Invest In Finite Resources: Follow Up

August 21st, 2007

A reader, Cheap Canuck, made an excellent comment regarding Invest In Finite Resources. I always love a good comment with lots of thought. I hope other readers with thoughts and opinions voice them.  This just goes to show that there is much to be learned from each other and the ability to converse with others around the world is what makes the internet such a powerful tool for learning.  Here is the comment by Cheap Canuck:

“While resources are finite from one perspective, from another they aren’t.

Gold seems like a finite resource (there’s only so much of it on the planet), but its possible to create gold from lead (and if the price gets high enough, it will become economically viable to do so) - http://chemistry.about.com/cs/generalchemistry/a/aa050601a.htm suddenly the finite isn’t so finite.

There’s only so much oil on the planet, as it get depleted prices will rise, until a comparable source of dense energy becomes attractive (hydrogen, ethanol, efficient solar power and large batteries- I’m not sure).

Investing in finite resource can actually be dangerous, because there’s no way to make sure technology won’t suddenly make it a lot easier to acquire (and therefore far less valuable). Gold prices would go down in a hurry if there was a very cheap way to make it from lead (I’d guess it would drop to almost the same price as lead).

I’m amazed at the ability of marketing to protect the value of diamonds in the face of superior, cheap, man-made diamonds (http://www.wired.com/wired/archive/11.09/diamond.html). I wouldn’t invest in Da Beers if you paid me (well, maybe if you paid me… it’d have to be a lot though). Finite becomes plentiful yet again.

Resources are finite, but they’re what the entire universe is made up of…”

Thanks for the comment! I agree, the entire universe is made up of these finite resources, and that is why when we begin mining in space, the entire supply/demand fundamentals will be out of whack and that will be a time to stay away from many of the finite resources. I don’t think we will be mining in space for a while though. I was aware that diamonds can be manufactured and that is one reason why I don’t consider them as an investment (and I urge readers to not invest in diamonds either). I’m worried that the supply can easily outstrip the demand and cause prices to drop quite easily. I’m still surprised when I see diamond exploration and mining companies start up! Why?!? I don’t really understand myself. Either way, I don’t invest in diamond mining or exploration companies.

As for gold being manufactured, I once heard a tale (I still don’t know if it was true) about some chemist finding a special way to make gold. I think I read about it on a alternative energy website (the kind that talk about perpetual motion machines). The story I heard wasn’t about using lead though (I don’t think it was anyways, though I can’t remember), it was a little more ‘out there’. I wish I knew if it was true? Until Cheap Canuck mentioned gold being manufactured, I’ve not heard another thing about it. Thanks for bringing it to my attention again! The truth is, gold isn’t something I invest in either, though I do mention it often because a lot of people like gold. I’m a bit of a contrarian in that regard.

I like investing in silver (please, tell me if anyone has heard about it being manufactured too?) because it is beginning to be used as a industrial metal (in electronics) and it is also used in jewelry AND as an alternative investment to gold. Also, the demand has continued to increase faster than the supply and world reserves are now getting to all-time lows!

My entire article, Invest In Finite Resources, was more about investing in resources that have a favourable supply/demand situation and outlook, and that the favourable supply/demand situation is often a result of the resource being both in demand and finite. It isn’t much of a finite resource if we have ten other ways of creating it (though it may still technically be finite, it’s supply/demand isn’t favourable). What Cheap Canuck brought back to my attention is that many of these finite resources have alternatives or can be manufactured. That is extremely important to remember when investing in a finite resource! Sometimes when the price becomes too high (like oil) other alternatives become more favourable. You must always be mindful of the supply and demand fundamentals. I don’t like copper because I think we can use other materials for much of our pipes in homes.

Oil for example: I’m a fan of investing in oil because it is the energy that we are stuck with for the next decade (or so) and it has a good supply/demand outlook with China and India increasing consumption faster than supply. I realize that there are many alternatives, like solar power (and many others). I believe that we get all our energy from the sun and that one day we will use electric cars and solar technology. That is the reason I wrote about Sterling Energy Systems (a fascinating company that claims with a 100×100 mile solar farm using its current technology, it could displace the entire fossil fuel consumption of the United States) and about our old battery technology (100 year old battery technology needs to improve before electric cars become a reality) situation on my sister site, NabloidGreen.com. I may invest in oil, due to its favourable supply/demand situation (and extreme profitability and large dividends, over 10% which over the next decade should make me some decent money!), but I also invest in green technologies that are showing promise… (Go Look at Nabloid Solar - A mutual fund with just solar companies and how damn good I’ve done with it #6 on Marketocracy for 6 months!).

So I’ve hedged against oil becoming a dinosaur of the past, which I actually hope it will, by investing in the most promising alternatives. I would much rather get our energy from the sun. But for now, oil companies can be a good investment (they are extremely profitable and offer high dividend yields that will make me decent money over the next decade). The point is, when the supply/demand fundamentals get too extreme and the prices of a product increase too much, alternatives can be used to replace many of the finite resources. The point Cheap Canuck was making is valid. There are alternatives to many of our finite resources and these alternatives sometimes become more favourable and can even replace some finite resources!

So the title of the article should be, Invest In Finite Resources That Have A Promising Outlook & Will Hold Their Value Better Than Cash (which is easily printed and thus devalues faster than many of the finite resources). Thus, I would rather invest in a finite resource than hold cash, but I’d rather invest in a great business than a finite resource. I hate holding cash (probably one of the few to ever say that!) as it feels like I’m losing too much value for each year I hold it. I still believe finite resources should have a place in every portfolio, but it has to be a well researched finite resource (not diamonds) to avoid some of the problems outlined above.

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