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Precious metals and energy stocks
Precious metals and energy stocks
Another story supporting my view that precious metals and energy stocks are the best place to invest for the next few years:
Uncertainty fuels commodities market
Precious metals, natural resources shares move higher By Myra P. Saefong, MarketWatch
Last Update: 12:24 PM ET Mar 31, 2006
SAN FRANCISCO (MarketWatch) -- Political and economic uncertainty worldwide will likely drive commodity prices higher in the second quarter, analysts say, with crude prices potentially topping $70-per-barrel and gold reaching more quarter-century highs. Yet while that's certainly not a sure thing in a market that's been known to trade contrary to fundamental factors, the potential for further gains fueled powerful first-quarter returns for mutual funds dedicated to natural resources and precious metals.
Precious metals funds rose 17.4% on average and natural resources funds added 8.7% for the year through Mar. 29, according to investment research firm Morningstar Inc.
The top-performing precious metals fund was U.S. Global Investors World Precious Minerals (UNWPX : US Glbl:World Prec Min UNWPX, up 34.5%. Sibling U.S. Global Investors Global Resources (PSPFX : US Glbl:Global Res PSPFX was the best-performing natural resources fund, rising 16.5%, largely due to substantial holdings in oil exploration and oil services stocks.
"It's clearly unfashionable, if not suicidal, to be bearish on oil, but from a contrarian standpoint, it's the only position to be in," said Peter Grandich, editor of Grandich Publications. U.S. government data show that crude inventories stand at their highest level since April 1999.
'It's clearly unfashionable, if not suicidal, to be bearish on oil -- but from a contrarian standpoint, it's the only position to be in.'
Peter Grandich, Grandich Publications
Even so, May crude futures closed above $67 a barrel Thursday for the first time in two months with fresh tension between Western countries and Iran over Tehran's nuclear activities fueling the rally. Prices aren't that far from the front-month futures record of $70.85 a barrel set on Aug. 30 and they're up over $4 so far this year.
Meanwhile, precious-metals prices have climbed to new heights, with gold and silver futures at levels not seen since the early 1980s.
"Gold as well as silver continues to benefit from a robust global growth pattern and consumption of all types of commodities," said Jon Nadler, an investment products analyst at bullion dealers Kitco.com. Gold futures closed Thursday at close to $592 an ounce -- up 12% year to date, and silver futures neared $12 an ounce, up 30% year to date. Hardly anything could ruin the outlook for the metals - except perhaps world peace, said Thomas Hartmann, an analyst at Altavest Worldwide Trading, who sees higher prices for gold and silver by the end of the second quarter.
Summer weather and tension surrounding Iran remain major factors in the outlook for energy commodities.
A resolution in the standoff with Iran or a "tame summer" could hurt the energy market, Hartmann said. "If hurricanes don't threaten the Gulf region, we're stuck with a lot of supply."
"There's a lot that could bring down the price of oil, but not likely in the second quarter," Hartmann said.
Balancing supply with worry
Crude futures touched a record back in August, but have yet to return to that level as almost seven-year highs in U.S. supplies have worked to offset ongoing market concerns about global output. 'With record amounts of [U.S.] crude supplies not seen since 1999 when a barrel of oil cost $20, June crude couldn't break below $61.'
Thomas Hartmann, Altavest Worldwide Trading
"With record amounts of [U.S.] crude supplies not seen since 1999 when a barrel of oil cost $20, June crude couldn't break below $61," said Hartmann. He sees a $15 to $20 premium built into prices and "it's likely to stay," he said, noting that the "growing global demand, political unease, and concerns over strengthening hurricane season" will keep oil above $55 a barrel.
Iran "took the spotlight for the first quarter of this year," with violence in Nigeria coming in a close second, said Ben Smith, a managing partner at First Enercast Financial.
Iran actually put in a $10 fear premium into the market as this potential lost supply "would be very noticeable in such a tight market," he said, pointing out that "with global growth in demand for crude, any supply disruption sends prices upward."
Many analysts agree that oil prices have quite a premium attached to them, but if they fall in the second quarter -- they won't fall too far.
"The only thing that matters in oil is how much of a fear premium does one believe is justifiable because based on current supplies versus demand, oil is at least $10 to $15 too high on a historical basis," said newsletter editor Grandich. Hartmann expects prices for crude at the end of the second quarter to stand at around $58 a barrel.
On the other hand, Matthew Parry, an economist at Moody's Kitco.com.predicts that prices may fall by around $5 in the second quarter because demand always slips during that period. Still, he also said he thinks the Organization of the Petroleum Exporting Countries will cut crude-oil production at its June meeting, "which will slow any price decline."
For natural gas, the story is all about weighing 2005's record hurricane season and expectations for another active storm season against the larger-than-average U.S. supply levels.
"Fears of supply interruptions will continue to support crude and [natural-] gas prices above the level indicated by the supply/demand balance," said James Williams, an economist at WTRG Economics. Still, "the tame winter produced an accumulation of supplies that will hard to burn through, even with a warm summer," said Hartmann. "A scorcher will be needed for people to crank up their ACs for months to reduce this glut before winter rolls around again."
The Energy Department has been saying natural-gas production is no problem, said Sean Brodrick, an editor at Weiss Research. At the same time, however, "it has lowered its outlook for future natural-gas production for the past five years in a row," he said.
Brodrick also calls attention to the fact that "the hurricane season -- with its potential for carnage in the Gulf of Mexico's 'energy alley' -- starts in June." The season officially runs from June 1 to Nov. 31, according to First Enercast's Smith, who expects to see natural-gas prices of $9.14 at the end of the second quarter. Futures prices reached a record of $15.78 in mid-December.
"Time is short, and all expectations are that this hurricane season will be another busy ... one," said Brodrick. "Natural gas is way under priced."
Commodities traders have also been focusing their attention on the precious metals, taking them to more than two-decade highs recently. "We continue to sense a new, refreshing preference for capital preservation among individual investors," said Kitco.com.#39;s Nadler. And "perhaps, in a world as uncertain as the one they are now facing, their attitude (and fondness for gold) makes perfect sense," he said. Still, it'll "take a sustained and widely recognized economic trend of some sort to push gold ... toward the next major goal of $600," said Brien Lundin, editor of Gold Newsletter. 'We will have knocked on the door of $600 [for gold] by the end of Q2.' Brien Lundin, Gold Newsletter The "ideal trend," he said, would be dollar weakness, which he expects to "fully manifest itself by early- to mid-summer."
Indeed, the second quarter will see more bullish factors for gold: the resumption of the U.S. dollar bear market and "political turmoil between Democrats and Republicans that will raise concerns worldwide about America's ability to function as a nation," said Grandich. The per-ounce price of $600 for gold is "a question of when, not if, and very likely in the second quarter," he said, adding that prices can reach $650-$700 by the year's end. Lundin said he thinks the market "will have knocked on the door of $600 by the end of the second quarter," and trade around $635 by the end of the year.
Silver's been making its own claim to fame lately too. In fact, futures prices traded near $12 an ounce on Thursday amid ongoing excitement about an exchange-traded fund from Barclays Global Investors that's expected to launch soon.
"Physical silver will be taken off the market with [the ETF's] approval," said Hartmann. Given that silver's an industrial metal and "without new mine production or new veins being found, the supply situation over time will tighten." As speculation leading up to the launch continues, Lundin expects silver to test, and possibly breach, the $12 mark.
Then again, if and when this new vehicle does get the go-ahead, he warns against buying the ETF "right out of the box." "The rampant speculation that has driven the metals to 22-year highs could disappear almost the second this new product hits the trading floor," Lundin said, "convinced that we may be in for a 'buy the rumor, sell the news' event." "I'd just as soon let others try to catch what may well be a figurative falling knife," he said. That said, the Barclays investment vehicle will "have a major, long-term impact on the silver sector," he said. And "the primary long-term effect ... will be to suck physical metal out of this notoriously thin market, and thereby propel the silver price much higher," he said. That'll be a "wonderful thing for investors in silver and silver stocks," he said.
Still, it's important to note that the risk of declines in commodity prices exists. Technical indictors for gold are "treading in severely overbought territory and smart gold bugs ... could use this rally as an opportunity to realize profits on a portion of their position," said Erik Gebhard, an analyst at Altavest.
Also, many of the current metals and energy traders may be unfamiliar with the fundamental reasons for being invested and are buying only because of the recent "spectacular gains," said Steven Jon Kaplan, a senior editor of Kitco.com. See a recent interview.
When the next downturn occurs, traders will "likely bail out en masse," he said. Therefore, Kaplan said he expects "that the second quarter of 2006 will be a poor one for almost all metals and energy sectors."
Looking further out, "worldwide demand for commodities, even as it experiences periodic pullbacks, will generally increase by a substantial percentage for at least another decade and probably more," he said.
Top 1Q precious metals funds
Fund Ticker YTD Return 1-Year Return
U.S. Global Investors World Precious Minerals UNWPX 34.5% 82.4%
U.S. Global Investors Gold Shares USERX 32.6 90.9
Van Eck Intern. Investors Gold A INIVX 22.8 79.6
Top 1Q natural resources funds
Fund Ticker YTD Return, 1-Year Return
U.S. Global Investors Global Res.PSPFX 16.5% 50.5%
Fidelity Select Natural Resources FNARX 14.6 52.9
Ivy Global Natural Resources A IGNAX 14.5 42.9
All data: Morningstar Inc. (As of 3/29/06)