The Commodity Investor Q&A
With Matt Badiali
July 16, 2008
Q: What are your current recommendations for silver plays, including low, medium, and high risk? – B.C.
A: I think precious metals are a pretty low-risk investment in general right now. We're on the brink of a global inflation crisis.
I'm no economist, but I know inflation when I see it. The price of oil is incredibly high. Oil affects the price of everything. Plastics are made from oil. Trucks, trains, and boats that move goods from point A to point B burn oil products. No matter what it is, if you bought it, you paid an "oil tax."
That's not an American phenomenon, that's worldwide. High oil prices mean price inflation on a global scale.
Take a look at Asia, where Indonesia's inflation rate is 10%, the Philippines' is 10%, and India's is 12%. Those countries are indicative of much of the developing world, where food and fuel prices have a bigger impact on the economy than in the West.
However, even in places like England, inflation is skyrocketing. The Financial Times reported inflation rose to 3.8% in June alone. The head of the Bank of England forecasts 4% by the end of the year – which now looks like a conservative estimate.
Global inflation is going to drive the price of gold and silver through the roof and into the sky. When inflation raises its ugly head, investors buy gold. Gold and precious metals are impossible to create from thin air (as opposed to paper and ink currencies). So as governments run printing presses night and day, the value of gold and silver soars.
The safest bet for silver bugs is a big silver exchange traded fund like PowerShares DB Silver Fund (DBS) or iShares Silver Trust (SLV). These funds are designed to track changes in the price of silver. Another possibility is the PowerShares DB Precious Metals Fund (DBP), which tracks both gold and silver.
However, I like the big silver miners. The recent market correction clobbered the entire sector. Many big silver stocks are sitting at 52-week lows. Any boost in the silver price will send them flying.
However, mining companies are risky. They can have problems with mines or striking workers. These problems can leave your shares flat while the rest of the sector soars. The best way to avoid this is to own shares of several mining companies. I don't know of a silver mining ETF, so you'll have to do it yourself.
In the next issue of the S&A Prospector, out July 25, I intend to recommend two new silver miners I think are safe and cheap.
Q: I read that it takes 10 barrels of water to extract one barrel of oil... and the water is tainted forever. In drought-stricken states like Utah, Wyoming, and Colorado I just don't see it happening on a large scale. Am I wrong on this? – D.B.
A: Stephen Colbert would call that "truthiness." It's kind of right, but loaded with an incorrect assumption: Oil is bad because it wrecks our water supply. That's crap. Here's why...
Oil reservoirs usually have a layer of oil floating on top of a layer of salt water. So wells often produce water with the oil. That water is polluted – naturally. Even without the oil, that water is salty, and unusable for drinking water.
Most virgin oil reservoirs are like a well-shaken bottle of soda. If you pop it open, the soda will fizz and shoot out. It doesn't take any water to produce that oil.
Eventually, though, that fizz fades and the soda goes flat. The same thing happens in an oil reservoir. Sometimes, after a field goes flat, a producer will pump water back in to push the remaining oil up. That's "enhanced oil recovery," and it takes a lot of water. But producers don't use potable water. They usually use water produced from the wells in the first place.
When oil does taint the water supply, there are ways to fix it. My first geology job out of college was doing environmental work in Florida. The state is a giant sand box, where anything in the ground ends up in the drinking water. Leaky pipes and underground storage tanks flushed petroleum products into the water supply. Now a ton of the state's tax dollars go to cleaning it up.
Even water-soluble petroleum products don't really want to mix with water. If you give them a chance to get out, they will. In the company I worked for, we built big towers, filled them with plastic wiffle balls, and sprayed the tainted water down from the top. In the meantime, a big fan at the bottom blew air up the tower.
The wiffle balls break the water into tiny droplets and the air blows off the pollutants. That was a successful, if expensive, technique. But when I left, the industry was working on in-situ (which means in place) remediation. Some engineers found they could inject oil-eating organisms directly into the ground water and clean it that way.
Good investing,
Matt
Editor's Note: E-mail me your commodity questions, and look for my answers in next Wednesday's Growth Stock Wire.
