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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, May 21, 2008

Q: Isn't it true the Canadian oil sands yield a type of low-grade oil good only for synthetics and not for gasoline or home heating? – A.D.
 
A: No. You can make gasoline out of asphalt. Oil is a hydrocarbon, which is a fancy name for a long chain of carbon, hydrogen, and various other atoms.
 
The smallest of these chains is methane gas (cow flatulence), made up of one carbon and four hydrogen atoms. The really long chains, like asphalt or the bitumen from oil sand, can be "cracked" into smaller pieces to make gasoline and heating oil.
 
Some refiners lack the ability to crack extra-long hydrocarbons, and must rely on "lighter" crudes. But these days, those crudes are harder to find and carry a premium price tag.
 
So several companies are either updating their refineries or building upgraders. An upgrader is simply a pre-refinery, where they can clean up bitumen, remove all the impurities (like salt and sand), and chop it into shorter chains so regular refiners can handle it.
 
As these upgraders come on line, demand for the oil sands' bitumen will skyrocket, pushing prices up. That's great news for big oil sands players, like Suncor. But the triple-digit gains will come to the smaller oil sands outfits Wall Street has yet to discover. Click here to read about one of my favorites right now.
 
Q: When I began to buy gold, I bought IAU instead of GLD. Their performance is the same, but everyone seems to recommend GLD and never IAU. Have I made a major mistake? – D.H.
 
A: Nope, your investment is fine. IAU and GLD both hold bullion, i.e. physical gold. The big difference between the two is size: GLD has a market value of $19.2 billion, while IAU is only about $2 billion. So anyone who wants to buy large blocks of shares will choose the more liquid option, GLD. But their price performances are virtually identical.
 
Besides the bullion funds, you can buy ETFs to bet on gold miners and gold futures. Take a look:
 

Fund

Sym

Value
Holding

streetTRACKS Gold Shares

GLD

$19.2 billion Bullion

iShares COMEX Gold Trust

IAU

$1.9 billion Bullion

Central Gold Trust

GTU

$144.6 million Bullion

PowerShares DB Gold

DGL

$82.8 million Futures

Market Vectors Gold Miners

GDX

$2.0 billion Stocks

As you would imagine, bullion is the most straightforward. These funds have a vault full of coins or bars that, theoretically, cover the shares.
 
The only futures fund on there is DGL. But using gold futures seems like an unnecessarily complicated way of tracking the price of gold, so I'm not fond of it.
 
The last fund is simply a basket of gold-mining companies that tracks the AMEX Gold Miners Index (^GDM on Yahoo). The top five holdings – Barrick, Goldcorp, AngloGold Ashanti, Newmont, and Goldfields – make up about 36% of the index.
 
These big miners are underperforming bullion ETFs over the last two years (GLD is up 27% while GDX is up about 17%). But I think this fund will do well when we reach the mania stage in the gold bull market.
 
For investors who simply want exposure to gold or mining, these funds are an easy place to start.
 
Good investing,
 
Matt




Recent Articles
Market Notes
Soaring commodity prices push Aussie dollar to 24-year high against the greenback.
 
Government-backed oil giants StatoilHydro (Norway) and Petrobras (Brazil) at all-time highs.
 
Airlines take a hit... Pinnacle and United at new lows.
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%