On Tuesday, Seeking Alpha published my first contribution entitled "Energy, Inflation and Gold", wherein I advised U.S. investors to take positions in energy and gold. The market responded with a huge April Fool's day rally while gold sold off big-time. Great timing for my debut! However, am I really an April Fool with respect to gold? Read on.
What actually changed Tuesday? Answer: absolutely nothing. One could make an argument that it was a short covering rally, which is my gut feel. What I do know for certain is: we still have a housing problem; we still have huge fiscal deficits; the economic data has been lousy for months and continues to be lousy; real inflation (as opposed to the inflation rates reported by Uncle Sam) is high and rising; oil remains over $100/barrel and the U.S. is still sending billions of U.S. dollars out of the U.S. every day to the oil producing nations. More importantly, the U.S. still has no energy policy to adequately address the realities of peak oil.
Peak oil is simply another way of saying worldwide oil supply will not keep up with worldwide oil demand. A good explanation of the peak oil theory can be found on Wikipedia.
There have been many postings and editorials lately advising investors to "get out of commodities". Let me be blunt: tune these people out! The 1% rally in the U.S. dollar on April Fool's day was a false rally in an otherwise structurally and fundamentally driven long-term downtrend. The U.S., being the largest oil consumer, as well as the biggest oil importer, is the most exposed country on the planet to the adverse economic consequences of peak oil. Not helping matters is a Federal Reserve currently printing money to bail out the sub-prime fraudulent activity, and, cutting interest rates in the face of rising inflation (!). Bottom line is that the U.S., the most exposed country in the world to higher oil prices, is heading into the era of peak oil with its financial house, if not in disarray, then surely in need of some oxygen.
As we all know, gold is a hedge in times of crisis. So what is the current crisis that will drive gold higher? In my opinion, the current crisis (which will remain a crisis for decades) is Peak Oil. We take $100/barrel oil for granted now. I, and others, believe it is on a long term uptrend driven by supply/demand fundamentals. Don't believe me? Listen to T. Boone Pickens, Matt Simmons, or Stephen Leeb. Heck, even Jim Mulva, CEO of Conoco Philips, publicly wondered if man would ever exceed 100 million barrels of worldwide crude production per day. The CEO of Hess has made similar comments. Today, the world uses ~85 million barrels a day. Our own government's EIA estimates 150 million barrels a day of demand in the not too distant future.
Where will this extra oil come from? Despite massive oil drilling in the last few years, the planet is barely able to replace the declines in existing large oil fields. Not a good sign. Yet, the U.S. government, media, and populace in general appear content to ignore the inconvenient truth of peak oil. You would think the fact that oil is at $100/barrel would get people's attention. We also have kids dying in Iraq. It's as though the "strategy" is to ignore peak oil and hope it just goes away. Not gonna happen, people. While I am at it, let me opine that peak oil, and not global warming, is the most immediate threat to the human race via its impact on the world economy and life as we know it today. If oil is $100/barrel now, and supply is meeting demand, what will the price go to when demand is greater than supply?
In this environment, U.S. investors must have a percentage of their portfolio in gold as an economic insurance policy. Since gold is priced in U.S. dollars, you have two big engines that will push gold higher: a falling U.S. dollar combined with rising inflation due to the affects of peak oil. I will go even further and contend the U.S. dollar, the U.S .equity markets, and the U.S. economy will remain weak, and weaken further, until the United States Congress passes a real energy policy (I will give my energy policy in my next Seeking Alpha posting).
Take a look at the S&P 500 since George Bush took office: it is down in real terms. That is, if you take into account the ~45% decline in the U.S. dollar, along with a *real* inflation rate of at least 5% the last couple of years, the S&P500 has been a losing proposition during Bush's entire presidency.
So, what is an investor to do in this environment? Answer: buy hard assets. Energy, precious metals, and commodities. My top suggestions in energy: a core holding should be Vanguard Energy [VGENX];Fidelity Select Natural Gas [FSNGX], Fidelity Select Energy Services [FSESX], Conoco Philips (COP), and StatOil (STO). In precious metals: Vanguard Precious Metals [VGPMX], Fidelity Select Gold [FSAGX], the gold ETF (GLD), and gold bullion itself buried in the backyard. In commodities, I must admist I am an amateur, but the Powershares DB Commodity Tracking Index (DBC) has been good to me. DBC has positions in oil, aluminum, gold, corn and wheat.
Just as important as what to be "in" is what to be "out" of: get out of the S&P 500 and U.S. bonds. Put your cash in currencies other than the U.S. dollar.
In the long run, time will expose the true April Fools. I hope I am dead wrong on peak oil. I also hope the next President of the United States will bring the leadership this country so badly needs with respect to peak oil. The last word: I just checked yesterday's market activity: oil closed up $3.63 to $104.61; gold closed up $20.50 to $904.80; the U.S. dollar closed down 0.42%.
This has been the dominant theme for the past few years. I seen nothing in current U.S. policy which will alter this theme in the coming months, years, and possibly decades.
Disclosure: I own all of the above suggestions, except for the gold in the backyard, which was supposed to be funny (or was it?).