth driver. The Chinese government knows that the country is fueling one of the greatest global expansions of all time and that it has a staggering 1.3 billion consumers.
That’s the context they see for the Olympics: A once-in-a-century opportunity to shine in one of the greatest global spotlights of all time.
To stimulate foreign direct investment, Beijing is pulling out all the stops: Below-market prices for land, government guarantees to offset risk, plus post-Olympic ownership rights. Estimates call for nearly $17 billion in direct investment to hit the games head-on.
But it’s the ancillary spending that’s even more critical: China plans to boost natural gas consumption by 400% to 500% … invest nearly $4 billion in information technology and infrastructure … expand fiber-optic networks … beef-up mobile communications capacity … establish digital capable HDTV transmission … and use GPS technology for transportation control.
It’s building highways, city expressways, subway lines, and an intra-city light rail. It’s expanding the Beijing airport, improving water, electric, gas, and heating facilities.
So the Olympic games themselves are just a metaphor for the massive push to modernization China is undertaking right now.
Second, China is launching a new rural initiative for 800 million citizens. China will set an economic growth target for rural areas of at least 8% per year. It will spend over $11 billion per year on rural education, irrigation and medical services in rural areas. And it will invest tens of billions to build 112,000 miles of rural roads. That’s the equivalent of circling the world at the equator more than four times.
Imagine the amount of cement, asphalt, tar and steel … the number of bridges, traffic signals, and aluminum signs … plus the myriad of gas stations, motels, hotels, restaurants and thousands more industries that will follow!
Bottom line: If you think that China is already sopping up the world’s raw materials and resources, you haven’t seen anything yet. The new rural initiative in China could make the last 10 years of development in that country look like a mere launching pad.
Natural Resource Profits
As Far as the Eye Can See
Despite minor ups and downs, I feel natural resources are the place to be. And for the extraordinary upside potential in the Asia-powered natural resource boom, consider select, high-leverage, limited-risk small-cap stocks. For example, right now, Sean and I are looking at:
- A diversified Asian metals miner trading for as little as 14 cents on the dollar. Profit potential: 583%
- A company with $6.4 BILLION in copper and gold in the ground with shares valued at just 2.3 cents on the dollar! Profit potential: Up to 1,000%
- A red-hot uranium company, whose stock I think could QUINTUPLE your money
See Sean’s latest report just released Wednesday night, or call 800-898-0819 for details.
See Sean’s latest report just released Wednesday night, or call 800-898-0819 for details.
Separately, for a nice China play, one of my favorites is US Global Investors’ China Region Opportunity Fund (USCOX).
And no matter which investments you choose, always keep a substantial portion of your nest egg stashed away for safety and income.
Best wishes,
Larry Edelson
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
