After the recent sell-off, some natural resources are getting close to cheap! And the pullbacks we’ve seen in gold, silver, oil, and uranium are merely the prelude to another big rise. Here’s why:
Corrections are necessary and healthy. Nothing moves up in a straight line, and these investments have been on fire for months. But you should think of these dips as speed bumps on a superhighway.
Look back to last year around this time, and again in December, and you’ll see that many analysts got very pessimistic about base metals when prices fell. In both instances, those drops turned out to be ordinary corrections. Anyone who sold soon regretted it. Plus …
Despite the usual naysayers,China’s demand for resources is still going gangbusters. Every few months, I hear the same old fears about China’s economy slowing down. But it’s just talk. Even in the most recent quarter, China’s 1.3 billion consumers collectively thumbed their noses at these so-called experts, helping to propel the country’s GDP by a whopping 10.2%!
Money poured into projects like buildings, roads, and power plants, and according to China’s National Bureau of Statistics, these investments rose 29.6% in the first four months of 2006 from the same period a year ago.
The Chinese government has been trying (meekly) to slow it down. But even some of their recent measures, including a token rise in interest rates, are clearly having no effect on China’s red-hot economy:
- China uses 40% of the world’s cement.
- It builds a city the size of Boston every two years.
- The country has 15,000 highway projects ongoing simultaneously.
Bullish for natural resources? Heck, yeah! Especially for these four hottest markets …
Golden Bull Has
Room to Run
If you’re bearish on gold, don’t tell the Chinese. The country has always had a cultural affinity for the yellow metal. And the latest news only builds a stronger case:
- Sales of gold jewelry in China surged nearly 30% in the month of April.
- In “A Golden Moment in Chinaâ€, Larry told you how China is going to launch a new gold exchange-traded fund (ETF), tentatively named “the GoldExpert.†This will give 300 million middle-class citizens in China — more than the entire population of the United States — immediate access to gold.
- Chinese economists are urging Beijing to quadruple its gold reserves to 2,500 metric tonnes from the current 600 tonnes. Why? Because the country’s foreign exchange reserves have become the world’s largest.
Of course, China isn’t the only bullish force driving gold. We should see new gold investor funds roll out in India. And Middle Eastern petrodollars are pouring into gold, too. In the latest move, a private Saudi jewelry group just plunked down $460 million for 36 metric tonnes of raw gold from an African central bank.
And despite all this demand and the highest prices in decades, global gold production is STILL declining.
Meanwhile, central banks have reduced their gold selling by 75% compared to last year. That also takes a huge amount of supply off the market.
The bottom line: Gold’s pullback is a buying opportunity.
Hi-Ho, Silver!
When it comes to silver, take my bullish case for gold and crank it up another notch.
Then, throw in forces that can spice up the market, and you’ve got the makings of an explosive new rise.
Example: Bolivia’s Evo Morales.
To show he means business, Morales recently nationalized the natural gas properties of foreign firms, and says he won’t pay three European firms after taking over their operations.
The Bolivian government is assuring international mining companies that it wouldn’t dream of nationalizing their assets. But I don’t think these reassurances are helping them sleep better.
If Bolivia nationalizes its silver mines, it’s easy to see how that could send production at Bolivia’s silver mines plummeting.
And even if that doesn’t happen, the world is already in a supply/demand squeeze when it comes to silver. According to CIBC World Markets, there will be a deficit of 77 million ounces of silver this year alone.
I think that deficit could widen because of China. Chinese silver imports recently jumped 200% year over year. The Chinese use a lot of silver not only in jewelry, but also for industrial purposes. Their rip-roaring demand could drive silver through the roof.
My target for silver in twelve months’ time: $20 an ounce.
Oil – Enjoy the Dip
While it Lasts
Crude recently pulled back to exactly where I was hoping it would. And now it’s sitting on an indicator that I like to use to judge the big-picture trend — the 50-day moving average. Based on that, plus a whole series of other indicators I use, we’re in a spot which could prompt a nice bounce.
Meanwhile … the U.S. is still guzzling crude oil just as fast as ever … American drivers are not slowing down their gasoline consumption by one iota … and no one has done a darn thing to increase our refinery capacity.
Meanwhile, remember China’s 10.2% GDP growth? It pumped up the country’s oil imports by more than 25% in the first quarter.
And can you imagine anything that will goose up demand more than China’s auto industry, with a record 1.73 million vehicles sold just in the first quarter of 2006? Heck, that’s a rise of 36.9% from the same period a year ago.
Then there’s the supply side …
As I told you in “Axis of Oil,†two weeks ago, Venezuela is raising royalties drastically or booting out oil companies altogether as they work to shift their customer base away from the West and toward Asia.
Well, guess what! Now, Ecuador has joined its fellow energy-rich Latin American countries by giving Occidental Petroleum the heave-ho.
Sure, political winds may shift. That still wouldn’t solve declining production around the world.
And speaking of winds, hurricane season is just around the corner. Last year’s storms devastated oil production in the Gulf of Mexico; some production still hasn’t recovered. This year could be even worse.
Uranium is White Hot!
I like gold, silver, and oil. But uranium may be in the strongest bull market we’ll see over the next decade. The recent pullback is a gift from the market gods — don’t ignore it!
Plus, I see six catalysts for higher uranium prices:
Catalyst #1: Last year, the world consumed 168 million pounds of uranium, but only 108 million pounds came out of mines. The rest came from stockpiles that are rapidly dwindling.
Catalyst #2: Australia exported about 27 million pounds of uranium last year — 25% of the world’s supply. And that should increase going forward, as new treaties open the export door to China.
Catalyst #3: China is revving up its nuclear program. It just brought a new million-kilowatt nuclear reactor online and should have another fired up by the end of the year.
Catalyst #4: India, too, has an ambitious nuclear program. Australia won’t sell to India because of concerns over India’s nuclear weapons, but that just means India will buy elsewhere, putting more pressure on global supply.
Catalyst #5: Russia is likely to switch from being a uranium exporter to being an importer as it adds 40 new reactors over a 20-year period.
Catalyst #6: America is still the world’s biggest nuclear power producer. Over the next decade, just to keep their current nuclear power plants running, U.S. companies will need to purchase 36 million pounds of uranium annually.
In addition, American firms already have plans to build another 20 nuclear power plants in the years ahead.
They’re already buying 60 million pounds of uranium oxide this year. That’s more than they need right now. So why spend the extra money? Because they think prices are heading higher.
But looking ahead, they’ve only contracted for 45 million pounds in 2007. By 2008, they’ve only signed for 30 million pounds, and after that, 10 million pounds. That’s far less than what they’ll need to keep the lights on at U.S. power plants. And it means domestic demand for uranium will continue soaring.
Don’t look now, but the projected shortages are horrendous. As of December 31, 2005, the industry was facing a shortage of over 5 million pounds for the next two to three years, and nearly THIRTY million pounds four years out.
With the rest of the world running 442 nuclear plants, and building or planning 130 more, worldwide demand for uranium will soar.
I’d say the bull market in uranium is just beginning, wouldn’t you?
Two Ways to Play
The Next Leg of the
Natural Resources Rally
When commodity prices shift into rally mode again, they could snap back … FAST! You don’t want to be left out in the cold.
If you want to focus on gold, consider …
American Century Global Gold Fund (BGEIX): This no-load fund has a total expense ratio of just 0.67% (less than half the category average). Its portfolio is stuffed with gold companies, but many of them produce silver as well.
And if you want a broader stake in the resources market, consider this fund …
U.S. Global Investors Global Resources Fund (PSPFX): It is consistently one of the top-performing funds in its category, and has the flexibility to switch from energy to base metals to precious metals — whatever it thinks is hot. PSPFX gets four stars from Morningstar, has a total expense ratio of 1.3% (lower than the category average), and some of the sharpest management in the business. Given the recent pullback in natural resources, this fund is a bargain!
Yours for Trading Profits,
Sean Brodrick
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. 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. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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