The Investment U e-Letter: Issue # 611
November 27, 2006
2007 Commodities Forecast: Money Manager Rick Rule Reveals the Commodity Boom’s Top Remaining Investments
by Dr. Mark Skousen, Investment U Chairman
Last week, I met up with Rick Rule at the New Orleans gold conference. Many readers know Rick as a regular speaker at Investment U and FreedomFest. But he’s also president of the brokerage firm Global Resource Investments.
I’ve known Rick and his delightful wife Bonnie for more than 20 years. And I’ve invested successfully in Rick’s deals and regard him as the shrewdest broker and money manager I’ve ever met in the natural resource sector. My subscribers, for example, have made a lot of money in Quest Capital (AMEX: QCC), a young Canadian business development company we’re still recommending.
Here's Rick's 2007 commodities forecast, including some of the investments he likes right now…
“Tremendous Profits” In Base Metal Commodities
Mark Skousen: It appears you were the most popular speaker in New Orleans this year. Is this good or bad?
Rick Rule: Probably bad! I’ve been most successful when I’ve been least popular. There were tremendous bargains in the natural resource markets in 1998 and 1999, but today I tell investors that it’s become harder and harder to find these bargains.
Mark Skousen: Do you agree with Jim Rogers that we are in the middle of a major bull market in commodities that could last for another 10 years?
Rick Rule: I respect Jim Rogers, but I don’t know if he’s right or not. The work that I do is more micro than macro. I look at the risk of investing in individual companies and then look to see if the price is worth the risk.
Mark Skousen: So have you been buying or selling?
Rick Rule: I tend to be pretty conservative compared to my peers, and follow the advice of your fellow advisors Alex Green and Steve Sjuggerud and use trailing stop orders to protect my profits on highly liquid commodity stocks.
Mark Skousen: Doesn’t your industry suffer from the same problem that high-tech stocks suffer from, that is, aren’t the price-to-earnings ratios quite high for mining companies?
Rick Rule: It really depends on the commodities. Companies that produce base metals like copper and zinc sell for low multiples. So do oil and gas companies. At $50 oil, they are tremendously profitable. But for gold mining stocks, the P/Es are crazy.
Mark Skousen: Do you like Canadian oil and gas trusts, now that they have been knocked down in price?
Rick Rule: I’d wait. The oil and gas industry is decapitalizing itself. The 15% yield was really only 6% dividends and 9% return of capital. For the past few years, they’ve been selling at premiums to their net asset value, and with the decapitalization process, we may see the time when they will start selling at a discount to NAV.
Natural gas, in particular, is way oversupplied right now due to a warm winter so far.
Mark Skousen: Why don’t gold stocks pay dividends?
Rick Rule: Gold stocks paid dividends until the mid-1970s because there was no expectation that the gold price would go up, and they were regarded as depleting assets. But when the gold price started shooting up, gold stocks were viewed as a leveraged way to play the future price of gold. They became ridiculously valued compared to their current cash flows.
Profitability isn’t particularly good even now at today’s gold prices, and they are spending enormous amounts forecasting... to fund new production or search for new properties.
Mark Skousen: Wait a minute! Many gold mining companies say their cost is $250 an ounce. With a $600 gold price, they must be highly profitable. Or is this cost figure made up?
Rick Rule: I would say so. Mark Twain said it best: “A miner is a liar sitting next to a hole in the ground.”
Today’s Hot Commodity Investments... and Forecasting Commodities in 2007
Mark Skousen: Given that most commodities are at all-time highs now, are there any bargains left?
Rick Rule: Yes, there are. Canadian natural gas is cheap right now, although it may go lower before it goes higher. I also think that the tax loss selling of Canadian income trusts in December will offer some excellent bargains in January.
I also like investing in water stocks, such as Pico (Nasdaq: PICO), which have done well in the past few years and still have great long-run potential. Finally, there is a firestorm of interest in alternative energy resources.
Mark Skousen: What do you like in alternative energy?
Rick Rule: I don’t like heavily subsidized energy. Solar doesn’t work. Wind doesn’t work... But geo-thermal and hydro-energy work, and there’s no depletion of the resource. From a forecasting standpoint, I think geo-thermal and hydrogen stocks are good long-term investment plays. Unfortunately, market caps are extremely low, so I don’t want to mention any names here.
Mark Skousen: Thanks for your commodities insights, Rick.
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- Rick Rule’s brokerage firm, Global Resource Investments, specializes in mining, oil & gas, water and other natural resource investments. For more information, call 800.477.7853.
- In Investment U #541, Jim Rogers explains that “in the past 45 years, you’d have made more money in commodities than in stocks, with less volatility and a better inflation hedge.” Read Another Raging Bull Market in Commodities to see why commodities are still poised for long-term gains.
- Despite a broad commodity correction this summer, uranium has defied gravity… The alternative fuel source has made yet another fresh 52-week high, up 45% since May, when every other commodity began falling from its highs. Favorable supply and demand conditions should continue to push prices higher. Read the full report.
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- Since its IPO in May, MasterCard (NYSE: MA) shares have climbed 157%. Along the way, insiders at the company have gobbled up 276,000 shares, spending more than $10 million of their own money. Louis Bass, Editor of the Hot IPO Trader, jumped on the stock on its first day of trading, and subscribers have locked in triple-digit gains. Learn more about how Lou screens for the most lucrative IPOs coming to market.
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