Category: Commodities

If you were in Las Vegas, it would be cheating to bet one chip on two numbers of the roulette wheel.

They'd kick you out of the casino after taking your money and maybe roughing you up a little.

But today I'm going to reveal to you a publicly traded company that should benefit from boom times as well as bust. It's a way to put one poker chip on two numbers of the roulette wheel at the same time. And it won't get you kicked in the ribs.

My prediction is that we're headed (or already in the midst of) a severe recession or depression. But I've been wrong before - and even if I'm right on the trend, I could be wrong on the timing or the scope - or any number of other factors that might derail my investment thesis.

Last week fertilizer stocks all surged in unison after the world's largest mining company BHP Billiton (NYSE: BHP) tried, and failed, to acquire the world's largest potassium company Potash Corp. (NYSE: POT).

Right now, there's only one company in the sector that's still (relatively) inexpensive. More on that company in a minute…

First, a little tooting of my own horn: just over a month ago, I recommended you pick up shares of another fertilizer company (now the second largest) -Mosaic Co. (NYSE: MOS).

Here's what I said on July 22:

I've been receiving a steady barrage of questions from readers wanting to know about buying gold and silver.

While I've been answering many of these questions in a piecemeal fashion throughout issues of the Resource Prospector, I thought I'd once and for all cobble the information together in one place.

Like anything, if you're just getting started in buying gold and silver it can be a somewhat daunting process.

That's because there are about as many different precious metal vendors as there are types of coins, and it can be a bit of a minefield if you don't know EXACTLY what you're looking for, how much you should be paying, and perhaps most importantly, why you're buying precious metals in the first place.

I recently received a question from reader David W. which seems to encapsulate just about every possible angle of this topic:

I hate falling into the trap of simply responding to the hottest news headlines - because very few people get rich by reacting to headlines and pulling the trigger on investments based on "hot" trends in the market.

At this point, computers can wipe the floor with most any day-trader, so if you think you can buy yesterday's news and still eke out a profit, you're probably wrong.

In the past couple weeks agriculture has been the hot topic on everyone's mind. First, fires in Russia caused wheat prices to double in less than a month as Vladimir Putin banned Russian wheat exports. In sympathy, many other crop commodities rose in price as well. Then yesterday, BHP Billiton (NYSE: BHP) the world's largest mining company, put in a failed bid to buy Potash Corp (NYSE: POT) the world's largest fertilizer company.

Australian minerals giant BHP Billiton (NYSE: BHP) failed to take over Potash Corp. (NYSE: POT) with a bid of $130 a share.

The failed bid pushed shares nearly 30% higher, raising Potash Corp's market cap to $42 billion - or $6 billion more than the offer from BHP.

Potash is the world's largest fertilizer company, and this failed takeover buoyed share prices throughout the fertilizer sector.

There are literally trillions of reasons to be bullish on gold - but I recently received a letter from the Social Security Administration (SSA) that further cemented my belief in the uptrend for gold (and silver).

In a letter titled "Your Social Security Statement" the Commissioner of Social Security Michael J. Astrue wrote:

"...by 2037, the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations."

I've done the calculations, and I now pay about 7% of my income in FICA taxes, an amount I realize also includes Medicare - which is of course, matched by my employer. So, that's 14% of my potential income gone. It's more than I currently save for my own retirement.

I was interested, and not surprised at all really, that municipalities in the United States have started to sell their water in order to help stem the tide of budget deficits.

From a story in The Wall Street Journal yesterday:

"Indianapolis is selling its water and sewer systems to a public trust to get money for crumbling streets and bridges. San Jose, Calif., fresh from cutting 49 firefighters, might take its water utility private. "Excess" tap water in Sacramento, Calif., is helping supply a Nestlé SA bottling plant."

You might be thinking that water is cheap - and that portioning off the public's water would not yield much cash.

If you've invested in ETFs over the past few years - you've probably lost money.

I know it's not news to you, but the simple fact is that most ETFs were never designed to succeed for individual investors - they were designed to do only one thing: line the pockets of the Wall Street big shots with the brilliant idea to sell "easy" investments to Main Street investors.

It's simple to see why: they make between 0.5% and 1.0% regardless of what the ETF does. Just another Wall Street con job.

Good investments are rarely easy, and although ETFs seem like a no-brainer, that's because most of them were specifically designed to appear that way.

I'm back in Vermont after a week in Sea Isle City, New Jersey. And there's nothing like a vacation to make you appreciate the comforts of home. Even though Vermont isn't very far from New Jersey, geographically, the weather difference is pretty dramatic. Vermont does get hot (we broke 100 degrees a few weeks back) but I've never felt the urge to apply and reapply sunscreen here, like I did in New Jersey last week. I still managed to get a sunburn.

And speaking of sunburn, we've seen a doubling of wheat prices over the past month thanks to fires in Russia, brought on by drought. Vladimir Putin just announced an export ban on all wheat for 2010.

In yesterday's issue of Resource Prospector I talked about the idea of shorting new commodity ETFs. There's lots of evidence that new ETFs, especially commodity ETFs, are launched at the height of their popularity. They can only fall from those heights.

There are a few exceptions. I will be publishing a special report about my three favorite ETFs - funds that are actually designed to make money, not lose money - in sectors that I think have plenty of upside.

If you haven't read my commentary on ETFs before, and you're wondering why firms would launch funds that tend to underperform, all you have to do is look at this simple chart...

On paper, I love socialism, the United Nations and ETFs. On paper, socialism is paradise where we all take equal advantage of each other and enjoy the fruits of the world's labor for free! The UN is the friendly world-policeman making sure that no one shoplifts or performs acts of mass-genocide, and ETFs are easy, convenient baskets of investments that every day investors can choose from to match their needs.

But in practice, all three are about as bad as it gets. Socialism is responsible for more death and destruction than any other form of government. The UN is an ineffectual collection of world improvers who can't manage to do the simplest of things right. And ETFs are baskets of investments typically launched at the peak of their popularity, which as we know, is the worst time to buy any investment.

So whenever I see a new commodity ETF coming over the horizon, my first instinct is to short it, if not completely ignore it.

Of course there are exceptions, and for the morbidly curious, I'm putting together a report about the ONLY three commodity ETFs that I like. It will be available sometime in the next week or so. Watch your inboxes.

In the meantime, let's look at one group of ETFs launched by one firm - most of these are based on commodities.

Below, I've posted a table of ETFs launched by Global X Funds.

I've flirted with the idea of dedicating each Friday's edition of the Resource Prospector to more humorous topics. But it's tough to be appropriately reverent about something as serious as our money while at the same time being humorous.

And to be honest, not many of the current topics in the resource sector are especially hilarious.

For instance: there's currently some degree of argument over whether we're currently experiencing inflation or deflation. I can't think of a more non-funny topic. If they say that comedy = tragedy + time, or that comedy is tragedy that happens to someone else, then it doesn't seem like there's much opportunity for jokes. After all, deflation or inflation is happening to all of us all of the time, so no matter how tragic it is now, it's likely to be at least as tragic later.

Gold and I are close - but I have no illusions about its usefulness or role in my portfolio. It's a store of value and a medium of exchange - though admittedly more the former than the latter at present.

Its ability to preserve wealth is unparalleled while the broad market remains bearish. I'll never sell all of my gold or silver, because as my younger sister Beth says, they're very effective paperweights.

She meant the remark as a slight against my 'foolish' choice to buy physical gold and silver - but I agree with her in one respect: gold and silver do an excellent job of paperweighting your last bottom dollar no matter how windy the markets get...

That being said, I am peeking over the horizon for a time when I will gladly sell most of my gold and silver to load up on an investment that's historically been the greatest generator of wealth and profits in world history: the broad stock market. More specifically, I want to buy the 30 companies in the Dow Jones Industrial Average index.

Ireland recently joined Greece, Portugal and Spain to round out the PIGS acronym of debt-downgraded European nations.

It's a legacy Europe won't soon escape for a variety of reasons. But I'm not going to talk about the largely boring reasons why Europe has no chance of escaping massive debt obligations - I'm more concerned with the immediate investment implications of such a downgrade.

To help predict what might come next, it's sometimes helpful to look back. Over the last eight months, buying silver after a Euro nation had its debt downgraded gave you an average one month gain of 2.6%.

I wrote about lithium two weeks ago, and I mentioned why it's so great for batteries. There are lots of highly technical reasons, but they mostly boil down to two main reasons:

1. It's the lightest metal, so it's great for just about every battery application where weight is a practical consideration, namely in mobile devices.

2. Somewhat related, it has the highest electric charge capacity per size and weight of any substance known to man.

But unfortunately, I just can't get as excited about the investment implications for lithium, the commodity, as I am about the battery technology - which lets me run my cell-phone and lap-top without using the much heavier lead-acid variety.

You can read all about lithium in a report from United States Geological Survey by clicking here.

There's plenty of demand for lithium, not just in batteries, but in ceramics, glass, and aluminum alloys. But I'm avoiding lithium miners because of the supply: there's plenty of it.

Whereas the scientist Dr. Werner Heisenberg is famous for his Uncertainty Principle of quantum physics, I'm somewhat less notorious for my Certainty Principle of investing. But I have one thing going for me: my principle is a lot more likely to help you and me make some money. I won't win any Nobel Prizes, but I might be able to retire a decade earlier.

I bring up quantum physics, because much of that field is based on the idea that you can't know everything all at once. Making meaningful observations about a given particle entails giving up knowledge of either its position or its velocity/direction - both of which are important for any physics problem.

In the investment world - unlike quantum physics, we can know with a great deal of certainty the position and direction of a company.

Because investing is different than quantum physics, thankfully.

We can know the direction and position of a publicly traded company because these companies are required to accurately report these facts in quarterly and annual reports.

There's been lots of chatter about a gold bubble. But I think you can make a much stronger argument that Treasuries are in the midst of history's biggest bubble right now.

Let me back up, because I know I'm making some short-cut assumptions that you might not make for yourself.

1) I'm assuming that gold IS money. That is, it's a store of value and a medium of exchange.

2) I'm assuming that the definition of a bubble describes when an asset is overbought to the point that its price is much, much higher than it should be.

3) If I can safely make these assumptions, then I think it's fair to compare gold to another form of money: the dollar, and by proxy U.S. Treasuries.

If we can agree that U.S. Treasuries are a fair proxy for the dollar, and that gold is money - then I truly struggle to see how ANYONE can come to the conclusion that gold is in a bubble, while simultaneously seeing Treasuries as not being in a bubble.

Here's why:

It's always an education to look at the other side of the argument.

In a July 10^th article on Seeking Alpha, I found what can only be called a complicated chart which is supposed to illuminate the technical reasons why silver is due for a fall in the near-term.

Here's the chart, for the masochists in my readership:

Market sentiment doesn't matter for gold.

That statement flies in the face of commonly held wisdom repeated ad nauseum by investment experts and the investing public alike.

I fully expect to be "taken to school" by any number of readers for this statement, but hear me out...

There are two basic reasons why sentiment doesn't matter for gold, or at least not yet.

The first is that gold's price has very little in common with broad market investor sentiment.

If you look at any number of "sentiment" metrics, you can put together a pretty tight little theory that betting against sentiment is almost always profitable.

Take a look at this chart I cribbed from Pragmatic Capitalist which shows consumer sentiment. I've taken the liberty of plotting the S&P 500 index (in red) directly over the sentiment index (in dark blue):

If you own gold and gold stocks, I say good for you. Gold is up about 10% year to date, and gold stocks seem to be the only bright light in an otherwise dim stock market.

And as much as I'd like to take credit for urging you to buy gold and gold stocks - it's ultimately your choice, your responsibility and your glory for your investment success.

But today I want to discuss the arguments surrounding the very fiscal policy that has so far allowed gold to make strides higher as world currencies continue to fall.

As I type, the Federal Government is no doubt pondering another massive stimulus package. Whenever the government asks the question "To spend or not to spend" the answer is almost always "spend, and if that doesn't work, spend some more."

It's an answer that comes easily, and not just because the Fed is run by unelected officials -or because spending is easier than listening to constituent groups complain that you're not spending - the simple truth is that the spenders have a cut-and-dried theory of economics on their side: Keynesianism.

In yesterday's edition, I talked about an oil services company that benefits from higher oil prices.

But higher oil prices don't just benefit oil companies. In fact, higher oil prices can sometimes hurt oil companies - because higher oil prices frequently reflect higher production costs - so while a company might get more dollars per barrel, each barrel costs it more to get out of the ground. And even though the effect is usually small, higher prices typically result in a somewhat diminished demand.

According to Enerdata, an independent energy consulting company, gasoline consumption dropped 4.5% in North America during the record high oil prices of 2008. That's certainly a significant drop, but as you're probably painfully aware, oil prices more than doubled from the previous year:

Right now, I'm bullish on many things - but lead might be the most contrarian commodity I'm bullish on.

That's why it pays to be a commodity investor, because we're still ahead of the crowds; we're contrarian.

Most, if not all investors, are heavily into broad index mutual funds. They've been buying the market, and hoping that it will turn around.

I'll keep my 'hope' for my favorite sports teams (go Philadelphia!), and instead use my brain to find investments that are forward looking. What has worked in the past might again work in the future - but not simply because it worked in the past.

And since we're coming up on 4^th of July weekend, I'm looking for patriotic investments, like lead.

I'm going to write today's issue under the rash assumption that we're already experiencing a double dip recession. I think such a recession has important implications for gold and gold investments, for the simple fact that severe downward trends in the broad market usually have deleterious effects on every asset class - at least for the short term.

If it happens again, we'll get another great opportunity to load up on gold stocks as they get temporarily dragged to hell by the broad market.

So, before I tell you what to look for, here's my brief reasoning for why I think we're in a double-dip recession.

Q2 of 2010 is in the books, and the broad market is down nearly 12% over that 3 month period. I'm using the S&P 500 as a proxy for GDP. Typically, stocks in the S&P 500 are a leading indicator for GDP, so it's not a perfect system, but it's good enough for today's discussion.

I know - the usual definition of a recession is: "a decline in GDP for two consecutive quarters" - but if you look at a chart of the S&P 500 over the past two quarters, that definition is small consolation:

There's an Egyptian proverb that says, "The mouth of a perfectly happy man is filled with beer."

And if you're like me, you spent many days and nights of your youth as a perfectly happy man. I'd like to invest in the likelihood that tomorrow's youth will continue drinking prodigious quantities of beer.

Okay, so beer technically isn't a commodity. It's a product - technically any good that's manufactured - but there are some investment implications that relate directly to the prices of certain commodities. Could they be the best "commodities?" I guess that's a matter of opinion...

There are many commodities that go into making beer - the most important being water, but also barley and hops.

To back up for a second: the thesis of this letter, one that I'm constantly re-checking and analyzing for cracks and leaks, is that commodity prices will advance while the broad market in stocks continues to waver, and world currencies suffer from inflation.

For months, former George Soros partner and famed resource investor Jim Rogers has been trumpeting natural gas and silver investments. I've been doing the same in the Resource Prospector newsletter since launching back in March. If you've been sitting on the sidelines, there is still time to take action before these investments run away from you.

Jim Rogerswrote the book on resource investing: Hot Commodities. I urge anyone interested in the topic to go out and get yourself a copy. Right now there are 29 new and 17 used copies of this book on Amazon.

When Jim Rogers said to buy natural gas and silver three months ago, I was already urging you to do the same. Natural gas prices have since risen by more than 25% - and some of the stocks in that sector have done far better.

I've also been pounding the silver drum. Silver is now up almost 10%, but I still think there's much more upside. You can read more about silver's potential in this past issue of the Resource Prospector by clicking here.

Rogers is still bullish on silver, but he recently mentioned another cheap commodity. It's something that Americans use everyday in great quantities - over 160 pounds per person every year.

If you were wise enough to buy stocks during the lows of 2009, you're probably feeling pretty good about your decision. Even if you just bought the S&P 500 SPDR (NYSE: SPY), which precisely tracks the total return of the S&P 500 index, you're up over 20% over the past year. That's huge.

Ask any mutual fund manager if they can replicate 20% annual gains in their fund and they might have you forcibly removed from their office. And we've all been told by the folks in the mainstream media that you can expect between 5% and 9% average gains just by being a diligent long-term buy and hold investor.

It's a nice sentiment - but it also assumes that stocks always go up over a long period of time, and that's just not a certainty. Putting all of your eggs into one asset class - even one with a good track record - is not an advisable move.

I'm going to recycle a chart I've shown several times now - for the simple reason that it details the exact reasons why you should not throw all of your net worth in one asset class. This chart is courtesy of Barry Bannister, Strategist for Stifel Nicolaus & Co.

It may seem outrageous -- what with central banks buying, inflation on the horizon and the U.S. dollar tanking -- but you can still buy gold on the cheap. Even as low as $120 an ounce, if you know where to look.

It’s full disclosure time! As you might have realized, I’m long term bullish on gold and silver as well as most other commodities. But over the past 6 months I’ve mostly been loading up on silver.

As I’ve said many times in past issues of the Resource Prospector I buy my gold and silver from one of two online dealers: kitco.com and Blanchard online. I have no professional relationship and I don’t get any kickbacks from either of these two companies - I’m paying full-board just like any other regular investor. I can recommend them because I’ve had good, responsive and professional experiences with both - AND they both have buy-back guarantees.

The only reason I’ll buy from one dealer over another is when they’re running special deals or they have a specific denomination of bullion that I’ve been looking for.

Gold prices hit another all time high Friday. Gold futures for August delivery hit $1,261.40 during the trading day.  

Investors, concerned about the inflationary monetary policy and slowing momentum of global growth, have been relentlessly buying gold as a hedge against inflation and as protection against further economic weakness.

But investors may be missing an even bigger opportunity in precious metals. Silver prices are lagging gold prices by as much as 22%. That's because the historical relationship between gold and silver prices has expanded as gold prices have run higher.

Gold prices hit new all time highs late Thursday afternoon. Gold futures for August delivery hit $1,252.50 during the trading day and closed the day at $1248.70. That set a new intra-day and a new closing high for gold futures.

Investors, concerned about the inflationary monetary policy and slowing momentum of global growth, have been relentlessly buying gold as a hedge against inflation and as protection against further economic weakness.

According to their own numbers, the U.S. Congress believes the Federal Government's debt will rise to 90% of Gross Domestic Product by 2020.  That means that the Government would need to raise Federal taxes to astronomic levels in order to pay for their reckless spending.  

But according to a study put together by W. Kurt Hauser of the Hoover Institution, Federal tax receipts can never capture more than 20% of GDP. That's because increases in tax rates produce no additional revenue above the 20% mark.  

Federal Reserve Chairman Ben Bernanke recently expressed some confusion about increases in gold prices.

According to a recent story in The Wall Street Journal, Bernanke said, “I don’t fully understand movements in the gold price.”

It seems like Bernanke and Treasury Secretary Tim Geithner, formerly of Goldman Sachs (NYSE: GS), believe that massive deficits and billion dollar gifts to Wall Street bankers should have no consequences.