WHY Natural Resources?
Every portfolio should have exposure to precious metals, agriculture, commodities, energy, and world dominating companies
If you are at all concerned about protecting your investments against creeping or accelerating dollar devaluation and inflation, you need to take a close look at natural resources. Virtually every other investment is fundamentally financial in nature, and therefore tied to the dollar. But natural resources represent tangible goods that can’t be printed into existence, and that gives them lasting value, particularly in the future.
What Inflation REALLY Is – Dollar Devaluation
The common assumption is that inflation equals rising prices. In truth, rising prices are just a symptom of an underlying problem. The real problem is dollar devaluation. That devaluation causes the value of the dollar to fall, resulting in higher prices.
From a government perspective, the public perception of inflation as representing rising prices is highly useful. It means that the public is distracted into believing that rising prices are being caused by some toxic force, such as greedy middlemen, evil foreign governments, Corporate America – or even by the citizenry (alleging that they are buying too much of certain goods that are causing prices to rise to dangerous levels).
In truth, any of those other explanations could actually cause inflation – but it would be very temporary. If the number of dollars in circulation is limited, then the inflation would eventually run out of steam because there simply wouldn’t be enough money to keep feeding the inflation. But the more significant big picture explanation for inflation is dollar devaluation – or more generally – currency devaluation.
There are two ways this can happen:
- Official devaluation – this is where a government formally lowers the value of its currency. This is more typical in developing economies, where the local currency is tied to the dollar. As a rule, the US government does not engage in official devaluations.
- Unofficial devaluation – this is where a government creates too much of its own currency (“Too much” being defined as increasing the level of currency in excess of the rate of real growth in the economy).
Dollar Devaluation – Money Printing By Another Name
Unofficial devaluation is a common occurrence throughout the world. Unofficial devaluation is simply printing too much currency. In extreme circumstances, the government might literally print money and distribute it throughout the economy through public spending. This always results in hyperinflation, and ultimately the complete destruction of the currency.
The US government regularly engages in unofficial currency devaluation, despite public pronouncements to the contrary. But does it with a twist – it increases the money supply through its public debt operations. No matter what is happening in the economy – growth, recession, or stagnation – the US national debt continues to rise. The national debt has climbed from $5.7 trillion in 200o to nearly $18 trillion today (actually $18.08 trillion as of January 31). That means the national debt has more than tripled in less than 15 years.
But here’s where the unofficial dollar devaluation comes into play. Of the roughly $18 trillion in outstanding debt, more than $7 trillion is held by either the Federal Reserve or various government agency trust funds.
That means that the government is issuing currency that’s backed by IOU’s to itself. That’s money printing by a different name, and explains why the cost of living has been rising steadily over the past 15 years, despite the low-inflation claims based on the Consumer Price Index (CPI).
Like all other currencies in the world, the US dollar is a fiat currency, by virtue of the fact that is not backed by anything tangible (including the gold in Fort Knox), and can be issued in virtually unlimited quantity.
Why Natural Resources Protect Against Dollar Devaluation and Inflation
One of the biggest problems with money printing schemes – no matter how they come about – is that natural resources don’t always cooperate in the expansion of money. While the money supply is being steadily increased, natural resources are available only in fixed quantities. This is the reason why natural resources can protect against devaluation and inflation.
It’s important to understand however that the relationship between natural resources and the dollar is not a precise inverse outcome. There may be times when the price of certain natural resources is declining, even in the face of devaluation and inflation. A good example of this has been the price of oil and gasoline since the middle of 2014. It has been falling even at a time of steady dollar devaluation.
The payoff in natural resources, as an investment, is found in the long term. Here are some examples of how natural resources play out in the long run:
- Gold: In 1970, gold was $35 an ounce. It is now trading at about $1,200, which is to say that it has increased by a factor of 34 in the past 45 years. And it’s nowhere near its all-time high.
- Oil: In 1970, oil was less than $3 a barrel. It is now trading in the $50 range, which is to say that it has risen in price by a factor of 17 in the past 45 years. This despite the virtual collapse in the oil price by 50% since the middle of 2014.
- Cars (composed of industrial metals): In 1970, the cost of an average car was $3,900. By 2014 it has risen to about $32,000. That means that new cars have risen by a factor of eight in 45 years.
- Houses (composed of building materials): In 1970, the cost of an average house was $26,600. In 2015, the median sale price of a house is $202,150. That’s an increase in price by a factor of eight in 45 years.
For reference sake, in 1970 the US national debt was about $400 billion, which is to say that we’ve added $17.6 trillion to the debt since. Where did all that debt money go? No doubt into many of the price levels listed above (among many others). This shows you dollar devaluation in action, which is the real reason for inflation. Given that natural resources are fundamental proofs against dollar devaluation and inflation, let’s take a look at four natural resources that can accomplish the goal – and one investment that can do the same even though it isn’t a natural resource.
Introducing the Natural Resources Portfolio
In building the Natural Resources Portfolio, we looked at building a solid game plan. We wanted to take a few moments to introduce the seven-part analysis our team uses along with an overview of how the portfolio is broken down.
We start with the following 7 steps:
1. We start with an exhaustive list of moral and financial criteria to make our selection process much simpler. We essentially filter out the “cream of the crop” after weeding out thousands of companies that don’t live up to our stringent criteria as faith-based investors.
2. We begin with 700 companies that meet our criteria and narrow this down to 200+ stocks. We let our senior analysts deem which companies are most likely to outperform the market over the next 12+ months.
3. We then look at the financial strength and momentum of each company. We forecast which company(s) rises will be short-lived and which will sustain their current trends.
4. Next, we look to see if each company’s industry has good prospects in the near term future. Great companies in weak sectors can go down with the sector while weak companies in a strong sector can go up. We seek to find strong companies in strong sectors.
5. We also want to see what other analysts are saying about our companies. Studies have shown that companies who have recently been upgraded tend to outperform the market.
6.We strongly evaluate what each company is worth. We want to find “diamonds in the rough”. We pour endless hours to find strong companies with attractive valuations. What you pay for a company is almost as important as its long-term potential.
7. Lastly, we examine the bang for the buck. After narrowing the list down to our Top 100 ideas, we then look for our TOP PICKS in each of the five categories – precious metals, agriculture, commodities, energy, and world dominators. This is a list of strong, successful businesses and ETFs that we feel have good risk-to-reward potential.
This portfolio is designed for investors who can withstand fluctuations (ups and downs of the markets) and are willing to hold for at least three to five years. It is not for those who are risk averse or looking to make quick gains. It is a long-term approach with a focus on building wealth along with inflation-protected growth.
Here is a breakdown of the current portfolio (split into 5 parts):
We believe long-term that the dollar will continue to lose value; and that gold and silver, along with mining companies should benefit from this trend.
As the global population continues to grow, we believe land and agriculture will continue to see shortages. This we believe will lead to higher food and land prices.
We believe the emerging markets will continue to expand and drive up commodity prices with their demand. As the dollar continues its long-term decline, this should also benefit steel, cooper, and other metals.
We believe that world energy demand should continue to be strong over the next 3-5 years and having exposure to companies involved in exploration, servicing, and drilling should see healthy gains. We also want exposure to natural gas and oil.
To provide the portfolio with a bit more stability, we look for companies dominating their industries, paying healthy dividends, and those that have global exposure. We like companies in stable industries with strong demand.
As you can see, this is a diversified portfolio. It is being actively monitored, and changes will be made as needed. You can sign up for active trade alerts to know when we are buying or selling any holdings within the portfolio.
As a member of the Natural Resources Portfolio, you’ll receive:
- Best Buys Now! – The hottest Natural Resources stocks on our buy list right now. We tell you the top 5 stocks to buy right now so you can get your money to work immediately.
- Target Buy and Sell Prices – “buy up to” prices and “target sell” prices so you’ll know exactly where to get in and out. We typically hold around 20 stocks.
- Monthly Newsletter and Updates – Once per month, you will receive a comprehensive newsletter and update where I highlight new stock picks in depth and provide commentary and an update on the current holdings.
- Trade Alerts – Any time we buy or sell a stock in the portfolio, you will receive a special email trade alert so you’ll know what’s happening in the portfolio and what actions you need to take in order to follow along.
- 24/7 Website Access – You will have your own username and password to log into our Natural Resources Portfolio via our website.
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