Tapping into the Bull Market in the “New Gold”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This week’s Global Bull Market Alert pick is a bet on coal, a commodity that Richard Gibbs, head of the global economics unit at Australia’s Macquarie Bank, calls “the new gold.” Here’s why your profits from the new Market Vectors Coal ETF (KOL) may be even bigger than from gold, coal’s more glamorous and higher-profile rival.

Despite its status as the most “environmentally incorrect” source of energy, coal provides 25% of the world’s energy and generates 40% of the world’s electricity. Coal plays a key role in the production of steel with approximately 70% of global steel production depending on coal as a source of energy. And coal already is in a strong bull market. The Stowe Coal Index, a composite of five-dozen worldwide producers, doubled in 2007. Newcastle Thermal, a benchmark price index in the industry, was up 73%.

Macquarie Bank’s Gibbs expects thermal coal prices to rise more than 50%, to an average $88 per metric ton, in the coming contract year. He expects metallurgical coal to reach an average price of $150 per metric ton in 2008. (Thermal coal is used for heating and power generation. Metallurgical coal is used in steel manufacturing.) Citicorp is even more bullish, forecasting that the annual contract price for thermal coal will reach $100 per metric ton while the price of metallurgical coal may hit $200 per ton — up from $95 now.

What’s behind the bull market in coal?

First, demand for coal is exploding. South Africa and fast-growth Eastern European economies rely heavily on coal as their main energy source. Even slow-growth Western Europe’s demand for coal increased 15% in 2007. But the real story is in China. Coal supplies 80% of China’s current power capacity even as China is building seven coal-fired plants a month. There just isn’t enough oil to fuel China’s exploding economic growth — and coal is playing an ever-increasing role as a source of energy.

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Second, coal supply has been afflicted by all sorts of weather-related disruptions. China temporarily has halted exports of thermal coal as a result of its highly publicized storms. South Africa’s heavy rains mean that it will cut coal exports as well. Australia, for years the world’s leading exporter of coal, also has been suffering from poor weather, which has disrupted coal production and transportation in its crucial, coal-producing state of Queensland.

Exploding demand, combined with supply disruptions, adds up to one thing: higher prices for coal.

So buy the new Market Vectors Coal ETF (KOL) at market today, and place your stop at $39.00. Although its biggest weighting is in the United States, 39%, it is a solidly global pick, with China Coal Energy, the largest holding at 8.13%, Indonesian miner Bumi Resources, the third-largest holding, at 7.96%, and China’s Shenhua Energy, the fifth-largest holding, at 7.83%. 

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