COMMODITY AND CURRENCY UPDATE

ENERGY

At what oil price will alternative energy supplies become feasible? Currently, the least expensive and most abundant substitute is oil from tar sands. A few years ago, this supply source was simply too expensive, but the recent sharp rise in oil prices and major technological advances have brought the production cost to the $18/28 per barrel range. Moreover, tar sands make up roughly half of the world’s total oil reserves and major production increases are currently underway. Also relatively inexpensive are nuclear power and natural gas, but at least in the US supplies are limited. In the case of nuclear energy, the problem is permitting constraints; with natural gas there’s and a lack of transportation and storage capacity. At oil prices of $40, liquefying coal becomes a feasible technology. “Clean coal” is still derided by skeptics, but serious pilot projects to advance the process of changing coal into gas and eventually a diesel-like liquid are underway. If oil prices stay at above $50, watch a lot of effort go into producing bio-diesel, a fuel derived from plants like soybeans, which can produce burnable oil. More costly alternatives will become interesting at ever higher prices. You should know that harnessing the most frequently talked-about alternatives (ocean wave, geo-thermal, solar or hydrogen) are technologically not mature or will stay economically unfeasible for some time. The bottom-line: there are lots of alternatives to oil and the most likely scenario is that a number of them will be developed alongside. The notion of New York’s lights going out in 2020, as portrayed in certain recent bestsellers, is bunk. December 19, 2005

CANADIAN DOLLAR

In spring of 2004, I predicted the Canadian dollar would achieve US$ parity within five years. I now think it may happen sooner. The currency has risen more than 20% since early last year, and the strong commodity price environment and capital flows suggest more is yet to come. There will be temporary reversals, but the odds are high that the overall trend for Canada’s “loonie” will be upward for some time to come. December 19, 2005

COMMODITY STOCKS

Should commodity stock positions be trimmed back? I don’t think so. In October, I cautioned of a setback for energy stocks, and recommended that investors take advantage. Energy did correct and has since rebounded convincingly. Moreover, a reasonably healthy global growth environment foreshadows further strength for the sector. Better economic conditions may also bring to an end the consolidation phase other commodities have experienced. Base metals, food and chemicals prices may post new highs. The two commodities which seem ready for a breather are gold and copper. With copper, the corrective phase will probably be ugly and protracted, once it arrives. With gold, any setback is likely to be shallow and temporary. December 19, 2005

URANIUM

How to invest in uranium, readers want to know after my report on escalating demand? It’s not an easy question to answer. Yes, I can tell you who produces uranium and who controls the largest reserves. But the problem is that the large-cap uranium proxies are either too expensive (Cameco Corporation) or that uranium production is only a peripheral part of the company’s activities (BHP Billiton). Which is why a new vehicle, developed by Canada’s Denison Mines may fit the bill. In May this year, Denison launched the Uranium Participation Company (Toronto, Symbol: U), whose sole mandate is to buy and hold physical uranium oxide in concentrate form. In an initial wave of excitement, the stock quickly vaulted to CAN$7.25, but a recent patch of softness has seen it fall back to around CAN$6.10, where it trades at a roughly 12.5% premium to the value of the underlying uranium. Given that uranium storage is difficult and that there are no comparable products with similar liquidity, I think that’s reasonable. You should know that uranium prices can be volatile, but if you’re as excited about the fundamentals for the commodity as I am and are looking for a practical investment alternative, U fits the bill. December 19, 2005


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!