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Energy vs. Precious Metals

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June 20, 2011 – Comments (40) | RELATED TICKERS: OIL , GAS.DL2

As I see it, there are two major ways to play the devaluation of the dollar: precious metals and energy. Personally, I prefer energy. I don't think gold and silver have major run-ups without oil also benefiting. Also, oil and gas have a lot more uses than gold and silver (and yes, they are also more abundant).

I pose this question: why must I buy precious metals over oil and gas? As usual, I am very interested in your responses.

40 Comments – Post Your Own

#1) On June 20, 2011 at 6:12 PM, truthisntstupid (92.94) wrote:

Comment #34 here

 

http://caps.fool.com/Blogs/dividends-vs-capital/344638

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#2) On June 20, 2011 at 6:13 PM, mongoose1969 (< 20) wrote:

I have no opinions and will watch this thread closely since I've been asking myself the same question.  Add NOV to my portfolio or look at something like a gold stock or TIE.

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#3) On June 20, 2011 at 6:23 PM, truthisntstupid (92.94) wrote:

I'd pick energy, too!

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#4) On June 20, 2011 at 6:29 PM, IIcx (< 20) wrote:

I guess the more interesting question, what evidence do we have that the USD isn't going to strengthen from here given the problems in the EC and tragic situation in Japan?

With QE3 off the table, the Fed is no longer in a devaluation mode and they currently hold about 70-80% of US debt (assuming what I recently read is accurate). Also, with Congress in the starting blocks for a fiscal responsibility race -- I guess we'll have to wait and see on that one but I'm not holding my breath.

If the USD does increase in value, energy and commodities are going to drop in price until inflation takes hold and that's going to take quite a while to materialize in a significant way.

About the only thing that can sink the ship, are the idiots who want a carbon tax to drive up the cost of everything and they aren't likely to get reelected. 

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#5) On June 20, 2011 at 6:39 PM, truthisntstupid (92.94) wrote:

Won't the price of pm's flatten or decline with a stronger USD?

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#6) On June 20, 2011 at 6:55 PM, IIcx (< 20) wrote:

truthisntstupid (85.22) wrote:

 Won't the price of pm's flatten or decline with a stronger USD?

========

Yes 

Not as much in the case of silver -- required for solar which has a negative ROEI at this point and isn't ready for primetime industrial roll-out -- but the nits in Washington are driving solar into the market to early so about 40% of Silver production will still be in demand.

Gold has limited industrial usage and as the dollar strengths will be less attractive to banks unless the USD is tied to it.

Energy will always be in demand but with Natural Gas plants and a nearly unlimited supply of it... 

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#7) On June 20, 2011 at 7:02 PM, awallejr (83.26) wrote:

Why an either or?  I invest in both sectors, although I prefer energy, and mainly for one reason, "dividends."  I put dividends in quotes because many energy plays are considered "return of capital."

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#8) On June 20, 2011 at 7:14 PM, ChrisGraley (30.03) wrote:

Here's my order in the shorter time frame (3-5 years)

1) Silver

2) Oil

3) Gold

4) (and very far behind) natural gas

Silver and Oil are similar in that we are consuming more than we are pulling out of the ground. If I believed that the economy was going to be on fire again, I'd pick oil over silver. I think that Saudi Arabia is lying about the oil supply as much as the US is lying about silver supply, but in a booming economy, Chinese oil demand will be exponential. In a poor economy, I think silver wins. The unemployed in the US will cut back on driving and vacations. The Chinese demand will subside, if the manufacturing sector isn't getting the orders. Also inflation pressure on everything else will less demand pretty much on everything else in a down economy. Which means that freight companies will haul less and demand less oil.

Gold is the same inflation hedge as it's always been. I don't think it's a bad investment in this economy, but I can't remember a time when globally so were so many currency pressures at the same time. I think that it's always had more institutional attention in any economy and maybe even more so in this one where everyone is trying to find a safe haven. I prefer not to compete with the big boys if I can help it.

Now, as for natural gas, I think the worst play for the short term may be the best play in the long term.  We are sitting on an ocean of natural gas and that eventually has to replace oil in the energy chain.

No matter what other technology that we come up with in the next couple of decades, I think that cheap natural gas will have to be utilised. My guess is that Chinese demand will bring oil prices to a point that North America will either switch to natural gas vehicles or electric vehicles that get power from natural gas power plants. 

I've hoarded silver, and I'm hoarding some cash (Canadian) to buy a little more when the economy takes a dip, but I've been buying natural gas stocks slowly as well.  I think that the payoff in 10 - 20 years may be huge and I'll accellerate buying when I'm certain of an economic turn-around.

 

 

 

 

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#9) On June 20, 2011 at 7:25 PM, 100ozRound (29.43) wrote:

Do you have to have one over another?  I counterpose a question: why not both?

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#10) On June 20, 2011 at 9:43 PM, TheDumbMoney (55.04) wrote:

This is a bit off-topic, and I am sorry for intruding.  But can anyone tell me reliable numbers on all of the supposed new industrial silver demand?  The last time I looked at it, which was only very  briefly, it appeared that the vast, vast, vast majority of increased total demand for silver over the last five years or so was for the "investment" category.  All it was though was a graph on a silver miner's website, and I think it only went through 2009, so I would love to see what people have on that.  I mention this because of what llcx said above.

Okay, I also think it is important to clarify an important difference between precious metals and energy.  I am not passing judgment on the substance of this, but I think it is probably objectively true that some of the price of the precious metals relates not just to the decline or expected decline of the dollar, but to more generalized worries about the fiat currency system.  This suggests a strong distinction from oil/energy, as to my knowledge nobody is buying oil/energy because they are worried about fiat currency.  Thus, if one thinks that more generalized fears over our fiat (or, as I and many call it, "elastic") currency are overblown, then perhaps oil/energy offer a purer hedge on the falling dollar, a better value?

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#11) On June 20, 2011 at 10:22 PM, outoffocus (23.12) wrote:

Its why I'm invested in both.

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#12) On June 20, 2011 at 10:26 PM, Frankydontfailme (27.48) wrote:

Yes dumberthanafool.

If (and really I mean when) we get into a flow blown deflationary environment, energy will underperform gold. This is due to gold's nature as the only true safe haven. People bicker about whether gold will go down in a panic due to wholesale liquidation, I don't believe this to be true. See below.

http://www.grandich.com/2011/06/flight-to-safety/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+GrandichsBlog+%28The+Grandich+Letter+%7C+Grandich+Blog%29

Gold sells off minimally during deflationary panic. It will rocket during inflationary periods (like energy of course).

It's not just the dollar, but virtually all of fiat currencies, tangled in an inflationary web.

Silver has a mind boggling demand over supply ratio. It will likely underperform gold during deflationary fears but can outperform when a) the true demand skew is revealed (comex default), b) high inflation takes hold and silver is treated at least in part as money (a cousin of gold).

 Long story short, own them all. Overweight gold always (unless it irrationally bubbles), overweight silver and oil when deflation is at its worst and Bernanchula has no choice but conjure federal reserve notes. 

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#13) On June 21, 2011 at 3:07 AM, awallejr (83.26) wrote:

Except you are discounting the income generated off energy and not necessarily off gold (tho some gold mining stocks pay dividends)

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#14) On June 21, 2011 at 8:16 AM, mongoose1969 (< 20) wrote:

Lots of people tauting gold stocks.  I'm sure the intent wasn't to talk about individual stocks but I'll bring it up.  I know there is no "best" stock, but I'd love to hear your picks on what you think is the best play in the gold market.

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#15) On June 21, 2011 at 10:22 AM, Jbay76 (< 20) wrote:

mongoose1969

AUQ, RBY, BRD, TYJHF.PK, AXU all have AMAZING upside potential. There is more and TMFSinchiruna is the man on this topic!

dumberthanafool

"Demand for silver is built on three main pillars: industrial and decorative uses, photography, and jewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption. In 2010, 487.4 million ounces of silver were used for industrial applications, 167.0 million ounces were consumed in the jewelry market, 50.3 million ounces were used in the silverware market and over 101.0 million ounces were used in coins and medals."

For more details, go here

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#16) On June 21, 2011 at 10:42 AM, IIcx (< 20) wrote:

Another interesting aspect to consider. I ran across a news piece last night that said that the criteria for evaluating inflation has changed and, if the older criteria was still used, we would currently have double-digit inflation. I'm uncertain if this is just spin but if household costs are an indicator, it appears logical.

Another good reason for Congress to get their fiscal house in order.

Silver's 200MA is around $28 which looks like a logical target for a buy but I'd wait for the Fed to start tightening before buying the dip.

The end of QE2 is priced in but a Fed tightening isn't at this point and it could happen sooner than projected.

Owning a hedge is a good idea but options might be the best way to play it at this point in time due to all the uncertainties. 

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#17) On June 21, 2011 at 11:39 AM, Frankydontfailme (27.48) wrote:

That's true awall, if you depend on your investments for income you'd likely want more exposure to energy and secular stocks.

Ilcx, good point but tightening is remarkably unlikely in this year or even the next. Mid 30's is a fine entry point for silver.

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#18) On June 21, 2011 at 11:57 AM, TheDumbMoney (55.04) wrote:

Jbay76, that statement seems to conflict with this chart, also from the silver institute.  Look at the growth of the top sliver in 2009 and 2010, and look at the growth in total ounces of demand in the last nine to ten years.

See here.  What I am trying to say is that it looks like the major growth area in the last two years at least has been "investment," which means stuff like silver ETFs and people buying Great Panther Silver bars.  Industrial use in 2010 was about even with 2007.  Silverware use has remained fairly constant for a decade.  Coins have shrunk appreciably in the last four years (probably as people who would have bought coins have switched into ETFs).  Total demand is up approximately 25% to 30% in ten years, and the price of silver (and this is at 2010, when it was below $30/oz) is up 300 to 400%.

I am just wondering if there is something I am missing here.

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#19) On June 21, 2011 at 11:58 AM, TheDumbMoney (55.04) wrote:

I didn't mean to say "conflict."  I believe the 95% number.  I'm just looking at where the growth in demand seems to be.

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#20) On June 21, 2011 at 12:20 PM, Jbay76 (< 20) wrote:

dumberthanafool

For the record, I hate those types of charts, I find them difficult to read.  But, when I scroll down the page to world silver supply demand table my world changes.  It seems as though investments rose by 48% from '09 to '10, and industrial useage increased by ~ 21%. 

However, while the growth differences between the two categories supports that silver investment hounds have been prowling around, the majority useage of silver remains industrial useage, at ~ 46% of total silver produced while investment purposes incresed consumption by  ~ 17%.  Industrial useage remains the category that uses silver the most. Thus, regardless of what one's stance is with PM investments, its important to recognize that silver's multi-purposed status makes it more than just a hedge against inflation, bad economic policies etc.

Interestingly enough, I could swear I read an article elsewhere this year that demand has outpaced supply, but I have to look around for it.  If I find it, I will repost it here.  Tthe data we are looking at goes up to 2010 only, so next year's publication should shed light on our current status.  

I am long silver miners, and have found a few that I am very pleased with. :D

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#21) On June 21, 2011 at 12:23 PM, IIcx (< 20) wrote:

dumberthanafool (24.56) wrote:

"I didn't mean to say "conflict."  I believe the 95% number.  I'm just looking at where the growth in demand seems to be."

========

You're right about the ETF and private bullion aspect but solar is a silver pig as well.

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#22) On June 21, 2011 at 12:34 PM, TheDumbMoney (55.04) wrote:

"...regardless of what one's stance is with PM investments, its important to recognize that silver's multi-purposed status makes it more than just a hedge against inflation,"

I certainly agree with that statement.

I acknowledge a large increase in industrial demand from 2009 to 2010, though I didn't attempt to calculate the number.  2009 was..er...a bit of an off year for business.  My point is that industrial demand as between 2007 and 2010 is roughly flat.

I know solar is a silver pig, I'm just looking at total industrial demand as between 2001 and 2010, and between 2007 and 2010.

Also, I misread the chart:  demand for coins is also up seriously since 2008.  It is demand in photography that has cratered in the last ten years, and particularly in the last three, for unsurprising reasons.  That collapse in demand in photographic applications has largely offset the increase in other industrial demand, at least through 2010 when this chart ends.

Am I wrong?

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#23) On June 21, 2011 at 1:15 PM, leohaas (33.95) wrote:

Silver is the clear winner. Here is why.

If the "the-sky-is-falling-because-all-fiat-currencies-are-about-to-collapse" folks are right, then silver will be valuable because of it being gold's cousin. After the fiat currency collapse, silver will be the main currency for small items.

If things aren't quite as bad as the doomsayers predict, then the industrial use of silver will keep on growing.

Either way, demand for silver will outstrip supply driving up prices.

Gold will of course benefit if the doom scenario happens. But if it doesn't, I don't see gold continuing its way up. I don't think it will collapse either (there will always be demand for it, and there aren't too many mines left that can produce for under about $800/ounce).

Energy will do well if the doom scenario is avoided. Worldwide economic growth, even if anemic, will lead to more demand. Long term, I have a hard time seeing how production can keep up unless prices go up significantly, making more expensive energy sources profitable (and less expensive forms of energy very profitable). However, energy will not be worth much in a collapsed society, unless you are investing in fire wood...

Disclosure: long SIL at the time of writing. PS. From this disclosure you can deduct on which of the two scenarios I am putting my money!

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#24) On June 21, 2011 at 2:27 PM, JakilaTheHun (99.94) wrote:

why must I buy precious metals over oil and gas?

The better question to me is why must the Dollar 'devalue'?

Everyone expects the Dollar to weaken, but the big surprise might be that the Dollar strengthens over the next few years. 

Very long-term, Dollar probably weakens as the international currency system reshapes itself.  Short-term (0-3 years):  all the commodity currencies are overvalued, the Euro has major issues, and the emerging markets are running into troubles of their own. 

Moreover, contrary to popular (and populist) belief, monetary policy in the US is very tight.

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#25) On June 21, 2011 at 2:44 PM, Jbay76 (< 20) wrote:

dumberthanafool

" Am I wrong?"

No, according to the numbers, you're pretty correct.  Photo's use of silver declined by ~34% from 2001 to 2010 while industrial use of silver increased by 39%.  I guess you can thank digital media for that decrease. 

Once the economy comes back to life and business produce more, silver consumption for industrial useage will increas.  I do think that there are more culprits than solar's for industrial sivler, mainly electronics.  More and more cars have more electronics int them, for better or worse, you have a global race to build the bigger supercomputer, etc.

Regardless, the take home message is that silver is very versatile and that is its gift to its owners

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#26) On June 21, 2011 at 2:53 PM, tmathe85 (52.79) wrote:

I am in the oil biz.......and I know for a FACT that in Norway (where they have the highest amount of technology and regulation and ethics) that 2 major oil reserviors have their reserves overstated. These are majore fields btw - in Norway.

 Now if this is happening in Norway, how does that make you feel about places like Saudi Arabia and Nigeria? What would happen to the price of oil if we found out global supplies were overstated by 10-40%.....Im just speculating here.....

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#27) On June 21, 2011 at 3:41 PM, TheDumbMoney (55.04) wrote:

Jbay, so then to summarize, if the chart is correct, what we have here is a commodity whose yearly cummulative economic usage (silverware, photography, jewelry, other industrial) in millions of ounces has apparently declined from 2001 to 2010, if one excludes the "coins" and "investment" categories.  This non-coin, non-investment decline is despite world economic growth since 2001, and despite population increases since 2001.

That is fairly bearish.  However, on the other hand, the declines in photography appear to have stabilized, as have declines in silverware.  And it is true that at least now it seems like other industrial uses will increase -- despite the 2009-2010 blip, that is the apparent trend.  Nonetheless, that increase in industrial uses had better be pretty significant to compensate for the 400% or so increase in the price/oz.  But of course price increases also encourage companies to seek alternatives.  And one of the major industrial uses is somewhat reliant on government subsidy at this time for its economic existence -- solar power.

It is just not my cup of tea, whether served in a silver cup or otherwise.  I haven't really looked at it thoroughly though, in this thread I'm only going by that one chart.  And for all I know industrial demand has skyrocketed in 2011, which the chart would not reflect.

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#28) On June 21, 2011 at 7:21 PM, DaddioResources (99.44) wrote:

First an investor and/or trader must answer these questions before a commitment can be made to either sector (a) currently or (b) sometime 1 yr to 5 yrs in the future:

(1) What is the supply and/or demand for each commodity?

(2) What is the trading profit margins for the vehicle you trade for each commodity?

(3) What is your objective for the trade?                   

You will always need energy and do not always need precious metals.  So, say if the dollar significantly increase in value both commodities go down in want but not necessarily need. 

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#29) On June 22, 2011 at 7:48 AM, SubVet571 (< 20) wrote:

The dollar will only strengthen if a NEW administration is elected.  Continued policies of the current un-foolish administration will give the markets reason to panic as they build up the debt.  The day after the election look for a huge jump or everyone jumping ship.

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#30) On June 22, 2011 at 9:52 AM, Jbay76 (< 20) wrote:

dumberthanafool

Yes, according to your statement, there was ~ an 8% decline from 2001 to 2010 if you remove those two uses of silver.  But that would only matter to someone who invests in silver for strictly industrial uses.  I see no point in investing in something for only part of its potential contributions/uses unless you are cherry picking to make a particular point

In the end, what matters is supply and demand.  The demand for silver exists in 7 different sectors, and overall demand has increased each year, as has its price.  If you want to remove one sector or two to try and prove a point, you're point is valid ONLY under those circumstances, which does portray the reality of the situation and is therefore a moot point.  Unless you can prove that the market and investors also do not look at the totality of silver and its applications, then it is wise to not exclude them from an analysis.

I think it only logical that industrial use wodl have gone down over the course fo the past years, we have been in a GERAT recession (whatever that is other than a re-wording of a depression), so manufacturing has gone down.  But that is temporary and indicative why I think it important to not exclude different uses from analysis.  It is good to recognize such a decline and see why that happened and postulate future trends, but overall consumption of silver has been increasing, and it will.  It's a finite resource, so it's value will go up as well.

Please don't take me the wrong way.  I do not intend to lambast you or anyone else.  I'm sure if we were having this conversation in person my body language and tone used would support that. In fact, I've quite enjoyed this, so thanks!

Cheers

J

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#31) On June 22, 2011 at 10:12 AM, catoismymotor (< 20) wrote:

Re #29:

Should we elect a new President on November 6, 2012 and your projected dip happens I'll be waiting to buy.

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#32) On June 22, 2011 at 10:16 AM, TheDumbMoney (55.04) wrote:

Jbay, I get your point, but the point is that, excluding investment uses, overall consumption is down.  The past three to four years have coincided with the increasing popularity of the silver ETF and of the idea that fiat currency is dying.  While it is true that if you include that investment demand as "consumption," overall consumption has been increasing from 2001 to 2010, it is is not at all clear to me: a) that that demand is sustainable in the long term, and b) that that is "consumption."  That is because that silver is not really being consumed, it is being maintained either by the ETF, by something like CEF, or by individual holders of silver bars.  It is available for the market for industrial uses at some future date, or for sale, unless one assumes the holders will hold it forever, which maybe they will.  That is why I think it was relevant to look at what has happened to silver, ex-investment/coins.  I also think it is relevant because a lot of the theme of silver is the exploding demand in emerging markets for jewelry, and exploding industrial applications.  Through 2010 at least, neither of those themes seem to be reflected in the numbers, at least not to the extent that optimism about them exist. 

I don't take anything you say the wrong way; I'm one who tends to get a bit too vigorous in my arguments and on this website myself. 

 The fact that the price of silver has increased even more proportionally than the investment or total consumption has increased in nine years also causes me entirely un-numerical and perhaps unfounded worries that there is some sort of non-physical-silver-based component to the demand, either a derivative market or at minimum, significant margin-buying.  But that's just one low-ranked fool's opinion.

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#33) On June 22, 2011 at 10:43 AM, Jbay76 (< 20) wrote:

dumberthanafool

If we conitnue this further, we may have to meet at a watering hole. :P

I get what you are saying, and I think you are pionting to silver's status shift to be more focused on its role as a currency than industrial component.  And I think in 2012, we'll see data that supports the continuation of that trend through 2011.  Maybe in 3-4 years we'll see a reversal whereby its importance in industry increases while its dependency as a currency decreases.  We can even extend this further and debate our beleifes as to whether or not, in that scenario, the holders of said silver sell it or hold on to it.  

Ultimately, my POV is that due to its mutiple uses in different sectors, it remians a safe investment.  Even safe is the miner bringing it up, and that is where I place my particular focus on.  I would also say that anyone willing to risk their money on a bank investment would be taking a greater risk right now than investing in silver or the silver miner...

My 0.02 and boy am I thirsty...

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#34) On June 22, 2011 at 10:56 AM, TheDumbMoney (55.04) wrote:

Well, I think we can agree on the bank thing, for the most part.  It may be that Berkowitz and others are right about BAC and on the insurance side, AIG, but I don't and won't hold bank stocks, as I have no clue how to evaluate them.  There may be some smaller and simpler banks that are ok, and maybe even some of the bigger banks like WFC are ok, but I just haven't looked into them.

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#35) On June 22, 2011 at 12:25 PM, Jbay76 (< 20) wrote:

well there you go..agreements of sorts....better than nothing....

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#36) On June 22, 2011 at 12:34 PM, TMFBabo (100.00) wrote:

I am in the oil biz.......and I know for a FACT that in Norway (where they have the highest amount of technology and regulation and ethics) that 2 major oil reserviors have their reserves overstated. These are majore fields btw - in Norway.

 Now if this is happening in Norway, how does that make you feel about places like Saudi Arabia and Nigeria? What would happen to the price of oil if we found out global supplies were overstated by 10-40%.....Im just speculating here.....

I guess you're saying that many countries are potentially (and probably) overstating reserves.

How do you feel about publicly traded companies such as majors (XOM, CVX, COP, RDS) and independent E&Pers? Are their reserves any more likely to be accurate? I'm hoping this is yes, since they supposedly get reserve estimates each year from petroleum engineers and such.

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#37) On June 22, 2011 at 12:37 PM, TMFBabo (100.00) wrote:

Also, a big thanks for all the responses. The original question was posed because I was curious as to why people pushed metals or energy, but not both (not often, anyway). I'm glad to know people agree that both have similar merits (and some different ones).

I am in no way implying that inflation is the only scenario, although I believe that we will have inflation to some degree in the medium/long term. In the short-term, I think anything can happen (in the face of widespread fear).

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#38) On July 07, 2011 at 2:43 PM, Luke4wf (< 20) wrote:

What are your thoughts on oil commodities vs. stock in oil companies? Commodities are still a bit of a puzzle to me as a complete newbie, (I draw cartoons for a living.)

I suppose the same question goes for mining firms vs. PMs commodities.  

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#39) On July 19, 2011 at 11:46 AM, secretbonus (< 20) wrote:

what about Agriculture? We are in the 7 year drought cycle that won't peak until mid 2014, and it's already as bad as it's been since the great depression... food and fuel inflation are BOTH always the strongest as consumers in reccessionary times whether reflationary, inflationary, etc will cut back on luxury items to buy food and fuel.

I also think that a lot of people in the hyperinflation camp underrate equities. There are 30 examples of hyperinflation in the last century and  stocks  have done very well during those periods. The Zimbabway stock market was perhaps the greatest bull market in history in nominal terms.

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#40) On July 19, 2011 at 11:46 AM, secretbonus (< 20) wrote:

*priced in zimbaway dollars of course

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