AABP Award 728x90

Gold, silver and oil futures can be slippery


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Dear Mr. Berko:

I want to own assets that will protect me from inflation. So, my broker had me trading gold, silver, oil and natural gas future contracts. In three months I lost $22,000. I got a new broker, who said he bought you a bottle of beer at a golf tournament in May. He would have me invest in a list of three gold stocks, three natural gas stocks and three oil stocks. Please give me your thoughts on these nine issues as inflation hedges.

D.A., Boca Raton, Fla.

Dear D.A.:

I like your broker, and he’s a darned good golfer. And, yes, we had a Bud Light Lime at his country club’s clubhouse. And I agree that buying oil, gold and natural gas stocks are less risky, by orders of magnitude, than buying oil, gold or natural gas futures. However, good intentions aside, this very well-meaning lad would probably mess up a free lunch. There’s a much safer way to hedge against inflation.

I agree that within the next year our economy could begin to experience significant inflation due to an inexorably expanding deficit and national debt. In a 1799 letter, Thomas Jefferson wrote: “I sincerely believe that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling on a large scale.” The next dozen months could validate Jefferson’s belief.

Southwestern Energy Co. (SWN-$41.56), Devon Energy Corp. (DVN-$56.89) and XTO Energy Inc. (XTO-$39.11) are fine natural gas stocks that should move higher as the economy gains strength. DVN and XTO even pay small dividends. But to minimize your risk as much as possible, I would recommend U.S. Natural Gas Fund LP (UNG-$13.88), an exchange-traded fund listed on the American Stock Exchange. UNG’s assets are investments in various futures contracts for natural gas that trade primarily on the New York Mercantile Exchange. UNG’s 52-week trading range is $11.91-$48.42. It’s a pure play on natural gas and has much less risk than the three natural gas stocks.

Royal Dutch Shell plc (RDS-B, $51.02), BP plc (BP-$49.83) and Chevron Corp. (CVX-$66.38) are fine oil companies trading some 40 percent below their recent high prices. RDS-B pays a 6.6 percent dividend, BP’s dividend yields 6.7 percent and CVX yields 3.9 percent. But I would rather that you own U.S. Oil (USO-$34.65), an exchange-traded fund with a 52-week trading range of $23-$105. USO is a pure play on the spot price of West Texas intermediate light sweet crude and purchases futures contracts on the New York Mercantile Exchange. I believe USO has much less risk than owning oil stocks or trading oil futures.

Finally, AngloGold Ashanti Ltd. (AU-$39.48), Eldorado Gold Corp. (EGO-$9.57) and Newmont Mining Corp. (NEM-$42) are good issues. However, I would be much more comfortable owning SPDR Gold Trust (GLD-$93.39), an exchange-traded fund with a 52-week trading range of $66-$99. GLD seeks to reflect the current price of gold bullion.

Although your broker didn’t mention Treasury Inflation-Protected Securities, I suggest iShares Barclays TIPS Bond Fund (TIP-$100.93). This exchange-traded fund seeks to duplicate the performance of government-issued Treasury Inflation-Protected Securities by investing in the inflation-protected bonds of its underlying index.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service

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