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The Chinese New Year began two days ago and marked the start of what Chinese astrologers call the “Year of the Metal Tiger.” In light of this, we have decided to review some of the major investment themes for the months ahead.
First among these themes, we now feel you should regard precious metals – and especially gold – as an asset class unto themselves. Over the past 40 years (and especially the last 10), they have proven themselves to be important holdings in good times and bad. By good times, we mean periods of inflation and growth. By bad times, we mean deflation and recession.
Admittedly, gold does lose its value as an asset class during the very best of times, such as we had from the early 1980s to the late 1990s. Unfortunately, those days are not likely to return. Instead, we will likely see cycles of inflation/deflation from now on, in which gold shines.
Naturally, your gold portfolio should be diversified to maximize safety and growth. Here are our top picks at the moment...
Our Top Precious Metals Picks
Among large cap gold stocks, our favorite remains Barrick Gold (NYSE:ABX), the biggest gold producer in the world, which should see healthy production increases going forward. Or for one-stop diversification, we like the closed-end fund ASA, which is exceptionally well-managed.
We also suggest you make room in your precious metals portfolio for junior producers. The right juniors, like the right small cap stocks, have considerably higher upside potential than large caps (albeit in exchange for somewhat higher risk). We have talked before about Silver Wheaton (NYSE:SLW), which offers you exposure to rising silver demand.
This past week, Barron's published an article about one of our favorite junior gold stocks, NovaGold Resources (NYSEMKT:NG). While the article made a couple of mistakes, the general thrust (which we agree with) is that Nova is sitting on world-class gold and copper properties. Moreover, the company has partnered with two much larger firms - Barrick Gold and Teck Resources (NYSE:TCK), a major Canadian mining company - to exploit the full potential of these properties.
Clearly, Barrick and Teck would not be partnering with Nova unless Nova's properties had the potential for strong profits – which they do.
Where Barron's went wrong was to criticize the current major shareholder of Nova, Thomas Kaplan, for having formerly sold out Apex Silver just before it encountered some major financial difficulties. In fact, he exited Apex three years before the company’s troubles. While he was running the show, the San Cristobal mine was discovered and plans were made for its development. Today the mine is one of the largest producing silver deposits in the world. The criticism is a bit like blaming GE's recent troubles on Jack Welch – a bit of a stretch.
The other thing Barron's failed to mention is that Kaplan has made fortunes in not just silver but also platinum and oil and gas. He uncovered the company Afplats which was initially listed on the pink sheets – home to penny stocks and other high risk ventures. But the company's success was such that, in 2007, Afplats was sold to Implats for $580 million.
Kaplan's record, along with the support of Barrick and Teck, only adds to our faith in Nova Gold. The company's assets include sizable deposits of several metals likely to benefit from extraordinary demand going forward. So we think NG is a sound choice for a small portion of your precious metals portfolio due to its growth potential.
Switching to a related topic...
Climategate?
Talk of “climategate” seems to be increasing day by day.
As you probably know by now, we are not deniers of climate change. We believe that human beings stand a good chance of destroying the world's environment over time.
However, we also suspect that Al Gore and many climatologists do not have a full understanding of how the future will unfold. Moreover, climatologists generally suggest we have 15 to 20 years before the effects of climate change begin to be felt. We, on the other hand, believe that Peak Oil and Peak All Resources have already arrived. In other words, we can't afford to postpone action.
So while the world argues about what the melting of arctic permafrost means or whether the statistics about temperature point to global warming or not, we have a very real problem of resource depletion which the world is largely ignoring.
The one thing we have in common with the environmentalists is our belief that alternative energy must be developed ASAP. But while environmentalists are solely concerned with reducing pollution, our chief worry is how a shortage of energy and other resources will affect the global economy and our standard of living.
On that score, our attention was drawn this weekend to a curious statement by the Saudi Arabian government.
To paraphrase an old cliché – watch what they do, not what they say. Saudi representatives stated that their country must be prepared for a peak in oil “demand.” As a result they have begun to diversify into other industries such as steel and aluminum.
This is a curious time to be talking about peak demand for oil. Renewable energies account for a very small fraction of overall energy supply. No one expects oil demand in China and other developing countries to peak anytime soon. Even China’s most ambitious renewable plans will lead to rising oil demand for another generation.
Could the Saudis have really meant peak “production”? Could they really be preparing for a time in which their own production will start to decline? In the same press release, the Saudis also mentioned in passing that they will begin to inject carbon dioxide into their largest source of oil – the giant Ghawar field. Ghawar is not only the main source of Saudi oil but the biggest oil field in the world. Injecting carbon dioxide is something you do to keep production from collapsing after you have tried everything else.
Watching what they are doing or planning to do, we suspect the Saudis really meant to say peak production. If Saudi Arabia has reached its peak, the world cannot be far behind. And if so, oil prices will continue rising and put a cap on stock prices - especially if they rise quickly enough to cause our Master Key, which has been flirting with negative readings, to turn negative.
Of course, we face not just an oil shortage but an overall commodity shortage. Gold, oil, and all raw materials will benefit.
If you want a core position in the resource boom, the easiest approach would be to buy shares in BHP Billiton (NYSE:BHP). The company is exceptionally well managed and diversified across most commodities. The majority of its mines are in Australia, a nation which should also benefit this century from being resource-rich and close to China.
One of the major changes taking place in the investment world this century is that the top growth stocks, both junior and major, are now found in the commodity sector rather than in consumer products. So while we will cover a variety of industries, we expect to continue emphasizing commodities.
Source: Positioning in Gold, Oil for the Months Ahead