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Profit From Wall Street's Global Commodities Grab

Commodities / Resources Investing Apr 27, 2010 - 05:26 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleWilliam Patalon III writes: Virtually every investor has heard about how the emergence of China and India promise to send commodity prices skyward in the months and years to come. The promised run-up has yet to begin in earnest, but prognosticators say it's merely a matter of time and just the "right" catalyst.

Money Morning Contributing Editor Peter Krauth - a noted commodities expert and editor of the Global Resource Alert advisory service - says he's found that "just right" catalyst. He's calling it the "Great Global Commodities Grab," and says it's being engineered by some of Wall Street's biggest investment banks.

But here's the key point: Because Wall Street is essentially "gaming" the system, this commodities grab is a chance for investors to reap bigger returns than they would get with the leverage afforded through options and futures - but without the risk.

Investors have reached the point where this physical commodities grab "gets really interesting," Krauth said in an interview with Money Morning. "JPMorgan Chase & Co. (NYSE: JPM) now owns ships overseas and storage tanks in Canada, Asia and Europe [that hold] millions of barrels of oil. And it's far from being the only one. Back in December, one report stated that if all the tankers being used as offshore storage tanks were placed end to end, that string of ships would stretch 26 miles."

Added Krauth: "We're talking about oil supplies being physically taken off the market... that can't help but affect market prices. And that's just with oil - Wall Street investment banks are taking major physical stakes in such commodities as gold and other precious metals, too."

Krauth - a highly regarded market analyst and expert in metals, mining and energy stocks - recently sat down with Money Morning Executive Editor William Patalon III to talk about how the "Great Global Commodities Grab" is going to ignite a rally in the prices of oil, gold, other precious metals and even agricultural commodities. During the question-and-answer session, Krauth also:

•Detailed how two leading investment banks just spent more than $2 billion to buy precious-metals-storage companies.
•Talked about how gold, throughout history, always ends up taking over for fiat (paper) currencies.
•Explained how the aggressive price forecasts Wall Street investment banks have made for both oil and gold are certain to become self-fulfilling prophecies.
•And described two companies - one an energy player and the other a junior miner - that he recently recommended to his advisory service, using them as illustrations to underscore his commodity-price predictions.

William Patalon III (Q): You've written extensively about the bullish, long-term prospects for commodities. But you've now uncovered a promising new development in the resources area - one that involves banks taking physical control of commodities. Just what is it that we're seeing here?

Peter Krauth: Well, it's actually being manifested in a variety of ways. Because of the financial crisis, many of the largest investment banks converted into what are called "bank holding companies." This obliges them to file on a quarterly basis a financial-statements form known as the Form FR Y-9C. This form - which must be filed with the U.S. Federal Reserve, provides useful insight into which sectors are taking on more weight. And, like clockwork, the prices of certain commodities run up within days of that filing.

At the same time, we're seeing these banks increasingly deploy a strategy of control. What I mean by this is they are no longer just "paper trading" commodities through futures contracts. This began a couple of years ago with the creation of exchange-traded funds (ETFs) that were physically backed with such commodities as gold, copper or silver, to name just a few.

But here's where it gets really interesting: JPMorgan Chase & Co. (NYSE: JPM) now owns ships overseas and storage tanks in Canada, Asia and Europe holding millions of barrels of oil. And Morgan is far from being the only one. Back in December, one report stated that if all the tankers being used as offshore storage tanks were placed end to end, that string of ships would stretch 26 miles. That's enough ships to physically blockade the English Channel and enough oil to meet the entirety of Europe's oil needs for half a week.

We're talking about oil supplies being physically taken off the market ... that can't help but affect market prices.

And that's just oil - Wall Street investment banks are taking major physical stakes in such commodities as gold and other precious metals, too.

(Q): And what Money Morning has labeled as the "Great Global Commodities Grab," doesn't stop with oil, does it, Peter?

Krauth: No, it doesn't. Banks are now also taking physical delivery of the gold they control through certain futures contracts, instead of settling the contracts in cash at maturity. JPMorgan and Goldman Sachs Group Inc. (NYSE: GS) - two of the real heavyweights in this realm - have recently purchased metals-warehousing businesses. To make these transactions, the two banks spent a combined $2.2 billion-plus, so you know they're taking this whole physical-commodities strategy very seriously - as well as to an entirely new, and unprecedented, level.

(Q): Why are banks grabbing up global commodity supplies?

Krauth: Globally speaking, banks realize that we're in long-term - secular - bull market for natural resources. And they understand that the end of this "bull run" is nowhere in sight. These big banks have more than $4 trillion riding on commodities, so they're making sure that this trade goes their way. How better to influence the price of a commodity than to control its supply - or at least enough of it to have a measurable impact? That's why they're taking steps to gain physical control.

(Q): Which commodities/natural resources are now being - or will be - the most affected?

Krauth: My research indicates that many different resources are being impacted. But there are two that I consider to be the most important - and those are oil and gold. These are quickly becoming the new currencies. Interest rates worldwide remain at historic lows. That's making paper currencies lose value - creating a financial hot potato of sorts.

So when savvy investors look around, they want something tangible, in demand, and whose value will increase. (As an aside - but an important one, at that, with virtually all commodities priced in U.S. dollars, it's especially important for American investors to protect their assets by allocating a portion of their holdings to commodities ... we'll get back to that thought momentarily).

We all know that oil is indispensable to living our lives the way we do now. And Asia's appetite for the stuff is insatiable and only going to increase. Gold's always been a haven against fiat currencies ... in fact, over the last 3,000 years, every single fiat currency in the world has eventually been replaced by gold. Fiat currency ... the paper U.S. dollars we rely upon ... is only as good as the public confidence that backs it. Once that confidence is gone, so is the value of that currency.

The United States has so far avoided this eventuality by shifting back and forth between gold and fiat money several times during its 200-plus-year existence. But the Obama administration faces some very tricky decisions in the months and years to come - and the same holds true for the administrations that eventually follow.

We're in its tenth year of a bull run in commodities, and I believe that prices have much higher to go. When people get really excited, gold - as well as silver - are among the few items on earth where a rising price actually spurs an increase in demand. They have no substitute.

(Q): What kind of impact could the trends that we're discussing - particularly the "Great Global Commodities Grab" by banks - have on commodity prices? Over what time period will this unfold, and why will this happen? How does your view of the future fit into the broader commodities boom that we're projecting?

Krauth: My calculations show that this bull market in resource commodities began nine years ago. We're probably only at the midway point, meaning this powerful trend has another 10 years to 12 years left. The emergence of China, India and the remainder of Greater Asia is unprecedented, so the demand for commodities - from a fundamental standpoint - is rock solid.

(Q): How does China factor into this? India? In addition to the commodities themselves, should we be investing in these countries?

Krauth: With one third of the world's entire population living in just these two countries combined, astute investors understand it's impossible to ignore their impact. They are modernizing at a dizzying pace, which naturally translates into massive escalations in the demand for natural resources, precious metals and agricultural commodities. However, I prefer to take the approach of investing in those companies producing the raw materials China and India need or want - no matter where they happened to be headquartered. That gives me more latitude, and becomes an effective risk-management tool, as well.

The emergence of China, India, Latin America and other newly minted capitalist economies will have a big impact on global demand for natural resources, precious metals and agricultural commodities. I believe that oil, gold, many of the base metals and even agricultural commodities could double or triple within three to five years.

And that was before the banks devised their latest market-manipulation strategy. The "Great Global Commodities Grab" by banks will only exacerbate things. Add in what banks are doing and I believe that we'll see commodities prices run up as much as four to six times from current levels. Let me be very clear here: The physical-commodities strategies now being employed by banks can only elevate the pressure beyond anything we've seen before.

(Q): Are banks, in effect, "gaming" the financial system?

Krauth: Yes, I believe what they are doing is skewing the game in their favor. When you look at the kinds of forecasts the banks are making, despite all the economic risks on the horizon, their level of conviction is very telling. For instance, you've got Goldman Sachs calling for gold to rise by $200 an ounce, or about 17%, this year alone. And Bank of America Corp. (NYSE: BAC) expects oil to hit $150 a barrel within four years, which would represent a gain of 79% from recent price levels.

The control that these big banks are gaining over commodity supplies is helping to guarantee higher prices: No wonder they're able to make such bold forecasts of future prices.

But now they've gone beyond all this and taken it even a step further. What these banks have realized is that there's a simple way to control vast amounts of resources for pennies on the dollar. You see, they've figured out they can "hoard resources" by owning shares in companies that themselves control billions of barrels of oil or millions of ounces of gold. In fact, these resources don't even have to be in production. Some companies are developing their holdings, so most of their resources are still in the ground. This kind of approach is just brilliant.

(Q): That leads us to the big question, the one that investors reading this will most likely want the answer to: What kinds of returns are possible from these investments, over what time period, and why?'

Krauth: Many of these resources companies are way undervalued for the quantity of resources they own. So as the price of the underlying commodity goes up, the shares of the companies will skyrocket because they can sell their output at higher prices, expanding profit margins handsomely. As for their in-ground resources, the market accepts higher prices and gradually revalues them accordingly.

And all of this happens even before the company extracts the resources. Plus, there aren't even storage costs to worry about; Mother Nature takes care of that.

In my view, it's not unrealistic to expect many of these companies to return anywhere from 10 times to 15 times your money. If you look back on the gains made in shares of some of the biggest names in commodities, that's already happened over the past seven or eight years.

(Q): For retail investors, what are some of the best ways to profit from this trend? Which sectors will benefit?

Krauth: I like some of the junior-resource/junior-mining companies. With the junior explorers or developers, those returns can be particularly explosive: A "junior" with discovery potential can sometimes return 10 times to 15 times an investors original outlay in as little as one to two years (12 months to 24 months). Who needs leverage or options, or to worry about expiry dates? Owning shares in these types of companies is akin to holding permanent "calls" on the underlying resource. The inherent leverage can be explosive.

(Q): To better illustrate some of the points you've made here, can you talk about some of the specific profit opportunities that you've either looked at, or acted upon, of late?

Krauth: Absolutely. Subscribers to my Global Resource Alert advisory service just added an oil-sands play to their portfolios. In addition to its obvious presence in Canada, this firm also has operations in Asia. It also has a patent on a technological process that can transform the "heavy" tar-sands oil into a higher-value (and easier-to-transport) energy product. It's a technology that competitors may wish to employ.

(Q): How about in the precious-metals arena?

Krauth: My subscribers have just added a precious-metals-explorer "junior" that already has several million ounces of "gold equivalent," millions in cash, no debt, a land package in a promising precious-metals belt, and an aggressive drilling program designed to define more ounces. This company has already attracted interest from an established major miner, so this is a story that investors will want to stay tuned to.

[Editor's Note: To find out more about the tar-sands and junior-mining companies mentioned in this interview - as well as other companies that can generate tenfold returns or more from Wall Street's "Great Global Commodities Grab" - check out Peter Krauth's "Global Resource Alert" advisory service. To learn more, please click here.]

Source :

Money Morning/The Money Map Report

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