The Biggest Resource Stories for 2011...and Beyond!

I’m going to countdown three of 2010’s biggest resource stories – not to reminisce about profitable investments from the year gone by, but to highlight what I believe will be very profitable investments in the year ahead…

No. 3: The Continuing Gold Rush

The gold price soared nearly 30% last year – punctuating a spectacular decade-long run that has seen the gold price quintuple! So has gold finally reach a “bubble phase?” Is the great gold bull market on its last legs?

In a word, No!

If gold is in a bubble, then it’s one heck of a bubble. Not even the 2008, economy-wrecking market crash could pop it. Gold is not in a bubble; it’s in a big bull market, plain and simple.

As stories about quantitative easing and other forms of overt currency debasement crossed the newswires last year, investors became increasingly concerned about the value of the paper they call “wealth.” Increasingly, these concerned investors have been shifting some of their wealth from paper to gold…and other hard assets.

Plus, it’s easier than ever to “own” gold (so to speak) via the rise of exchange-traded funds (ETFs) like SPDR Gold Trust (NYSE:GLD). With a click of your mouse, you can buy into the new gold rush – although in many respects it’s better to buy real gold and take delivery, a point that I’ve made over and over.

At the same time, the world’s gold buyers are chasing declining mine output. That is, despite the rising price of gold, the world is likely past the point of Peak Gold output. All the output from new mines isn’t replacing the decline in output from older mines.

But demand is the main story in the gold market…demand for real money, not the paper kind. The monetary universe is changing in a fundamental way, with the price of gold serving as the barometer, thermometer and inclinometer. The cozy old economic order – post World War II, with the US dollar as the world’s reserve currency – is passing away, and things won’t ever go back to the long, lost “good old days.”

I’ve had endless discussions with skeptics about “why gold prices are rising.” Of course, the skeptics can deny, up and down, the meaning of rising gold prices. But at the end of the day, investors and savers around the globe are becoming increasingly fearful of holding paper currencies.

I won’t even go into the monetary problems that national governments across the world are facing with fiat currencies. Just accept the fact that mankind’s monetary default position is gold, and that’s been the case for 5,000 years or more. Don’t fight history.

Here at Agora Financial, we’ve been recommending that readers buy gold since the late 1990s, when it was selling for under $300 per ounce. We still like it at $1,375 an ounce.

When it comes to gold, there’s one key idea to take into 2011: Gold is money. And gold makes better money than the government-issued kind. The big risk of owning currency and bonds is that any Tom, Dick & Harry – OK, the politicians and bankers – can create as much of it as they want. This year and next, your biggest risk is in not understanding that concept.

No. 2: The Shale Gas Revolution

Just a few years ago, the energy investment idea du jour was to build liquefied natural gas (LNG) terminals to handle future imports to the voracious US hydrocarbon market. Remember Cheniere Energy, once the darling of newsletter writers? Now there’s talk of re-tooling some of America’s LNG systems for the exportation of natural gas. Instead of bringing foreign gas to our shores, the newest idea is to liquefy natural gas in North America and export it to Europe and China. In terms of gas, the world has turned upside down.

The world energy landscape has changed with new developments in extracting natural gas from shale beds and tight sands. Innovative extraction technologies have dramatically altered the economics of natural gas extraction in North America. South Africa’s Sasol Corp., for example, is teaming up with Talisman (NYSE:TLM) to turn otherwise stranded gas into liquid fuel in northern British Columbia. It’s a truly revolutionary process – a point that The New York Times made a few days after I mentioned this joint-venture to the subscribers of Outstanding Investments.

Companies like Consol Energy (NYSE:CNX) and MarkWest Energy (NYSE:MWE) are also benefitting from US, Canadian and now global shale gas development. Even our friends the Chinese are coming to the US, to learn how we’re cracking shale for gas, so they can duplicate the effort back in the Motherland.

At the same time, the technology for freeing shale gas is finding its way into the oil patch, with companies like Venoco (NYSE:VQ) working to turn California’s Monterey Shale into a vast new oil resource. There are a lot of hydrocarbon molecules out there. The trick is to harvest them.

Forward-looking investors should not ignore the fact that shale gas development will provide enormous opportunities for the oil service guys, particularly Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).

There’s much more to come with the shale gas revolution. We’re just in the early innings on this one. There’s plenty of good investing ahead, and a lot of hydrocarbon molecules yet to be sucked out of the crust.

No. 1: The Rare Earths Boom

Rare earths are a group of exotic elements of the Periodic Table (Lanthanides, mostly), with unique electrical, magnetic, optical and other properties. Without them there’s basically no clean tech, green tech, advanced electronics, electric cars, and much more. It’s not that rare earths are geologically “rare.” It’s more that they’re so darned hard to process in industrial quantities, and into high tolerance end products. That is, the end products are mostly in the nature of “designer molecules.”

Thus, doing the rare earths gig is far more than basic exploration, mining and crushing. Doing rare earths correctly involves being really good in chemistry and chemical engineering as well. There’s nothing easy about it.

The big rare earths story for 2010 was how an otherwise obscure sector of the mining and processing industry became a destination point for billions of dollars of new investment. As 2010 drew to a close, we were in a market mania, in some respects, with some rare earth stocks “melting up.” The story was driven by China and its precipitous reductions in export quotas – front page news across the globe.

You may have seen the statistic that China controls about 97% of the world’s rare earths supply. Let’s not quibble about the exact number – a few fractions one way or the other. And when China ratcheted down its rare earths quotas during 2010 – part of a long-range strategic industrial policy, I must add – it shook the Western world to its industrial foundations. It’s all been a shock to the global trading system.

This shock has produced some shockingly large gains in the shares of rare earth mining companies. A lot of these stocks have become very volatile and frothy. So caution is warranted. But the rare earth story is very real and very exciting.

Don’t miss this one!


Byron King
for The Daily Reckoning

The Daily Reckoning