Unless you've just returned from an isolated tropical island, you've already been told that gold is approaching the high of the last Kondratieff commodity bull market in 1980 which was $850. The chart doesn't show that whole history. There were three phases starting with the crash from the 1980 commodity tops--some commodities topped in 1973/74 along with some economies, but most in 1980. Then the "flatline" of the 1990's at the new lower levels below 1980 prices until 1996/97 when the bottom fell out in a deflationary scare exacerbated by the Asian collapse and the Russian bankruptcy debacles. After the double bottoms of 1999 and 2001, commodities were off to the races with shortages of supply in everything.
Gold and natural gas (and others like copper and other metals) accelerated their climbs in 2005 before collapsing last year. The CRB Index, which represents all commodities futures trade in the US, shows the general pattern of the past two years: a three phase correction which ended recently in August. Crude oil and gold have led the charge thereafter, but the CRB inset shows that all commodities have joined the parade with their own patterns. (Click for a larger chart.)
NYMEX natural gas resembles gold in its long term chart shapes although with leads and lags and exaggerations. NG is lagging now but beginning to make its move which happened to start at its normal seasonal low of late summer and early fall. Gas is the "clean fuel" and gives the US nearly 25% of its energy needs right now, but gas is subject to distribution and storage constraints and has had its wings clipped a bit as well by the short-sighted rush into the grain alcohol "gasoline" which requires as much energy to produce as we get from it.
We have heard the reports of two new liquified natural gas ports to be built on the Sonoran coast of Mexico "not in California's back yard" but close enough for short pipelines to Arizona, California, and possibly El Paso, Texas. Gas is still being flared off from oil wells in many areas of the world, but that is going to stop in a big way as liquified natural gas finally comes to North America and Europe. The 21st century is the gas century. Russia is the gas colossus, so get used to Mr. Putin's swagger and finger-pointing.
US-sourced natural gas is widely assumed to be on its last legs, but an elegant study of the giant Hugoton Basin by the Kansas Geological Survey and University of Kansas concludes that the Hugoton Basin of Kansas and Oklahoma will remain a major producer at until at least 2050. My guess is that the import of liquified natural gas (LNG) through the new mega-ports like those in Sonora will finally put a world price floor under US gas which was a political victim of price controls for so long that exploration and distribution infra-structure has lagged.
At first glance the specter of massive LNG imports coming in a few years would seem to be bearish for US natural gas. But I suspect it will be bullish, especially given the long term Kondratieff bull cycle we are in. World gas will be priced on the same energy output terms (BTU) as is crude oil.
A wise acquaintance of mine looks for inevitable cases of supply shortages which will cause price gains and tries to buy it in some sort of vehicle that "pays you to wait" until the inevitable comes to pass. As part of my retirement income research it seemed advisable to look for one income vehicles in addition to bonds. I believe Loomis & Sayles Bond Fund (LSBRX or LSBDX) is the finest fund in the land available to me. It can go anywhere with any kind of bond or any duration, and it has done so for over 16 years. It is beating accelerating inflation for the past few years. However it seemed prudent to look at income vehicles which are directly involved in commodity areas. One simple way is to buy Pimco's Commodity Real Return Fund (PCRDX or PCRIX)and I have it. I discovered that PCRIX normally requires a $5,000,000 committment to buy, but at Vanguard Brokerage Service one can get in for a $25,000 minimum presumably because a lot of Vanguard investors buy Pimco. The difference in trailing twelve month dividend yields is 5.43% for PCRIX ($25,000 minimum) and 5.02% for PCRDX ($5,000 minimum). Both pay their dividends from their underlying TIPS bonds, which I have recently discussed, and structured commodity notes. I hadn't written about these funds for several years during the "rest period" we saw in the chart, but now is a good time to look.
But getting back to natural gas, there are at least four US gas royalty trusts which trade as stocks and pay rather nice dividends. I started accumulating them on price declines. They do not trade in huge volumes so you have to use limit orders and be patient. Owning them is also all about patience as you are collecting 6-9% annually in monthly payouts while waiting for the great gas bull market. No taxes are paid by the trusts, only by you. San Juan Royalty (SJT) gets its income from the New Mexico San Juan field and Hugoton Royalty (HGT) from the Kansas field. These two are nearly 100% natural gas with just a bit of petroleum distillate. Mesa Royalty (MTR)--the grandaddy of US trusts founded by T. Boone Pickens--and Cross Timbers Royalty (CRT) started by the same parent as Hugoton Royalty--give us approximately a 70% natural gas exposure. SJT and HGT pay between 6% and 7% due to trailing lower gas prices and MTR and CRT pay over 8% due to ~30% crude oil/distillate components.
These are "wasting asset" holdings in the sense that they are not renewing their assets except by modest in-filing between wells, whee permitted, and reworking of current wells, both by their underlying operators. They have conservative reserves equal to at least ten years each, but if one looks back at these reserve life numbers four or five years ago, they were similar then. The Kansas University Hugoton study lends weight to the idea that there will be additional extensions to current estimates.
Younger investors and/or those not looking for yield may want to consider Russia's Gazprom (OGZPY) and US-based XTO Energy as a long term gas holdings. An independent and free, but delayed release, website for continued updates on many energy companies is Kurt Wulff's McDep Oil and Gas Investment Research.
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