The Daily Commodities » DailyWealth.com

More Good News From the Commodity Complex

DailyWealth.com — Wed, 16 Mar 2011 21:07:39 +0000

Yesterday, we showed why it’s not all bad news for DailyWealth readers: We’re “forever” owners of gold for insurance against times like these. And as gold’s long-term chart shows, the incredible uptrend is still intact.

Today, we feature more “not bad” news: The “contrarian’s commodity,” natural gas, is holding steady in the face of a huge commodity correction. A major fuel for power plants, and the heating and cooling of homes, natural gas is so hated and beaten-down that gas bears can’t knock the price down much past $4 per thousand cubic feet (mcf). Here’s why…

We know from an industry contact that domestic gas production costs are running around $3.50-$4 per mcf. Companies can’t make money producing gas when prices are that low. The taps shut down.

This fundamental aspect of the gas market shows up in a bit of “common sense technical analysis.” You’ll note from the three-year chart below that natural gas simply refuses to fall below the $3.50-$3.75 level… even in the face of this week’s awesome selling pressure in the commodity complex.

Source: http://www.dailywealth.com/1666/On-the-Ground-in-Japan

It’s Still Boom Times for Iowa

DailyWealth.com — Thu, 03 Feb 2011 20:33:38 +0000

Our chart today shows they’re still partying in Iowa… and that you should get ready to pay more for food…

As Michael Pollan details in his excellent book Omnivore’s Dilemma, most Americans eat a heck of a lot more corn than they realize. The cows, chickens, and pigs you eat are fattened with corn. Corn syrup makes your soda taste good. It’s also in all kinds of cereals, condiments, and packaged foods. The stuff is the foundation of the U.S. food system. And thanks to the Great and Stupid ethanol boondoggle, we now burn 40% our annual production as motor fuel.

All this is why corn is a permanent member of our daily “watch list.” For much of the past 20 years, a bushel of corn has traded in the $2-$3 area. But due to recent weather trouble, historically low stockpiles, and the emergence of Asia as a big buyer of corn, prices are skyrocketing. The vital commodity is up 77% since the summer… and just struck a new 52-week high.

Just like robust oil prices mean good times in Texas, robust corn prices mean good times in Iowa, the nation’s largest corn producing state… and boom times in fertilizer companies like Mosaic.

Big Action in the Contrarian’s Commodity

DailyWealth.com — Sun, 23 Jan 2011 01:05:22 +0000

Investing in the “contrarian’s commodity” is getting a little better these days…

For the past 18 months, we’ve recommended taking a position in crude oil’s clean cousin, natural gas. Natural gas is used to make fertilizers and plastics, to heat and cool homes, and to fire electrical power plants. New drilling technologies have brought on huge new supplies of the stuff… which produced a 66% decline in price from 2008 to 2009. This fall has made natural gas one of the few hated assets left in the world.

Over the past few years, “natty” has formed a hard price floor in the $3.50 to $4.00 area. This is the price level where producers start cutting production. (It’s also a price where our preferred natural gas vehicles can pay distributions of 5%-7%.)

As our chart of the week displays, natural gas is getting a little less hated these days. After sinking below $4 in October, the fuel has rallied hard… and just broke out to a five-month high.

Source: DailyWealth

Get Ready to Pay More for Food

DailyWealth.com — Sun, 16 Jan 2011 03:01:47 +0000

The message from our chart of the week: “Get ready to pay more for food.”

As Michael Pollan reminds us in his excellent book, The Omnivore’s Dilemma, the foundation of the U.S. food system is a vast annual crop of calorie-dense, nutrient-lite corn. The cows, chickens, and pigs you eat are fattened with corn. Corn syrup makes your soda taste good. It’s also in all kinds of cereals, condiments, and packaged foods.

And due to one of the truly stupid government boondoggles of all time, we now burn 40% of the corn crop as motor fuel. (We stand in awe of the screw job the farm lobby pulled on the taxpayer. These guys could give Wall Street banks a run for the taxpayers’ money.)

That’s why it’s important to note where corn prices are today. You see, for much of the past 20 years, corn has traded in the $2-$3 per bushel area. But due to recent weather trouble, historically low stockpiles, and the emergence of Asia as a big buyer of corn, prices are skyrocketing. Since June 2010, corn has shot from $3.50 to $6.42… an 83% gain in seven months. This huge move means it’s party time in Iowa… and food prices are going higher.

Source: http://www.dailywealth.com/1604/Two-of-2011-s-Surest-Bets

The Safest Way to Make Over 1,000% in Silver

DailyWealth.com — Sun, 02 Jan 2011 20:59:07 +0000

By Dr. Steve Sjuggerud
Saturday, January 1, 2011

“Silver is now more attractive than it has been in decades,” my colleague Porter Stansberry wrote to his subscribers.

“Assuming gold hits my target of $2,000 an ounce and assuming the price of gold is 16 times the price of silver,” Porter continued, “then silver should be worth about $125 by the time the bull market in silver reaches its peak.“

If Porter is even half right, then a recently launched silver investment could be the safest way to make over 1,000% in silver.

You see, before this year, we didn’t have a simple way to buy a basket of silver companies. But now we do…

The Global X Silver Miners Fund (SIL).

This exchange traded fund owns a basket of the world’s purest plays on silver mining – 30 stocks in all, with decent geographic diversification. (Silver companies from Canada and Mexico each make up a larger percentage of the fund than U.S. silver companies.)

If you think gold mining companies are speculative – you ain’t seen nuthin’. Silver mining companies are extremely volatile. To see what I mean, take a look at the performance of the underlying index of the Global X Silver Miners Fund, versus the price of silver.

In 2008, when the price of silver fell in half, shares of silver mining companies lost 80% of their value.

Since bottoming in 2008, silver mining companies are up FOURFOLD, as you can see in the chart. Silver is up about 250%.

Shares of silver companies are significantly more volatile than the price of silver. If Porter is right about the price of silver rising 500%, silver mining companies could easily soar over 1,000%.

Right now, you have four basic ways to profit if the price of silver goes up…

You can buy bags of silver coins from a dealer… but to build a serious position, you’d end up with a garage full of silver.

You can buy shares of the iShares Silver Trust (SLV), which tracks the price of silver. (For leverage to the silver price, you could buy double-long and double-short silver funds from ProShares.)

You can buy shares of a handful of silver companies.

For maximum upside, with more diversification than owning just a couple silver stocks, you can buy the Global X Silver Miners Fund, which holds shares of 25 silver companies. It’s a volatile basket. But if silver rises like Porter thinks, you could make 1,000%-plus here.

As Porter told his readers, “However you decide to own it, make sure you buy some silver now.”

Good investing,

Steve

How to Get In Early On America’s Next Great Commodity Boom

DailyWealth.com — Sun, 14 Nov 2010 07:48:26 +0000

By Chris Mayer, editor, Capital & Crisis
Saturday, November 13, 2010

If you’re interested in safely making money in commodities over the coming decade, I have two important numbers for you…

The first is the price of natural gas in the U.S. – which is less than $4 per million British thermal units (mBtu).

The second is the price of natural gas in Asia, where people will pay $10 per mBtu for natural gas they import from overseas.

This is a disparity someone can make a lot of money on. The only reason it exists at all is because the natural gas market is still mainly a local market. It is not as easy to ship natural gas into a country as it is to ship oil. You have to supercool it so it liquefies. Then you can put it on a tanker and ship it to a terminal where your buyer can regasify it. This is the LNG trade.

There are problems. U.S. energy companies, before the shale gas boom changed everything, thought the U.S. would need to import natural gas. So the U.S. has about 10 LNG import terminals and two more in the works. Now, with a natural gas glut in the U.S., these terminals are pretty much useless.

Owners of these terminals want to refit the terminals to turn them into export terminals, where the gas is liquefied and shipped out. They are now petitioning the U.S. government for export licenses.

As the Financial Times reported, “The U.S. could soon be competing with Russia and the Middle East to supply the world with natural gas, a shift in production that would reshape energy markets over the next decade.” Even if the U.S. exported just 10% of its natural gas, it would become the largest exporter of LNG in the world. Few countries can match the U.S. in natural gas resources or low costs.

So where will the natural gas go? This is an interesting question, because it yields some surprising answers.

I attended the ASPO conference last month in Washington, D.C. (ASPO stands for the Association for the Study of Peak Oil and Gas.) One of the more fascinating presentations was by Jonathan Callahan, founder of Mazama Science.

He looked at natural gas through the lens of the import/export markets. This is a good thing to do for any commodity because it can tip you off to what’s happening in that market. When China went from being one of the biggest exporters of soybeans to the biggest importer, the effect on agricultural markets was huge.

Anytime a big exporter becomes a big importer, you can bet it spells opportunity for that commodity. China, for instance, remains a big importer of oil and iron ore, which has been good for investors in those commodities. China will very soon become a big importer of coking coal – which is used to make steel. So will India and Brazil. This is good to know if you’re an investor, as it will drive demand for coking coal.

So Callahan looked at natural gas through the same kind of lens. He created these charts that capture the trends. For the U.K., it looks like this:

You can see the U.K. was an importer of natural gas through the 1980s and 1990s. Then there was the North Sea boost, matched by a step up in consumption. Finally, as the North Sea supplies dwindle, the U.K. has gone deep in the red as an importer. This chart exhibits a pattern we see time and time again. Consumption is sticky and stubborn. It doesn’t go down much.

Using this same analysis, Callahan looks at all the big producers and consumers of natural gas. The big buyers here are Japan, South Korea, and Taiwan. All of the gas they import comes from LNG tankers.

But what about, say, China? Here is another one of Callahan’s charts. Note it is just starting to turn negative – which means China is just becoming a net buyer of natural gas. Per-capita consumption, Callahan points out, is only a fraction of China’s neighbors’. He predicts – and I agree – it will soon be a huge importer of natural gas.

Combine China with Japan, Taiwan, and South Korea and Callahan concludes, “Clearly, East Asian demand for LNG will not be letting up anytime soon.”

Callahan’s data suggest this trend is present all around the world… from the Middle East to South America to Europe.

The impact on the global market seems clear. “If shale gas doesn’t turn out to be as prolific as hoped,” Callahan wraps up, “we can expect to see increasingly expensive natural gas in the next decade. Forewarned is forearmed.” (I encourage you to check out his website – mazamascience.com, where you can see his presentations and read his blog.)

So put together Callahan’s data on exports and imports with the glut in the U.S. and the lack of export terminals. I think it’s pretty clear we’ll see more export terminals in the U.S. It’s too big of an opportunity to ignore. The U.S. could become the leading exporter of natural gas in the next decade.

It’s also pretty clear that worldwide, we’ll see the LNG trade grow significantly to make up the shortfalls that are emerging in South America, Asia, Europe, and the Middle East.

It’s a great time to buy infrastructure firms that build these plants. It’s also a great time to look at companies with lots of North American natural gas reserves. With natural gas in the dumps right now, these assets are cheap… but they won’t stay that way for long.

Regards,

Chris Mayer

Editor’s note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris’ research, you can always count on contrarian investment ideas you won’t read about anywhere else. Click here to learn more about Capital & Crisis.

This Guru-Approved Asset is Soaring

DailyWealth.com — Fri, 12 Nov 2010 03:04:32 +0000

The “food rally” we’ve been highlighting for the past year is in full bloom. Just ask the “DBA.”

DBA is the symbol of the popular investment fund that allows investors a “one-click” way to take a position in vital agricultural commodities, like corn, soybeans, wheat, sugar, cattle, hogs, and coffee. We keep an eye on this fund because “ag” is a favorite idea of super investors, like Marc Faber and Jim Rogers.

The bull case here is the same as most commodity sectors. Growing demand from Asian markets like China and India will keep a long-term tailwind at the sector’s back.

As you can see from today’s chart, this potential tailwind is howling right now. After spending much of the past year in the dumps, the DBA has climbed 28% since July… and just reached a fresh 12-month high. The trend is up for this “guru-approved” basket of commodities.

A Big Trend Change in Commodity Sector

DailyWealth.com — Tue, 09 Nov 2010 19:06:32 +0000

The new uranium breakout we highlighted back in July is turning into a big rally…

Driven by a demand surge from Asia, uranium – the fuel for nuclear power plants – enjoyed a huge rise from 2003 to 2007. A bursting speculative bubble and the credit crisis eventually hammered the commodity and its producers…

But as we noted back in July, shares of Uranium Participation Corp (which acts as a proxy for the price of uranium) started getting “less bad” and staged a breakout from its long downtrend.

As you can see from our updated chart, Uranium Participation Corp isn’t just acting “less bad,” it’s surging to its highest level in over a year. Uranium producers and explorers are jumping 5%… 10%… even 15% daily. The bear market in uranium is over… and the bull run is on.

How to Build Your 1,000% Portfolio Today

DailyWealth.com — Thu, 04 Nov 2010 18:51:58 +0000

By Matt Badiali, editor, S&A Resource Report

Thursday, November 4, 2010

Last month, I showed you it’s possible to make 1,000% as a “hoarder.”

As shareholders of Seabridge Gold learned recently, this strategy – of buying hated, cheap resource assets in anticipation of higher prices – can result in astounding, ten-bagger gains.

We need to know all about “hoarding” right now because a similar situation may be setting up in the natural gas business. Natural gas prices – and natural gas stock prices – are in the basement right now. New drilling technologies have brought on a ton of new supply… but emerging demand for power generation and transportation could double gas prices in the coming years.

That’s why it’s time to start learning how to hoard “PUDs.”

PUD stands for “Proven Undeveloped Reserves.” These are undeveloped gas wells with zero exploration risk. Firms aren’t extracting the gas, because prices are so low. Typically, PUDs are located in the middle of proven fields just waiting to be drilled.

Right now, the stock market is offering incredibly cheap PUDs.

The price of natural gas is so low, investors aren’t willing to pay much at all for future production of PUDs. Companies only receive stock market value for their current productions and cash flows… So promising properties are selling for peanuts. There’s zero investor interest in the stuff. Everybody thinks natural gas is dead.

We have a “Steve Sjuggerud” situation developing here. These assets are hated… they’re cheap… But we don’t yet have an uptrend in natural gas and natural gas stocks. It’s early in this game – but not too early to start doing our homework. So let’s check out some ideas on locating cheap PUDs…

Below is a table of natural gas producers that trade on the stock market. I figured out the price of each company’s PUDs per share, in thousand cubic feet (MCF) equivalent increments. We want to buy massive amounts of PUDs as cheaply as possible.

Company	PUD per Share	Price per MCF
Galleon Energy	8 MCF	$ 0.50
ATP Oil and Gas	14 MCF	$ 1.01
Penn Virginia	11 MCF	$ 1.36
Petroleum Development Corp	22 MCF	$ 1.48
Goodrich Petroleum	7 MCF	$ 1.85
Berry Petroleum	15 MCF	$ 2.36
Sandridge Energy	2 MCF	$ 2.44
Chesapeake Energy	9 MCF	$ 2.39
EQT Corporation	15 MCF	$ 2.44
Energy XXI Bermuda	9 MCF	$ 2.44

This is a broad-brush approach, based on the price of the natural gas in the ground. (We didn’t factor in debts, for example.) It gets us a rough idea of where to find values in gas.

That’s the first step in putting together a portfolio that could return you 1,000% as natural gas prices emerge from this downturn.

I’m convinced natural gas will be a huge bull market in a few years. In a future essay, I’ll dig deeper into some of these companies… I’ll identify the best operators in the best regions of North America. I’ll also show you how electrical and transportation demand could send their shares up hundreds – maybe thousands – of percent in the coming years. Stay tuned…

Good investing,

Matt Badiali

P.S. I just finished putting together a great report about how to earn income from some of these companies. I detailed the keys to picking the right companies… and I named my two favorite PUD owners in the emerging Eagle Ford shale play. If you want to learn more about it, go here.

Further Reading:

For a story of how asset hoarding can lead to outrageous 1,000% gains, don’t miss Matt’s first “PUD” essay here: An Unusual Kind of Commodity Stock That Can Return 1,000%.

DailyWealth Classic: If you’re new to DailyWealth – or you’re looking for a refresher course on Sjug’s investment style – check out the first “cheap, hated, uptrend” essay we ever published here. (The investment Steve mentioned has nearly tripled since then.)

Mining Stock Investors Are About to Get Clobbered

DailyWealth.com — Sun, 31 Oct 2010 21:55:08 +0000

By Matt Badiali, editor, S&A Resource Report
Saturday, October 30, 2010

Source: Daily Wealth

Oh boy… the crowd is about to get killed in resource stocks again.

And this time, the Grim Reaper comes in the form of “rare earth element” stocks…

As my editor Brian Hunt told you last week, “‘Rare earth elements’ is the name of an exotic group of metals, including strange-sounding members like lanthanum and cerium. These little-known metals are crucial components of electric car batteries, wind turbines, and advanced electronics (the kind in your iPod or cell phone).”

Rare earth elements are the hottest thing in the mining world right now. China holds a virtual monopoly on the rare earth industry. And in the past few months, the Chinese have reduced the amount of rare earths they’re willing to ship to other countries.

This has created a frenzy for the handful of rare earth element plays in the stock market.

Take Molycorp (MCP) for instance…

Molycorp controls the Mountain Pass mine. In the 1970s and 1980s, before China got in the game, the U.S. was the world’s largest producer of rare earths. A big part of that production came from Mountain Pass. The mine is shuttered now, but it remains the largest developed rare earth deposit in North America.

Just a few months ago, Molycorp went public at $14 per share… It has ridden a hype wave to a 150% gain and a $3 billion market cap.

Here’s the thing: The demand for rare earth elements isn’t that large. According to the MIT Technology Review, it will be 125,000 tons this year. The entire market is worth less than $1 billion per year. In other words, Molycorp’s market cap is three times the size of the annual market of its proposed product (yes, that market is going to grow, but it will remain relatively small).

There is another huge problem with Molycorp… It isn’t owning up to the amount of work required to meet its promises to shareholders. Right now, the only place you can refine the rocks into pure metal is in China. Molycorp will need to spend over $511 million to build the infrastructure it needs to compete with the existing Chinese industry.

(The company estimates it can be in full production by 2012. In my experience, most mines develop hiccups along the way. Full production is likely to occur sometime in 2013.)

Finally, the potential for loss at this stock price is huge… I calculated the net present value for Molycorp. This is a rough estimate of the fair value for the stock right now. It takes into account assets, debt, and future cash flows. I also figured out the company’s the value by comparables (like valuing your house by looking at the recent deals in your neighborhood).

These two methods produced values between $570 million and $636 million.

Today, Molycorp trades for $2.94 billion. That’s between 4.6 times and 5.1 times larger than its current value.

Remember, this company must spend hundreds of millions of dollars over the next few years. It won’t be cash flow positive for at least three years. It won’t even know if it can get the loans for the construction before next summer. In other words, the downside risk here is enormous… yet the stock is priced for perfection. If bad news comes (and it comes often in mining), shares of Molycorp could fall a long, long way.

If you already own shares, congratulations. You’ve made a heck of a trade. Now, it’s time to tighten up your trailing stops. Don’t hesitate to sell. Aggressive traders can consider shorting the stock (although it might be hard to get shares to borrow).

If you’re on the sidelines watching the hype build and thinking about hopping in here, you’re crazy. It’s much too dangerous… the assets are much too expensive. You’ll find safer and comparably large returns in uranium miners right now.

Good investing,

Matt Badiali

P.S. Another dangerous signal for the rare earth complex is the introduction of a new rare earth stock ETF last week. As we’ve covered in the past, this is an ugly indicator that means a big correction is around the corner… You can read about this indicator here.

Editor’s note:

Steve is out looking at timberland again today – this time in Northwest Florida. So he will follow up yesterday’s essay early next week.

The Daily Commodities » DailyWealth.com

More Good News From the Commodity Complex

It’s Still Boom Times for Iowa

Big Action in the Contrarian’s Commodity

Get Ready to Pay More for Food

The Safest Way to Make Over 1,000% in Silver

How to Get In Early On America’s Next Great Commodity Boom

This Guru-Approved Asset is Soaring

A Big Trend Change in Commodity Sector

How to Build Your 1,000% Portfolio Today

Mining Stock Investors Are About to Get Clobbered

By Matt Badiali, editor, S&A Resource Report Saturday, October 30, 2010

By Matt Badiali, editor, S&A Resource Report
Saturday, October 30, 2010