Natural Gas – The New Silver?

Up until 2010, silver lagged gold in performance. Generally the two would move up and down together (with silver being more volatile). Then it 2010, silver caught up in a violent manner:

Source: Yahoo Finance

Up until 2010, some people were saying that the gold/silver ratio was too high in favor of gold and that silver had to catch up. Others said that the old relationships no longer mattered and that silver, the “poor man’s gold,” would not catch up.

Of course with many new investors in the precious metals arena, including myself, who had not invested through the 1970’s, many did not know what to believe. In the end, silver did catch up. Silver is valuable in many cultures and has old and new industrial uses. Demand is there.

Natural Gas – Another Commodity Suffering From a Lopsided Ratio

Now we have natural gas, which in 2010 and into 2011, is in the same sort of debate that silver was in from 2006-2009. Historically, the barrel of oil/Mcf of gas ratio was 10:1 (oil is measured in “barrels” and gas is measured in ‘thousand cubic feet’ or million BTU’s -British Thermal Units). Currently, that ratio is over 20:1 with a barrel of oil costing between $71-92 throughout 2010 (as measured by the American price) and gas swinging mostly between $3.75-5.05/Mcf during 2010.

People are asking the same questions – will natural gas return closer to its historic ratio? Have recent gas exploration technologies permanently changed the historic ratio so that it won’t return to that? Of course I am assuming here that the ratio changes because gas prices rise, and not because oil prices fall:).

If natural gas does snap back, even to $6, it doesn’t have to hit $14+ like it did during the frenzy a few years back, then it could mean enormous profits for many natural gas companies who have learned to make money at $4. Well-known resource investor Rick Rule pointed that out in many of his recent interviews, including this audio interview with King World News.

Could natural gas snap back? It could yet that is only an opinion. In the interest of disclosure, it is my opinion that sometime in the next 3 years it will.  Demand for gas in Europe, Asia and other places is enormous. And interestingly, natural gas being a LOCAL market, it is much more expensive in Asia and Europe. I can see more liquefied natural gas (LNG) terminals being built for EXPORT in North America. Kitimat, operated and co-owned by Apache Corp, will likely see enormous export business.

Also, the process of extracting gas from rock, known as fracc’ing, is under increasing environmental scrutiny which could disrupt supplies. And furthermore, as America shifts toward using gas more, for trucks, heating, buses, maybe cars and ELECTRICITY PRODUCTION, we could see the local demand side force some price increases.

About Chris Grande

Disclosures

At the time of this writing (3/1/2011) I neither own or control any securities mentioned in this column