How to Allocate Your Portfolio in These Inflationary Times

If you're concerned about inflation - (and I don't know why you would be, it's not like trillions of dollars have been printed or anything...) - you've probably given some thought as to how you should allocate the assets in your investing portfolio.  After all, the best investors know that portfolio allocation is THE most important element when it comes to investing - if you get the big picture wrong, you're not going to make that up with individual stock or asset picking heroics.

Expert investor and guest author David Galland weighs in today with his recommendations on asset allocation in these crazy times...

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Gold Stocks in a Failing Fiat Currency

By David Galland, Managing Director, Casey Research

As the U.S. dollar takes a nosedive and precious metals gain more and more attention from individual investors, the number of questions and concerns is increasing as well. The following reader email addressed to Casey Research is representative of so many inquiries that we decided to provide an in-depth response that may prove instructional to others as well.

I have been agonizing about getting metal after dumping paper metal I held and was reading the Daily Dispatch looking for investment clues. I was pondering the ratios of thirds that you mentioned in a recent Dispatch and the pursuing of metal stocks when an issue occurred to me that was not mentioned.

On the one hand, you discuss the dollar trap of investors running from one currency to another, away from the dollar and back to it. I fear that the dollar is doomed as are other fiat currencies, and time is getting short. So the question that came to mind is, what happens if one is invested in metal stocks or any vehicle that is denominated in a fiat currency, and that currency goes bust, blotto?


What value does that investment retain? Does it become a total loss? Redefined into the currency of the locality that operations are in? Converted into some other New World Order monetary unit, SDR's or nationalization of any regional assets by the locals? Is this impossible to plan for?


I realize I am probably speculating on a subject that can only be determined by psychics and crystal balls, or those with a sixth sense on the subject, but it is an issue I have not heard anyone ponder, except those who only beat the drum for physical metals.


If I allocate away from physical into speculative investments denominated in fiat in the ratios you suggest, it might provide an additional boost if one’s timing is impeccable. But weighing that against being trapped in a depreciating currency unit, along with the possibility of physical metal becoming unobtainium, it does not seem to be a prudent decision.


I would appreciate a further explanation for your ratios, and does the ratio vary with total personal asset amount? Is your ratio determined by finances or politics?


Chet

Here at Casey Research, our current rule of thumb suggests a portfolio allocation of approximately one-third in precious metals and related investments; one-third in cash (spread among several currencies), and one-third in “other” – namely deep-value stocks, energy, emerging market investments, etc. These ratios are meant entirely as a general guideline, as everyone’s circumstances will be different.

The concept is that the one-third dedicated to a mix of physical precious metals and stocks (the mix determined by risk tolerance) will offer you “insurance” against further currency debasement as well as some very attractive upside potential… with the amount of the upside determined by the amount of risk you are willing to take on.

Which is to say, with the true Mania Phase of the precious metals markets still ahead of us, the micro-cap junior resource explorers still hold the potential for explosive profits. But they require being able to hang in there through periods of extreme volatility. Moving down the risk/reward scale, the larger producers will provide very handsome upside, but without the risk of being “trapped” in a thinly traded junior. And finally, for the precious metals component of the portfolio, the amount you hold in physical metals should be viewed as a core holding of “good” money.

The one-third dedicated to cash reduces overall volatility and gives you ammo to jump on new opportunities. By spreading the money across a number of better-managed currencies, as well as your native currency for general expenses and liquidity, your currency portfolio can preserve value better than a “red or black” bet on a single currency such as the U.S. dollar or euro.

Our subscribers have done well with the “resource” currencies of the Canadian dollar and the Norwegian krone. In time, as the purchasing power of the fiat currencies begin to decline, we’ll be looking to reduce this segment of the portfolio.

The final one-third is something of a catch-all, where we opportunistically follow some key themes such as energy, food, inverse interest rates, foreign real estate, and so forth.

Again, that particular allocation is necessarily general – with some focusing more heavily on the precious metals, others on the cash component, and others on more traditional stocks.

Now, as to the part of Chet’s question dealing with “what happens if one is invested in metal stocks or any vehicle that is denominated in a fiat currency, and that currency goes bust, blotto?”

To answer that, I adroitly hand the baton over to Terry Coxon, one of our Casey economists and editors.

Here’s Terry…

Not to worry. You may be confusing “denominated in” with “quoted in.” 

Every bond and every CD is denominated in a particular currency, which means that what it promises to pay you is a certain number of units of the currency. A U.S. Treasury bond, for example, promises you a certain number of U.S. dollars. An investment’s denomination is part of the investment’s character. 

In most cases, an investment is quoted in a particular currency. Prices of U.S. Treasury bonds, to use the same example, are customarily quoted in U.S. dollars. But that is only a matter of customary practice. You could, if you found it convenient, quote the price of a U.S. Treasury bond in Swiss francs. For all I know, there are people in Zurich who do just that. 

That’s the difference between denominated in and quoted in. The denomination is inherent in the investment. The currency used for price quotes is a matter of convention and can change.
By convention, stocks trading in New York are quoted in U.S. dollars, stocks trading in London are quoted in pence, and stocks trading in Tokyo are quoted in yen. Notably, some stocks are quoted in more than one currency, such as Canadian stocks that trade both in Canada and in the U.S. – a demonstration that the currency used for quoting a stock’s price is a matter of choice and not something inherent in the investment. 

So in what currency is a common stock denominated? No currency at all. A share of common stock doesn’t promise to pay you a certain number of units of a particular currency. Instead, it promises to pay you a pro-rata portion of whatever money or other property the company distributes as a dividend. If all paper currencies lose all value, successful gold mining companies will still own their properties and can still operate profitably. But when they pay dividends, they won’t be paying out dollars or any other paper currency. They will be paying out whatever has replaced the paper currencies – perhaps gold itself. 

Carefully chosen gold stocks won’t evaporate when paper currencies do. They will rise in value.

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And no one chooses gold stocks more carefully than BIG GOLD editor Jeff Clark. Picked for asset protection as well as outstanding profit potential, his medium- to large-cap gold and silver producers are generating steady returns of 56.8%... 46%... even 187.9% for subscribers. And right now, if you give it a try, you can kill two resource birds with one stone: Pay just $79 per year for BIG GOLD, plus receive 12 monthly issues of Casey’s Energy Opportunities FREE. More here.

Ed. note: I am a Big Gold subscriber and affiliate.

Coal Outlook 2011: What Australia's Floods Mean for Coal Supply and Prices

Australia's nasty flooding is drastically hampering their ability to crank out coal.  How serious and long lasting will the effects of these floods be on coal supply, and prices?  Our energy guru Marin Katusa explores...


Australian Floods Cause Drought in the Coal Market

By Marin Katusa, Casey’s Energy Report

The most important metallurgical coal basin in the world is underwater. Open pits have become lakes, stockpiles are soaked, and rail lines are submerged and in places destroyed. Damage is estimated at $5 to $6 billion.

Australia accounts for almost two-thirds of global coking coal production. Much of it comes from Queensland, where an area the size of France and Germany combined is underwater. That includes the Bowen Basin coal region, which produces almost a third of the world’s coking coal. The Bowen Basin was hit with 350 mm of rain in December, against an average of 102 mm.

Floods are now receding from the Bowen, giving some miners an opportunity to ship from existing stockpiles. Other mines are still inaccessible, and several rail lines are still submerged or damaged. And since open pits are still flooded and will take weeks to drain, shipping from stockpiles only postpones the inevitable: a reduction in met coal supply. Analysts think a recovery to pre-flood coal production levels will take at least three months.

At least six major global coal miners have declared force majeure, which means they can miss contractual shipments because of circumstances out of their control. The list includes Anglo American, Aquila Resources, BHP Billiton, Macarthur Coal, Rio Tinto, Vale, and Xstrata. Mines responsible for between 100 and 140 million tons of annual coking coal production are now under force majeure, representing as much as 40% of global supply.

And it’s probably not over yet. Australia’s Bureau of Meteorology predicts both eastern New South Wales and southeastern Queensland have a 60% to 70% chance of receiving higher-than-average rainfalls between January and March 2011.

What does it mean for coal prices and coal equities?

First, coal is not traded daily, like copper or gold. Coking coal prices are set in quarterly negotiations between steelmakers and coal miners; contracts for the first quarter of 2011 were mostly settled before the floods, at an average of $225 per ton (already the second highest level ever). So prices have not changed yet, but there is lots of talk about where they will go next. Analyst predictions for the second quarter range from $250 to $350 per ton.

Coking coal producers not affected by the floods are already reflecting the increase, and that will likely continue. Teck Resources, for example, climbed from below $59 to almost $63 in the last days of December, before slipping with the markets. Western Coal and Grande Cache Coal also made gains. The longer-term impact will of course depend on how long it takes for Australia’s mines to return to normal operations, but in general the situation supports Casey’s bullish stance on coking coal: there is not a lot of supply, and demand is constant, if not rising, so prices can only trend up.

Casey’s support for coking coal has already generated big returns on at least one recommendation. Some ten months ago, I was on Business News Network (BNN) talking about met coal and recommended Cline Mining at just over $1. Those who traded on that advice are now looking at a 300%+ gain, as Cline is currently trading at more than $4, in less than four months. And Casey’s Energy Report recently added a new metallurgical near-term coal producer to its portfolio.

As for thermal coal, prices seem poised to edge up slightly because of the floods but, unlike metallurgical coal, there is plenty of thermal coal to go around. The situation has disrupted just 8% of global thermal supply. So while the floods may be causing a pop in thermal coal equities, the increase is unsustainable. There are thermal coal deposits all over the world, and many countries produce enough to meet most of their energy needs. China’s thermal coal stockpiles remain very healthy, for example, and it is the second-largest importer of thermal coal in the world. The top importer is Japan, but even it only imports some 113 million tonnes annually and relies on coal for less than 30% of its electricity needs.

As such, the pop in thermal coal equities is not going to last. Hence, investors should use the lift as an opportunity to reduce their positions.

The floods are also a reminder of the extremes of Australian weather – a prolonged drought in Queensland ended just two weeks before the torrential rains began. And while the rains pound Queensland and New South Wales, which cover the eastern third of the country, searing temperatures have residents of neighboring South Australia and Victoria on alert for bushfires. That is simply a reminder that Australia’s weather can often impact the country’s all-important met coal mines.

[No one is more knowledgeable in the volatile energy market than Marin Katusa and his team. That’s how subscribers could rake in an exceptional 818% gain on Uranium Energy (UEC) in only 24 months. Subscribe today and get Casey’s Energy Report for 30% off the regular price – plus one year of Casey’s Extraordinary Technology FREE. Find out more here.]

Ed. note: I am a Casey Energy Report subscriber and affiliate.

Tips for Gold and Resource Stock Investing in 2011

Nice job here by guest author David Galland, who urges you to keep a level head when investing in resource stocks and companies.  Most importantly, he says, always know your goal for a trade or investment before you actually make it.  Solid advice that's all to easy to forget!
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Before You Shoot Your Next Arrow

By David Galland, Managing Director, Casey Research

While I have read certain works on the life and ponderings of Buddha, I claim no deep knowledge of his philosophy. Note I didn’t use the word “religion,” because Buddha himself claimed no supernatural powers and even begged his followers not to deify him after his death. Hardly had he drawn his last breath, however, when the deification began – though most Buddhists won’t claim it as such.

Even so, there are Buddhist practices I think useful in this hectic world of ours – practices that don’t involve dressing in robes and refusing to swat flies. For example, I rather like to meditate from time to time. Nothing too involved, just ten or fifteen minutes of quiet deep breathing as part of calming the mind and all that.

I also find a lot of wisdom in the training of the Zen archers, who seek to clear their minds of all internal dialogue not related to the simple process of releasing the arrow at the target. Simply, they strive for only one goal – perfect form. Thus they clear their minds of all others, even those that might be considered complementary to the task at hand – for example, getting a pat on the back from the instructor, or plopping the arrow closer to the bull’s-eye than the next person down the line.

Of course, as humans are wont to do, Buddha’s successors have taken the man’s simple approach to life and wrapped it in gaudy and self-important rituals, in the process turning it into a livelihood for predatory priests. But that’s another story and shouldn’t take away from Buddha’s core beliefs.

Especially the bit about simplifying and focusing your goals. That idea has always seemed to me to have relevance for a wide range of pursuits, from the putting green to the stock market.

Based on my many interactions with investors over the years, I have concluded that there are really just two sorts. There are those that have clear goals, and those who don’t. Those who do make the money. Those who don’t provide the money to those who do (investing in a zero-sum game – for every winner, there is a loser).

This thought was made more tangible to me in recent days, based on a personal experience. Long story short, I had invested in a pre-public company years ago. It wasn’t a big investment, and it took longer than anticipated to ultimately go public. When it did, it had a fairly good run, but as the reason I bought it in the first place was still ahead of it, I hung on. Well, as is so often the case, the company’s missed a hurdle and came tumbling back to earth. With the stock trading hardly at all, and for just a few pennies a share.

Lo and behold, the company’s management reinvented the company as targeting rare earths and managed to acquire a project of merit. The investment that I had written off as worthless soared on high volume.

Now, if there is one thing that anyone with experience in the small-cap resource stocks will tell you, is that the time to sell is when there is someone to sell to – because absent volume, getting out of a decent-sized position is not easy.

So, there was the dilemma – hold on in the hope that the surprise home run turns into the sort you bestow on your grandchildren? Or secure your gains by selling and moving on?

At the point of such a decision, the mind gets very un-Zen-like. Visions of untold riches dance in the head, followed by fits of fretting as the stock pulls back. Next thing you know, you are tossing and turning in the night, conflicting thoughts chasing each other around like cats.

In the final analysis, I recalled the old adage that pigs get fat but hogs get slaughtered. I sold enough to take my initial investment off the table, and a healthy profit – holding on to a modest position to enjoy any further upside. And, having done so, the internal dialogue came to an abrupt halt.

Now, the funny thing is that after a brief pause, the company is again moving up – but I have no intention of second guessing my decision to sell when I did. On a percentage basis, my returns were in the moon shot category – the sort that only the junior resource sector can produce – so it would be just plain churlish to gripe.

More to the point, the stock could just as easily have peaked and once again collapsed, in which case I would really feel like a dolt had I not taken an exit.

All of which delivers me to the point. Namely that it is very important, especially for the resource investors among you, that you actually have a firm goal in mind for each investment you make – and that you remain single-mindedly focused on that goal.

Do you own gold or silver as a protection against inflation? If so, then why even bother checking the price on a daily basis, let alone every few minutes?

Or do you own it as a speculation? If so, what is your specific profit target? Don’t have one? If not, then it seems to me a bit like setting off on a journey without knowing where you want to actually go.

Do you know exactly why you own the resource stocks you do? What hurdle are you betting they will clear next, and by doing so ratchet the price higher? Is your goal to get your original investment off the table on a double? Or do you have a specific price target in mind, at which point you will close the position entirely and move on to more fertile ground?

This idea of keeping an easily understood, single goal in mind for each of your investments is hugely important, because without it you are going to be susceptible to the fears, fantasies, and folly that ultimately cause investors to end up on the losing side of the equation… by selling good companies on pullbacks, holding on to positions well past the point of reasonableness or chasing stocks after they’ve spiked.

Probably the most successful investor I know – I won’t say his name, because he might not like my pointing out that he has tucked away close to a billion dollars, thanks primarily through investments in the resource sector – has a well-deserved reputation for selling too early.

While it is remarkable that he has made so much money in this sector, what is more remarkable is how he did it. Which I would sum up as follows…

• First and foremost, he follows a process – almost mechanically.

• He buys low, with a specific objective in mind. Both in terms of hurdles he expects the company to clear, but also in terms of the returns he expects to get on his investment.

• When his return objectives are met, he sells. Maybe enough to get his original investment off the table, maybe the entire position – depending on his reassessment of the company’s potential to clear the next hurdle. But he always sells at least enough to get his original investment off the table, no matter how much exciting news there is and how much optimism others may feel about the stock.

• He only buys on his own terms. If invited to participate in a private placement, he will do so only if he is completely comfortable with the terms. If the company is offering a warrant with a one-year expiration term and he thinks the development work will take two years, he’ll ask for a two-year warrant. If the company won’t budge, he moves on, confident in the knowledge that there will always be another deal coming down the pike.

• He’s careful with his money. As he likes to say, if you spend your dollars, they can’t mate and make you more dollars.

• He’s not afraid to concentrate investments, but again on his terms, and only when he has done the due diligence needed to be confident that the potential reward warrants the level of risk involved.

If those principles and practices sound simple, it is because they are. But following that process is also incredibly effective.

Interestingly, this process rhymes with the finely honed investment methodologies of the late great Benjamin Graham, author of The Intelligent Investor and mentor to a small cadre of close associates that included Warren Buffett, Jean-Marie Eveillard, William Ruane and Irving Kahn – all of whom used what they learned from Graham to become billionaires, or close to it.

Let that sink in for a moment. One man, Graham, developed a methodology for investing – and it’s actually a pretty simple methodology – that the people working with him were able to duplicate in building their own fortunes. Following a proven process works.

And while Graham wouldn’t have touched a junior resource stock with a twenty-foot pole – his methodology was focused on balance sheet analysis, not a strong point for junior exploration stocks that have no E in their P/E – the principle of following a specific process that mitigates the odds of a loss holds up well. The proof in the pudding is the success of my aforementioned friend, and many others I know who are similarly disciplined.

With all of that said, do you know why you own what you own? Do you have a clear goal in mind for each of your positions? Do you know how much of your portfolio is allocated to speculative resource plays, and are you comfortable with the idea that those stocks have historically suffered extreme sell-offs?

Warren Buffett, whose investment acumen is hard to argue with, likes to quip that the two most important rules for investment success are, Rule #1 – Never lose money. Rule #2 – Never forget rule No. 1.

While it is almost impossible not to lose money along the way while investing in resource shares, it is equally true that once you have scraped your original investment off the table, it is impossible to lose money. Sure, you can give back your profits – but you can’t lose money.

All of which is, I think, worth reflecting on as you aim your next arrow.

[And if you aim your arrows just right, small-cap resource stocks can give you great leverage to the underlying commodities – such as the precious metals. Louis James, senior editor of Casey’s International Speculator, is a master at market archery, beating the S&P 500 by an incredible 8.4x in 2010. Subscribe today and get $300 off the retail price… plus one full year of Casey’s Energy Report FREE. But hurry, this offer ends soon. More here.]

Ed. Note: I am a Casey International Speculator subscriber and affiliate.

How to Invest Alongside Richard Russell: Get Into Gold Before the Mania Phase

Richard Russell recently went on record as saying that gold has not yet hit the third - and most lucrative - stage of its current bull market: The Mania Phase.  Casey's Andrey Dashkov agrees, and makes the case that you should use this opportunity to pick up some gold junior miners before things really get out of hand.
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Chart of the Month: TSX-V Speaks Volumes - Gold Mania Still Ahead

by Andrey Dashkov, Casey’s International Speculator

With the gold price hitting nominal highs last month, there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling?

A bull market typically progresses through 3 phases: the Stealth Phase, in which early adopters start buying; the Wall of Worry Phase (or Awareness Phase), when institutions begin buying and every significant fluctuation makes investors worry that the bull market is over; and the Mania Phase when the general public piles on, driving prices beyond reason or sustainability.

This is followed by the Blow-off Phase, when the bear takes over from the bull and the herd gets slaughtered. Judging by the volume on the TSX Venture Exchange (TSX-V), where a lot of gold juniors are listed, we conclude that the next phase of our current gold bull market, the Mania, still lies ahead.

Have a look at the chart below:

Click to enlarge

If a mania were unveiling now, we would expect to see a sharp increase in investment capital entering the TSX-V, driving its trading volume upward. Over the last few months, the TSX-V daily volume has spiked upward sharply, but as the chart clearly shows, short-term volume is extremely volatile, spikes are common, and equally large drops are just as common.

Stocks of junior exploration companies are leveraged to gold, meaning they rise or fall by a greater percentage than does the yellow metal itself. So a spike in volume should be expected in reaction to an ascending gold price. A more reliable barometer is volume’s 10-period moving average that removes interim market gyrations. Using this measure, the TSX-V’s volume looks like it has returned to a slope of ascent similar to before the 2008 market crash, and the longer-term trend is steadily upward – steady being the key word.

More investors are entering our market, but the pace is not yet accelerating greatly, as we’d expect in a true Mania Phase. In other words, an early indicator of the mania in this bull cycle will be a sustained parabolic move upwards in the TSX-V’s average volume. And that is not happening yet.

Our other volume indicator, the GLD gold ETF, behaves in an interesting manner: it frequently moves counter to the TSX-V. An explanation for this might be that GLD is considered a “blue-chip” stock; a safer haven for investors who actively trade on the TSX-V and park their cash in GLD during periods when they consider juniors overly risky.

The moving average of GLD’s volume remains on a moderate multi-year ascent but has turned down recently. However, its daily volume is up in recent trading. Given the observed correlation between trading volumes of the TSX-V and GLD, this may point to a cooling-down in TSX-V trading activity in the near term.

Finally, the ^HUI gold miners index has tracked TSX-V volume as well, also having resumed a slope of ascent similar to that of the years before the 2008 crash. We see this as another indication that we are in an accumulation phase of the bull market.

We will continue tracking these parameters and updates when we see significant changes. For now, the bottom line is that even with the gold price moving sharply higher, the mania remains an anticipated future event.

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[But when the Mania Phase does hit, there’ll be no stopping it. And the best leverage – beating the S&P 500 by more than 8 times – comes from the little-known “gold nuggets” that International Speculator editor Louis James keeps digging up for his subscribers. For a very limited time, you can save $300 on the annual subscription fee – plus receive Casey’s Energy Report FREE for a year! To learn more, click here now.]

Jim Puplava Interviews Gold Expert Eric Sprott and Neil Howe, Author of The Fourth Turning

Jim Puplava recently sat down with Eric Sprott, one of Canada's top fund managers, to talk about the global economy and gold, at Casey Research's recent investment conference.  Here's a link to the interview below...

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Looking at the out-of-control printing of fiat money and the irresponsibility of central banks and treasuries, Eric Sprott tells Jim Puplava of Financial Sense Newshour, it is obvious to smart investors that gold is the asset to own. Listen to Eric, one of Canada’s most highly regarded asset managers, explain the dire straits the global economy is in and how to protect yourself.

The crisis we’re in today has been absolutely foreseeable, says Neil Howe, co-author of the famous book The Fourth Turning, in the second half of this interview. These recurring “turnings” are driven, he states, by generational aging and are a manifestation of the prevailing social mood. Hear his predictions about what’s yet to come and how long the current “fourth turning” will last.

You can listen to both interviews here.

Eric and Neil are just two of dozens of experts who presented their views, insights, and top stock picks at Casey’s Gold & Resource Summit in October. You can hear all their invaluable advice in 17 hours of audio on CD… details here.

Ed. Note: I am a Casey Research affiliate and subscriber.

Interview with Sergey Kurzin, CEO of Junior Gold Miner Orsu Metals

The following is an interview Jeff Clark, co-editor of Casey’s International Speculator, conducted with Dr. Sergey Kurzin, a Casey Explorers’ League honoree. The Explorers’ League regularly inducts serially successful mine finders with at least three economic discoveries under their belts – a true accomplishment considering that most explorers don’t even have one economic find throughout their careers.

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Kazakhstan: A Positive Climate for Gold

Jeff Clark, Casey’s International Speculator, interviews Dr. Sergey Kurzin

We haven't interviewed Dr. Sergey Kurzin since his induction into the Explorers' League in October 2008. As you'll read, he's had his head down in Kazakhstan but is now ready to speak publicly about his company, Orsu Metals (T.OSU), a gold-copper exploration and development company operating in Kazakhstan and Kyrgyzstan. Sergey is one of the most knowledgeable people we know about the politics in that region, including Russia. Here are his latest thoughts on his company and copper…

JEFF CLARK: It’s been two years since we talked, Sergey. Tell us what you've been doing.

DR. SERGEY KURZIN: I’ve been cleaning up the mess at our Varvarinskoye project, which we acquired from the merger with European Minerals. It was a very complicated arrangement with the banks, who could not agree with each other, and a very unforgiving, hostile, off-take agreement. On top of that, the output was hedged at $575 gold – can you imagine that at current prices? But the main problem was the deposit itself – the grades were 30% below what was stated in the reports. That’s why my head was down, to renovate this company. Now with this cleared up, we have put all our existing projects together and brought them to an advanced level.

Jeff: You’ve been operating in Kazakhstan and Kyrgyzstan for 20-plus years now. Tell us about the business climate there.

Sergey: Well, the business climate, like everything, has its ups and downs. But one can quite comfortably operate in Kazakhstan. If you have a contract with the government, meaning a license or title, and you comply with the requirements of the contract, you don’t have a problem. You just get on with your business. When metal prices moved higher and people were making big profits, they increased taxation in Kazakhstan, as a lot of other countries did, but the climate is still positive.

Jeff: Would you consider Kazakhstan a pro-mining jurisdiction?

Sergey: Yes. Kazakhstan is predominately a natural resource country. It is a giant country with a low population. It has oil in the west and north, and metals in the central region and onwards to the east. They have oil, gas, uranium, gold, copper, zinc, chrome – what did I miss? All the metals you basically want are in Kazakhstan.

Jeff: What about the politics in Kazakhstan?

Sergey: Politically, it is stable. Perhaps it is not an identical democracy to the United Kingdom or Canada, but it is still a democracy as they understand it, in terms of consistency of legislation. Meanwhile, Kyrgyzstan has just had elections, which went peacefully.  The new government is democratically elected and has the support of both the United States and Russia, so I think it is going to be okay.

Jeff: How have you been able to navigate the political waters better than most other companies operating in that region?

Sergey: Well, thank you, that is a compliment. The fact is we’ve done quite a few positive things in Kazakhstan with my previous company, Oriel Resources. We took the Voskhod deposit through all the usual stages of development, obtained all the essential approvals at the regional and district level, and created jobs. I have partners in Kazakhstan who I have been working with for eighteen years. They know what they are doing in this part of the world, so in conjunction with them, we are working quite well.

Jeff: So it's important to have strong local partners.

s, it is usually because they don’t have reliable, trustworthy, long-term relations with a local partner. If you are in Canada, you don’t need such a partner. But in Kazakhstan – which is part of the former Soviet Union – there is a certain way people look at things. They were never part of the British Commonwealth or anything like that, so they look at things differently. I am a Russian by birth and an ex-Russian citizen and lived there for 30 years. I have a lot of people with a Russian background working in the company that help navigate these waters.

Jeff: How did Orsu secure property rights in Kazakhstan?

Sergey: We have a contract with the government and work in accordance with the contract, complying with all the terms and conditions. As long as you do this, you are in good shape.

Jeff: Speaking of Russia, how would you assess mineral exploration in the Russian Federation?

Sergey: Well, that is a very interesting question. As you know, Orsu Metals is not in Russia at the moment. Why? Because there is a federal law that controls strategic assets and creates risk for explorers. But to be honest – in my personal opinion – it has nothing to do with strategic assets. It has everything to do with Russian companies trying to reduce competition.

Jeff: How are they doing that?

Sergey: By keeping them from developing big strategic assets. I believe the Russians already realize that this law is a mistake, because it puts off major Western companies to mining. I think they are currently reconsidering the situation.

Jeff: What do you base that judgment on?

Sergey: Putin and his speeches. But Russia is a large country and pretty slow historically. How fast they will react, I don’t know. But they’re talking about it. At the moment, I am not sure if it is worth establishing yourself in deep Siberia for a project of less than 50 tonnes of gold – just over 1.5 million ounces – which is on the border of what's considered a strategic asset. It would be too expensive and too difficult logistically.

The problem Russia faces with all its restricting legislation and bureaucracy is basically the absence of any new exploration in the whole country! They still exploit and use what they had twenty years ago before the Soviet Union collapsed. So everything that was worth developing is basically taken. There is a lack of new projects, the existing ones are too expensive, and those still undeveloped are usually not worth the effort.

Jeff: Your flagship project is Karchiga in Kazakhstan. I read that you recently increased your interest from 70% to 94.75%.

Sergey: Yes. Karchiga is a copper play. There is a little bit of gold, but we are not even considering it. And Karchiga is the most advanced Orsu project, but not necessarily the largest. It has a lot of advantages, like the location being forty kilometers from the Chinese border. It is a well-defined area and within an historic copper mining belt. 

It is not expensive to develop. We hope to use a lot of Chinese equipment, which will give us some interesting project finance opportunities with potential Chinese off-take agreements. And the infrastructure is good. There are hard paved roads on the Chinese side and a couple of smelters in the vicinity. Electricity is 10 kilometers away, water is plentiful, and the landscape is very gentle. Our contract with the Kazakh government is good until 2022.

As of Q1 2010, we have a 43-101-compliant indicated resource of nine million tonnes at 1.87% copper and an inferred resource of 1.83 million tonnes at 1.6% copper. That's about 400 million pounds of copper, over a billion dollars worth. We expect to complete our definitive feasibility study in September 2011. So this is a good project to turn a company into a producer. We’ve done projects more complicated than this in Kazakhstan, and it is our firm target to complete construction by Q1 2013.

Jeff: I saw that China is investing $13 billion in Kazakhstan. 

Sergey: Kazakhstan is full of natural resources, which China desperately needs for its development and growth. It's easier to bring it from Kazakhstan than import it from South America or Africa. Kazakhstan has a thousand-kilometer border with China. Our Karchiga project is only forty kilometers from the border, so it’s a given synergy. And copper in particular is one of the key metals for infrastructure.

Jeff: So why should I buy shares of Orsu now?

Sergey: Because we have a major resource. Six million ounces of gold equivalent. And our enterprise value is $30 million. What is that, $5 an ounce? It’s a pretty strong case, I think. The company will grow, too. We will acquire added projects and are progressing the existing ones. We are strongly undervalued. If you can discount all the risks, we should be trading at five or six times where we are now. The fact is, we have a track record and a very good technical team. I’ve been on the road and there was big interest in Toronto, New York, and London. We’ve been very well received. I think the stock will see some movement. Nothing happens instantly, as you well know, so give me some time.

Jeff: We will. To wrap it up, Sergey, what do you see going forward with copper and gold?

Sergey: I will answer simply. I think that gold, for the foreseeable future, is not going down because it is a barometer of people's fear. But I’m even more bullish on copper because it is essential. Gold is an artificial thing, a safe haven, and insurance against currency devaluation. But copper – especially in Kazakhstan where you are next door to China – has a strong future. And don’t forget, India is not far away. Of course there will be hiccups, but the overall trend in copper is definitely up, in my opinion.

Jeff: Thanks for your time, Sergey. We'll be watching as you develop Orsu. 

Sergey: Thanks a lot.

[Finding junior mining stocks to invest in is easy… and so is losing your shirt in the process. Finding winning stocks, on the other hand, requires asking the right questions. Learn all about “The 8 Ps of Resource Stock Evaluation,” Doug Casey’s secret of success, in our FREE special report. Click here to read it.]

Why the Gulf Disaster is Wildly Bullish for Canada's Oil Sands

Congrats to our friend and energy guru Marin Katusa on his excellent interview recently with John Mauldin!  I subscribe to Mauldin's premium service - thought the conversation was fantasic (which included resource expert Rick Rule as well).

Marin is always on the hunt for energy investments that also have economic advantages over competitors.  He wants stuff that's profitable at the lowest energy prices possible.  And while the Canadian oil sands don't immediately come to mind when you think of low cost oil, things start to click when you reason out which areas will benefit from the coming smackdown on offshore drilling...

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A Run for the Canadian Border

By Marin Katusa, Chief Energy Strategist, Casey Research

The Gulf of Mexico disaster has changed U.S. priorities, costs, and energy supply sources for years to come. But the fact that the U.S. needs energy isn’t changing anytime soon, and as mass sources of green energy are still a while away, the most likely alternative might be the most surprising one.

With US$15 billion invested annually in offshore drilling in the United States, the disaster in the Gulf of Mexico means that this money is getting ready to migrate elsewhere. And it is the Athabasca oil sands of Alberta, Canada, that are number one on the list.

Given the amount of bad press the oil sands get, this could come as a shocker. But technological advances and improvements in recovery methods, as well as reduction of water usage and greenhouse gas emissions, have made oil sands a viable and popular option for the future of U.S. energy.

The numbers, too, are looking in their favor. Out of the 1.34 trillion barrels that is the world’s total proved oil reserves (2009), only about 20% (270 billion barrels) of this number is actually available to free-flowing capital investment – the vast majority is in the tight grip of various national oil companies.

And a good chunk of these “free-market” barrels, about 178 billion, is sitting underneath the feet of Canadians, or as some call them, the Crazy Canucks. For a country that runs on oil, the United States couldn’t have been presented with a better lifesaver. Compared to alternatives such as Chavez’s Venezuela or the oil fields of the Middle East, reliable oil from politically stable and friendly Canada is by far the easier pill to swallow.

As it is, roughly one in every six barrels of oil consumed by a U.S. citizen today comes from the Canadian oil sands. The fact that infrastructure is already in place for oil sands development and oil already flows through pipelines between the two countries only sweetens the deal.

So, we wouldn’t be taking a huge step in assuming that any future capital spending that will be diverted away from the Gulf of Mexico will find it hard to bypass Canada. In addition, as global oil supply is affected by the drilling restrictions, in the long term we’ll be seeing higher oil prices. While this news might not make the drivers amongst us happy, it couldn’t get better for Alberta and the energy companies operating in the oil sands. With oil prices hovering over US$70 a barrel, the stream of investment dollars into the oil sands is guaranteed.

Obama’s first-ever Oval Office address has confirmed our expectations of no more growth in the American offshore drilling industry anytime soon. But the Gulf accounted for a large chunk of U.S. oil production (25-30%) and consumption (9% – the entire consumption of France), and that shortfall must be met.

While renewable energy is where the future of U.S. energy lies, according to Obama, it is still some time before green energy producers will be able to meet the full demands of the nation. In the meantime, authorities have also realized the importance of Canada for U.S. energy and are enticing companies with new pipelines. Plans on expanding the Keystone Pipeline, linking up Texas and Oklahoma to 500,000 Canadian barrels a day, have already been drawn up and put into motion.

The turmoil in the U.S. energy market has created a number of opportunities, both in the short and long term. For now, investment into the Canadian oil sands is about to increase dramatically, and things are moving rapidly. We’ve uncovered the lowest-cost producer with significant upside production, and they’re the one on the list as a takeout target by Big Oil.

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[Discover the oil sands company Marin thinks so highly of… and get ready to profit when shares shoot up. But oil sands are not the only energy investment to benefit from the Gulf Coast disaster – read more here or sign up right now for a $39/yr. subscription with 3-month money-back guarantee.]

Energy Investing Outlook for 2010 and Beyond: Geothermal, Natural Gas, Peak Oil, and More!

With oil back up in the $70 range, what's the current energy outlook for the global economy?  And more importantly - how should we invest?  For some insights, we're going to turn it over to our pal David Galland, who's rounded up two of Casey Research's energy experts for an insightful interview...

The Doctor and the Dealman: An Energy Update

By David Galland, Managing Director, Casey’s Energy Report

At first glance, no two individuals could seem more different.

The Doctor, middle-aged and balding, could be the very archetype of the college professor. The Dealman is young with a full head of well-styled hair: more than a few people have compared his looks to Elvis in his prime.

The Doctor is quiet and soft-spoken. The Dealman is outspoken and, under the right circumstances, even outrageous.

On further examination, however, you begin to uncover the similarities that make them one of the energy sector’s most potent teams, starting with the fact that they each possess an intimidating intelligence.

Case in point, while only 23 years old, the Dealman taught advanced mathematics at the university level.

The Doctor, an elected fellow of the Royal Society of Canada, is a PhD professor of petroleum and coal geology at the University of British Columbia and the winner of the coveted Thiessen Award, the highest award presented by the International Committee for Coal and Organic Petrology.

They also both share a passion for the energy sector, though as is typical with this atypical team, they approach the sector from two different perspectives.

The Doctor, one of North America’s leading experts in “unconventional” oil and gas, loves to analyze every aspect of modern-day hydrocarbon exploration and production.

While fully conversant in the technological and geological facets of the global hunt for energy, in his work as the chief investment officer for Casey Research’s Energy division, the Dealman lives to find the next big money-making energy play. Even if it requires working almost around the clock, he is passionate to uncover companies with the magical combination of the right management, the right commodity in the right place and with the right geology. And, most important, the right financial structure at the right price that allows investors to lock in serious upside potential but with very little downside risk.

Individually, the Doctor, Dr. Marc Bustin, and the Dealman, Marin Katusa, are powerful resources when it comes to separating facts from fiction about today’s energy scene and where the real opportunities for investors are to be found. But working as a team, they become a force of nature.

With oil gushing into the Gulf, the global economy under pressure as well as the prices of energy and energy stocks, and with the new American Power Act lurking in the background, John Mauldin called to ask if we could provide an update for readers on the always-important energy sector.

And so, with that goal in mind, I arranged to sit the Doctor and the Dealman down for a chat. The highlights of that chat follow.

Q: Let's start by asking your opinion, Dr. Bustin, on the sinking of the Deepwater Horizon rig off the coast of Louisiana and the impact that could have on oil exploration in the U.S.

Bustin: It’s an environmental ecological disaster, and everything else pales besides that fact. That said, I think what we're looking at is a major shutdown in offshore exploration off North America.

In addition to the Obama administration, the Canadian government has also come out and said that there will be no further offshore exploration until we understand what went wrong and there is something in place to better control a similar incident should it happen.

The impact of the disaster is already being felt in that Obama had only recently announced an expansion of offshore drilling, but that's now dead. Likewise, probably for the rest of my life, offshore Western Canada won't go ahead, so it's a huge impact, and of course this is going to affect the mid-term oil price.

Katusa: It is really important to understand that, for companies with existing drilling permits, the costs are going to be significantly higher… in terms of construction and maintenance costs, labor, permits, battling lawsuits filed by environmental groups and others with an interest in the water – the fishing industry, for example. Then there is a big increase in insurance costs, more taxes, and special clean-up funds.

As a result, when you start looking at the bottom line impact on companies you might want to invest in, when it comes to offshore projects, the netbacks are going to decrease significantly, so your profits are going to decrease significantly. Then there’s the overhang of the potential for another actual disaster and the clean-up costs.

Q: So this is clearly going to be a setback to offshore drilling. What are the implications from a supply perspective? Are you guys believers in the whole Peak Oil thing?

Bustin: Fundamentally, I'm a believer in the concept of Peak Oil. Yet, with the new accessibility to reservoirs made possible by technologies that allow us to drill horizontally and release petrocarbons unconventionally through fracking, I am not sure we have actually seen Peak Oil. Ultimately, however, we are burning through an awful lot of what is undeniably a finite resource.

Katusa: David, the problem with the Peak Oil theory is, it doesn’t take into account the increase of production and supply and the economic value of the reserve using unconventional technologies, which are always improving. Moving forward, we are long-term bulls on the oil price, but we've been consistent in telling our subscribers to stick to the fundamentals – that the companies they should be investing in are those that are able to produce at the lowest costs. Viewed from another angle, if a company in your portfolio needs $150 oil to make a profit, you should be a seller.

Q: What cutoff price do you think investors should be looking at for a company they want to own?

Katusa: In our in-house calculations, we use US$45 per barrel. If a company cannot produce economically and with a solid netback at $45 oil, they are not a low-cost producer and should be avoided.

Q: For the readers who are not familiar with the term, can you define "netback"?

Katusa: Netback is basically the difference between your production costs and what you sell your oil for at the well head. Let's say the spot oil price you are receiving is $75 and your all-in costs are $40, your netback would be $75 minus $40, for a netback of $35.

Q: On the topic of unconventional production, there's clearly a trend towards viewing the oil sands from an environmental standpoint as being a bad thing. Do you anticipate there being additional taxes levied or even a complete ban on the sale of oil from oil sands?

Katusa: The oil sands have too big of a production profile for them to be banned as a source. Already, one out of every six barrels of oil consumed by a U.S. citizen comes from the Canadian oil sands. We’ll almost certainly see increased taxes, however, that assure that oil sands are not going to be our cheap source of oil, though it will continue to be a sure source of oil.

Q: Won't that ratchet overall prices higher?

Bustin: The overarching problem is that the oil sands projects are so capital intensive – we're talking about 60-80 billion dollars already invested, with potentially another 300 billion dollars yet to be invested to maximize the resource. You can't put together projects with a capex of that magnitude unless you have a predictable price of oil.

Katusa: It’s worth noting here that the existing production is profitable at a cost of around $40-$45 per barrel. But of course, that doesn’t take into account any new taxes.
For the time being, taking into account the netbacks being earned by both conventional and unconventional producers – with even the oil sands operators currently operating at margins of close to 100% -- we see the potential for some downward pressure in the price of oil in the short term. Remember, for years and years, the big oil companies were running at 10-15% margins.

Q: Do you think we’ll see a carbon tax – cap-and-trade and all that?

Bustin: Absolutely.

Katusa: Whether you like it or not, it’s coming. While we all know it’s complete nonsense, if there is one certainty in today’s world, it is that the governments are going to tax whatever they can, and most of the people who support the current government in the U.S. believe that a carbon tax is good because they’re taxing the bad polluting companies that have billions of dollars in their banks. So it's coming.

Right now the voluntary market for CO2 is trading around $8-10 per ton, but in Europe, which has a mandatory market, the cost is double that. That's a big cost.

Q: Let's talk a bit about natural gas. From the geological perspective and also as an energy investor. Dr. Bustin, what’s your outlook for natural gas?

Bustin: In North America, we see natural gas lingering around the $5-or $6 range probably for the rest of the year. There really is a lot of natural gas available. Also keeping a lid on prices is that there are a lot of projects on line that aren’t quite economic at current prices. However, as soon as prices start moving up a little, a large amount of gas will become economic and therefore hit the market.

Prices in Europe are starting to decline significantly from a year ago as well, thanks also to increased supplies, so we're pretty soft on natural gas. That doesn’t mean you can't make money in natural gas or by investing in natural gas-producing companies – you can, but you have to be very selective and focus on low-cost producers.

Katusa: Moving forward, there are two things that will be very important to the sector. The first is that, thanks to unconventional technology becoming increasingly streamlined and effective, there are thousands of wells that have been drilled, fracked, but not completed. Those wells can come on stream with between 2-10 BCFs per day and are just sitting there. Think of it as a shadow supply of natural gas in the U.S.

The second thing to keep in mind is that the success that companies have had in exploiting the shales has resulted in massive new deposits.

Finally, it’s important to understand some of what’s going on with the oil-to-gas-equivalent ratio, which has traditionally been around 6:1. Consequently, at current spot prices, many analysts and promoters are saying, "Well, natural gas is cheap relative to the price of oil." Be careful when you hear that.

For instance, a lot of oil companies are purchasing gas companies because lower gas prices have made the companies cheap. The oil companies then look to boost the reserves on their balance sheets by reflecting the gas they acquire as BOEs, or barrels of oil equivalence. They will then actually book it as a barrel of oil to analysts at a ratio that is something like 22:1 today.

Q: What are the implications to us as investors?

Katusa: It all comes down to what a company is actually worth, which will guide you in what you pay for it. If a company says it has a billion barrels of oil equivalent in the ground, it will command a much higher price than if it showed its actual oil reserves and that it also had, say, three TCFs (trillion cubic feet) of gas. A surprising number of companies are doing this, including mid-tiers and majors. Imagine the implication to shareholders if this con is exposed for what it is?

Q: Can these companies actually convert their gas into usable oil?

Katusa: No.

Q: With the oil/gas ratio skewed in favor of gas, what about the market for substituting oil with gas?

Katusa: You have to ask, can we create a market for the natural gas that actually substitutes for oil? Of course, the big one would be having more compressed natural gas stations to encourage car manufacturers to make the switch, and there are a number of companies in North America looking to do just that. The big movers in that initiative are Canadians, but the idea has a lot of potential given the general theme of trying to reduce reliance on oil from foreign sources.

Q: Isn’t an increasing amount of base power generation switchable from oil to gas?

Bustin: With a lot of effort. Of course, the big one is the switch from coal to natural gas. Natural gas is much cleaner burning. In Canada, just a couple of weeks ago, legislation was passed calling for no new coal-fired plants. I think after a period of 15 years, they won't allow the existing coal-fired plants to be refurbished and continue to burn coal. So there's going to be a huge shift towards natural gas-fired electrical generation in North America, because of the carbon issues.

Q: I know you guys like coal, which is kind of counterintuitive, seeing how most people view it as dirty and dangerous. What's driving your outlook on coal – again from a fundamental standpoint and also in terms of finding investment opportunities?

Katusa: Start with the big picture. As much as 75% of China’s electricity generation currently comes from burning coal. That’s not going to change anytime soon. In fact, 2009 was the first year ever that China actually imported coal. Not so long ago, it had been a big exporter. But already half of the coal in the world that is produced is used by China.

On top of that, and this is pretty ironic given the popular view of coal, is that the U.S. is the second largest consumer of coal in the world, after China – with India being a distant third. Everyone is saying coal is dirty, coal is ugly, coal is smelly. It's done. We're going green. Even Obama said so. Yet if you’re careful, it’s where the profit is to be made. In fact, coal has been the biggest winner of all the energy subsectors over the last 12 months.

Q: How do we invest?

Katusa: In terms of investments, we like those related to met coal, versus thermal. As a reference point, there have been contracts signed in China at $105 per ton of thermal coal, but and as high as $500 per ton of met coal.

That’s because on the order of 90% of all steel production is dependent on met coal because of the temperature it produces. In North America, there are serious difficulties bringing on a thermal coal project, starting with environmentalists and government regulators, but also because transportation of the coal is the largest cost of a coal project – and therefore the deciding factor in the economics. Simply, at today’s prices, if you don’t already have a train running almost right up to your new thermal coal mine, it’s almost certainly not going to get off the ground.

So we have decided to stick with met coal for North America. On our North American met coal plays, we have recently recommended two in our alert service. They are doing well, and we expect them to go a lot higher.

Q: You like companies with significant upside as opposed to run-of-the-mill returns. That typically means small-cap companies. Are there smaller coal companies investors can get into, or are these all large companies?

Katusa: The coal companies have huge amounts of cash right now, because they’re kind of like the base metal of the energy sector. They’re boring, but they make a lot of money.

There are ETFs you can use to play the coal sector, but the reason why I like the juniors is the share price can go up ten times, as was the case recently with Western Canadian Coal. Of course, there are big companies with good coal exposure, like Peabody or Nobel or Teck Cominco. They have great assets, but the bang for your buck is not going to be as high as with a small-cap play.

Q: Let’s talk nuclear. There has been a lot of talk about pebble-bed reactors dotting the Chinese landscape, yet here they are scrambling for coal. Whatever happened to the dozens of new nuclear plants that were supposed to be headed for China?

Katusa: Despite popular conceptions, the pebble-bed reactors are actually an old technology, initially developed by the Nazis. The Chinese bought the technology off the Germans.

Pebble-bed reactors were supposed to be the Henry Ford Model T of nuclear reactors. They would actually be built in an assembly line. Imagine it like a LEGO set. As a town grows, you add a module. As the city grows and the energy requirements grow, so does the number of nuclear reactors.

However, the technology is still not ready for prime time. In fact, it's years away. That said, in the not-too-distant future, the demand for power and the need for governments to launch make-work projects will almost certainly kick off a rush to get a piece of the action. Especially in China.

Q: How would you play it as an investor?

Katusa: The best way is through a small-cap uranium company with a substantial economic resource, because these reactors are going to need a lot of feed. The time will come when the spot price of uranium is going to return north of $100 per pound. The last time that happened, a lot of the early investors in the better uranium juniors – most of which are Canadian – made a lot of money.

Q: What's your time line for uranium to push back over $100 per pound?

Katusa: I'd say 3-5 years.

Q: What are the fundamental reasons for this?

Katusa: The HEU Agreement, which involved nuclear warheads being dismantled and the uranium blended down to nuclear fuel has now come to an end and it will be three years before it is renegotiated. The last time it was negotiated, Boris Yeltsin was in power and Russia was on its knees. That's not the situation today. Russia is very powerful and Putin is still running the country behind the scenes. This time around, they’re going to negotiate a much different agreement. And don’t forget that today, unlike back when the last treaty was negotiated, the China factor is huge.

We would expect the Russians to go to the Chinese first before they renegotiate with the Americans. So the Americans are a victim of their own success by depending on the cheap Russian nuclear fuel. That time is coming to an end in three years, and within five to six years you'll see spot prices very high.

With the world increasingly looking to ramp up nuclear energy production – as it very much is – any of the companies with large reserves and the potential for low-cost production are going to be trading at a nice premium to where they are today.

Q: As an investor, where in the energy sector is your biggest focus right now? Where are the big opportunities in the relative near term?

Katusa: Before you can talk about specific opportunities, it’s important to be sure you have the right strategy to bringing those opportunities into your portfolio. These are very fragile markets, and so our strategy has been very conservative for some time now.

For instance, we spend a lot of time identifying great management teams that are personally heavily invested in their own companies – and then wait for them to raise cash through private placements that allow investors to pick up both a share and a warrant on favorable terms. Once the holding period is over, which can be as little as a few months, selling the shares and riding the warrants can be a good move as it gives you most of the upside with none of the downside if the markets tumble.

Likewise, we don’t chase stocks but instead decide what we’re willing to pay for a stock – which in these volatile times might be 20% below where it currently trades – and then wait patiently for it to come to us. That approach doesn’t always work, as sometimes we don’t get filled, but we’re okay with having a greater-than-normal allocation to cash at this point.

Another technique we use is what we call the Casey Cash Box – which involves running regular screens of a universe of small to mid-sized energy companies, looking for prospective companies selling at discounts to cash and other liquid assets. You might say we look to buy dollars for quarters.

Finally, when we get the desired result from our analysis – i.e., we buy good companies cheap and watch them move higher, we don’t hesitate to cash out our initial investments and take a free ride on the balance.

These are dangerous markets, and being cautious while building a diversified portfolio of energy plays makes a lot of sense. At least to us.

Okay, with that foundation, where would I invest today?

For starters, I might try to get ahead of the large sovereign wealth funds. And they are being pressured to invest in green energy. That’s one reason we’re more bullish than ever on green energy plays with the real potential to be economic.

Q: So which of the green energies are potentially economic?

Katusa: Geothermal and run-of-river are two we particularly like just now.

Q: Geothermal is not a new technology. It’s been used in energy production for something like 100 years, right?

Katusa: That’s correct.

Q: So why isn't it in wider use? What percentage of the base load in electricity in the U.S. comes from geothermal?

Katusa: Less than 1%.

Bustin: Economic geothermal projects are found in areas where you have very high heat flow or fluids near the surface. Of all the deep dry rock geothermal projects, where the real energy potential exists, none are actually economic. Currently they’re still in the experimental stage. At some of the more prospective sites in Australia, they ran into some significant problems, so it's still in the science box.

As a consequence, most of the geothermal projects you see are not where the real future is, which is in the deep dry rock geothermal projects, and those are going to take more time and a lot of money to get right.

Q: Aren’t government subsidies that can help the geothermal companies try to reach economic sustainability a big part of the attraction just now? Isn’t that also the case with run-of-river?

Katusa: No question, depending on the jurisdiction a company operates in, the subsidies for green energy projects can be very substantial. So much so that it makes it almost impossible for a company to lose money. Which, of course, all but eliminates the risk to shareholders as the company tries to build something that can last.

As for run-of-river, which involves diverting flow from a strongly running river, using it to turn a turbine, then returning it to the main river, there are actually quite a few opportunities. In fact, our latest look at the sector found over 45 small-cap companies. We recommended two, and one of them gave us a double that allowed us to cash out all of our initial investment, giving subscribers a free ride on the rest.

Overall, the prices on these companies have reached the point where we are holding off on any new recommendations in the sector, but we expect the prices will come back to an attractive level in the not-too-distant future. We’ll be ready when they do.

Q: Dr. Bustin, we’ve heard from the Dealman. Now, speaking from the technical perspective, are there any particular energy sectors now attracting your attention?

Bustin: Well, I'm really concerned about the coal sector. We're so dependent globally on coal. If we start slapping some major carbon taxes on coal, it's going to be catastrophic. I'm not quite sure how it's going to work out, because there is no way China and India and a lot of the developing nations, particularly in Southern Africa, which are so dependent on coal, are going to be able to manage. If they have to face these carbon taxes, I'm not sure where the world economy is going to head, because there's no way we can free ourselves from coal.

Q: I've heard the idea to use taxes to level the playing field between the dirty and the clean sources of base power. So coal would be weighed down, if you will, by added taxes to the point where there is no cost advantage to using it over natural gas. Have you heard the same thing?

Katusa: The beauty of coal is, it's base load. It's cheap and it's easy. The problem with solar is nighttime, and the problem with wind is no wind. And even run-of-river, which we like, fluctuates according to the climate, which is why geothermal is our favorite green energy because of its base load potential.

Taken together, these alternative energy sources are okay as secondary sources to meet excess demand, but they’re not your go-to sources. What most people don’t realize is that much of the power used isn't from people charging their Blackberry or running their computers, or any of that. It’s used by big commercial industries, such as manufacturing and mining, for example.

Q: In the past, Dr. Bustin, you’ve said that is the question is not so much about which energy sources to use, but rather that, in order for the world to maintain even the status quo, the answer will be “All of the above.” In order to avoid the economic devastation of runaway energy costs, we're going to need every single source we can get over the next ten years. Fair statement?

Bustin: Yes, it is. Unfortunately, when we look at our gross national product per capita, it's directly proportional to our energy consumption. And, of course, if you look at multiple billions of people who have very low standards of living and if you want to give them a gross national product per capita comparable to that we enjoy in the developed world, you have to expect global energy consumption is going to continue to skyrocket.

As I’ve tried to indicate, the only way to even come close to meeting that energy demand is with coal. There is just no alternative for the foreseeable future, until we get into bigger reactors or some other interesting usage of nuclear power. Bottom line, we're stuck with fossil fuels, and the fossil fuel that is readily available and most economic is coal.

Q: Are you looking from an investment standpoint at any offshore opportunities to tap into some of that demand for coal coming out of China?

Katusa: We've got one on our radar screen now, but it’s premature to mention it here. I've actually visited the site twice and like the story. It's a great project, the management is heavily invested in it themselves, but we haven’t recommended it yet because we are waiting for a couple of financings to come free trading, which will result in more stock available – and that will create downward pressure. By being patient, investors should be able to get it at a cheaper price. That theme, of being patient, can’t be stressed enough. Especially in markets as volatile as these.

Q. Good advice, and a good place to leave off. Thanks for your time.

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David Galland is a partner in Casey Research, LLC., an international firm providing research and investment recommendations to individuals in over 150 countries. Prior to joining Casey Research, he was a founding partner and director of a successful mutual fund group (Blanchard Group of Mutual Funds), and well as a founding partner and executive vice-president for EverBank, one of the biggest recent successes in online financial services.

If you’re interested in the staying closely in touch with the ever changing investment opportunities in the energy sector, you’ll find no better team than Marin Katusa and Dr. Marc Bustin as your guides. Just recently they tapped into one of the best-kept secrets in European energy policy – a sure-fire winner. Read more here.

Ed. Note: I am a Casey Research affiliate and subscriber.  I also head up their Sacramento Phyle.