Some environmentalists hate all hydrocarbons and think we should stop using them.  Others, hate coal, but love gas.  Should you invest in either of them?  We look at the factors favoring each below….

Natural Gas Investing

Natural Gas is a form of energy often found alongside oil, but with different properties.  In the early years of energy exploration, they used to just burn natural gas off because they felt it was worthless in comparison to oil.  While it’s true that It is not as efficient of an energy source, it is also far more plentiful in the US today than oil.

In recent years, new shale drilling technology has enabled formerly un-drillable natural gas, recoverable.  This has increased domestic supply to over 100 years of usage.

Natural Gas is also a favorite of many environmentalists because it burns much cleaner than oil or coal, which are currently our two primary forms of energy.

Because so much natural gas supply has recently come onto the market, the price of natural gas has gotten down into the $4 range.  This makes it one of the few cheap markets available today.  Of course, it has gotten cheap for a reason.  A lot of supply exists out there.  Some analysts think prices will go even lower based on the abundance of supply.  Others believe that because one form of energy is as good as another to large consumers of energy, the price can’t go much lower because coal and other consumers will switch to using natural gas.

Something to consider is that if you can find companies which are making a nice profit even though prices are this low, you might have a stable investment in a proven commodity.

Coal Investing

Coal is still the major source of electricity in the world.  Many people hate it because it is dirty to consume, yet this is one of the world’s primary sources of energy.  In BP’s 2009 annual energy review, it reported that coal’s share of global energy increased in 2009 and that the percentage of global energy demand met by coal was the highest since 1970.  The use of coal is not going away anytime soon.

Coal demand could really begin to outstrip supply in the coming years if governments continue to interfere in this business.  For instance, India uses a large amount of coal for energy.  Because of this politicians have recently enforced low prices to appease the voters.  (Hopefully you realize that this breaks basic laws of economics and will obviously backfire.)  What has happened since then is that coal producers inside of India are having difficulty turning a profit as these low prices.  Many are having to shut their doors because they can’t operate at a loss.  Therefore India will have to import more coal (at higher prices) in order to meet local demand.  Everyone in India loses in this situation, but it is very bullish for coal prices around the world.

China appears to want to venture down this road as well.  In June 2010, they announced price freezes of their own on coal.  Of course, governments can always change their laws, but in the short term the environment for higher coal prices appears set.

Whether these temporary measures stay in place or not, investing in coal or coal producing companies might be a source of stability to your portfolio in a world of volatility.  The people of the world will demand energy shortly after they demand food no matter what is happening in the economy.  And as economic growth happens, more energy is required.

If you have any thoughts or questions on this or other topics, please let us know.  We’ll discuss alternative energy investing next.

Government, Disasters, & Wars

Like any other investment, there are characteristics particular to oil investing.  In the oil industry…

1)      Governments are constantly changing regulation and most of the world’s oil seems to be held in some of the least desirable government controlled locations.

2)      An oil spill, explosion, or other disaster can be very damaging to the environment, people, and by extension shareholder value.  Any company to whom this happens to can be hit very hard.  For example, a company whose main activity is drilling in the Gulf of Mexico can see business obliterated if the US Government bans offshore drilling.

3)      Wars (particularly in the Middle East) can push oil prices significantly higher, but can also be damaging to companies if they operate in large part in that area.

The Canadian Oil Sands

It’s interesting that the places in the world which seem to have the most oil, also seem to have the most instability.  The Middle East is constantly in and out of war.  Many other countries which have oil also seem to have unrest.  Nigeria has it’s rebel groups.  Venezuela has Chavez whose communism is destroying that country.  Many other major oil companies around the world are either partially or wholly government owned.  This leads to terrible management.  Mexico and Venezuela are both examples of this.  The profits are used for government projects instead of investing back into the business and thus the companies and their oil production declines.

Add all this together and combine it with the fact that one of the greatest growth stories in the oil industry is happening in Canada, and you have an explosive opportunity.  The Canadian oil sands is one of the largest deposits of oil on the planet.  The problem with them is that this heavy oil is found in sand and so the cost of drilling/mining is more expensive than traditional West Texas Light Sweet Crude.  It generally costs about $40/barrel to bring to market.  (Exxon Mobile is the lowest cost producer at under $20/barrel.)  This means that when oil prices were at $40/barrel only a couple years ago, it was impossible for these companies to make a profit.  However, at $80/barrel, they can make a very nice profit.  When the price is over $100/barrel, they really sing!  If you believe in the global demand story for oil and particularly if you believe that continued war and government mal-investment across the world will cause higher prices, then these Canadian oil sands could be the ticket to large profits.

The same can be said for the massive development in the Eagle Ford in South Texas where new technologies have made it possible to produce enormous amounts of oil in what was previously a passed over oil field.

Factors such as these should be considered when investing or speculating in oil related investments.  We’ll look at gas and coal next.  If you have any thoughts or questions on this or other topics, please let us know.

Today’s video focuses on the biggest news items of the last 6 weeks which relate to the coming stock market crash, real estate problems and other economic indicators showing that our economy is taking a giant turn for the worse.  Because it was about 6 weeks since my last report, I’m sticking to what I feel like are the biggest news items in both this video.

As you’ll see, there have been some major harbingers of trouble for the US economy (like a stock market crash coming soon).  I hope you enjoy this video and that it helps you prepare…

As you’ll see, there have been some major harbingers of trouble for the US Dollar as well as some incredible signs of new demand for gold.  I hope you enjoy this video…

Here is a link to some videos and stories on oil companies in Israel.  As with any investment, you should ideally only invest if you both understand it and feel like it’s within the stewardship calling the Lord is leading you in.  Obviously, if the Lord spoke unmistakably to you about investing in a certain way, you should follow His voice.

As for us, we are not geologists and so we have no opinion on how economic the oil deposits are that these companies have found (and therefore have no idea whether or not one of these companies will be a good investment), but we did find it all very interesting and thought it would be fun to share with you on a Friday!  Have a blessed weekend!

As we’ve stated previously, the world is consuming more and more oil all the time while new supplies are not able to keep up.  While politicians love to talk about alternative energy, the fact that we rely on oil as our main source of energy cannot possibly change anytime soon.  It is easier to imagine a world where economic activity drops severely and far less energy is used in total, than it is that our entire system of technology will magically shift to another source within a decade.

We feel like there are four main factors to consider in oil investing:

1)      If China, India, Brazil and other countries continue to rapidly grow and see peasants become middle class energy consuming individuals, the competition for limited oil resources will become fiercer and the price will have to rise to find equilibrium.  This is very bullish for the price of oil and oil companies.

2)      On the bearish side, we have the belief that the economy is going to turn decisively downward.  The less economic growth, the lower the price of oil and therefore oil companies.

3)      Finally, we believe war is coming to the Middle East soon (and probably often).  This should give a short term spike to oil prices which could increase the value of oil companies.  (Although it could hurt companies specifically operating in that area.)  This could also increase the value of oil which comes from more stable jurisdictions (such as Canada).

4)      As the realities of the BP Oil disaster (and others like it) set in, politicians change laws which can negatively impact oil companies.  This can be bearish for some although potentially bullish for other companies depending on the laws and the way each company operates.

Based on what we’ve written above, it seems ideal to us to wait and watch the stock market fall and buy oil or oil companies which operate in safe jurisdictions the day before war breaks out in the Middle East.  So if you know the answer to that question, please let us know!

We’re going to layout to mind sets for approaching investing in this area.  Both of these mindsets are based upon the theory that even though the world economy is going to slow in the short to medium term, the middle class population growth and therefore growth of oil consumption around the world will be a stronger trend.  Thus the increasing demand of new consumers will outweigh the shrinking demand of a slowing economy.  If you believe differently than this, then this premise doesn’t apply to you.  For instance, if you believe that the world economy will turn so bad that there will not be new middle class consumers in the emerging markets of the world, then perhaps oil prices will stay low for a considerably long time.  Or if you believe that the economy will start improving soon, then perhaps there will be no crash, and today’s price is the best you will see.

Finally, if you believe that the US Dollar will drastically lose value then investing in oil or a company that sells lost of oil could be a very smart thing to do because oil is a globally consumed product and if the US Dollar drops, the price of oil will shoot upwards in Dollars.  In this case, owning oil or oil companies could be a very important protective allocation for you.

With those assumptions made…

If you believe that war in the Middle East is a bigger factor than a declining economy, than you might want to invest in oil &/or oil related companies now.

If you think the market decline is the significant factor to consider, than you might want to wait to invest until you can receive a better price.

In the next post in this series, we’ll look into how government actions, disasters, and wars effect oil and oil companies as well as the interesting opportunity in Canada.  If you have any thoughts or questions on this or other topics, please let us know.

The first advantage is that some believe that we have entered a longer term phase where commodities are more and more scarce.  The thinking here is that as more people around the world become consumers, more and more commodities will be necessary.  Thus prices would increase.

Second, if you are concerned with the value of the US Dollar dropping in the future, then having exposure to commodities can be a great protection against the value of your investment dropping.

For example, let’s say you own shares of Exxon Mobil.  This is a US based company, so you might be concerned that the value of your investment would fall due to it trading in US Dollars (and we would agree that it probably would).  However, their main product is oil which is bought and sold worldwide.  While they might have to readjust their distribution strategy if this were to happen, they produce oil which is highly valued around the world.  Thus if the price of oil became $1000/barrel because of Dollar depreciation, and thus no one in the US could afford this price, people in other countries would continue to buy it.  In their currencies, this price would not be extreme.  This is how a worldwide commodity gives you protection against hyperinflation.

Natural gas might be an exception to this rule because it is still primarily a local product.  It is difficult to transport across oceans.  Liquefied Natural Gas technology (LNG) has made it possible, but this is not the way the majority of gas is consumed.  It will be interesting to see who gas prices are affected if indeed we see serious US Dollar depreciation.

Energy seems to be an area that will be of extreme importance in the coming years.  You should carefully consider whether or not to invest here.  In the next post in this series, we’ll look at the main factors you need to consider before investing in oil or any energy commodity.  If you have any thoughts or questions on this or other topics, please let us know.

Sources of Energy

lives.  We’ve been discussing asset management in a crazy economy.  Today, we’ll being to look at oil, gas, clean energy, and other forms which you can invest in.

Energy is a basic key to life in the modern world and the overall economy in general.  Consider the fact that the world population is growing at a staggering rate and that the countries with the largest populations have just begun to leave the agrarian lifestyle they have lived for thousands of years and have become energy consumers.  Now add to this the understanding that the world is not producing or finding new sources of energy at anywhere near the rate of usage growth.  Together, this is a very combustible situation.

Many people believe in “Peak Oil”.  This idea is that the world has run (or is running out) of new oil sources and therefore, not only is demand going up, but that supply is going down.  There is certainly something to this theory.  However, others say that new technology allows us to find new sources of oil or exploit previously unrecoverable oil all the time.  Either way, there is no question that the supply is not growing at nearly the rate that the demand is.

On the flip side, energy prices do tend to go down as the economy turns down.  The thinking is that if there is less economic activity, people will consume less energy and thus the price of energy (and its associated companies) tends to fall if the overall stock market is falling.

A catalyst on the upside is war in the Middle East.  Since a large portion of the world’s oil is in the Middle East and because war tends to break out often in that region, it is always a good idea to keep your finger on this pulse.  If war breaks out in the Middle East, the price of oil usually surges.  If war breaks out in Iran, it could surge even more than usual because the Strait of Hormuz is a 21 mile wide body of water between Iran and Saudi Arabia that sees a large portion of the world oil passing through.  Iran would surely work to cut this passage in any war dramatically sending world oil prices higher and putting a significant blow to the world economy.

Some people have a serious dislike for hydrocarbons (oil, gas, coal, etc.).  If you feel that the use of these is evil, then you shouldn’t invest in them and will have to limit your search to clean energy forms.  If on the other hand, you see that these materials will be used to bring a higher standard of living to millions and billions of people and you want to be a part of that, then you should consider investing in them.  As with any other investment decision, you need to follow the Lord in the ways He’s leading you to steward what He’s given you.

Tomorrow, we’ll look at the advantages presented by the fact that energy sources (whether gas, oil, or even certain characteristics of clean energy sources) are commodities.  If you have any thoughts or questions on this or other topics, please let us know.

Leverage Gold ETF

Gold and Silver investing can be turbocharged for greater profit (or loss).  We’ve been discussing asset management in a crazy economy.  Today we’ll look at the use of leverage in gold and silver investing.

A leveraged gold or silver ETF is designed to achieve a multiple on the price of the underlying asset.  We’re only going to list a leveraged gold ETF here because the leveraged silver ETF’s we’ve seen underperform so badly due to the volatility that we don’t even want to mention them.

Leveraged gold & silver funds are designed to achieve twice (or more) the movement in the price of gold.  Like all leveraged funds, you run the risk of the volatility squeezing out the gains the longer you hold the fund.  So it’s important that you carefully monitor the performance of your fund and only hold during periods where you expect the price of gold to really appreciate.

For instance, if August/September and you know that the price of gold is really strong from September through January, perhaps you would hold this fund during this period and then sell at the end.  Or if you feel like gold is running and will be up much more often than down, this is a fund to hold during that time period.

But remember, the fund will achieve twice the losses of gold too, so this is much more volatile than the price of gold and can lose value quickly as gold falls.  Be ready to sell and have disciplined stop losses when gold takes its customary declines.

Last Few Words on Gold & Silver Investing

Gold and Silver are going to be very important investments in the coming years.  For some it might make sense to stick to the physical metals because they have less risk and should provide stability and appreciation.  For others who have the assets to assume more risk, we’ve detailed many ways for you to take advantage of an environment where the price of gold and silver quickly appreciates.  (Remember this could be because the perceived value of the metals increases, or because the value of the US Dollar drops….or both!)  Reuters reported on May 28, 2010 that of the 30 largest hedge funds, 12 have substantial gold & gold mining stock holdings.  This should give you an idea what many of the largest money managers in the world feel about this asset class.

We mentioned the gold/silver ratio when we talked about Gold & Silver, but we’ll do so here again.  As this is written, the ratio of gold to silver is very high historically.  The traditional ratio is 15 or 16 to 1 which means that if gold is at $1,200/oz then silver would around $75 to $80/oz.  In the most recent century, the ratio was more like 40 to 1.  Today’s ratio above 60 to 1 is extremely high.  In past financial scares people have rushed into silver to drive the ratio back towards the traditional one.  If this happens again, silver would appreciate more dramatically than gold.   Of course, with this potential upside comes more volatility.

Next, we’ll look at energy investing.  If you have any thoughts or questions on this or other topics, please let us know.

Examples of this risk could be a resource not proving to be what it was expected to be.  Or a particular jurisdiction where the company has massive investment turning against mining.  Along with all the other risks that are always present when investing with any one company.

If you’ve decided to invest in miners, there are more choices to make.  Should you invest in:

1) Major (Senior) Producers

2) Junior Producers

3) Explorers

A Major producer is going to be the most stable.  They have assets all over the world and large annual production.  The risks of one event decimating the value of the company are very small.  At the same time, the reward of a major new discovery is not as accretive to the value for shareholders.

The opposite is true of a Junior (or smaller) producer.  It has more risk associated with its fewer ventures, but can do really well with a major discovery.  These also have the potential of being bought out at a hefty premium by the Majors.

Different people categorize miners in different ways, so if you see talk of a Mid-Major or something similar, this would be a company somewhere in between.

An Exploration focused company is on the extreme end of risk and reward.  They typically have no production.  They are simply searching for gold at the end of a rainbow.  Most of these companies are money pits which do nothing but take money from starry eyed “investors”.  The few companies of this type that do strike the big find see their share prices grow at unbelievable multiples.

If you would prefer to reduce the headaches and risks of managing a portfolio of individual stocks, you might want to invest through either an ETF or a Mutual Fund.  An ETF will be a diversified low cost way to invest in many miners.  A Mutual Fund will have higher costs, but will give you the management expertise of that manager &/or team.

Gold & Silver Streamers

A streamer is a royalty company.  It is like an investment bank to the mining industry.  The companies provide funding to junior miners who have found a gold or silver resource, but who don’t have the capital to fund the drilling.

The streamer steps in and provides this funding in return for a future stream of gold or silver at a set price.  For instance, a gold streamer might provide money up front in order to buy a set amount of gold each year at a cost of $300/ounce.  The beauty of this model is that if the price of oil or other inputs increases down the road, this will not have any impact on the streamer because its price of acquisition for each ounce is set.  Because it owns a future stream of low cost gold or silver, it has nice low risk leverage to the price of gold or silver as it appreciates.

Next, we’ll look at ways to use leverage to increase your returns on gold and silver investing (that are in some ways less risky than what we’ve been talking about) as well as wrap up this series on gold and silver with some last thoughts.

If you have any thoughts or questions on this or other topics, please let us know.