To QE or to not QE? That is the question.

Whether ‘tis nobler in the markets to suffer

The slings and arrows of outrageous inflation,

Or to take arms against a sea of deficits,

And through austerity, end them.

Yesterday, I sat in on a meeting with the top researchers, analysts and investment gurus here at Wyatt Investment Research. In one room sat many decades of investment experience, two MBAs in Finance, and each person with a specific skill-set that’s unmatched anywhere outside of a multi-billion dollar i-bank or fund.

Gold and Silver might be entering the realm of Giffen goods in their relation to money as I type this. Let us examine the definition and then some evidence.

1. The good in question must be an inferior good

You won't here many who believe in investing in gold and silver calling it inferior to US dollars, but the definition of an inferior good in this context is one where demand of a good decreases when income rises. In our example above bread would be an inferior good as it can be assumed that a family with such a budget would buy less bread and more other foods if their food budget were to double to $200.

A strong case can be made for gold acting as an inferior good in the US, and in fact the world, over the past 80 years. In the decades since the Great Depression the amount of individual wealth that has been held in the form of gold has not kept pace with the amount of wealth in general. Until the financial crisis household wealth in the form of stocks, bonds and home equity were at all time highs not just in nominal value, but in percentage of a person's total wealth. It’s true that the illegalization of gold ownership, the rise and fall of the Bretton Woods agreement and tax policy have all contributed to keeping both gold holdings and prices down. But all that matters for this portion of the analysis is that gold has acted as an inferior good over a substantial portion of this time period.

They also don’t believe in the possibility of the dollar losing its reserve currency status, a trend that’s compounded by the fact that most people probably don’t know the meaning of the phrase “reserve currency.”

If people did believe in the likelihood of these very real threats, than it’s likely that they would prepare for them, and in preparing for these crises, they would not come to pass.

Voters would demand the abolition of the Federal Reserve, and they’d only vote fiscally conservative candidates into office. They wouldn’t demand endless regulation and “benefits” from their government. They would buy gold and silver, not US Treasuries. They’d save excess capital, not spend themselves into debt.

The likelihood of crisis is increased, in part, because of people’s inability to imagine that it will come to pass, and so prepare for it.

Why prepare for a flood if you don’t think it will rain?

Right now, we have crystal clear proof on the topic of the wages of reserve currency devaluation. We know, because we’re seeing those wages everyday.

Reserve currency devaluation results in higher commodity prices.

I don’t even think that Ben Bernanke himself would dispute the above statement privately.

Over the course of Bernanke’s tenure, we’ve heard some fancy banker speak. We’ve heard about increasing liquidity and backstopping the financial system and easing quantitatively.

But today, everything that you would expect to happen when a currency is devalued is happening – and more.

Before I get to the “and more” portion, we don’t have to look very far or hard at all to find the wages of currency devaluation.

My favorite counter-indicator just signaled that some of the world’s best resource companies could soon be on sale.

I call it the Geithner-tron or maybe the Timmy-matrix.

And it essentially goes something like this: whenever Tim Geithner says something with a real sense of purpose or resolution, I know that the opposite is true.

The last time my Timbo-whatzit signaled signal went off me was on October 18, 2010. That’s when he dropped this doozy:

“U.S. Treasury Secretary Timothy Geithner vowed on Monday that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health.”

To recap, that was just two weeks before Ben Bernanke unveiled QE2, the Federal Reserve’s $600 billion Treasury purchasing program – a move that can only be described as bearish for the dollar.

In the past 80 years, it only occurred twice, but if you had simply bought and sold stocks according to this strategy, you would have turned a $1,000 initial investment into over $21 million with just seven transactions.

You would have missed the biggest run-ups in the stock market, but you would have also missed ALL of the biggest draw-downs.

The best part is that it’s an incredibly simple strategy to follow. It requires no special math skills and it can be used by anyone with even a discount brokerage account. A small initial stake is not a hindrance either. The two most important components (as with any long term investment) are time and patience.

I’m currently following this investment strategy in my personal investment account. Sure, I have other investments outside of this strategy in the form of a 401(k), a smattering of individual stock holdings and some broad mutual funds, but I’m putting no small part of my portfolio into this strategy.

The Government is failing itself and its citizens. Every year you and I grow poorer. Every year we pay more for basic necessities. Every year we see our earning power diminish.

And yet, our Government remains steadfastly loyal to the very policies that cause this increasing poverty.

It’s following the EXACT same path as dozens of other failed, defunct states. In fact, the list of failed states would be a short one if it didn’t include those governments who devalued their currencies.

Devaluing a currency might be the best way to destroy a state. War rarely wipes out the state. Disease, famine, rebellion - these misfortunes don’t hold a candle to currency devaluation.

Now, I want to emphasize and point out that I’ve never endorsed any candidate for office in this letter. Nor have I disclosed my political affiliation. I won’t ever do so, for the simple reason that many people will immediately frame everything I say inside of a political construct.

I don’t write this letter under any political banner.

I’m a commodity investor for entirely market-driven reasons, and I’ll tell you what I told one of my critics: if you invest with a political ax to grind, you will lose money.

Politics and investing do not make good bedfellows.

So when I accuse the President of being a fool or a liar I do so apolitically, and I do it entirely of the construct of being a commodity investor.

I really doubt that we’ll see $6 silver - but that’s not the point of this exercise.

Back when I made some predictions about silver in that November article, it was in the middle of a momentous straight-line bull market.

Nobody wanted to hear that silver could go down. In fact, I had many readers write in to tell me that it was completely absurd to even suggest that silver might dip below $22 an ounce ever again.

But my thesis for owning silver is not so rickety as to be shaken by even substantial corrections down to the $16-$18 range. Less than a year ago silver sold for $15 an ounce. I bought silver at that price, as well as at $17, $18 and on up the line.

All sarcasm aside, you’d be best advised to pay close attention to the Federal Reserve. Stock market investors especially need to understand that valuations are screaming higher as a strict and natural consequence of a flood of money from the Federal Reserve.

Some people will quibble and equivocate about the assertion that the Fed is printing money.

You don’t have to agree that the Fed is printing money in the most rigorous definition of the word, but the effect is the same on the balance sheet of the Fed (they’re buying billions of dollars of Treasuries) as well as the effect it has on the stock market.

I should qualify the statement: if you are a homeowner, a taxpayer, a retiree, or someone with any savings, investments or dollar-denominated assets - you are the fall guy.

I’ll back up further: what are you taking the fall for?

Simple.

You’re already on the hook for bad mortgages on the books of banks like JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), and you’ve already backstopped General Motors (NYSE: GM) and Chrysler.

“But Kevin, I didn’t bail out those companies - the Government did.”

Well, Mr. Fall Guy, you know as well as I do that the Government doesn’t have any savings, so the money and resources that they have given and promised to give insolvent corporations didn’t come from some secret government rainy-day fund.

The point is that it’s tough to get excited about buying stocks on a fundamental basis when they’re much more expensive than they were a year or two ago. With unemployment near multi-decade highs, the price of nearly every commodity on the rise, and a concerted effort to devalue the dollar, the American consumer is getting pinched on all sides. It’s only a matter of if, not when, stocks will correct.

We know that when the broad market falls, many other un-related sectors get creamed as well. Junior gold mining stocks, for instance, typically fall dramatically when the broad market dips.

That’s because many investors pull their riskiest capital out the market soonest. They’ll let the money ride on blue chips, but not on risky micro-cap resource companies.

If Exxon Mobil (NYSE: XOM) catches a cold, you can bet that tiny oil exploration companies will get pneumonia and some will die.

But government can’t abide higher prices on food. So President Obama will institute price controls. If you think that we couldn’t possibly have food riots here in the United States, then you probably also believe that we couldn’t possibly have price controls in the United States.

But you’d be wrong on the second count, at least.

In 1971, President Nixon enacted wage and price controls - and the biggest reason he gave for these price controls was rising food prices. He also capped oil prices.

You might remember oil shortages during this time - that was a direct result of Nixon’s price controls.

There’s an important theory of valuing assets, including investments that’s known as “intrinsic value.”

Now, before I go on, we should come to a mutual understanding that ALL value is subjective. That is, the small differences in preference among people will always mean that a given asset will be valued differently according to whom you ask.

For instance, my wife is crazy about fresh, perfectly ripened peaches. She’ll gladly pay top dollar at a roadside stand to buy more peaches than we could possibly eat.

On the other hand, my father grew up with a peach tree in his backyard. By the time he was 10 years old he had consumed a lifetime’s worth of peaches, so he’d probably rather go hungry than to eat another peach.

But I think we can all agree that a peach has an intrinsic value, in that it can be eaten, it has a certain amount of calories, vitamins, fiber, sugar, and protein. It has a shelf-life, as well as pretty specific storage requirements.

In yesterday’s edition of the Resource Prospector, I discussed a few things I’m doing to protect myself from the increasing likelihood of food shortages and general fallout from the effects of currency depreciation and energy cost increases.

And I received some excellent additional advice from some readers.

Laura wrote in to say,

“Hi Kevin,

Just to be clear, “lexicon” is a fancy word that means vocabulary – and “food riot” is a phrase that refers to a group of angry, hungry, violent people who destroy property because they feel (among other things) that food prices are too high.

And yes, to answer any questions from the peanut gallery in my office, I do believe we’ll see food riots in these United States of America sometime in the next year and a half.

I’m belaboring this point because I want to be crystal clear with this prediction, not because I especially like making predictions. Quite the opposite, actually – I detest making predictions because it’s so easy to be wrong on the scope, specifics, time-frame, location, etc.

In that vein, if I am wrong about this prediction, it will probably be a matter of my timing rather than anything else.

Today there are two huge trends that are about to benefit one small sector more than any other.

First I’ll tell you the trends so you can connect the dots - and I’ll give you one way to invest.

The first trend is somewhat well-known. It goes like this: when interest rates in the United States begin to rise, the Japanese stock market tends to outperform.

You can see this trend in action in the somewhat complicated table below:

There’s little doubt that the world’s superpowers are now fighting a new war. It’s not a cold one, or a hot one. No tanks, bombs or poison gas. At least not yet.

But open hostility between Europe, Brazil, China, India and the United States blanket the headlines nearly every day.

It’s a long-awaited answer to the question, “Do deficits matter?”

And the answer is a resounding, “Yes of course they do, don’t be silly - why in the world wouldn’t they matter?”

Ask anyone on the street if Europe is in trouble, and they’ll say “yes!”

But ask them exactly why, and exactly how much trouble?

They might answer, “Because of debt problems...and I’m not sure.”

That’s about the most information you’ll get from any mainstream media source. Most news stories about European debt problems will mention the problem, and then immediately quote a bunch of European central bankers and politicians about who’s to blame, and/or why it’s not really that big of a deal.

For instance, this story about the “Euro Crisis” in The Wall Street Journal today doesn’t give ANY specific information about which European countries owe what to whom.

Before I can even pick up the phone, gold is bottoming out at $250 an ounce, a multi-decade low.

Without hesitation, I dial my precious metal vendor of choice, and have my wife call up the backup vendor.

I tell her, “Cash out all of the bonds we have, and buy as much gold as you can!”

I panic, as my gold vendor’s line is busy. I redial once, twice, ten times, trying to get a hold of anyone who will take my dollars in exchange for more physical gold.

While I dial, I think “why is gold tanking?” and then I take a step back and start searching for a valid reason. Did Federal Reserve Chairman Ben Bernanke announce some unthinkable deflationary policy? I don’t understand. How could gold fall so far, so fast?

For the record, we have likely passed the point of peak oil production. I know there are some people out there who don’t agree with that statement. Some of them might even be reading this letter right now. But in the oil exploration and production industry, there is little argument. There just isn’t.

If you have any proof that we have yet to hit peak oil production (in other words, you have oil production numbers that are on the rise, not on the decline) then I’d love to see it.

With peak oil production in our rear-view, we will necessarily produce less oil in the future - until eventually oil is too expensive to bring to market.

Right now, oil and natural gas prices are stretched to their limits.

Rarely before in history has oil been so expensive while at the same time, natural gas prices so cheap.

You can see this price differential in effect by looking at this chart, which divides the price of one barrel of oil by the price of one million british thermal units (mmbtu) of natural gas:

The Wall Street Journal published a story about a lack of trading in pork belly contracts on the Chicago Mercantile Exchange (CME). According to the story, the CME was once dubbed, “the house that bellies built.” To the uninitiated, pork bellies are basically just frozen slabs of bacon.

I don’t know about you, but even in this world of extremely health conscious consumers, low-fat diet gurus and less-meat more-vegetables mantras, I have no illusions about the future of bacon in the diet of Americans.

To be clear: I’ll be eating bacon with my eggs, on my cheeseburgers, and wrapped around anything even if “scientists” link it to every disease known to man.

The world’s second most popular beverage (after water) is about to get a whole lot more expensive.

I’m talking about coffee.

The reason for the price increase (besides slightly higher oil prices and general currency devaluation) is pretty serious, at least in coffee circles.

You see, for many years, coffee roasters and other institutional coffee consumers have complained about the lack of consistency of quality in Arabica beans.

Part of the allure of having a large, liquid commodity exchange is that the commodity itself is fungible, that is, of the same quality and consistency - from one ear of corn to the next, from one ounce of gold minted in South Africa to one smelted in Alaska.

I know: it’s exciting that bond yields are frantically rising. The as-seen-on-TV inflationary event is starting to unwind, right?

Well...not entirely.

Sure, it’s a small validation for people who have been trading in dollars for gold and silver. It’s even a bigger coup for people who sold bonds to buy commodity stocks.

But bond yields could fall tomorrow. In fact, I’d argue that they’ve risen so far, so fast, that they’re probably due to fall tomorrow.

My point is, there’s no reason to become “extra-bullish” on gold just because of a bond-yield spike. My investment thesis for owning gold is a long-term one. It’s largely predicated on ignoring short term moves in bonds, the dollar - even gold!

As a result of our Federal Government’s inability to cut spending while at the same time extending Bush era tax cuts, our country’s debt is in danger of being downgraded from its triple-A rating.

What it means: future bond rates will necessarily have to go higher. You don’t get to keep selling low-yield debt when your ability to pay it back is universally recognized as not-quite-prime.

Don’t get me wrong: I’m not saying that we should raise taxes. But I am saying that you can’t cut taxes unless you’re prepared to cut expenses. If it seems like an extreme position, then I take that as good news for my gold and silver holdings.

So we know that Bernanke is a liar, but what’s worse is the actual things he’s being truthful about. Taken on face value, Bernanke’s plans simply aren’t working.

In short, Bernanke’s latest announcement of $600 billion of Treasury purchases is intended to lower short term interest rates, which (in theory) should spur investment and growth.

From a pragmatic viewpoint, I think it’s fair to ask: has this strategy worked?

For that answer, you can take a look at the Treasury yield curve here at the Treasury’s website.

If you scroll down, you can see that after Bernanke’s announcement on November 2, only the shortest-term rates (the 30-day Treasuries) have gone down. Every other yield rate from 90 days out to 30 years went up.

Perhaps most notably, the three year Treasury yield nearly doubled, from 0.51% to 0.99%. Doubling your interest payments over three years doesn’t seem like the wisest tradeoff - especially when you’re paying for that yield by conjuring $75 billion every month out of thin air.

After my last article about my predictions for the price of silver I’ve received dozens of emails asking about buying precious metals in a variety of tax-sheltered accounts.

Most questions were about IRAs.

And while I AM NOT a tax accountant, or even a regular accountant, or even especially well versed in the labyrinthine intricacies of tax-law, I did some research, and I think I have a helpful answer.

But you might not like what you have to hear.

First - I advise you to speak to a tax attorney before making any big decisions regarding your IRA.

The first thing you need to know about adding gold or silver to your IRA is that not all IRA custodians are set up to do so.

The only way you can be a successful investor is to be a student of possibilities.

To that end, I’ve recently received some questions about silver that I’d like to share with you.

I’ll start with the most bullish question:

“How high do you speculate it will go and what time era? Also, can you recommend the Best Silver Dealer to Buy/Sell Silver to?”

Before I get into silver’s potential upside, I’ll answer the second question first. I recently put together a few articles on how I buy physical silver and gold.

You can read them (for free) by clicking the links below:

How to buy silver and gold Part I

How to buy silver and gold Part II

How to buy silver and gold Part III

Over the long term it doesn’t matter. The dollar can rise, fall, go to zero - or a billion. It won’t matter. Because the dollar index is really just a mirror, reflecting the dollar’s different exchange rates of a basket of other paper currencies: the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swiss Franc, and the Swedish Krona.

So, it’s entirely possible for all of these currencies to fall in tandem over a long period of time, and although the dollar index would remain flat, the price of gold would rise.

All of these currencies are backed by nothing more than their promises to pay back sovereign debt slower than the rate of inflation.

Europe is already having trouble with this promise, which is why Greece bond rates skyrocketed earlier this year, and it’s why Ireland’s bond rates are soaring today. It’s why Portugal recently threatened to abandon the Euro.

Right now, the list of cheap commodities is pretty short.

Almost every single commodity is selling for more than it was last year. Many are selling at or near five year highs. Almost all of them are significantly more expensive than they were ten years ago - or ever.

There are a handful of exceptions, and the two I’m going to talk about today are cocoa and milk.

You’re not hearing about cocoa and milk in the mainstream media. But the same investment thesis that’s had me bullish for gold, silver, oil, corn, etc. - has me bullish for milk and cocoa.

And while cocoa and milk will NEVER be as flashy as other commodities, the fact remains that they are both cheaper than they were a year ago.

And even better, the trends for both are starting to turn around. We don’t have to pick a bottom. Both commodities bottomed in the past few months. We’re in a clear uptrend:

I’m not going to rail against Tim Geithner or Ben Bernanke today. I’ve spent the better part of the last two weeks doing so. Too much anger is bad for the soul.

In the meantime, the world moves on. And commodity prices continue their march upwards.

So to cleanse the palate, I’m going to discuss how to invest in one of the most popular commodities in existence.

Coffee. As you may know, coffee is the second most popular beverage in the world after plain old water. In total, the world drinks 400 billion cups of coffee every year.

And yes, you can invest in coffee, and no you don’t need to open a futures trading account.

If you drink anywhere near as much coffee as I do, you probably should have some exposure to it in your portfolio. I’ve talked before about investing in what you know. I’m sure you’ve heard it from other sources as well.

That is: Tim Geithner’s proclamation less than three weeks ago. Quoting CNBC:

“U.S. Treasury Secretary Timothy Geithner vowed on Monday [October 18^th] that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health.”

In light of the FACT that the dollar has been devalued since his comment, this ‘vow’ from our Treasury Secretary beggars the dilemma: is he a liar, or is he a fool?

I’m leaving out a third option: he could certainly be a foolish liar.

If that’s not enough of a slap in the face to encourage you to abandon the familiar bosom of the dollar and leap into the reliable arms of gold and silver, then I don’t know what would encourage you to do so.

With the mid-term elections still not quite wrapped up and the FOMC meeting Quantitative Easing (QE) announcement not yet made, we are in the eye of the storm.

My over-under prediction for the Fed’s announcement is $1 trillion in new Treasury purchases.

If the announcement is at or under $1 trillion, I think it will be a disappointment to global markets and investors. The effect: stocks and commodities will wither, while the dollar will rally.

If the announcement is over $1 trillion, I expect stocks and commodities to rally, and the dollar to weaken.

I’m getting a little help on the $1 trillion ballpark figure from the Spanish banking group BBVA. Economists there are predicting $1 trillion.

NPR news has been talking about a $500 billion number for a low-ball prediction.

I won’t make the foolish mistake of pushing my personal political views into this letter. My wife calls my ideas crazy, if not offensive and downright unrealistic.

So if my politics elicit disgust and confusion with my own wife, I doubt I’ll have much luck parading them in the pages of the Resource Prospector.

Who you vote for is your business.

But when it comes down to what you should vote for, I have a few things to say on the subject.

I’m talking about the way that we all conduct our personal investment portfolios, as well as the goods and services we buy.

I’ve long believed that these everyday activities are a much more important ongoing vote than any one you cast into a ballot box.

Gold’s Bull Run began in 1999. There’s no question about it. Just take a look at this 13 year chart of gold prices:

So...it’s confusing for the esteemed editors of The Wall Street Journal to say that buying the metal in 2007 meant that you were “early to the gold trade.”

But this past weekend’s story in The Journal titled “A Gold Bull and His Prediction: $10,000 an Ounce” makes just such a claim about Shayne McGuire, a pension manager with $330 million worth of gold held in the Teacher Retirement System of Texas.

Legendary commodity investor and hedge fund manager Jim Rogers recently pointed out that silver prices are 50% below all time highs.

He’s talking about the brief momentary highs of nearly $50 an ounce back in 1980.

Withsilver currently selling for less than $24 an ounce, Mr. Rogers is technically correct.

But priced in 2010 dollars, the inflation adjusted high for silver would be closer to $124.

So if you believe that silver prices will make new inflation adjusted highs, then you’re expecting to see a five-fold increase in the price of silver.

Silver has already trounced just about every other asset so far this year - it’s up 40% since January 1^st.

I've been on quite a tear writing about gold and silver of late. That's not because I think you should run out and buy them right now. In fact, I think you should wait.

Wait for what I believe will be a substantial correction, and therefore, a buying opportunity for physical gold and silver next month when Ben Bernanke announces his plans for Quantitative Easing.

I'd look for a 5-10% correction following his announcement as a great time to make some purchases.

In the meantime, there's a specific stock opportunity that's shaping up nicely.

On September 1, 2010 I urged you to buy shares of Freeport McMoran (NYSE: FCX) under $80 a share.

This potential selloff is good news for people like me - who have been dollar cost averaging into precious metals for years - but it also represents a solid buying opportunity for investors who have never bought any physical precious metals.

I'm looking at the FOMC announcement as another buying opportunity, and I urge you to do the same.

If you're interested in buying precious metals, but haven't ever felt comfortable buying from "mainstream" retailers that you see advertised on TV, hear about on the radio or get emails about, then today's letter is for you.

In this issue (and continued in tomorrow's) I will explain exactly how to buy precious metals, how to store them, as well as when, how and why to sell.

Volatility is good for investors who have patience and a concrete plan to take advantage of it.

At the risk of pointing out the obvious, volatility simply refers to a security's standard deviation of returns - in other words how much variation there is from the average. It's also helpful to consider a securities' volatility relative to the market, and we have a handy metric for this called "beta."

On Yahoo! Finance, for instance, you can find a company's beta by clicking on the "key statistics" tab along the left side of the screen. I've cut and paste some screen-grabs from ExxonMobil (NYSE: XOM) to show you how to find beta.

I'm using Exxon as an example - but you can find almost any company's beta using the same process. (Some companies on foreign exchanges as well as ETFs won't have a beta listed - depending on the stock portal you're using.)

I don't envy Ben Bernanke. It seems like no matter what decision he makes, he will face enormous scrutiny from powerful and powerfully opinionated interests.

For instance, if he continues down the road of printing more money, (aka "Quantitative Easing") he'll hear about it from fiscal conservatives, libertarians, and a whole group of people who are just plain angry about the idea of printing more dollars, even though they might not know exactly why they're angry.

If you work hard to save your money, invest it wisely and make responsible fiscal decisions like me, I think you should be angry. Inflationary policy necessarily hurts those of us who save our money instead of spend it. It rewards people who spend recklessly - it even rewards people who go way over their heads in debt to support their profligate lifestyles.

It's likely just a coincidence… but it appears that some folks in Japan might have had some inside knowledge about the central bank's decision last night to lower rates.

If you're at all familiar with my investment thesis - you know that I believe artificially low interest rates and other inflationary measures from central banks will have a bullish effect on commodities of all stripes, especially and including precious metals.

It's a simple thesis: precious metals famously offer no yield, but when central banks lower the cost of borrowing money to artificial levels, and inflate the currency, precious metals hold their ground. It's only when central bank debt securities offer better than the going rate of inflation (or the perceived threat of inflation) that gold and silver lose their luster with the investing public at large.

Yesterday I urged you to sell Treasuries. And my timing couldn't have been better. Just hours after I made my announcement, a Bloomberg story shed more light on the Treasury market.

"Treasuries gained as the government's $35 billion sale of five-year notes drew the lowest yield since the government began quarterly offerings of the securities in 1976."

I've bolded the above statement because what it means is that five year Treasury note prices are at historic, all time highs. For those readers unfamiliar with Treasuries: when the yield is low, the price is high.

The U.S. Treasury sells these securities at or very close to par - that is, for 100 cents on the dollar. For the sake of this example, let's assume they're selling at par.

It's not often you get a chance to buy a commodity for the less than the price you'd pay during the Carter Administration. That's how I know the time is right to start nibbling at companies in the sector. The underlying asset is a true bargain - no matter how you dice it. So the companies that can bring this particular commodity to market and remain profitable at today's prices are destined to be huge profit machines in the coming years as the price of all "real stuff" continues to rise.

But if you're reading this letter right now, you probably don't care one lick for this commodity. It's the opposite of sexy commodities like oil or gold. In some PC circles it might even offend. It's certainly not one of those commodity investments that you'll brag to a neighbor about at a cocktail party or over a back-yard cookout.

The thing is, this boring, unloved and slightly un-PC investment has creamed the broad market over the past 23 years.

For some industries - like shipping - oil prices are one of the biggest cost inputs. Other industries, like...oh say, online publishing, are somewhat less dependent on oil.

But every sector of the economy does have an oil cost input.

That's why I'm extremely worried about oil prices, and where we all know they're going.

For a small taste of what's in store, Charles Maxwell, senior energy analyst for Weeden & Co. - a man with 50 years experience in the field - recently predicted that we'll see $150/barrel oil within the next five years, and $300 oil by 2020.

I'm a bit less optimistic - because I think we could easily break the $150 barrier in the next 18 months. It was only 24 months ago that we saw similar prices - so it's not out of the question.

For the past two years, silver has traded at a discount to gold. Typically, gold sells for 55 times the price of silver, but since August of 2008, the ratio has tilted heavily in the favor of gold. The chart below shows this ratio which is calculated by simply dividing the spot price of gold by the spot price of silver.

I've written about this ratio frequently, and I've pointed out that it is "mean-reverting" which is just a fancy way of saying that it eventually returns to the average. It's returned back to the average hundreds of times in the past 120 years - and it's one of the most reliable mean reverting ratios out there. It's the Old Faithful of the investment world.

I remain super bullish on gold - I just bought some more last week. Yesterday I talked about how to buy gold and silver, and how to make sure you don't get ripped off.

I also remain totally engrossed with the price movement of several major commodities, the most important being oil. I've talked recently about the all-encompassing importance of oil with regard to every single investment and asset class. If you don't know how oil supply and price affects every single one of your investments, then you might not be in a good position.

Unfortunately, I also have a good amount of cash on hand. I say 'unfortunately' because like many investors, I feel like I've fallen into the trap of being fearfully inactive. I have little faith in the broad stock market, but I do like some companies in the commodity sector. I've talked at length about owning Exxon (NYSE: XOM), Archer Daniels Midland (NYSE: ADM), and a handful of others. I like companies like Exxon and ADM because they will survive a currency crisis. They have pricing power, they have international reach, and they have products that everyone needs.

Do you own the world's biggest oil company? Of course I'm talking about Exxon (NYSE: XOM) - and odds are if you've invested in a mutual fund or broad index, you do own Exxon.

But what if you could go back in time and buy Exxon in 1996, at under $20 a share?

Nearly 15 years ago, Exxon had yet to merge with Mobil, the largest industrial merger ever.

But they were still a huge company with a long track record of profits.

Buying Exxon Mobil at $20 a share would let you lock in a near-triple at the company's current share price of nearly $60. Okay, so a triple over 15 years isn't going to sail any ships.

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.