Twice a year we have a meeting with our economist, Woody Brock of Strategic Economic Decisions, Inc. Those of you who came to our seminar in June 2007 would have heard him speak, others may have seen the video of his talk. We are proud to be amongst Woody’s clients and value his work enormously. He is truly independent, he absolutely believes in economic theory and that the correct application of good theory will provide extraordinary insights into market conditions and give informed investors a huge edge.
What is very interesting is that we use quite different techniques. However, our broad based conclusions are not that much different from Woody’s. We study the fundamentals, utilise a huge resource known as our life experiences, read everything, and incessantly scour charts of all investment and financial markets, such as equities, interest rates, commodities, currencies, etc., going back twenty or thirty years. By doing this work we get an understanding of what is really going on and which investments offer genuine opportunities because they align correctly to the ever-evolving conditions.
Woody’s view on the oil price is simple: it is all about supply. First and foremost supply, and only second to that, demand. His view coincides with Jean-Claude Trichet, President of the European Central Bank, and the chiefs of Shell, BP and Repsol who, amongst others, also say it is not speculation but supply.
A number of years ago Woody wrote an essay on this very subject pointing out that the oil price was bound to rise exponentially because of insurmountable issues. The most important issue being the unwillingness of the oil majors to invest trillions of dollars in unfriendly territories in search of another North Sea oil sized resource. The reason for this is the subsequent threat of nationalisation by the host country. The oil majors will not invest the money necessary to find the oil that is needed to meet the increasing demand that is arising from the inevitable growth of the emerging nations, as China grows to be the biggest economy in the world.
The chart for crude oil remains in an orderly uptrend, with absolutely no sign of weakness. The recent clamour that oil is a bubble has subsided somewhat although it is probably true that a majority of not terribly well informed analysts and observers still think it is a bubble. As we have said elsewhere, the majority in such matters are rarely, if ever, correct.
Energy stocks have suffered some weakness, although here again orderly uptrends are the order of the day. We have a policy at fullCircle which is to not sell investments that are in orderly uptrends. We think that’s a good policy and we have no intention of changing it. In the same way that we will choose to only own investments in uptrends, so do we abominate those investments that are in disorderly downtrends and right now there are plenty of those. It is strange to us that they remain part of so many other portfolios.
The gold price moves steadily higher, having recently touched $944.90/oz. On studying the chart, it seems to us that $950/oz should be exceeded quite soon – the longer it takes, the better and the more likely it will be followed by an early test of the all-time high at $1,030.80/oz set on 17th March 2008. Gold bullion is a primary bull market that has been in an orderly upward trend for a number of years, we have happily remained invested in it, almost from the outset. If, as we expect, over the next few years, the gold price increases to about $2,000/oz, and we really believe that it will, then investments such as the BlackRock Gold & General fund should, from current levels, increase by a factor of at least three times.
• By John Robson & Andrew Selsby at Full Circle Asset Management, as published in the threesixty Newsletter.