Oil and oil stocks paused this week.
The price of crude oil, which had surged above $70, came back down to the mid-$60s. Oil stocks also receded — about 3% to 5%.
It was a slight, grudging nod to world leaders who tried desperately to contain the oil price explosion.
The
U.S.
,
Japan
and 25 other countries released massive amounts of strategic oil reserves.
Saudi Arabia
tried to twist the arm of other OPEC countries to produce more. Federal and state lawmakers even talked about legislating lower gas prices.
And yet, after all that effort and all that talk, the most they could achieve was a brief pause? A decline of a few meager percentage points?
This begs the question: What will happen now? What will happen as all these countries start buying up oil on the world market in order to replenish their strategic reserves?
Gold Investors
Provide the Answers
While politicians were dueling with the oil market, no one was minding the gold market.
Gold and gold stocks were largely forgotten, never making the headlines, hardly ever on the radar screen of Wall Street.
So quietly and without fanfare, a small — but growing — minority of gold investors thumbed their noses at world leaders, bought aggressively, and drove gold prices skyward.
That was their simple answer to the dumb question about what happens when politicians try to hold down a market: Things backfire. Prices surge.
That’s certainly what’s just happened with gold, and the implications of the move are multi-faceted:
First, gold has busted through to new highs for the year.
Indeed, on three separate occasions in the past 11 months, the exchange-traded fund that tracks gold bullion (GLD) has come close to the $44.50 level (representing $445 per ounce of bullion).
Each time, it failed to surpass that critical level. And each time, it dropped back down again.
But this week was different: GLD and gold bullion smashed through all three barriers like a hot knife through warm butter. Then they just kept on going.
No pause, no hesitation.
Second, gold investors are sending a clear message to all those politicians and world leaders who are trying so desperately to hold back oil prices. In essence, the message is:
The natural forces of supply and demand are a lot stronger than you are. You have done absolutely nothing to alter those forces. So stop wasting your time and get out of our way.
Third, this no-nonsense, stubborn drive by gold investors is a direct reflection of a similar, no-nonsense drive by oil investors. And these oil investors now appear to be gearing up to ram oil prices through to new, all-time, highs as well.
Fourth, everything you see happening in both markets — oil and gold — is a direct reflection of what’s going on in the real world …
Oil Supplies
Tighter Than Ever
We’ve told you how over 90% of all known reserves in the world are now already in production.
We’ve told you how, among these, 80% of the wells are in their “depletion†phase.
And we’ve told you how 10% of all oil production comes from just four oil fields … while 80% comes from older fields discovered before 1970, most of which are deteriorating.
Now, the latest news from the Gulf of Mexico is shattering even that already-tenuous balance. Yesterday’s New York Times explains it this way:
“When it passed over the gulf’s crowded waters, Katrina was at its peak, a Category 5 storm … Winds of 175 miles an hour snapped mooring lines, sending some platforms adrift. Waves toppled steel structures, and underwater slides shifted the ground under pipeline …
“Four installations owned by Royal Dutch/Shell, the gulf’s largest operator, suffered extensive damage. These included the biggest offshore facility in the region, a tension-leg platform called Mars, which is expected to be out of commission for months after being shaved by the hurricane’s winds and waves.â€
The biggest concern, however, is the damage to the underwater network of THIRTY-THREE THOUSAND miles of pipelines, and this damage has NOT YET BEEN ASSESSED. So the current price of oil does not yet reflect whatever has happened below the Gulf’s surface.
We don’t know for sure how bad the pipeline damage is. But we do know that last year’s Hurricane Ivan produced mudslides that snapped the pipelines, shifted parts around and caused long delays before production could be resumed. The consequences of Hurricane Katrina could be far worse.
$100 Oil!
Nearly all Wall Street oil analysts missed the surge in oil. They didn’t see it coming. They didn’t dream prices could rise this high. And if anything, they thought oil prices were going lower.
For example, 24 analysts, strategists and economists surveyed by Bloomberg in December 2004 predicted an average price of $39 for crude oil in 2005.
But among them, there is now one who is on target, in our view: Jeffrey Rubin, chief economist of Canadian Imperial Bank of Commerce. Here are his forecasts, issued September 7:
|
Average price for 2006: |
$84 per barrel |
His reasoning: Consumption is exceeding demand at the pace of 1.8 million barrels per day. Moreover, this gap between supply and demand could grow to as much as 3 million barrels a day by 2008.
We agree. Indeed, this is what Larry has been saying all along, with one big difference:
“Investors in this market,†he commented this morning, “don’t make money by trying to guess the average price of oil during a calendar year. They make money with the big, broad surges that carry oil prices far above their yearly averages, including the potential for $100 oil a lot sooner than 2007.â€
How You Can Profit,
Starting Right Away
This week’s pause in the oil markets is giving investors a gift.
Look at it this way: The energy-boom express train has come to a momentary stop. A narrow door has opened. And some investors are boarding.
Right now, for example, Oil Service HOLDRs (OIH), which represents a portfolio of oil service company shares, is at 119, well within its 6-month uptrend.
If it breaks below this trend, it could retreat some more. But if it resumes its upward march, I think it’s headed as high as the $130 zone, just on this move.
I feel that gives investors plenty of upside potential right here and now, with even more in future moves. You can buy shares in the OIH exchange-traded fund itself. You can buy shares in the companies it holds. Or, for the most leverage with the smallest investment, you can buy options on those shares, like subscribers to Larry’s Energy Options Alert are doing.
Gold Investors Already
Having a Field Day
Meanwhile, gold investors are already having a field day, a precursor to what we expect in the oil and energy stocks.
At the outset, I showed you how the streetTRACKS Gold exchange-traded fund (GLD) has surged to a new, 11-month high. So that’s one way gold investors are cashing in: Instead of buying gold bullion bars, gold bullion coins or gold future contracts like they used to, many are just buying GLD.
Here’s another way …
Royal Gold (RGLD) which I’ve been highlighting here in Money and Markets, is soaring virtually nonstop, with still more gains likely in the days ahead.
Naturally, dips are always possible. And there’s no such thing as a risk-free stock, especially when it’s risen almost 41% (from $19.12 to $26.94) just since August 30!
But if you can catch a dip and you’re willing to accept some risk, the potential pay-off is that this stock will just keep on soaring, giving you as much as another 30% or 40% in a relatively short period.
My Safe Money subscribers should already be holding this stock from lower levels, and many are waiting for my next Flash Alert to buy more. I suggest you do the same.
Another, Less
Aggressive Gold Play
While Royal Gold has surged 41%, Newmont Mining is up 15.7%, also since August 30.
That’s not nearly as sharp. But it’s still not bad for less than three weeks! Moreover, with Newmont, you get all the advantages of the most established North American gold mining company with one of the longest track records in the business.
My father, Irving Weiss, and his friends invested in companies like Newmont in the early 1930s. In those days, like today, Wall Street thought gold mines were for the birds and said their shareholders must be nuts. But his friends, including Bernard Baruch, Tom Brag and two other leading gold traders, didn’t give a darn about what Wall Street thought or said. They just bought up the shares, steadily and deliberately.
In the last book he wrote before he died, Dad explained it this way:
“Most investors have no idea how huge the profits were in gold shares after the crash in ’29. Homestake, for instance, went from a bottom of $65 per share after the crash to $130 and change in 1931. From there, it doubled again to more than $350 a share by 1933. By the time it peaked in 1936, it had climbed to $540 a share — an astronomical gain of more than $475 per share. That was a 7-fold increase.
“In the meantime, the dividends also doubled, redoubled, and doubled again — reaching $56 per share in 1935. Think about it. The dividends earned in one year alone almost paid back the entire purchase price of the stock.
“Homestake was not an isolated example. Dome, another great gold producer, did even better. You could have bought Dome for as little as $6 a share after the crash. But in the next seven years, it paid $16.60 in dividends. The dividends alone were equal to more than 2 1/2 times the cost of the stock. Meanwhile, the price of Dome rose to $61 a share. A person who put $10,000 into Dome could have walked away with more than $100,000 — while nearly everything else remained depressed.
“Tom Bragg reaped the biggest benefit. He was the largest holder of Newmont Mining. Then he left Wall Street to become a major executive in the company and stayed with gold for the big rise in subsequent years.â€
I don’t know if the profit potential today is going to be the same as that of the 1930s. But I do know a decisive break-out in a stock when I see one.
And right now, that’s exactly what you have in Newmont Mining. The stock was declining, in a gradual downtrend, from late last year until early this month.
But this week, it has just broken out, paving the way for far higher prices.
It’s only natural: Investors who have been making a killing in energy shares are looking to do two things:
CONTINUE making a killing in energy shares, plus, at the same time …
ADD some diversification to their portfolio with these kinds of gold shares.
How High Could
Newmont Go?
If gold bullion soars as high as Larry expects it will, the sky’s the limit for Newmont. But I also like to step back from the trees and look at the long-term picture. That helps give me an idea of what’s a reasonable expectation and what’s not.
In the case of Newmont, the pattern since late 2000 has been a rising zigzag within a broad range, with surges of as much as 25 points.
And right now, despite its recent run-up, Newmont is still near the LOW side of that range.
Prognosis: Assuming the pattern holds, this stock should be headed straight for the $55 – $60 area, giving you the potential for another 22% – 33% appreciation from current levels, possibly within less than six months.
Can you bet on it? Of course not. But I think this is a reasonable guesstimate of what the potential is.
Safe Money subscribers already hold this stock. If you have some extra funds available and you can afford some risk, I think you should join them.
Just be sure to keep a big chunk of your money stashed away in cash, earning a nice yield and protected from market ups and downs — no matter what the future may bring.
Good luck and God bless!
Martin
P.S. For your speculative funds, the most amazing leverage you can achieve is with options. And right now, there is no market with a more consistent and determined uptrend than oil markets.
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 Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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