Thursday, April 24, 2008
The numbers in the title of this article look absolutely shocking side-by-side, even though there is plenty of evidence to suggest that even those numbers are merely rest stops on a chart with a perpetual sky-reaching tilt.
These two figures conjure disbelief in the mind at first look, but then, depending on your where you stand in relation to these industries, they appear inevitable.
It is utterly astounding to think that gold and oil could still yet double, more or less, from today’s levels. With gasoline prices stretching the budgets of most North American families, the price of auto fuels in a $200 barrel of oil world would easily be well over $6 a gallon.
The only real questions to consider are 1) when will we see these prices, and 2) how can I hedge against these price risks.
In terms of question 1, unless you are planning on checking out in the most profound sense of the term, the question is more or less irrelevant. In that it is a given that your income will not put on the same kind of height as these prices are, positioning now for this future is of prime importance.
The obvious hedges against the destructive effects of these prices against your savings, should you have any, and investments, is to reduce your consumption of oil while increasing your investment in both gold and oil.
There will be a continuing chorus from ill-informed would-be oracles who will tell you the price of oil is going to decline with U.S. economic growth, and that gold has reached its peak and will now observe the traditional decrease in cyclical value, which you must strive to ignore.
What we still haven’t seen in this gold market, which is very much still in a long-term bull mode, is the wholesale entry into the market for physical gold and all of its derivative manifestations by mainstream investors. Despite its remarkable performance since 2003, it remains a fringe investment, a mere hedge in the portfolio against other factors.
We are certainly in a collective state of suspended animation as investors. We are still stunned by the uppercut of real estate prices tumble and the body-blow of the subsequent cinching down of credit availability. Large pools of capital are now being invested into funds that will proceed to accumulate distressed mortgages and the assets backing them at severely discounted levels, akin to the arrival of carrion birds at the end of a pitched battle. Is it any surprise that the vultures of capital who will gorge on the mangled financial corpses are the very same ones who orchestrated the destruction? Only in America.
I’ve decided that I am going to launch a new portfolio that will be made freely available on MidasLetter.com that will be called the Everyman Portfolio. I’m going to invest only $500 a month on stocks that are directly related to gold and/or oil. Surely most of us can afford to invest $500 per month, I hope.
Just to make the playing field a bigger and safer place for anyone who might like to invest alongside the Everyman Gold and Oil Portfolio, we will restrict our investments to large cap producers of both commodities.
The theory here, is that with a mere $500 per month invested, the performance of the portfolio will perform more closely to gold’s past performance during the last five years, rather than the S&P 500, as shown in the chart below.
This will satisfy the investment portion of our preparation for the $200 and $2,000 world.
The next aspect of the proposed remedy to these eye-popping and wallet-crippling numbers has already been executed on.
Namely, I have adopted a program of minimal hydrocarbon-fuelled transportation. This was much easier to accomplish than I originally thought it would be.
I divide my time between Bowen Island, on Canada’s west coast, and Portland, Oregon. On Bowen Island, I spend most of each day writing, at the end of which, I walk through the woods to town ( a ninety minute sojourn) with faithful Blue Heeler Vera leading the way to acquire any food or groceries. I then take the bus back, which drops me off in front of my house. Total transportation costs for the day: $2.50.
In Portland, Oregon, I live on the southeast side of the city, and can easily walk to everything I need within 30 minutes. The benefits of not driving on a daily basis, besides financial, are health related. Walking so much eliminates any concern over weight, and you can’t imagine how good you feel after a walk in the fresh air everyday.
Things go up steeply when air travel is involved, and obviously you can’t spend too much time on the road without spending large amounts on airline tickets, whose prices are largely determined by the cost of JP54, which is the industry designation for jet fuel.
But there’s my solution to the 2 and 2 world imminently approaching. It may sound a little corny, and be impractical for many, but making it practical is really an investment in your financial and physical health.
