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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, March 18, 2009

Q: I'm looking to make major gains when the roof blows off and gold goes to $2,000. I'm thinking an ETF. What do you think? – T.B.
 
A: Let's be clear. If you're looking to simply preserve your wealth with gold, I recommend gold bullion. But I'm reading you as a speculator. So let's get down to speculatin'...
 
For getting leverage on a rising gold price, I'm not a fan of buying the gold ETFs. They are simply paper gold. Gold would have to run up to $1,013 an ounce for you to make just 10% on your investment from here.
 
You can consider options plays on the ETFs if you're an experienced trader. But options are complicated... so they're not right for everyone. That's why I like mining companies as your best gold speculation.
 
The cost of mining gold is way down. You can think of a gold mine as a simple commodity exchange. You trade a basket of stuff it takes to extract gold (like diesel fuel, copper, iron, and concrete) and exchange it for the yellow metal.
 
Those commodities are sitting at 2004 prices, but the price of gold is 125% higher than back then. In other words, right now, that trade works out in your favor.
 
According to Bloomberg, the three largest U.S.-listed gold miners should earn between 6% and 10% more in 2009 than in 2008. It won't be just the big guys... The entire sector will enjoy increased earnings. So even if gold goes nowhere, you can make decent gains. And if the "roof blows off" gold, you'll make three, five, or even 10 times your money.
 
I like this idea so much, I dedicated the most recent issue of my commodity-focused S&A Oil Report to my top gold stock right now. It's a small company... but independent auditing sources confirm it's sitting on one of the largest untapped gold deposits on the planet – and the deposit is located just outside a major U.S. city. 
 
Q: Do you think Westshore Terminals will be hurt by cap and trade like the Eastern U.S. coal companies may be? – J.G.
 
A: As we discussed last week, a cap and trade system essentially monetizes carbon dioxide – it would cap the amount of carbon dioxide produced and allow companies to trade credits on a market – like any other commodity.
 
Companies that produced a lot of carbon (like at a coal-fired power plant) would have to buy more credits, essentially paying a sales tax on coal. Power producers will turn to cheaper alternatives, like natural gas.
 
That doesn't look promising for eastern coal companies. But those with access to Asia should survive or even prosper – that's where Westshore Terminals comes in.
 
Westshore Terminals is a Vancouver, Canada-based company that does a remarkably simple job: It takes coal off rail cars, sorts it, and puts it on ships. It's the busiest coal export terminal in North America and the largest dry bulk terminal on the west coast of either North and South America.
 
I think companies that facilitate the shipment of coal eastward will do well in a cap and trade future. Cheap coal will be sucked into Asia like gas into a Corvette. That means Westshore is in a great position.
 
Westshore has a huge moat, because of its size. The company has operated for nearly 40 years, so we know its model works. It can continue for as long as Canada has coal and someone overseas wants to buy it. My father is a shareholder... That should tell you what I think about the company's future.
 
Westshore had a great year in 2008 – it paid out $1.80 per share in dividends compared to just $1.16 in 2007. But about half of its revenue fluctuates with the coal price. Since the coal price is down 65% from its high last July, Westshore won't make as much this year as in 2008, and dividends will fall.
 
But the yield should stay strong: According to my colleague and 12% Letter editor Tom Dyson, the stock should yield 9% in the absolute worst case in 2009.
 
Good investing,
 
Matt




In The Daily Crux
Market Notes
Homebuilders get a reprieve... Centex, KB Home, and Lennar all up over 6% yesterday.
 
Oil inches up to $50... this rally shouldn't be happening.
 
U.S. Steel at 52-week low... fellow materials stocks Nucor (steel) and Alcoa (aluminum) also plummet.
 
Earnings today... Cintas, Darden Restaurants, General Mills, Nike, Oracle.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%