I’m at the Money Show in Las Vegas today, and everyone’s asking me about the correction in gold: “What does it mean? What should I do?”
My answer: This week’s decline in gold — and other commodities — is a rare gift, a chance for you to buy while others are temporarily selling.
This story is not about one day or even one week. It’s about what I call “the mighty and the mightier” — investments that go up … retreat temporarily … and then go up much more.
Examples: The stocks and mutual funds I’ve highlighted here in Money and Markets. I sure hope you’ve gotten into some of them. They’re on fire. And even after this week’s sharp correction in commodities, their flames are still blazing. If not, this may be your chance. But as usual, it pays to be selective. For starters, consider …
USEC (USU):
Up 19.8% in Less
Than Two Months
I first told you about USEC in the March 22 issue of Money and Markets.
The company processes used uranium, about half of which comes from old Russian atomic warheads, and converts it into enriched uranium for nuclear power plants.
Not everything with USEC is rosy. The price the company pays for electricity is going much higher — up by 50% in its next one-year contract, according to press reports.
And to cut costs, USEC plans to reduce its workforce at its Paducah, Kentucky facility. Annually, that plant uses more power than the entire state of Maine.
Likewise, the price USEC pays for uranium from Russian warheads is also moving up.
But there’s good news …
- The company just received Nuclear Regulatory Commission approval for a new plant that uses the latest technology.
- Sales and earnings are definitely going in the right direction.
- The company’s share of revenue from uranium sales was up 65% in the most recent quarter.
- Per-share earnings have soared from a penny to $0.40.
Perhaps most important, I think USEC has pricing power in its favor with uranium likely to reach $100 per pound in the next year. Why?
- There are 442 operational nuclear power reactors in the world. So demand for
uranium fuel is enormous.
- Total global uranium consumption was estimated at 176.3 million pounds in 2005. Only 47% was supplied directly from mining. Stockpiles are dwindling — fast!
- 130 new nuclear power plants are either being built or are in the planning stages. Some analysts put the number of planned reactors as high as 160!
In short, the growing gap between uranium supply and demand should keep the uranium market red hot. USEC is containing costs and should have plenty of customers.
American Century
Global Gold Fund (BGEIX):
Up 58% in Six Months …
This was one of my first picks for Money and Markets. In the same issue, I also profiled AIM Gold & Precious Metals Fund (IGDAX), which is up 47.7% over the same period. The really good news is that we’re in a rip-roaring gold bull market, so all the gold funds I’ve recommended have done well. Take a look:
- U.S. Global Investors World Precious Minerals Fund has risen 68% in five months.
- The U.S. Global Investors Gold Shares Fund is up 69.6% since December 28.
- Two gold ETFs, the GLD and the IAU, are up 33% since I talked about them on January 18.
You’re probably wondering, “Is it too late to buy a gold fund now?”
My answer: No!
Gold just had a nice, healthy correction. I figure it could last a bit longer. But not very much longer. Based on my technical analysis, I see gold heading next for $870. And if technicals don’t float your boat, consider these fundamentals …
- There are reliable reports that the Russian Central Bank plans to double its gold resources from 5% to 10%.
- Chinese economists are pressing China’s central bank to quadruple its gold reserves.
- Global gold production peaked in 2001 at 2,620 metric tonnes. Last year, production fell to 2,519 metric tonnes. South Africa, the world’s premiere gold producer, saw production fall 13.3%.
- This year, gold production should rise — but only 90 tonnes, or 4%. South Africa continues to weigh on global output, with its gold production falling 9.3% in March.
- Gold ETFs have attracted almost $9 billion in 18 months and account for about 10% of global gold demand — 400 tonnes a year.
Meanwhile, the U.S. dollar has been swooning against the yen and the euro. I’ve told you how the greenback and gold are on the “seesaw of pain” — when one goes up, the other usually goes down. Well, I think the dollar can go a LOT lower.
The recent pullback in gold doesn’t alter that seesaw. Not by one iota.
Pacific Ethanol (PEIX):
Up 69.7% Since April 5!
In our April 5 issue, I wrote:
“The government is throwing money at alternative fuels like ethanol, and Pacific Ethanol is one of those stocks that should make the most of it.”
Boy, has it ever!
Just understand that Pacific Ethanol is a momentum play — the stock is doing well because a lot of investors want to invest in ethanol, and there are very few plays out there.
Fundamentally, though, Pacific Ethanol is a stomach-turner. Over the last 12 months, it posted sales of only $88 million and didn’t turn a dime in profit. So how does it justify its market cap of $1.28 billion? Maybe because every time President George W. Bush talks about oil, he seems to mention ethanol as a solution.
And there are many reasons why ethanol’s use as an alternative fuel should continue to garner investors’ interest (and money). Here are just three …
- Global oil supply and demand is closely balanced at around 85 million barrels per day. Excess pumping capacity has dwindled to just under a million barrels per day.
- Any number of potential trouble spots — in Venezuela, Nigeria, Chad, Iraq, or Iran — could easily overwhelm the small safety net.
Did you see what happened in Venezuela on Friday? President Hugo Chavez claimed to have “total control” of four heavy oil ventures run by foreign companies, including Exxon and BP. The companies say that’s news to them. As I told you in The Axis of Oil, Chavez has been busy rewriting contracts on a whim and raising taxes sky-high on foreign oil ventures. That’s the kind of action that could eventually drive out foreign capital … and send Venezuela’s oil production much lower.
- Hurricane season is right around the corner. Just two storms last year — Katrina and Rita — knocked out a cumulative 28% of the annual oil production in the Gulf of Mexico (approximately 547.5 million barrels) plus 20.5% of annual natural gas production. And experts are saying this hurricane season will be another doozy.
As I’ve argued before, corn-based ethanol, at least using today’s technology, has a very low energy-return-on-energy-invested (EROEI).
Still, you can’t argue with all the money being thrown at this stock. With that in mind, if you want to take some money out of this stock and put it elsewhere, or protect yourself with a stop, that might not be a bad idea — just in case this hot stock turns cold.
The Big Picture
Right now, it’s tough to make a bad investment choice when it comes to gold or energy. And my personal opinion is that the bull markets in both energy and precious metals will last for years to come.
But that doesn’t mean there won’t be corrections — even steep, scary corrections — along the way. That’s all right. Consolidation is a normal and necessary part of any bull market. It gives you a chance to buy your favorite investments for less money.
Yours for trading profits,
Sean
For more information and archived issues, visit http://www.moneyandmarkets.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
