We stand at a critical juncture in the greatest wave of profits investors could see in years.
The price of key natural resources — copper, silver and gasoline — has already blasted off, making new highs just last week.
But other, equally important markets, such as gold and crude oil, are just beginning to stir. They have moved steadily higher in recent days. But they have not exploded — yet.
This is giving nimble investors a unique window to jump into natural resource investments before the next big round of gains. And in a moment, I’ll suggest various alternatives, ranging from relatively conservative to the most aggressive.
First, though, take a closer look at what’s happening now, why it’s happening, and how long it could last.
What’s Happening
Nearly all natural resource sectors paused last month. And sure enough, as soon as they did, out came the habitual Wall Street naysayers: “The boom is over,†they declared. “Time to come back to traditional investments,†they urged.
Now, however, those voices have suddenly quieted again, and for very obvious reasons:
The price of copper, which had been zigzagging downward since early February, suddenly made an about face last week and zoomed to its highest level of all time.
The price of silver, which had been lagging behind gold for years, jumped into the lead, catapulting solidly past the $10-per ounce level and making a beeline for $11.
The wholesale price of unleaded gasoline, although still below last year’s peak, has suddenly spurted to a new high for 2006, and looks like it’s headed higher very quickly.
As I told you on Friday, these are not trivial events. They’re sending you the signal that something big is stirring. Plus, they’re telling you that related markets are likely to follow. Specifically:
Gold fell in mid-February to near the $540-per-ounce level, spooking a lot of weak-kneed investors.
Then, earlier this month, it did it again, scaring out another batch of investors who didn’t have the capital to hang on.
In neither instance, however, did their selling drive gold down very far. And now, the yellow metal has turned higher again … easily eclipsing the $550 level … likely headed for $570, $580 and beyond.
Crude oil also took a hit in February, falling as low as $58. The pundits pointed to new data about bulging oil inventories and trotted out theories about how those inventories must drive prices down.
What they didn’t tell you is that the so-called “big†oil stockpiles are minuscule compared to the huge amounts of oil bought and sold each month on the massive world oil market. The stockpiles may cause some short-term fluctuations, but they have little to do with medium- and long-term trends.
Indeed, despite all the talk, the price of crude oil failed to go down significantly this month and is now zigzagging higher again, holding well above the $60-per-barrel level … heading for new highs for the year … soon new highs of all time.
Why It’s Happening and
How Long It Could Last
Most Wall Street pundits still don’t get it.
They don’t connect the dots between (a) recent world events and (b) what we’re seeing in the markets right now.
Then they fail to connect (b) the market events to (c) all to the profits that can be made.
Worst of all, their agenda is to move you away from natural resources into the sectors that they traditionally like to push, like financial stocks or tech stocks.
That’s too bad. It means many investors will miss the opportunity. Or worse, they’ll wind up jumping in just before the next big correction.
Our view: Never before in our lifetimes have we seen such a convergence of sustainable, high-octane engines driving natural resource prices higher:
High-Octane Engine #1
Government Spending
Is Far Beyond Control
The world’s starter engine that drives demand is neither in China or India. It’s right here in the United States, in Washington, D.C.
It may not be the largest demand engine in the world. But it’s certainly the one that sets the example — not only for American consumers, but also for government policymakers in Europe, Asia and Latin America.
And right now, it has gone wild, absolutely out of control. On Saturday, the New York Times explained it this way:
“The largess demonstrated by the Senate in padding its budget with billions of dollars in additional spending this week showed that lawmakers are no different from many of their constituents: they don’t mind pulling out the charge card when money is tight. …
“Just hours after opening a new line of credit through an increase in the federal debt limit, the Senate splurged on a bevy of popular programs before approving a spending plan that was as much a political document as an economic one, its fine print geared to the coming elections.
“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.
And now, Congress has further raised the debt limit to $9 trillion, while padding the budget with a new round of spending — for the wars … hurricane relief … Medicare … and election-year pork barrel.
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.
High-Octane Engine #2
Largest Trade Deficit in
The History of Mankind
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.
Their theory:
Why worry? As long as foreign central banks
and investors are willing to dish out the dough,
why not spend to our heart’s content?
Sound familiar? It should. Because it’s precisely the same rationale used by millions of consumers who have binged on debt and spending all over the USA, ultimately digging themselves into a deep hole and lining up in the bankruptcy courts.
Result: With both the U.S. government and U.S. consumers binging in unison, we now have the single biggest trade deficit in the history of mankind.
In 2001, it 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 just released, it looks like the U.S. trade deficit is 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 to 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 555 of today’s dollars, and each barrel of crude oil is worth 64, how much will they be worth if the value of each dollar plunges in half?
Answer: Double, or $1,010 for gold and $128 for oil. And that’s assuming no increase in demand, no disruption of supplies, plus no change in any other factor that might drive these prices higher.
High-Octane Engine #3
The Unbridled Surge in
Demand from Asia
Tony was in Asia last week for a reason, and he’ll tell you more about it tomorrow, zeroing in on their high-tech companies.
Larry is going to Asia this week for a similar reason, focusing on natural resource companies. (He’ll fill you in on the details Thursday.)
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 thousands of miles of superhighways, thousands of miles of copper wiring, and millions of acres of construction.
In China, city streets that used to be jammed with bicycles fueled exclusively by pedal power and sweat are now jammed with automobiles burning gasoline and diesel.
This single transformation alone has turned China from a small energy exporter to a big energy importer, creating a demand that is hundreds of times greater than any oil stockpile anywhere in the world.
In Vietnam, until very recently, the economy was largely agricultural, revolving around rice farming. They still used the traditional approach of planting seeds, flooding the paddies, transplanting seedlings, and harvesting by hand.
Today, a whole new industrial economy is being born.
It includes a modern oil industry … supported by offshore platforms … and using some of the most advanced technology on the planet.
Australia, the country-continent with the most natural resources closest to Asia, is in the forefront of filling these mushrooming needs.
Its uranium companies are ramping up rapidly.
Its copper mines are going gangbusters.
And more so than any other resource-rich region in the world, it’s in the right place at the right time to take advantage of the Asian boom.
High-Octane Engine #4
The Threat of Large Supply Disruptions Is Growing Larger With Each Passing Day
Don’t be fooled by recent efforts to calm the explosive crisis in the Middle East and Persian Gulf.
The U.S. ambassador to Iraq proposes to talk to Iran, and Iran has agreed to talk to the U.S. ambassador. But both sides admit it’s an exercise in futility. As I told you in last week’s Money and Markets, Iran’s President Ahmadinejad is marching ahead rapidly with a master plan to take over Iraq. If he makes any temporary pact with the American forces (unlikely), it will merely be to further his goals.
Meanwhile, Secretary of State Condoleezza Rice is still talking about diplomatic solutions to the upcoming showdown about nuclear weapons. But it’s just talk. Everyone knows that the time for negotiations ended when Western Europe’s two years of talks with Iran broke down last year.
No, this is not the end of the world. We will survive the crisis. And if you look at the world from a longer-term perspective, you can even see the bad news in a brighter light (my earlier report).
One thing, however, is certain: With the combined power from these high-octane engines, it should be obvious that the natural resource boom you’re seeing right now is not a one-time, flash-in-the-pan phenomenon. It’s a long-term, worldwide wave that’s just beginning to gain momentum and could continue for years.
Investment Vehicles Ranging
From Relatively Conservative to
Some of the Most Aggressive
All natural resource investments involve at least some risk. So they’re not for the same kind of money you’d stash away in Treasury bills or a Treasury-only money fund.
But relatively speaking, the most conservative are those that do not involve leverage. These are investments that are tied directly to the market value of the natural resource … or which aim primarily for yield. Two examples:
- StreetTRACKS Gold Trust (GLD): The largest gold-based exchange-traded fund. Its price is set to 1/10th of an ounce of bullion. So for every dollar increase in gold, the fund is designed to rise by 10 cents. No leverage to the upside. But also relatively less risk to the downside.
- Enerplus (ERF): Canada’s leading energy royalty trust, designed to maximize your dividend yield by distributing nearly all the royalties it earns, as it earns them. With its expanding array of appreciating oil and gas properties, unit holders have been rewarded not only with consistent near-double-digit yields, but also some hefty price appreciation.
If you want to add some leverage, look at promising large-cap companies that are producing natural resources or servicing the producers. You can buy some of the companies’ shares directly. Or you can buy them indirectly through vehicles like Global Energy Fund (GAGEX), Select SPDR Energy ETF (XLE), or Oil Service HOLDRs (OIH).
And …
For maximum leverage with no time limitation, consider small- and mid-cap companies in Asia or Australia. These are inside — or right at the doorstep of — the great natural resource boom.
They give you the potential to increase your wealth by tenfold or more in the next two or three years. And they require exposing your capital in only small amounts.
Like options, they give you virtually boundless opportunity with strictly limited risk. But unlike options, they do not expire. Larry provides the details in his special report published just this past Saturday. At this critical juncture, time is of the essence.
Good luck and God bless!
Martin
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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.
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