$200 Oil, $2000 Gold?

The numbers in the title of this article look absolutely shocking side by side, even though there is plenty of evidence to suggest that even those numbers are merely rest stops on a chart with a perpetual sky-reaching tilt.

These two figures conjure disbelief in the mind at first look, but then, depending on your where you stand in relation to these industries, they appear inevitable.

It is utterly astounding to think that gold and oil could still yet double, more or less, from today's levels. With gasoline prices stretching the budgets of most North American families, the price of auto fuels in a $200-barrel-of-oil world would easily be well over $6 a gallon.

The only real questions to consider are 1) when will we see these prices, and 2) how can I hedge against these price risks.

In terms of question 1, unless you are planning on checking out in the most profound sense of the term, the question is more or less irrelevant. In that it is a given that your income will not put on the same kind of height as these prices are, positioning now for this future is of prime importance.

The obvious hedges against the destructive effects of these prices against your savings, should you have any, and investments, is to reduce your consumption of oil while increasing your investment in both gold and oil.

There will be a continuing chorus from ill-informed would-be oracles who will tell you the price of oil is going to decline with U.S. economic growth, and that gold has reached its peak and will now observe the traditional decrease in cyclical value, which you must strive to ignore.

What we still haven't seen in this gold market, which is very much still in a long-term bull mode, is the wholesale entry into the market for physical gold and all of its derivative manifestations by mainstream investors. Despite its remarkable performance since 2003, it remains a fringe investment, a mere hedge in the portfolio against other factors.

We are certainly in a collective state of suspended animation as investors. We are still stunned by the uppercut of real estate prices tumbling and the body-blow of the subsequent cinching down of credit availability. Large pools of capital are now being invested into funds that will proceed to accumulate distressed mortgages and the assets backing them at severely discounted levels, akin to the arrival of carrion birds at the end of a pitched battle. Is it any surprise that the vultures of capital who will gorge on the mangled financial corpses are the very same ones who orchestrated the destruction? Only in America.

I've decided that I am going to launch a new portfolio that will be made freely available on MidasLetter.com that will be called the Everyman Portfolio. I'm going to invest only $500 a month on stocks that are directly related to gold and/or oil. Surely most of us can afford to invest $500 per month, I hope.

Just to make the playing field a bigger and safer place for anyone who might like to invest alongside the Everyman Gold and Oil Portfolio, we will restrict our investments to large cap producers of both commodities.

The theory here, is that with a mere $500 per month invested, the performance of the portfolio will perform more closely to gold's past performance during the last five years, rather than the S&P 500, as shown in the chart below.

This will satisfy the investment portion of our preparation for the $200 and $2,000 world.

The next aspect of the proposed remedy to these eye-popping and wallet-crippling numbers has already been executed on.

Namely, I have adopted a program of minimal hydrocarbon-fueled transportation. This was much easier to accomplish than I originally thought it would be.

I divide my time between Bowen Island, on Canada's west coast, and Portland, Oregon. On Bowen Island, I spend most of each day writing, at the end of which, I walk through the woods to town ( a ninety minute sojourn) with faithful Blue Heeler Vera leading the way to acquire any food or groceries. I then take the bus back, which drops me off in front of my house. Total transportation costs for the day: $2.50.

In Portland, Oregon, I live on the southeast side of the city, and can easily walk to everything I need within 30 minutes. The benefits of not driving on a daily basis, besides financial, are health related. Walking so much eliminates any concern over weight, and you can't imagine how good you feel after a walk in the fresh air everyday.

Things go up steeply when air travel is involved, and obviously you can't spend too much time on the road without spending large amounts on airline tickets, whose prices are largely determined by the cost of JP54, which is the industry designation for jet fuel.

But there's my solution to the 2 and 2 world imminently approaching. It may sound a little corny, and be impractical for many, but making it practical is really an investment in your financial and physical health

Comments

[AmesTiedeman]

James, You should start with PGH, PWE and HTE on the oil side.

[AE_Savant]

PVX and AAV also.

IF $200 oil & $2000 gold are inevitable, USO is the ETF to invest in for oil, GLD for gold.

[AtlanticAve]

Sadly, most Americans probably can't afford $500/month for this portfolio. They're too busy paying down the debt on their credit cards or scraping together enough money to keep their mortgage intact.

Maybe the SA audience is a bit more affluent.

[alg]

A headline that states $200 oil and $2000 gold does not make it so. You give nothing to substantiate this headline. It does not even rise to the level of a prediction. In fact using the real estate example why would you not think gold could collapse? Unlike oil, gold is not a necessary item.

[paultaut]

dear alg: Gold is favored by the growing economies of the world as a sub for all currencies...the relationship with oil goes back to the 70's...$800 gold and $40 oil but since oil is already above, 100 gold is lagging badly.

The "oil" that is being referred to here is WTI...this production has already Peaked...$200 for the light grade will be cheap in the future.

I got into PVX,PTF,CNE,HTE, and PWE as they swallowed my PTF and CNE......they could go to zero tommorow and I would still be ahead...I have been in and out of PGH...will get in again soon...60% nat. gas.

Real estate is not a commodity in the US in general...unless you include farms. It is a commodity if the only way to build is straight up or offshore.

Since there is a lack of refining capacity for the heavy/sour grades, I expect a massive increase in pre-refined product imports and shortages developing because our ports will not be able to handle the increase.

Anyone know which are the top oil transporters? This is not a rhetorical question...I would like to know.

[Jack Yetiv]

I used to be heavy into HTE, but I think refining margins will continue to be squeezed by higher oil prices and lowering demand for gasoline, decreasing pricing power of the refiners.

I like ERF, PWE and AAV, although I hold all PWE right now because I think it has good upside potential if they execute better and I believe the 13% yield is pretty safe in this environment.

Jack Yetiv

[bowman711]

Since others are giving their recommendations for stocks for this new portfolio, I agree with Pengrowth Energy (PGH). I would suggest, for a longer-term investment, that you consider Oilsands Quest (BQI). As I write this, the last trade was at $4.64 - but several independent analysts who have written on the company say it has $24-$32 per share proven reserves. Also, if there is ever any kind of serious disruption in the world oil supply, owning shares in a company with huge reserves a couple hundred miles north of the border would be highly desirable.

[User 30121]

First, I really enjoyed this article. Thanks for writing it. Second, stocks and ETF's are fine for some, but I prefer PHYSICAL HOLDINGS of my precious metals, primarily gold and silver, for the most OBVIOUS reason of all: those stocks and ETF's may not be worth the PAPER they're printed on when push turns to shove one day!!!!! Right now as I write this, gold and silver are BEGGING to be bought/hoarded. Get some while the "gettin' is good".

[MarcCourtenay]

Terrific article and the Everyman Portfolio is a practical idea. I split my time as well and spend half the year here in Salem, Oregon. It would be great to stay in touch and give our sites some mutual ideas and synergy. Keep up the good work and please don't hesitate to contact me through ChecktheMarkets.com
Marc Courtenay

[kurt walter]

The average Joe can't afford $500.00 per month because they owe $9,000.00 in credit card debt at 19 percent. Remember, they absolutely had to have that big Flat screen TV and all the new tech gizmos and gadgets that come out every year. Plus, they need to lease that giant SUV. It is called poor money management. It is easier to bitch and moan about gas prices and look for big daddy Federal Government to use taxpayer money to bail them out then get their own fiscal house in order. I say: "Ask not what your country can do for you ..."

[bearfund]

kurt walter is dead right. Many Americans have negative net work and many others would, if corporations, be reporting negative annual earnings. There is very little wealth left in America today if one subtracts out all the liabilities. $500 a month is preposterous for most people. They're lucky if their credit card and HELOC balances aren't growing at that rate.

[Silver-Bullet]

What James West writes here is pretty forward thinking.

Please take heed. Or ignore at your own demise.

Listen more on oil and gold in the April 26 broadcast in the following link:
financialsense.com/fsn...

[BxCap]

Enjoyed the article, thanks to all for the ideas and ETF's. I wouldn't worry to much about this article's applicability for those that cannot afford $500/month for investments. I doubt they read this website.

[maher]

Shorter term, the US Dollar will gain strength and may likely drive oil price down but only until such time as Iran war starts in earnest.

Right now the Iran war factor is the 'force majeur' behind high oil price, US Dollar takes second seat to that.

And believe it or not, the potential for an all out conflict with Iran is increasing by the day.

"It's Iran , stupid!"

[cruiser9805]

I'm only putting in 150, what's left after debt. I'm also into verasun (VSE) as an alternative temporary play and into (ncen), new micro cap windpower generation. The only question i have now is when nanosolar stock will come into play. They make Solar cells at 1 dolar per watt! It's cutting edge technology will wipe out the competition.

[curious cat]

what a great idea, if only the government had given me a rebate,... well, i guess they knew i would only invest it, so they decided to keep my share. thank god we have such smart people making decisions for the rest of us. man, if i had to figure out what i would do with all the extra money, i would go mad. mad, i tell you!