You read that title right, I am talking about The Ultimate
Energy Investments, not the "Alternative
Energy" investments. Alternative energy
is a very sexy word to the ears of investors, in recent years. I am all for alternative energy
developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe LENR
, or Cold Fusion
, which involves precious metal palladium
, is humanity's only solution to Peak Oil energy crisis.
We face the Peak Oil
reality, a reality that the total energy supply of the world will begin to decline
, instead of continue to increase. The world must cope with and live within the reality of ever declining
energy supply, until a new abundant energy source
can be developed to replace the depleting fossil fuels
of the earth.
It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard energy
itself, as a commodity investment? This is why I gave the title of this article as "The Ultimate
Energy Investments". Yes I am talking about HOARDING ENERGY
How do you hoard energy
? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?
It is not possible to hoard energy directly, but it is possible to hoard energy indirectly
. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.
The ultimate energy investments
are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.
Precious metals, particularly PGM
, are such ultimate energy hoarding
investments, because these metals cost huge amount of energy to produce. According to the annual report
of Anglo Platinum
), the direct electrical energy cost of producing just one ounce of PGM metal, is almost 7GJ
in 2008, or 7x10^9 Joules
. In terms of electricity that's roughly 2000
kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.
I guestimate that all direct and indirect energy cost combined, it costs about 10,000
KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in six tons
of coal.ONE OUNCE of PGM metal equals SIX TONS of coal
. Remember that and think about it!
engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed one ton of coal
to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!
When you buy a one ounce platinum
coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.
As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.
Isn't it great that you can hoard energy itself
, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: one ounce of platinum or palladium equals to six metric tons of coal
The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is aluminum
. There is no scarcity in the raw material to produce aluminum. Aluminum production
is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.
If you want to hoard electricity
, you can hoard aluminum
bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like Alcoa Inc.
) or Aluminum Corp. of China
) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.
Recently, another energy source, natural gas
, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.
What can you buy to invest in natural gas
, besides producers like CHK
? Many people talk about natural gas ETF funds
. I must point out that people should NOT
touch any of these ETF
s that are based on nothing but paper
. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have worthless papers
created out of thin air by counter-parties. I have learned my lesson
, fortunately without suffering any loss. I argued
why people should NOT invest in UNG
, or any other paper based ETF
s. It is extremely important that you read it
and try to understand the difference
and physical goods
Is there no way to hoard
physical natural gas
for an investment? Well, there IS
a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called urea
, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce urea
, comes from natural gas
. No other raw material is involves. Urea
is stable, safe and cost effective to store. By hoarding urea
, you are hoarding natural gas in solid form. Current urea
price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.
Go ahead to hoard urea
at current low price if you want to invest in physical natural gas
As for me, I have been a long term advocater
investment. There is now even more reason to invest in palladium, besides the bullish factors I have talked about
repeatedly. At current price
of only $578/oz
, it is nice to know that one ounce of palladium
represents at least six metric tons of coal
, right at your finger tip. Since the December, 2008 lows
of precious metals, the performance of palladium
has beaten other precious metals: gold
will continue to outperform
the other precious metals, until at least it reaches a price parity
Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like ABX
, just to name a few.
When it comes to platinum, there are much fewer choices: AGPPY.PK
When it comes to palladium
, the only primary mining plays available is Stillwater Mining
), and North American Palladium
Full Disclosure: The author holds shares in SWC
as the largest long position. The author also holds shares in PAL
. The author hoards physical palladium
metal but currently has no plan to hoard physical urea
due to lack of suitable market access. The author has no long or short position in any of the ETF