Gold, Oil, Potash and Food: Top Investments This Decade

Last week I wrote a piece forecasting $200 a barrel oil and $2,000 an ounce gold, and I gotta say, I’ve never seen that amount of mail generated by a single article in all my years as a writer. The top concern of the correspondents was, “How do I invest to protect against and capitalize on this eventual reality?”

I haven’t responded yet to all of the email, because it would take me a month to respond individually. So I thought this week I would flesh out the themes in that article a bit in the hopes of providing a path to prosperity over the coming decade.

Of foremost importance is to embrace the idea that the investment climate of the next decade is nothing like the last decade. The landscape and very mechanics of market fluctuations have transferred, as the market itself has become instantaneously reflective of immediate influential factors, from a reactive environment to a predictive one.

What I mean by that is, in the past, the fluctuations in the markets in general more in reaction to economic data and events, whereas now, with the near-instant transfer of information independent of geography or time zones, combined with the massive computing power of linked networks and light-speed chips, the market has become more predictive of data and events yet to transpire.

This is why we are seeing days rife with bad news where the markets are exuberant versus days where the news is benign or even great, and the market plummets. The most capitalized investment institutions are using their formidable human and computing resources to position for what they believe the market will do tomorrow, 5 days from now, 30 days from now, etc. The arcane mathematical models developed, deployed, and then reconfigured again by thousands of Ph.D.’s in the course of a single session, and then revised overnight render us individual investors virtually powerless to accurately predict short term price movements.

This is also why the junior markets are floundering right now.

The volume of available equity units no longer qualifies for the massive position changes demanded by these quantified models, so they’re left to function absent an ever growing number of institutions. The problem compounds itself as performance in the juniors stalls, invoking further abandonment by banking units who need volume and yield.

It’s the same thing that draws the largest investor classes ranked as 1) Traditional Funds, Banks and Insurance Companies 2) Sovereign Wealth Funds, and 3) Hedge Funds away from low volume junior markets and towards large volume (and therefore, larger yield potential) derivative transactions. With the re-bundling and risk insurance opportunities afforded as further derivative of derivative transactions, its no wonder the asset backed securities market turned into such a feeding frenzy before the inevitable melt-down.

Currently, a second feeding frenzy is developing, as these opportunistic groups circle the growing pools of distressed assets now flooding the market, making ready to swoop in and scoop them up when the bottom is perceived.

click to enlarge

During the first quarter of 2008, 650,000 U.S. families saw the initiation of foreclosure proceedings on their homes. That’s 1 in every 194 U.S. households!

One in every 54 Nevada households received a foreclosure filing during the first quarter, the highest foreclosure rate among the states and 3.6 times the national average. Foreclosure filings were reported on 19,595 Nevada properties during the quarter, up 3 percent from the previous quarter and up 137 percent from the first quarter of 2007.

Foreclosure filings were reported on 169,831 California properties during the first quarter, the highest total among the states and a rate of one in every 78 households — the nation’s second highest foreclosure rate. Foreclosure activity in California increased 32 percent from the previous quarter and was up nearly 213 percent from the first quarter of 2007.

Can you imagine the re-bundling and derivative parasites of Wall Street now slavering and foaming at the lips to whip up a new carnage for maximum gain?!

So back to the main question – how do we invest – and thereby defend ourselves against these newly skewed and un-equitable markets?

The only way is to invest for long-term value. Forget what’s “hot”. That’s the language of Wall Street teeing you up for the sucker punch.

You’ve probably found your way to this article because you already have developed a healthy mistrust of the Wall Street top tier publications, who obscure the parroted PR messages amid “journalism”.

And down here where the rhetoric goes a little more lights and the language tends toward plain, we embrace the lessons of history, with our gaze firmly set on present reality.

And the reality is: gold is a reliable hedge against floating fiat currencies whose values are literally unquantifiable. Buy physical gold, or ETF’s backed by physical gold, for the conservative portion of your portfolios. Owning the majors who demonstrate continues reserve growth each year is also a good bet for conservative positions.

Finding a few well positioned and well managed gold juniors for the higher risk portion of your portfolio will be an astute investment in time. More and more, quality deposits will be picked up at earlier stages of development, providing shorter-term payouts for the right projects. Look for juniors with near surface, higher grade situations close to infrastructure in politically stable jurisdictions. Look for management teams with connections to larger companies, and track records of success.

Watch our for companies financed too cheaply and/or frequently, with so much paper out, that even if they found Fort Knox the upside for investors would be severely encumbered by the company’s own derivative slicing and dicing.

When it comes to oil, Canada is where its at for the next decade. The costs of production of oil from the sands of northern Alberta and BC presently start at about $80 a barrel, and so with prices below that a relic of the past, and with more oil than Saudi Arabia and Russia combined, you’d be nuts not to have investments here.

Same thing applies – producing majors for conservative positions, premium juniors for the risk tolerant ones. Increasingly, jurisdiction matters. Don’t think that any foreign country is exempt from nationalist inclinations should it be deemed their discovered fields are in the “national interest”. More Ecuadors and Mongolias are our there. Personally, I’d stay right out of China. Any nation who shoots its youthful citizens can’t be trusted in business. There’s a day of reckoning on that horizon yet.

Now where we have new opportunity is in agriculture. Poor farmers are about to become the next minted middle class. Unfortunately, most of the Mom and Pops out there of any size are going to be consolidated into large Agri-Corps.

The process has already started in Canada, where new Capital Pool Companies and other emerging juniors have already begun the process of consolidating farms under centralized management systems to maximize positioning on anticipated future high demand crops.

Its not just rice and wheat that are seeing record highs. It's EVERYTHING!

We could even see agricultural land start to compete with residential real estate in terms of value growth, considering Ag-land is going north while residential is still tanking.

And so, in tandem with concerted farming activity, potash remains a tremendous opportunity, as its price will continue to climb. Already up 227% in a year, this is one commodity that threatens to outpace gold and oil in terms of near term performance.

As with oil and gold, the major producers are conservative bets (well not so conservative with the largest producer, Potash Corporation of Saskatchewan (POT) predicted to increase in price by at least 50% according to bank analysts), while the handful of juniors who are able to lay claim to good potash ground will provide some heart-stopping gains for riskier investments.

There are many other ways to invest in this quad of investment profit – but I don’t have time to write a book on it….yet.

Comments

[woody8:]

Don't you think, though, that in the near term gold, potash etc are likely to drop? Would you be going in now at these levels? Gold is on a downward path, as are stocks like POT.

2008 Apr 30 08:36 AM

[bluesmoke:]

Good article.

2008 Apr 30 10:43 AM

[Norman Lepo...:]

Good article. I agree with woody8. All these pundits advise to buy when stocks are ridiculously overpriced. Then when they correct, they say it is time to sell.

2008 Apr 30 10:56 AM

[Dan Schmeidler:]

Yes, Gold is falling. Yes, Ag is correcting. The point of the article (which I strongly agree with) is that investing encompasses the purchase of an asset for a future return. The time frame for an investment in volatile times (similar to today's) should be extended even further. Don't look at Gold prices falling (while interest rates are going back down to historic lows) as a trend. It would be absolutely irrational if it was a trend. The more Gold prices are falling in an environment where interest rates are near or nearing all time lows, the more likely it is that a bottom for Gold will soon be found. As far as Ag is concerned: The same. Lower interest rates will drive inflation higher, especially (as proven by recent market prices) on essential or nondiscretionary items. Discretionary inflation is pretty much nonexistent and even deflationary and should therefore allow the Feds to keep the interest rates low for a longer period of time. (This of course, the FOMC will NOT admit to today: They want to create an environment of lower inflation expectations and will therefore probably even hint at rate increases in the near term). If you are looking short term, stay away from Oil, Ag, Gold. Long-term though, a WHOLE different story (see aforementioned $2000 - $200 parity).

2008 Apr 30 02:11 PM

[Dan Schmeidler:]

Also, the markets are seemingly guessing that a bottom reached in the "loosening" interest rate cycle, will soon imply future rate increases, stronger currencies, and lower inflation expectations. Apparently, that is why markets are bidding Gold prices down. I would disagree with this assumption, because it is about as optimistic as one can possibly be about an outcome to our current environment.

2008 Apr 30 02:17 PM

[Success:]

Nice post. I agree that for the short-term oil, gold, and ag is not a good investment. However, for the long term I will stick with them. I have ag stocks and when their price drops I load up on more and more shares. It' s a no brainer. Just sit back and analysis. We have over populated, and urbanized pretty much everything and everywhere. So, we will need more and more food and oil consumption just to make ends meet. The economy is on a free fall because of our arrogance, and our need for more technology, so lets make money on our technology, and our arrogance. Hold on for about five to ten years, and after building up a good postion you will be very happy.

2008 Apr 30 02:46 PM

[len811:]

Forclosure map interesting, but I can't make it out, not even the legend. Would really love to see it! {clicking didn't present a more readable version)

2008 Apr 30 06:01 PM

[Darwinist:]

With Fed fund rate at 2.25%(2% after 4/30/08) and inflation rate at 5% for 2008 at the minimum, I see no reasons why inflation can be stopped. Fed fund rate has to be at 8.5% or so in order to reign or tame inflation, according to Taylor rule. Remember the inflation is always a monetary problem whereas human beings prints money faster than the available goods. I think it's is going to be reflected in necessties, especially food. Don't blame Ag bull market, blame Fed !

2008 Apr 30 10:04 PM

[relmor:]

I agree 100 percent with Darwinist. This is all the Feds fault. Lets analyis what the fed really does. Its really simple. ALL THEY DO IS DECIDE HOW MUCH INFLATION WE WILL HAVE. Because deflation is not an option!!! Deflation does not make us grow and our markets and banks would collapse if we allowed deflation. Remember the 30's? We would look back on them in longing. What got us out of the depression? DDAAAAAAAAAAAA!!!!!!!! MASSIVE INFLATION!!! Removal of the gold standard, and confiscation of our gold and then ripping us off on the price, raising it 7 dollars days later. Thanks FED, FDR, and all the other communists(or facsists actually) who run our country. Capatalists? Ya right, we havent had a capitalistic government in place since pre Wilson. So nice try.

2008 May 01 01:57 PM

[relmor:]

O, and another thing, the fed expects americans to pay back the principal plus interest with just principle. 1st grade math doesnt even support economic theories. You know the show smarter than a 5th grader. I say put them in charge of the Fed, they would do a better job because maybe they would understand this, and stop charging us interest on our own money. Not the governments money, its not the feds money, ITS OUR MONEY DESIGNED FOR US TO PAY DEBTS AND ACCIRE HARD ACCENTS. Look on your federal reserve not. You are not legally entitled to buy gold with it, only exchange it for other dollars. Pre Fed dollars were always redemable for a small amount of real assets.

2008 May 01 02:01 PM

[relmor:]

The reason you cant redeam it for real assets....... DA TAAAA There are no real assets. So good luck with that.

2008 May 01 02:03 PM

[frenchy967:]

I was flowing with the article until the housing price chart that shows a drop in price from 600,000 to 200,000. If that were true we would be in a depression and Bear would look like an odd lot.
I own a house in one of the most expensive counties in the U.S. Prices here are flat to down slightly. Demand is strong and entry level houses are not available. An acre of land is approx. 1.5mm. My family owns farmland in Ohio, it has doubled over the last few years to about 4,000/ acre. We will never sell that land even though it will be back to 2,000 per when grains retreat.
To suggest jumping on these bubbles is irresponsible. We have seen grains rise to similar levels in every decade, then fall back: price cures itself via demand/supply dynamics.

2008 May 01 02:53 PM

[jjason:]

Sorry but I disagree about owning gold and buying commodities. Commodity prices go up and down over time...just like most stocks. Did you see POT drop $20.00 per share recently? And gold does not pay any dividends. I happen to like getting paid for investing today. (well, actually, at the end of the month or every quarter) A combination of dividends and capital gains from purchasing good companies can return 10 to 15 percent each year.

At the moment, OPEC is a cartel. The potash producers are also cornering the market by limiting production and controlling prices. Diamonds and gold are useful for looking at but do not produce any income. I care about good food, a roof over my head and vacations. Go and buy all the gold you want and maybe someday (like in 40 years) you will think like me...if you buy low and sell high. But be careful of the zero sum zero game!

2008 May 01 03:02 PM

[StateofConf...:]

There are many articles about inflation and deflation brought on by the banking crisis. My conclusion is that we already have a lot of inflation worldwide in energy and food, which are related. Large population pools are raising their standard of living so these items will have continued high demand. The other side is deflation due to credit debt defaults, job loss in the US and tapped out consumers. This will lower demand on non essential items (the US being the major consumer nation) and cause deflated prices. At some point the Fed will raise interest rates a bit but can't do much or defaltion may go into a death spiral when all credit stops.

I expect commodities will rise in price, including gold and silver to match the oil and food increase. Owning physical metal doesn't do much for me (I do have some silver quarters) so why is buying ETFs like DBC, PZD or DBA a bad idea? Will the futures markets stop functioning? If it does, do you think we would still have food in stores?

2008 May 02 12:37 AM

[abcsofhealth:]

Lots of good commentary BUT I would add that our markets have been converted to NOTHING more than a large player, SWING game.
Cases in point:
1)57% of our index volumn is CONTROLLED by the derivative fund bases.
He who CONTROLS the volumn CONTROLS the price.
2)The relative info available for positional status of the institutional POSITIONS in equities reported on 13f to the SEC for public disclosure is REPORTED as TOTAL held. This the HERD believes is ALL a long position. This is complete missdirection as these number %'s do NOT break out, the LOANED short positions, USED by the submanager desks, to rake interest on resales and the short position TAKE, to 2nd and third party PLAYS.
3) Giving of TAXPAYERS money, with ZERO say, to JP Morgan, to be used to BAIL out a NON-REGULATED hedge fund called Bear Stearns.
4) The plunge protection team. Direct market CONTROL, by the government.
5) The fractial banking reserve requirements, not only at 9/1 in FIAT money creation BUT allowed to INSURE positions, through NON-REGULATED 2nd/3th party, rated through Moodys (PAID FOR), with AAA, effectively taking these positions in derivatives, OFF the books. The effective reserve requirements are as LOW as 1 to 2 %.
I could go on and on BUT the point is we no longer have a fair market as the LAWS of real supply and demand and general economics are NO LONGER applicable and weight LESS and LESS YOY. Options/futures/swaps/... the books banking positions and a lot of other derivative positions hold sway on todays markets.
IMO, there is NOTHING fair in todays market.
Just my opinion!
Have a nice day!
abcs

2008 May 02 03:22 PM