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The Commodity Investor Q&A
With Matt Badiali
September 3, 2008
Q: After all is said and done about gold and silver, what are your views on investing in the really rare metal, platinum? – L.S.
A: The other day, I called up Van Simmons of David Hall Rare Coins. He mentioned Platinum Eagles, the U.S. mint's platinum coin. It turns out, Platinum Eagles are hard to get your hands on these days.
Platinum's scarcity is probably due to the disparity in the platinum-to-gold ratio. Here's how it works...
For the last 10 years, the average ratio of the price of an ounce of platinum to an ounce of gold was 1.9. That means you could buy 1.9 ounces of gold for the price of a single ounce of platinum. The ratio varies by about 0.3 ounces to either side.
Some hard-core precious metal investors make a lot of money trading the ratio... When the ratio hits 1.6 to 1, they buy platinum and sell gold. When the ratio gets to 2.2 to 1, they sell platinum and buy gold.
In May, the ratio hit 2.4 ounces of platinum per ounce of gold. Traders dumped their platinum and piled into gold. The ratio plummeted, and now it is around 1.7 ounces of platinum per ounce of gold. Traders are buying platinum again.
One of the easiest sources of platinum bullion is the U.S. mint's Platinum Eagle coins. So they're getting scarce.
In the long run, I think platinum will continue to perform the way precious metals are supposed to – as a hedge against paper currency inflation. If you want an alternative to gold and silver, you should look into platinum.
Q: Where do you see natural gas headed? What is the best way to invest? – K.C.
A: How desperate would you have to be to pay $7 or $8 a gallon for gasoline? Well, China recently did the equivalent of that... for natural gas.
A Chinese liquid natural gas company, Guangdong Dapeng, paid about $17 per thousand cubic feet of natural gas. The U.S. pays about $8 per thousand cubic feet.
We only import about 14% of our total natural gas consumption. But unlike the U.S., China doesn't have a large domestic supply. And China's natural gas consumption rose 177% from 1998 to 2006 (2007 data isn't out yet).
If China continues to set the price for natural gas on the spot market, the U.S. will start paying a lot more for natural gas imports. Otherwise, we'll see Canadian natural gas shipped east.
Bullish investors can try natural gas futures or natural gas producers (like Chesapeake Energy). I've also recently written about how Pennsylvania's Marcellus Shale is a huge opportunity in the natural gas market.
The easiest way to get direct exposure to natural gas prices is through the United States Natural Gas Fund (UNG), which generally tracks the natural gas spot price.
Q: What is the future for nuclear energy? – R.W.
A: Don't let "paper reactors" fool you. The incredible inflation of construction costs will sink many planned nuclear projects. I'd be surprised if half the planned plants make the leap from blueprint to construction.
The rising costs of commodities like copper, steel, concrete, and oil drove the cost of building new reactors straight up. Areva, the French nuclear engineering firm, recently updated the cost of building the new generation of reactor, the OL3, in Finland.
The project's original budget was €3 billion with a summer 2008 completion date. The new budget has ballooned to €4.5 billion – an increase of 50%. And the plant won't be on line until 2011.
This kind of price escalation was not included in the budgets for many (if any) of the planned reactors. So, while I think nuclear energy has a place, it won't step in for natural gas or coal anytime soon.
Good investing,
Matt
