Get Ready For $100 Oil and $1,600 Gold Curtis Hesler, Professional Timing Service 06.09.06, 11:50 AM ET
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Missoula, Mont. - Commodity bull markets last 15 to 20 years on average, and the current bull phase is but six years along. Commodities always go to new highs once a bull market starts. Studies have shown that the best-performing assets during the first five years of the decade are the best-performing assets during the last five years of the decade as well. Conversely, the worst-performing assets during the first five years of the decade are the worst-performing assets during the last five years of the decade.
Curtis Hesler recommended Suncor Energy when it dipped to $52 in November. By May, it was trading at over $100. Click here for three new energy buys in Professional Timing Service. Grasp these thoughts. They should be your guiding light. Furthermore, following the recent corrections in metals and energy issues, this may be one of the better times to make tangible asset investments.
I have a stopgap--a fail-safe, if you will--model. It is the Annual Asset Allocation Model that we calculate each October. This model tells us which of three asset classes offers the best risk-to-reward potential for the next year.
In October 2000, it shifted from bonds to tangible assets, and it has remained solidly in that mode ever since. If I were to calculate the model today, it would still tell us to invest in commodities.
I often talk of balancing risk to reward. What does that mean?
There was a time in the Middle Ages when you could shoot dice and get the same payoff no matter what number you bet on. You could win 10 Flanders on a 2 or on a 7. Well, there is risk and reward. The 7 is the most likely outcome. But there is only one way a 2 can come up out of 36 possibilities--a 1 on each die. There are six ways a 7 can occur - 6 on one die and 1 on the other, 5 on one die and 2 on the other, etc. Some bets are clearly better. In this case, the rewards are inadequate--equal payoffs will kill you.
Successful investing, then, requires that you assess both risk and reward. Today's stock investors are obsessed with imagined potential rewards, but they have no regard for risk.
Special Offer: The pullback in energy and precious metals stocks has opened up a buying window for savvy investors. Click here to download Curtis Hesler's "Oil & Gold: Slam Dunk Investing for Income and Capital Gains," a special report detailing specific buys, from Professional Timing Service. Stock market investors and bond buyers are betting on a 2--lots of risk for little reward. Commodity buyers are betting 7's, but the reward potential is enormous. The commodity naysayers are essentially arguing that higher commodity prices will cause a worldwide recession...then, raw material demand will fall and, thus, commodity prices will fall. This ignores the dynamics at work. China's economy alone is growing at over 9% annually. If it were growing at 7%, it would essentially double in the next ten years; quantitatively, that is a huge double.
China's consumer class currently amounts to about 300 million people, which is equal to the entire population of the U.S. Already, there are shortages of raw materials and energy. A doubling of Chinese demand will not relieve the pressures we are seeing on commodity prices.
Don't ignore India and the rest of Asia. Global commerce is expanding in areas where the numbers are enormous, and this growth is energy intensive. In ten years, the number of people demanding goods and services will easily double, but the amount of available energy and raw materials will diminish.
We will see crude oil production peak, as well as a peak in production of other basic commodities, such as copper. A lack of new investment has left the world with a lack of new supply. The next ten years are going to be a whole lot like the 1970s, with a global bent.
Special Offer: Emerging markets are hot. Play the strength of "BRIC" markets with names like this Chinese oil company and this Brazilian bank--both up more than 20% since John Christy told subscribers to buy them earlier this year. Click here for details in the Forbes International Investment Report. Betting on higher commodity prices during the next five to ten years is as close as you will ever come to placing a bet on a sure thing. The potential rewards far outpace the risk. The asset class that performs the worst in the first five years of the decade tends to do the worst in the last five years of the decade. That should bring the Nasdaq to mind. This should not be surprising, as commodity bull markets are always accompanied by bear markets in the popular averages.
The Nasdaq has made a decent recovery from its first bear market leg, and it is now beginning its next decline. The other popular averages will follow suit. How far will they fall? Look for the Nasdaq to drop to 1,100 and the Standard & Poor's 500 to go under 775.
A secular (long-term) bear market began in 2000, and a cyclical correction, which launched from lows in October 2002, is ending. The next leg in the secular bear is beginning. The U.S. Federal Reserve is targeting housing prices, and the housing market is already slowing in many parts of the country.
Phoenix and San Diego are particularly soft. Higher energy prices are beginning to affect consumer behavior, and consumer spending is directly related to stock prices. As consumer spending slows, the stock market will fall.
Bottom line: You should only hold stocks that are advantaged by higher commodity prices. Due to the recent corrections in metals and energy, this is an excellent time to be using weakness to accumulate commodity-related investments.
Special Offer: Click here for three junior gold miners recommended by Professional Timing Service that you should have in your precious metals portfolio right now. Here is the most recent look at our Energy Forecaster, a model designed to measure the potential in the energy sector. It looks great.
Something wicked this way comes, and it is Iran. The little rhetoric episode on June 5 is a preview. Iran will convert threats into action--you can count on that. They want oil denominated in euros; they want to decrease production to increase prices; they want to use oil as a weapon against the West while they develop other, more deadly weapons; they want political control in the Middle East; and they want to hurt the West. They will accomplish most of these goals.
Crude oil settled back to $71.45 per barrel December basis, which is in line with the support level I was looking for. Currently, crude oil is looking stronger, and the next stop should be $81 basis December--probably this summer. It will not be long before the oil guys will be talking about a floor at $70, and I expect to see crude over $100 during the year.
As for gold, I think the recent correction in precious metals is all but over. At least, the worst is behind us. The near term is setting up an excellent low in among precious metals. From a long-term standpoint, we are looking at a time that we will look back on as the last best place to buy gold and silver stocks. Gold is going to go to $1,600, and at least double its 1980 high, regardless of whether it goes to $600 or $580 first. The key here is to augment your future rewards and minimize risk by accumulating mining shares during weakness.
In terms of recommendations, I still am bullish on Goldcorp (nyse: GG - news - people ) and Gabelli Global Gold & Natural Resources Income Trust (amex: GGN - news - people ). I also think energy investors who buy into Canetic Resources Trust (nyse: CNE - news - people ) will be richly rewarded.
A word of caution: As energy and the metals take more of the spotlight, the scams will come out of the woodwork. In the 1960s and '70s, when the space program was all the rage, sheet metal companies were going public with names like Space Age Metals. Stick with solid, proven enterprises and avoid the fly-by-nights.
Excerpted from the June 2006 edition of Curtis Hesler's Professional Timing Service. For more information and to subscribe, click here.
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