Oil, Coal, Copper, Silver and Gold

All four are termed 'commodities,' but all four are different. Let's examine them all briefly, and see what attributes, liabilities, and chances one takes in investing in them.

OIL

Most oil is held by Muslim nations it seems, and in general they don't like America. This does not mean they won't sell us their oil, because oil with no one to buy it is useless. It's doubtful that a Muslim nation can either afford to, nor want to sit on a valuable commodity which is in great demand. The owners of oil will undoubtedly squeeze every dime then can out of it, but that's a normal thing for a business to do. The word "Cartel" used to come into play with oil, but it no longer seems applicable since OPEC lost control. Oil is a commodity which is used, burned, or in some way disposed of, and is gone forever. No reclamation is possible. When all the oil is gone, if that ever happens, that is it. Oil consumption is rapidly increasing because of India and China's coming onto the civilized, developing category. As oil consumption increases, so does the pollution and bad air which hangs over major cities. Oil prospecting, discovery, drilling, refining, and distribution is very expensive, and therefore seems to be limited to huge corporations, which may or may not be efficient, moral, or even legal in some instances. Investing in oil, means buying stocks in major corporations. Not for me, because of the huge, inefficient way large corporations run, and the small dividends compared to profits.

COAL

Coal is found in thousands of places on earth. In America, it is said that we have enough coal for hundreds of years. Coal is abundant, but can be difficult to use if the greenies and pollution freaks have their way. Modern coal fired power plants are becoming more and more efficient, with less and less fly ash and other obnoxious gasses being emitted from stacks. In Colorado, where I live, there are proposals for three new coal fired power plants, which will eventually be built, I am certain. Disadvantages of coal are its ash and sulfur content. Western coal is low sulfur and eastern coal, which is usually mined underground, is commonly high sulfur, which gives the pollution crowd the vapors. Being a railroad aficionado, I fondly remember steam locomotives, and love the smell of coal smoke. While a modern steam locomotive could easily be built today, which would handily compare in operating costs with diesels, it would be difficult to multiple unit them, so each locomotive would have to have its own crew. At one time there was an ample supply of extremely hard coal, called anthracite. It was so full of BTU's, and burned so cleanly and slowly, that hundreds of thousands of homes in big eastern cites had anthracite furnaces which required but a shovel full a day to keep the entire house warm. One anthracite hauling railroad honed in on the clean burning stuff, and invented a gal named "Phoebe Snow" who was all dressed in white and never got dirty, because she rode the road with anthracite. Investing in coal? I wouldn't think so because of the horrendous rules and regulations plus occasional deaths, which can bankrupt a company.

COPPER

Copper prices have more than quadrupled of late, thanks to Asia's improving economies. China is building, building, building, and all of these new buildings have copper pipes and even copper roofs in some places. Copper is used for wire in these buildings and windings in electrical generators. Copper won't rust, and other than silver, is probably the best conductor of electricity known to man. India is building also, and all of its new buildings have copper wire, and copper pipe. Copper is not scarce other than its huge demand. The world isn't running out of copper, but extant mines just can't fill current needs. I believe that the demand for copper will lessen in the future, and the price will fall. This is my opinion only, but I wouldn't invest in copper at the present time. It was only a short time ago when copper at 70 cents a pound was regarded as outrageous. $4 copper is now common. It seems to be at the same point that gold and silver were in the spring of 1980. I think it will fall.

SILVER

The first coins ever struck were silver coins. There are silver coins in existence which are thousands of years old. It is historic money, and also a by-product of copper mining. Or in some instances, copper is a by-product of silver mining. Silver is the best conductor of electricity, but far too expensive for use where copper is currently used, such as wire and motor and generator windings. Silver won't rust, but it will tarnish when exposed to air, which makes it ugly. When silver coinage was used in the world, it never tarnished because it was used so much, and also because it was only 90% silver, with a 10% alloy preventing it from tarnishing. My favorite 10 oz silver bars are tightly wrapped in clear plastic so they won't tarnish. Silver requires a lot of space to store. I often use the comparison of buying a small home. You could probably hold enough gold in both hands to buy it, but it would take a large pickup truck to contain enough silver to buy a home. I have a client who has thousands of ounces of silver, and he says that when he picks up 125 - 100 oz bars, his pickup springs are bottomed out. At today's prices, that's about $150,000, so the pickup truck of silver is an adequate comparison.

The historic ratio of silver to gold, is 16 to 1, and this is virtually everywhere, and not just the US. A couple of years ago, the ratio was 77 to 1. Of late it has been as low as 44 to 1. Currently, the ratio has risen to about 52 to 1. Why do ratios differ and change? Because of supply and demand. Actually, it is said that there is more silver around than gold, which should make silver go sky high, and I think it will. Mexico has lots of silver, but its citizens are living in abject poverty. Mexico has oil too, but all of that natural wealth is being squandered by its corrupt government, so the citizens starve and work for $5 a day. Natural wealth won't make a nation prosperous if its government is corrupt.

Silver and gold have been around for thousands of years, both are actual money, and their value is not dependent on a governmental whim, dictum, or law. Since silver has less value per ounce than gold, because it is more plentiful, it has been used as coinage, and still should be. "Bags" of U.S. Silver coins ($1,000 face) are the most economical way to own silver, but to me the most undesirable way, since the bags weigh in at over 56 pounds. Thousand ounce bars are the next cheapest way, but also undesirable, at least to me. First of all, none of them weight exactly 1,000 ounces as do the 100's, 10's or coins. Each one must be individually allocated and its weight and hallmark noted before a purchase can be made, and then it is sold by the ounce and fraction of an ounce. Thousand ounce bars are also very heavy, weighting even more than the bags.

GOLD

Gold won't tarnish, rust or decay. It will be the same after a thousand years in the ocean as it was the day the ship sank. It is magnificently beautiful, and is a historic symbol of safety and security. Silver it is said is "poor man's gold." Silver is both a precious metal and an industrial metal, but gold is a pure precious metal, and coveted throughout history in all lands and nations. Gold is compact, and if you ever want or have to move, gold is easier to tote than silver. A lot easier, as the home price mentioned above illustrates. A safe full of silver is not an easy thing to steal, since it is so heavy and bulky. A cache of gold is a much easier thing to get away with by a thief. When catastrophe strikes and everyone is scared out of their wits, most think of gold, not silver. Thieves like to steal valuable things, and a couple of Krugerrands have the same value as a hundred ounce silver bar. Thieves will usually look for gold, and not silver. Gold will buy today what it bought a hundred years ago, as will silver. The reason is that they stand alone as historic and actual wealth, which no governmental tampering or legislating will change, even though they wish it weren't so.

What to invest in, is a nice question, but one thing must be considered, and that is what happens to the investment? Coal and oil, once burned or used are gone forever. Copper can be re-claimed, but is way over-priced. Silver and gold are historic money for thousands of years, and are real money…forever. Protect yourself.

June 9, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com