Gold and Oil

[haha]

I don't like the odds that presently are being offered by Mr. Market. I think two ideas that will outperform going forward, for quite a while, are gold and oil. Oil has the advantage of being a finite and probably very scarce resource. It has the disadvantage of being very economically sensitive, and thus susceptible to scary shakeouts. I like any reasonably priced producer with plenty of reserves in place. Lots of oil investment is " on the come". Stay away from that today, because the come may not be there.

Well placed oil service firms should also do very well, and they will not be subject to confiscatory taxation should all hell break loose.

Gold is interesting. An investment pariah. Dead money. Yet since 1999 gold has outperformed most of it's competition.

Lawrence Summers, former Secretary of the Treasury, and the youngest president of Harvard University, wrote a paper modeling the price behavior of gold and gold equities. Over a very long period of time, they have shown roughly a negative .75 correlation with the S&P, and other indexes of investmnet return on capital.

Those who are not investment nihilists may want to look into this area. I have bought some, and I want to by more. I want to have 33% of my total nut in these two ideas soon.

Remember, "Baby needs a new pair of shoes."

Mikey

 

[unclemick]

The classic old pharts chart: London gold/West Texas Intermediate shows gold bottoms at roughly 76,82,99-00 and in the buy range now. However having got hosed more than once over the last thirty years - as in being wrong on gold or at least not getting that well, I'll probably pass this time. I actually owned Homestake when it paid 4% dividends. Oh well - good hunting.

 

[oldcrowcall]

A lot of gold's increase has been due to a dollar bear market rather than a gold bull market. Gold is more attractive to buyers on a weak US currency. That could certainly continue tho!

 

[haha]

A lot of gold's increase has been due to a dollar bear market rather than a gold bull market.

Contra to this idea is the fact that gold has also appreciated against the yen and the Euro, at least using 1999 as the base. When we make these comparisons, the base year becomes very important.

Mikey

 

[wabmester]

I've owned gold and energy stocks for the last couple of years. Both have done very well, but I consider both to be highly speculative hedges. I'd never consider speculating with 33% of my stash unless I had well over 33% more money than I'd ever need.

I think you're probably right that these are good bets, but that's an awfully big bet, and these are two areas that have become very popular in the last year or two, so a lot of the upside is behind us.

Besides, baby already has new shoes.

 

[haha]

I'd never consider speculating with 33% of my stash unless I had well over 33% more money than I'd ever need.

Hi Wabmester,

Thanks for sharing your comments. I think I may not quite understand your reasoning. It appears that you think that one who invests in oil and gold should be prepared to write off his entire investment, and then some more. How could this occur?

Although the price of oil has gone up a lot, if there are fundamental changes in the supply /demand balance, as I believe that there are, we haven't seen anything yet. Also, the producers and service companies have not yet reflected the recent high crude or NG price. Either the oil price is wrong, which goes against EMH, or the equity prices are wrong, which also goes against EMH. In any case, it would hard to lose 50% of a reasonably chosen oil allocation at this point. So if the 33% were allocated 23% oil, and 10% gold, it might be possible but difficult to permanently lose 50% of 23%, or 12.5% of stash with the oil part.

The gold analysis is harder, since the world is definitely not running out of gold. Say it might be possible to lose 2/3 here, or 6.7%. Again, with sound companies and or bullion this would be a particularly maladroit outcome.

So I get a max drawdown of less than 20% of stash, which I think is very conservative. At this point the remaining investment would be in very underpriced companies and commodities.

As we all know, it would no trouble at all to take a 25% hit in the S&P and still own overpriced goods.

Which says nothing of the upside. Gold and S&P are opposite ends of a teetertotter. Although we can't say for sure, it appears that the S&P may have reached a limit on it's upswing, and gold a limit (the ground!) on it's downswing. While it is impossible to know for sure, I think gold is still well below the middle, and S&P still well above.

I am not really trying to convince anyone. More I am trying to run through my reasoning.

BTW, I have always had at least a 10% energy allocation since the natural gas "bubble" of the mid 80s. I have anywhere form 500% to 15 % profits in current energy investments. One of my faults in the past is that I took the "safe money" early in a run, and then abandoned ship. Some of these commodity booms just go and go and go, and this time I would like to stay aboard longer si tengo los cojones .

Mikey

 

[John Galt]

si tengo los cojones? You do and you'll clean it up!

John Galt

 

[wabmester]

I think I may not quite understand your reasoning. It appears that you think that one who invests in oil and gold should be prepared to write off his entire investment, and then some more. How could this occur?

Mikey, I was merely stating that I don't speculate with money I need, and even if I had surplus cash, speculative bets probably wouldn't be the first place I'd put it. In other words, I'm retired and I like the idea of capital preservation. You rememer me, the guy who gets excited about stuff like TIPS

I consider an investment to be speculative if I can't reasonably estimate the ROI. And if I can't reasonably estimate the downside risk, I assume that worst-case is my principal goes to zero. There are plenty of ways to get to zero: worthless options, bankruptcy, default, etc.

Having said that, a lot of people think energy is the next hot sector, and I can't say I disagree.

Gold, on the other hand, is a complete mystery to me. I suppose worst-case is that it falls to around what it costs to dig it out of the ground, but if investment demand goes away, I don't see why it couldn't fall even lower.

 

[John Galt]

I have invested all that I intend to in gold
(jewelry) for my ex. as well as oil for her Cadillac.
Really was not a problem until I decided to ER.
Anyway, I think that lifestyle is fine as long as I am
not required to pay for it.

John Galt

 

[haha]

In other words, I'm retired and I like the idea of capital preservation.   You rememer me, the guy who gets excited about stuff like TIPS  

I consider an investment to be speculative if I can't reasonably estimate the ROI.  And if I can't reasonably estimate the downside risk, I assume that worst-case is my principal goes to zero.   There are plenty of ways to get to zero: worthless options, bankruptcy, default, etc.

Well, I definitely can't argue about TIPs. I doubt they will ever again offer the high real yields of the recent past. Which is too bad, but it also offers pretty fair security of principle to today's buyer, such as yourself.

However, other than TIPs , I Bonds, E-Bonds and cash and near cash, I don't think there is much around where one can actually estimate ROI, even within 50% error.

I can't find it in myself to settle for what is sure right now, so I keep a lot of cash, and look for things that while they may appear risky, I believe thay are not particulary so. Many oil investments fit this mold, IMO.

Jon Markman recently wrote on oil:
http://moneycentral.msn.com/content/P87339.asp

Gold, as you pointed out, is another matter. I wouldn't try to argue against your assertion that gold has no easily discovered intrinsic value. But 200 years of history have suggested that when other alternatives for capital go down, gold goes up. One thing I know for sure, if anything starts going up, plenty of people will jump in and send it higher. Remember Beanie Babies? It may not make sense, but it is as predictable as fights in a bar. It's not my favorite typs of investment, (or speculation), but it might be pretty much ok for a while yet.

Mikey

 

[Cut-Throat]

mikey a gold bug - who would have thought!

 

[haha]

I have invested all that I intend to in gold(jewelry) for my ex. as well as oil for her Cadillac.

Good point John. Women like to wear gold, and at least some men like to buy it for them. This is currently a much larger part of demand than investment. In fact, I believe I am right in staing that there has been net dis-investment over recent years.

The nice thing about gold as an investment is that although demand for jewelry and similar uses may trail off as prices rise, investment demand increases. In other words, the demand curve employs positive feedback. This is how booms can happen.

Mikey

 

[haha]

mikey a gold bug - who would have thought!

Cut -Throat my friend, remember that on the internet no one knows you are a dog.

Truthfully, I am a 47 yo woman librarian, taking Black Cohosh for my hot flashes. Additionally, I have a cellar full of gold. And yes, I intend to vore for that cute John Edwards

Mikey

 

[BUM]

taking Black Cohosh for my hot flashes

mikey,

Its a new century. Try Lydia Pinkham's Vegetable Compound.
Get with it girlfriend.

BUM

 

[John Galt]

Black Cohosh played first base for the Atlanta
Crackers in the old Negro Leagues. Hell of a
ball player.

John Galt

 

[BUM]

Whos' on first?