Gold topped $1,420 this morning, another new high.
I was on Frank Curzio's S&A Podcast this morning. He asked me if I recently recommended gold "as a momentum play or for fundamental reasons."
I told him it was strictly fundamentals. We're simply printing too much money. Brazil's finance minister, Guido Mantega, recently said, "Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter."
When the Brazilians tell you you're printing too much money... YOU'RE PRINTING TOO MUCH MONEY!
The race is on to develop North America's substantial natural gas reserves. First, ExxonMobil paid $31 billion to buy XTO Energy, making ExxonMobil the largest natural gas producer in the country. Then, Royal Dutch Shell bought $4.7 billion of assets from East Resources (including more than a million acres in the Marcellus shale).
And now, Chevron will pay $43.34 a share for Atlas Energy, which has a huge position in the Marcellus shale in Pennsylvania. Chevron cited "high-quality resource, competitive cost structure in the Marcellus, strong growth potential of the asset base and its proximity to premier natural gas markets," according to the Financial Times.
Chevron is paying about $3.2 billion (plus $1.2 billion in debt) for about 9 trillion cubic feet of natural gas and 486,000 acres of the Marcellus shale. Atlas assets also include 49% of a Marcellus pipeline joint venture called Laurel Mountain Midstream, as well as 623,000 acres of the Utica shale gas formation in upstate New York.
The deal makes Chevron the 60% partner of India's Reliance Industries. Reliance did a $1.7 billion joint venture with Atlas to help develop the Marcellus shale.
I like gold because it's the only real money. I like coal and iron ore because they have relatively simple geology. And I like natural gas because it's the only fossil fuel in abundant supply that has political tailwinds behind it.
But among those commodities, natural gas is the only one today that makes me feel like a contrarian – paying cheap prices and receiving excellent value in return. Of the four stocks that account for about one-third of my net worth, two are direct plays on the development of domestic natural gas supplies.
We subscribe to the view that, in natural resource investing, you're either a contrarian or a victim. Given that, natural gas is about the only commodity I'm really bullish on. The easy money has already been made on all the others...
But with natural gas, the easy money is still sitting on the table. For a while, the conventional wisdom has been down on natural gas. There's too much supply, people said. As a result, prices have fallen to historic lows.
But supply is a funny thing. Everyone thought the world was awash in oil in the early 1970s. Then, the Saudis disabused us of that idea through their history-making embargo.
That's why ExxonMobil, Chevron, Reliance, Shell, and others are buying now. It's gotten too cheap. You never know what's going to happen... But history has taught us to expect something will make natural gas prices go higher. You just don't get to know exactly when or what it'll be.
I just recommended two oil and gas producers in the current issue of Extreme Value. One is primarily an oil sands company, and the other is primarily a natural gas producer. Both have more undeveloped reserves off their balance sheets than developed reserves on. The companies say they'll double their production within five years. Most natural gas companies would have to go shopping for more land to fulfill that promise. But these two companies don't need any more land. Each has several years of production locked under the ground in massive North American land positions.
One company has about 12 years worth of production in natural gas reserves on the balance sheet... and about three times that much in undeveloped land off the balance sheet. It's got a drilling inventory of 35,000 separate locations. If gas prices move, these guys will make a ton of money and do it faster than a lot of other competitors who will be scrambling to overcome higher costs.
The other company is minting money, using relatively inexpensive natural gas to produce oil from bitumen (oil sands). It reported a 25% production increase last quarter.
Given that the Fed is printing money to beat the band and most businesses aren't growing the way they were before everything fell apart in 2008... If you want to know how to make big capital gains and steady dividends in natural gas, you should click here to access Extreme Value.
The commodities bull is raging all around us now, and we've long made the case that it's not smart to bet against a "trigger-happy" Federal Reserve. When the Fed says it wants inflation, it's like a drug addict planning his next fix – what comes next is a foregone conclusion.
Hedge-fund billionaire David Tepper recently expressed a popular view about the Fed's money-printing activities when he said, "What, I'm going to say, 'No, Fed, I disagree with you, I don't want to be long equities'?"
Tepper assumes newly printed money will go into stocks... and he's probably right. But is inflation good for business? I don't think so. Never has been. Never will be. And if it's not good for business, how good can it possibly be for stocks?
The question reminds me of a day I spent with Porter and Steve many years ago...
It was August 1998, and we were all working in the Baltimore office building Stansberry & Associates now occupies. The Asian crisis had started the year before, and the Russian crisis was underway.
We were standing at the corner of St. Paul and Preston streets, waiting to cross so we could eat lunch at our usual spot, a little sandwich shop run by a friendly, industrious Russian immigrant named Gary. Steve mentioned he'd been watching interest rates plummet as investors fled risk, selling stocks and buying dollars. It was a great buying opportunity for stocks, he said... and he was right.
The S&P 500 bottomed out that week below 1,000, and eventually topped 1,500 in early 2000, a little more than 18 months later. It was a wonderful buy-the-dip moment in the greatest bull market of all time. The bull raged on...
But in less than two years, it was dead. The biggest bull market of all time was destroyed in a three-year bear rout. A crisis helped push interest rates to new lows, and the blow-off top of an already overpriced market wasn't far away.
So maybe Tepper is right. Stocks could easily rally even higher as the Fed prints $600 billion of new money, reinvests funds from maturing mortgage-backed securities (MBS) into more MBSs, and keeps interest rates near zero.
My guess is stocks won't be as popular once the bond market starts to roll over in the next year or two. Bonds offer a terrible, low-return, high-risk proposition today. But the thundering herd loves them. Tens of billions of dollars have flowed into them. Think about that. Newly printed money, pouring into fixed-income instruments. It can only end one way, the same way all market frenzies end – with big losses for almost everybody involved.
The Fed has already created $1.7 trillion so far. And it just committed another $900 billion (including $300 billion from maturing mortgage securities). That's $2.6 trillion. The total value of every publicly traded equity in the world is around $50 trillion.
Going long up to now has been the easy trade, though many analysts (including some of ours) believed we'd see falling prices. And while everyone is a genius in a rally, I wanted to highlight what I consider some of our better calls this year...
The first is from the October issue of Stansberry's Investment Advisory, titled "The Power Grid Will Fail Within 36 Months." Porter and Braden argue quantitative easing 2 (QE2) and Chinese demand will cause coal prices to skyrocket.
The first round of quantitative easing (from March 2009 to March 2010) triggered a 300% increase in the price of coal. While I don't expect prices to move quite so far, quite so fast the second time, I'm fairly certain coal prices will move higher on the back of the Fed's money printing. How much? I'd say at least 50% over the next year.
But that's not the real problem... China is.
Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy... What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China and demand for electricity is growing roughly 9% a year. It's hard to comprehend how fast demand for coal is growing in China, but consider these facts...
China is now the world's second-largest consumer of electricity, after the United States. A decade ago, China's installed generation base was only 315 gigawatts. Today, it's 900 gigawatts – and 78% of its production is still coal-based.
Today, China consumes three times more coal than the U.S. – more than three billion tons. But China only has about half of the U.S.'s coal reserves. And that means, China must import a lot of coal. At current growth rates, China would exhaust its current reserves in only 16 years. Obviously that's not going to happen – more mines will be dug, etc. But just as obviously, it will take a long time to build the mines and lay the railroad infrastructure required. In the meantime, China will need a lot of coal.
We've already seen how QE2 goosed commodity prices. Just look at the CRB commodity price index – the most widely followed measure of commodity prices on Wall Street.
And what about China? Today, the International Energy Agency, the world's energy policy advisor, released a report saying China's fossil fuel demand will drive prices higher for the next 25 years. China overtook the U.S. last year as the world's largest consumer of energy, but per-capita consumption is still only a third of the average of developed economies. China's energy demand will account for almost half the net growth in oil demand and over one-fifth of the increase in natural gas demand. But the most important fact...
Faith Birol, the IEA's chief economist, said over the next 25 years, China "will build coal-fired power plants with a combined generating capacity of 600 gigawatts." That's equivalent to all the coal-fired power plants currently in the U.S., Japan, and Europe.
Porter and Braden's subscribers are up more than 15% on their coal recommendation, but the upside is still huge. To learn more about Stansberry's Investment Advisory and access their coal pick, click here...
Steve Sjuggerud also made a great call on tech stocks in the October True Wealth.
I don't get it... At the peak back in 2000, everyone was clamoring to buy tech stocks. And they wanted nothing to do with bonds.
Fast-forward 10 years... The Nasdaq is down over 50% from its highs... And bonds have performed outstandingly.
Tech stocks are now cheap, and bonds offer you very little return. But guess what everyone is clamoring to buy? Bond funds. I can't believe it. It's actually time to buy big, safe tech stocks.
In short, Big Tech is the cheapest it's been in my career. And these companies are not going out of business in a couple years... The situation is quite the opposite. They have net cash in the bank of $16 billion, $31 billion, and $25 billion, respectively. They couldn't be healthier. It's time to buy... It wouldn't be crazy for this group of stocks to go up by as much as 100% over the next 18 months ...our gains could be roughly 200% in that time.
The technology-heavy Nasdaq Composite Index just had its biggest two-month rally since the end of April 2009 – up 18.6%. That compares to 12.8% for the S&P 500. The Nasdaq is only 2.2% from its pre-Lehman highs.
Steve's recommendation is up 28%, to a new 52-week high. To learn more about True Wealth and access his October report, click here.
New highs: Denison Mines (DNN), Esperanza Resources (EPZ.V), Fronteer Gold (FRG), Market Vectors Gold (GDX), Inter-Citic Mineral (ICI.TO), Keyera Facilities Income Trust (KEY-UN.TO), MAG Silver (MVG), ProShares Ultra Technology (ROM), Silver Wheaton (SLW), Silver Standard Resources (SSRI), Silvercorp (SVM), Claymore China Real Estate (TAO), Virginia Mines (VGQ.TO), Arch Coal (ACI), Puda Coal (PUDA), Penn Virginia Resource Partners (PVR), Barrick Gold (ABX), iShares Silver Trust (SLV), ConocoPhillips (COP), McDonald's (MCD).
In the mailbag... readers have more to say about Guns and Gold. Send your comments to feedback@stansberryresearch.com.
"I would be tempted to join one of your 'elite' groups/activities if you all weren't a bunch of freakin' gun lovers who apparently just can't wait to have an excuse to shoot something or someone. Going to Argentina to spend a week with a bird-shooting expert? How nice. You obviously don't give a damn about this planet, animals, or the need to encourage civility among people rather than encouraging them to take up arms. Admit it – you'd love to see the return of the Wild West culture, where everyone carries a gun. Maybe we can start having old-fashioned shoot-outs in the streets too." – Paid-up subscriber "Peace Lover"
Porter comment: We do think the world would be a much better place – and much more polite – if everyone carried a gun. But we have no desire to shoot anyone...
"Well, since I'm not identified, I don't have a lot of gold, but some. Guns? I have approximately 45 at this time. Ammo? Approximately 80,000 rounds with more on backorder. Feel sure I can trade ammo for gold if the need arises. But I can't throw gold at the enemy and do much damage. Throw a few hundred rounds from an AR-15, the fun begins." – Paid-up subscriber Fred
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
November 9, 2010