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How Rich Investors Buy InsuranceBy
Friday, March 12, 2010
In July 2007, I was sitting in the Fairmont Hotel in Vancouver, British Columbia, talking to Rick Rule, founder of Global Resource Investments. Rick is one of the most important resource financiers in the world... and he has an extraordinary eye for value and investment safety.
We were talking about portfolio insurance. Specifically, the kind to protect you from the huge "oil risk" I told you about yesterday.
Rick was explaining how he had set up his clients to withstand a big spike in oil prices. You see, back in 2000, oil traded for about $25 a barrel. Rick thought that was much too low. Even then, it was obvious oil production in countries like Mexico, Indonesia, and Venezuela was in trouble.
Increasing demand from emerging markets looked like it would put a huge dent in surplus production. Rick expected a big run up in the oil price. Big price spikes can disrupt an investment portfolio, since oil is a major cost for many different kinds of businesses. Accelerating oil prices can kill earnings in a hurry.
Of course, higher prices boost revenues and earnings for the companies that produce it. So making smart investments in oil companies ahead of rising oil prices can counter the losses it creates in other sectors. This is how insurance works.
Rick's insurance strategy was simple. He wanted his clients to buy into Alberta, Canada's oil sands. The vast deposit of bitumen (extremely heavy oil trapped in sand) covers about 54,000 square miles. It's a massive source of oil. Rick calls the Alberta oil sands "the Western world's most predictable resource."
What he means is, there's no mystery to these deposits and no need for traditional exploration. The bitumen is there in the ground... not miles offshore and miles below the sea. Plus, Canada is a politically stable country that shares a border with the greatest military power on Earth.
Since this oil is trapped in heavy sand, however, it costs more to extract. The bitumen must be refined before it becomes usable crude, so it costs nearly $40 per barrel to produce... much more than conventional oil. Of course, when the open-market price for oil spikes, that $40-a-barrel refining cost looks insignificant to investors... and they pile into oil sand stocks.
And as we know now, Rick got his big spike in oil prices in late 2007 and early 2008: Crude hit its all-time high of $145.66 per barrel on July 11, 2008. Rick and his clients enjoyed tremendous gains. Many oil sand players rose 300%, even 500% during that time.
As I told you yesterday, Iran presents a big oil-spike risk right now. Iran wants to "go nuclear." The U.S. and Israel do not want it to go nuclear. I think the situation will be resolved peacefully, but I'm encouraging everyone I know to own safe Canadian oil in case it isn't. If the problem in Iran goes "hot," safe Canadian energy assets will skyrocket in value.
This is why Rick likes Canadian oil as wealth insurance. If there's a problem with Iran, Iraq, Saudi Arabia, Russia, or any other major producer, you've got a fantastic oil hedge. For hedging against oil disruptions in the Middle East, Canadian oil is even better than gold.
Good investing,
Matt Badiali
P.S. I devoted the entire issue of my most recent Resource Report to the best Canadian oil assets you can buy right now. These are assets you can buy today and hold for years. In the case of an oil spike, you'll make a fortune. In the case of no oil spike, you'll simply own some of the most productive energy assets in the world. You can learn how to access this issue, and read about another extraordinary situation in the oil complex, here.
Further Reading:
If you missed Matt's column yesterday, go back and take a look. In it, he explains why a tiny, sparsely populated region in Oman could pose a massive threat to the global energy market... and why you should buy your oil insurance while it's still cheap. Find his essay here: The Giant Financial Risk You'll Never Hear About on Television.
Rick Rule's area of expertise is natural resources – like energy and metals. From 1998 to 2006, Rick turned $15 million into roughly $460 million (before fees) for his customers. So when he talks commodities, we listen. Get the details on his latest big play here: Rick Rule's Favorite Resource Sector.
Market NotesCONTRARIAN INVESTORS NEED TO READ THIS Energy investors shouldn't just focus on oil sands right now. As the chart below shows, its cousin natural gas is "supercheap" these days.
Longtime DailyWealth readers know we encourage folks to view the world through several different "lenses," one being the price of gold. By using gold as a "gauge" to value various assets like land, stocks, and other commodities, you can filter out the declining value of paper currencies. It's no magic pill for making great investments, but it can give you a great "real money" guide for buying cheap assets.
Count natural gas in the "cheap asset" category right now. The chart below displays the past 10 years of natural gas trading in terms of gold. As you can see, natural gas fluctuated around the same value versus gold from 2002-2008. But in 2008, lots of new natural gas supplies came online, while gold soared in value. This "natural gas down, gold up" situation has left the clean fuel near historic levels of cheapness.
This is no call for a big rally in natural gas... We're simply pointing out that natural gas has been clobbered in the past year. If you're a contrarian, you're interested in natural gas.
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