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speedybure (< 20)

Ripe For The Picking



April 30, 2009 – Comments (0) | RELATED TICKERS: GLD , XTO.DL , PBR

The value of any asset is the present value of all future free cash flow. That being said they resource complex/Basic mateials are severly undervalued for numerous reasons.

1) I hate to sound repetitive, the future wave of inflation will push these prices much higher than the first leg of the commoditty boom. ignoring the degree of future of inflation, the market is currently pricing in a very low inflation rate in the future. This isn't just confined to U.S inflation, but global inflation will be the highest in history. This preceding statement is very easy to rationalize as The U.S and GB will expirience unprcedented inflation, along with the numerous european countries that have expanded the money supply as well. In addition, Almost every industrialized nation has engaged in fiscal stimulus i.e (US, GB, Several European Countries, China, Australia, Canada and some others). In other words the intrinsic value of all commoditties has been increasing realtive to the global fiat money system.

2) Supply is shrinking, and in some cases at an alarming rate. Oil would obivously be at the top of the list, with the consensus being 15-20 years of supply left barring new record oil discoveries which is highly unlikely. Sure there will be discoveries in Asia, canadian oil sands and eventually in alaska but the chance of any of these significantly adding to the total oil supply is slim to none. Despite the talk of alternative energy which has been going on for several years has advanced very little. Although I believe nuclear energy and natural gas are the most efficient in terms of energy cost, it will be at least a decade for the former to be instituted in US and The BRIC countries (which consume the majority of oil inventories). In other words the supply-demand function for oil is temporarily distorted.

The same goes for base metals, which have seen a huge slowdown in the mining of them. Copper and silver in my opinion will see a huge rebound as soon as this is realized (Silver is mainly mined with base metals). Gold has seen 3 consecutive years of mining ouput despite the rising price (Barrick came out a day or two ago and said global production continues to decline). Most gold analysts think the biggest deposits have been already been discovered, but who really knows? Platinum is also very misunderstood, as it is used in catalytic converts along with a multitude of other products. It also is used in jewelry and serves as an investment function (though very small). The prices has been dropping which does not make sense due to the fact a large population in China and other BRIC countries will be driving cars in the very near future coupled with the substancial drop off in production (Due to the reoccuring problems in South Africa, which sits on the largest platinum base).

Although I could write for days on various commoditties, Wheat is the last one which i wish to briefly expand on. The Production - Consumption gap has continued to narrow for about 8 years, which I expect to continue. I have data going back two decades but rather than posting it, it is always better to gather it yourself. Third world countries that are starting to industrialize allow for an increasing population as capital accumulation increases: they produces goods more cheaply while creating more jobs and thus an increased standard of living (There have been caveats to this throughout history i.e China under Mao caused an enormous population increase that wouldn't have happened otherwise).


* In other words, resource stocks have many catalysts in the near future, make them great buys especialy at these prices. 

Some name to think about: FCX, BHP, AUY*, AEM*, CEO, PBR*, PWE*, ANGLO-GOLD, SLW*, SSRI, RGLD*,gg,nem, ABX, RJI*, RJA, XTo, CHK, CVX, RDSA, RTP,  Enereplus*,ABB Grain*, NuFarm, Incitec Pivot, Migao* and many more.

*Disclosure of Ownership 

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