With the radio blaring "Shut Down" I pulled into the Texaco station to fill up…
$38.50 later, and still in a Wilson brothers mood, I recalled that gas was just 30 cents a gallon when the song debuted. On the surface, with just a tenfold increase in the price gas in 45 years, energy would appear to have been a bummer of an investment.
But a lot of money has been made in this sector, and not just last year with oil at $140 a barrel. Fortunes were made in energy stocks in the late '70s. At its peak, energy accounted for 32% of the market cap of the S&P. Energy was the place to be. Today the energy sector accounts for just 13% of the S&P. Fortunes are about to made again.
Imagine the entire population of the world is just 100 people.
Of those 100 people, only five live in the United States. You and four other Americans must compete with the other 95 for survival. Right now the five are looking pretty good.
The five:
- Use 21% of the world's energy
- Own 42% of the world's cars
- Control 34% of the world's money
Life is good for the five so far. So what about the other 95? They're jealous. They want to live like the five. Wouldn't you? Hollywood's depiction of the American lifestyle has made us the envy of the world. The Internet has only fanned the flames.
What will the 95 do to catch up to the five? What would you do? One thing they won't do is agonize about their carbon footprint. There is a direct correlation between energy use and per capita income. In other words, the more energy a country uses, the wealthier its citizens become.
Nice ride.
China has a population of 1.3 billion. Put another way, 20 of every 100 people on the planet are Chinese. It may surprise you that very few people in China own a car.
According to a report by ChinaNews, the per-capita car ownership ratio in China will increase to 40 cars for every 1,000 citizens by 2010 from the current 24. By contrast, the U.S. has 765 vehicles per 1,000 (2002 data). Europe (including the former Soviet countries) has an average of about 300 vehicles per 1,000.
What happens to energy use as per capita car ownership in China approaches that of Europe? And that's just China. Similar demographics are at work everywhere in the developing world. According to the EIA (Energy Information Administration), worldwide energy consumption is projected to increase over 40% by 2030! That's a tsunami I want to ride.
Back at the gas station…
As The Beach Boys finished their song, I reflected on how much the world has changed since the sixties. Is this the beginning of the end of an era? Will the "five" continue to control as much of the world as they do now? I doubt it.
How much will it cost to fill up in 2019? Does anyone believe it will cost less? From an investment point of view there's only one question that matters.
Which side of the pump do you want to be on?
"Catch a Wave (and you're sittin' on top of the world)"
The above quote is courtesy of The Beach Boys, 1963. Our own Rusty McDougal believes you should get your board in the water. That is, you should be overweight in energy (versus the S&P). He should know. He's been following the energy and natural resources sector for almost 20 years.
Hard assets provide welcome relief from the waves of monetary mayhem and financial chaos. In this article, Rusty shows you how to gain financial protection and avoid the beach break.
The "September Effect" is in effect…
We hope you took our recent advice to lighten up on equities and increase your allocation to metals. Two weeks ago, we wrote, "September might be one of the worst months for stocks, but historically it is a very strong month for gold. Use the "September Effect" to your advantage. Lighten up on stocks and be sure your wealth is protected with the Midas metal."
Right on cue, stocks fell sharply on big volume as September arrived. And gold had its first major breakout in months. Gold stocks blasted higher this week, with the gold miners ETF up 13% in three days.
Silver is on the run too. The chart below shows that the silver ETF just broke above a one and a half year downtrend.
But the precious metals are responding to much more than a seasonal trend. There are powerful fundamentals at work too. And one point of extreme strength is the growing demand in China.
China is urging citizens to "cash in" on gold and silver…
When the Chinese invest in a market, the world takes notice. But this time it is not just Chinese companies and state-owned investment funds that are doing the investing.
The Chinese government recently removed restrictions on gold and silver bullion investments. And they are now actively encouraging 1.3 billion Chinese citizens to buy precious metals!
China Central Television is the primary state-owned television company. They are currently running a news program telling the public just how easy it is to buy precious metals.
"China has introduced its first ever investment opportunity for silver bullion," the commercial states. "Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."
The Chinese are great savers. And these investments are already said to be soaring in popularity. If a small fraction of these 1.3 billion savers start saving gold and silver, precious metals prices could soar!
Poor man's gold…
Asian cultures have a longtime affinity for precious metals. For the Chinese, it began in the 1500s when Spanish galleons began bringing silver from Mexico to trade for silk and spices. Still today, the Chinese word for "bank" means "silver movement."
And because of its relatively low price, silver has always been thought of as "the poor man's gold." In this video, a Chinese merchant makes that case. She says:
"We are the first to offer silver bullion as an investment opportunity. The price for the first batch of the bullion is set very low, close to the cost of the raw material. The investment threshold is not high. And it is more suitable for the general public. Silver is much cheaper than gold."
Hi Ho Silver… Away!
I turn to Rusty on matters of precious metals, particularly silver. He has studied the silver market daily for almost 15 years. Rusty says, "The silver market is much more volatile than gold. During the last major precious metals bull market, gold rose 2,429%... while silver gained 5,555%."
On a historical basis, the price of gold averages about 30 times the price of silver. But gold has risen faster than silver over the last few years. Today, gold is 62 times the price of silver. To reach the historical mean, gold would either have to have to fall by half… or silver would have to double in price.
Which do you think is more likely?
If your answer is the latter, go to the front of the line.
But you better hurry… 1.3 billion Chinese people are already queuing up!
I strongly encourage you to read Rusty's latest article.
He'll tell you how to avoid a repeat of the portfolio meltdown that occurred this time last year. And he'll show you exactly what you should do to profit.
Good Investing,
Bob Irish
Investment Director
Investor's Daily Edge
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