What's The Connection Between Gold And Natural Gas?

 |  Includes: COP, CVX, GEOI, HGT, PBT, STO, SU, XOM
by: Michael Fitzsimmons

What I call the "Bush gold rally" continues in full-force. Why do I label it such? Let's take a quick look at gold's 15 year price chart (in U.S. dollars):

Note that the breakout above $400 took place in late 2003. The steady rise continued as the Bush administration grew the size of government and set spending records. More debt was put on America's shoulders during Bush's 8 years than in the entire previous 200+ history of the country.

The "change" President Obama promised is nowhere to be seen. The growth in government, spending, and war expenditures continue unabated. Thus, gold is likely to end Obama's reign with a higher percentage gain than it had during Bush's tenure.

It is now abundantly clear that neither "conservative" Republicans nor "liberal" Democrats are capable of solving this country's most serious problems. Seemingly alone in the woods is Ron Paul, who has warned about the dangers of the Federal Reserve and moving away from Constitutional money for decades. Paul has also criticized Congress for allowing the Executive Branch to commit to foreign wars (and the debt they incur...) without a Congressional vote and formal declaration as the Constitution requires. The Constitution is key to solving America's problems and the farther we get away from it, the higher the price of gold and the more unstable the country.

So what is the solution to the U.S. economy and what can restore U.S. economic strength? Well, it's not more warfare. The real strength of the United States has never been its military might - it has been its economic power. As my readers are well aware, I believe there is absolutely no way the U.S. can regain its economic power while simultaneously sending $1 billion a day out of the country for foreign oil. In other words, it is impossible to solve this commodity problem with fiscal or monetary policy. I have been proven correct on this assertion - QE1 and QE2 have done nothing to solve the structural problems of the United States. Every time the economy gains steam, oil prices rise and the U.S. sends more money out of the country and consumers suffer. We are on an economic yo-yo completely tied to the price of the foreign oil we must have to power our economy.

What this country needs is a strategic long-term comprehensive energy policy to reduce foreign oil imports.

It is that simple! Since 70% of U.S. oil consumption is used in the transportation sector, it is clear we must replace gasoline usage. The only domestic energy source capable of doing so is natural gas. Logically then, natural gas transportation is the key to solving U.S. economic weakness. Building out a natural gas transportation infrastructure would create millions of good jobs and deliver dividends to all Americans (instead of foreign oil producers) for decades into the future.

So, to tie this all together - gold will continue to march higher as long as the U.S. strays from Constitutional money and does not embrace natural gas transportation. If America DID embrace natural gas transportation and re-industrialize itself around a natural gas transportation infrastructure AND get rid of the Federal Reserve, gold would come down as the power and might of the United States returns to its rightful place at the top of the world's economic pyramid. (Here is an interesting article sent to me by SA's MMarrkk.)

So, there is progress being made. But at the present rate, it is much to slow to solve America's addiction to foreign oil, and as we have seen, much to slow to stop the parabolic rise of gold. The two, in my mind, are directly related.

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So, what does a U.S. investor do? You've got to own oil stocks. Those that pay decent dividends are best: Chevron (NYSE:CVX), Conoco Phillips (NYSE:COP), StatOil (NYSE:STO), Suncor Energy (NYSE:SU) and perhaps some higher yielding trusts like Hugoton Royalty Trust (NYSE:HGT), Permian Basin Royalty Trust (NYSE:PBT), or Enerplus (NYSE:ERF). If you think natural gas has a chance in the U.S., you may want to invest in Exxon Mobil (NYSE:XOM) even though the dividend is quite poor and the management continues with its huge stock buybacks that suck the wealth away from shareholders. However, smaller domestic shale plays like GeoResources Inc (NASDAQ:GEOI) that have more exposure to oil than natural gas are good growth plays. Obviously I believe the long-term price of oil will march continually higher (until the governments engineer recessions and/or depressions). Thus, one must buy some gold and silver on pullbacks. Good luck!

Disclosure: I am long GEOI, COP, SU, PBT, HGT.

Additional disclosure: I was asked to tone down the political angle and I tried to do so. However, it is impossible to talk logically about gold without pointing out that neither the Reps or Dems are doing anything to reduce the size of the gov, the spending, the warfare, or the energy crisis that are all at the root of U.S. economic decline. So, I tried. I do apologize about not spelling out the names of the companies, I usually do that!