Coal Is the New Gold

05/28/2008 12:00 am EST

Focus: COMMODITIES

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Bull Market Alert, says coal will be the fuel of choice for some time, as supply remains tight and demand stays strong.

[We’re making] 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 Market Vectors Coal ETF (NYSEArca: 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 about half of the electricity in every state in the United States, except California. Coal plays a key role in the production of steel, with approximately 70% of the global steel production depending on coal as a source of energy.

And the price of coal has been soaring to record levels. Macquarie Bank expects metallurgical coal to reach an average price of $150 per metric ton in 2008. Citicorp is even more bullish, forecasting that the annual contract price for thermal coal will reach $100 per metric ton in 2008, while the price of metallurgical coal may hit $200 per ton. (Thermal coal is used for heating and power generation. Metallurgical coal is used in steel manufacturing).

What's behind the bull market in coal?

First, demand 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.

Second, global coal supply has been afflicted by a broad range of supply disruptions. China has temporarily shut down its mines as a result of its recent devastating earthquake. Reports indicate that China is now down to a 12-day supply of coal. In addition, in April, China officially announced it would close coal factories in a 125-mile perimeter around the Olympics site of Beijing between July 20 and August 24th to reduce emissions, pollution, and smog during the Olympic Games.

[Also], Australia, for years the world's leading exporter of coal, 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 Market Vectors Coal ETF at market today, and place your stop at $43.50. (It closed at $50 Tuesday—Editor.) Although the soaring prices of US coal stocks means that its biggest weighting is in the US (52.9%), KOL is a solid global pick. This ETF enables you to buy a basket of 39 coal-related companies from 12 different countries.

For even bigger potential gains, buy the October $60 calls (KOLJH.X).

Subscribe to Vardy’s Global Bull Market Alert here…

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