Hedge Turmoil with Gold & Clean EnergyMideast Turmoil: Look to Gold, Silver & Clean Energy
Published 2/24/2011
Many of the great declines in the stockmarket over the past 30 years have been related to oil (United StatesOil – USO). This week we have seen the major indices plummet ongeopolitical chaos throughout North Africa, especially the largeoil-producing Libya, as investors returned to gold (SPDR Gold Shares –GLD), silver (iShares Silver Trust – SLV) and oil. As the market reachedrecord overbought territory, any excuse could begin a significantpullback in equities (SPDR S&P 500 – SPY).
Investors are monitoring key assets in Egypt (Market VectorsEgypt Index – EGPT). If either the Suez Canal or Sumed Pipeline comeunder attack, then we will see a major oil spike, possibly worse than inthe late 1970s. Already Iran has taken advantage of the chaos andpassed into the Mediterranean, further escalating potential conflictsbetween Israel (iShares MSCI Israel Cap Invest Mkt Index – EIS) and theIranian Allies of Hezbollah and Syria who want to take back control ofthe Golan Heights. This Middle Eastern instability may have deeperconsequences and I don’t believe it will end anytime soon. In fact, itmay even eventually spread to Saudi Arabia where the royal familymaintains weak control and extremists are gaining popularity. In lateJanuary in an article entitled, Will Gold, Silver and Oil Prices Soar on Middle East Unrest?I wrote about the domino effect hypothesis, stating that chaos wouldnot be contained in Tunisia and Egypt. This spread of chaos, causingvolatile power vacuums, could have a significant impact on gold and oil,especially now that the domino hypothesis is being confirmed.
At the end of January investors returned to precious metals.Gold has been on sale every six months. A January phenomenon occurs whenmutual funds and institutional investors reposition their holdings,sometimes allowing investors to buy a sector on sale. At the end ofJanuary, gold and silver found support as geopolitical conditionsworsened. The recent Libyan crisis has caused oil to jump which in turnhas caused a decline in equities.
As much as the financial crisis and record government spendinghas helped gold soar to record highs, terrorism and war have been majordrivers of the price since Sept. 11, 2001. The Middle East possessesapproximately 65% of the world’s oil reserves, and Egypt in particularhas two key assets which effect the global oil trade: the Suez Canal andthe Sumed Pipeline. Many analysts did not expect Libya to fall intocivil war. Reports are showing that oil exports are being curtailed,sending oil into new 52-week highs.
The “Sputnik” moment which President Obama spoke about in hisState of the Union address may come faster than expected out ofnecessity. Washington is actively pursuing supply of North Americanheavy rare earth assets to fast-track into production as top-secretdefense technologies depend on it. Sanctions on China from the WTO willnot be enough to meet the growing demand. Even China, which producesover 97% of the rare earths, has expressed interest in heavy rare earthassets globally. Hyundai, the latest company on the electric-car scene,recently commented that it was pursuing a rare earth supply as well.
Economies are growing and demand has increased since the lastmajor Iranian Revolution in 1979 when oil spiked higher. An oil spikenow could be much more detrimental 32 years later. The world is moredependent on fossil fuels and many nations are struggling with slowgrowth and huge debt burdens. An oil spike could cause a major setbackfor the global economic recovery unless governments initiate majoralternative energy and clean energy programs. I believe these currentevents will create a more significant push into clean energy, non carbonenergy. A few commodity sectors may benefit including uranium (Global XUranium ETF – URA), lithium (Global X Lithium ETF – LIT) and rareearths (Market Vectors Rare Earth/Str Metals ETF – REMX).
President Obama has released this year’s budget and it wasshocking. Many analysts were surprised by the huge amount of capitalallocated to clean, alternative energy in order to spur innovation andjob growth. In the recent budget, a $7,500 tax credit will be given tocar buyers who purchase an electric car. Obama has a goal of putting 1million electric vehicles on the road by 2015. Many analysts arepredicting about a 10% increase in cars sold due to this legislation.However, tensions are escalating as Iran sticks out its tongue at Israelby passing through the Suez Canal. Oil prices could spike as turmoilspreads through North Africa and the Middle East. Legislators aresending a message that they want to wean themselves off of MiddleEastern oil and look into clean and independent energy.
Investors should expose themselves to the potentialsupply-demand constraints and rise in oil prices by purchasingdevelopers with major assets in these clean energy mineral sectors or bydiversifying into these newly created ETFs, such as REMX or LIT, whichtrack these sectors. As oil spikes, these clean energy commoditiesshould receive a renewed interest by legislators and investors whobelieve in clean energy power generation.
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Jeb Handwerger is editor of Gold Stock Trades.