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Tuesday, July 21, 2009

Buy natural gas low now, sell it higher later

Nobody wanted stocks when the Dow was struggling at 6500 but those same people are now testing the waters 2000 points higher.

So what am I looking at now?

Well, as a commodity guy and the editor of Resource Trader Alert I’m always looking for the best moves in hard assets.

A neglected sector that has gotten my attention is natural gas. The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Overall crude itself has more than doubled from the lows with nat. gas lagging far behind.

For me the risk on nat gas is on the upside…in other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 – which is a $40,000 move per futures contract. For my taste the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero, it will always have some value, and many fundamentals can change the present landscape of low, low prices.

Thankfully very few “Sheeple” are grazing on the green green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. The Potash to increase crop yields has been a big mover the past few years with low grain carryover forcing farmers to get every kernel or pod out of the ground possible. Nat gas also provides much of the electricity to cool our cities in the hot dog days of summer.

The hurricane season is always a wild card that can add risk premium to prices. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts.

Think of your reaction to possible oil plays back in February when no bottom was in sight. Being ahead of the energy curve is the place I want to be. When things don’t develop as planned the losses at lower levels are manageable and probability is on our side that eventually prices will move up.
-- from "How to Become a Better Investor" by Alan Knuckman


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