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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, August 6, 2008

Q: Do you see the recent hammering in natural gas as a buy opportunity? Or should I wait? – A.L.
A: July was a brutal month for natural gas. It fell about 30% during a tough month for nearly every commodity. However, the long-term trend for natural gas remains strong.
The U.S. gets about 20% of our natural gas from Canada. Within five years or so, oil production in the Canadian tar sands will use up every bit of natural gas the Canadians produce... Tar sand refining requires huge amounts of electricity, which is powered by gas up there.
That'll leave the U.S. short. And we can only get a dribble from other sources, like liquefied natural gas (LNG). So domestic supplies will be worth a lot more.
Natural gas prices should go up in the States and Canada because we're paying a lower price than the rest of the world. According to Global Resource Investments founder Rick Rule, the Japanese pay around $15 or $16 per MCF of imported natural gas. It's going for around $9 per MCF in the U.S.
I think legendary oilman and investor T. Boone Pickens will see to it that natural gas demand and natural gas prices remain strong.
Right now, oil equals vehicle fuel and natural gas equals electricity. Pickens has been all over TV and radio for the last few months. He has a grand plan to use natural gas as a vehicle fuel. While I'm not totally sold on the idea, the fact remains that natural gas will likely become a more mainstream energy source.
It's politically attractive to support natural gas as a vehicle fuel. It's clean. Most of it is produced domestically. And that makes me a fan of natural gas investments for the long-term. So I think now is not a bad time to buy.
Q: When do you think it would be good to buy back some gold? – H.J.
A: I won't pretend to know what gold is going to cost tomorrow. So rather than put a price range or a time frame on it, let's look at simple numbers...
July's numbers put inflation around 5%. That means the value of your dollar is declining 5% per year. If you stashed your dollars in 10-year U.S. Treasury bonds (which yield 4%), your real return is -1%.
The best investment you can make to ward off inflation is gold and silver. Because inflation makes these assets more valuable, not less, they offer you a real return of 5%.
How long will you wait to buy gold, knowing that your dollars are worth less and less?
Q: I recently read that Saudi Arabia has been overstating its reserves for several years now. What's your take on this? – R.M.
A: Someone's been reading Matthew Simmons...
Simmons' book, Twilight in the Desert, paints a scary picture of a fading Saudi Arabia. The problem is, Simmons doesn't have all the data. Only Saudi Arabia truly knows the state of its oil fields... and it isn't telling.
So let's think about it from a financial perspective. Say I own a huge water well in a drought-stricken town. As all the other water supplies dry up, the price of water goes up. I'm making more and more money.
I know my well is still producing lots of water. But do I go around claiming I've got more water than I do? Or do I keep quiet and make a ton of money?
Saudi Arabia's situation is a little different. It doesn't really like the "town" it supplies. It knows the resource will eventually run dry, so it has a lot of incentive to find more. And it's found $100 oil is sustainable.
Better yet, the "town" responds to rising prices by planning to tax the other water suppliers. The U.S. government says it will hammer domestic oil companies for making money selling something whose price it can't control.
No, I don't think Saudi Arabia is overstating anything. The country has no reason to. And it could have huge reserves of marginal oil that wasn't worth producing at lower prices.
And a while back, I sent an e-mail to a bunch of friends in the oil patch, asking them where to go to see the best new oil discoveries. One friend at a major oil company sent back a two-word reply: Saudi Arabia.
Good investing,

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