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In running the numbers for Monday's energy year in review, it was hard not to get stoked about coal. As I mentioned in Monday's energy review, domestic coal prices have increased 140% this year so far, and the benchmark for Asian coal has risen over 120% during the past year. Zigler wrote about The New Black Gold back in February, and its performance lately deserves another look. So I started digging into how I, the lowly individual investor, might get a handle on this meteoric mineral in my IRA. There's nothing as convenient as GLD out there for investing in gold, or even the PowerShares DBA for investing in agriculture. Instead, we're pretty much forced to go with a pick-and-shovel approach. Which leads us to KOL. Van Eck launched the ETF KOL this past January just for me, it would seem. Like their Gold Miners ETF (and most of their others), it takes the commodities story and boils it down to a handful of companies most directly related to the commodity. But like most pick-and-shovel strategies, the effects of a run in the underlying element don't always run right alongside. Since KOL launched, its return has been 15%. In the same time period, the Central Appalachia Coal Futures contract has grown 136%. This isn't a slam on KOL - I never expect an equity index to follow lockstep with the commodity it purports to track. Instead, KOL is a way to capitalize on the sustained high price, and high demand for coal. The underlying index for KOLH is the Stowe Coal Index - an index of 41 companies around the world involved in mining the black stuff. The index officially went live in September of last year, with the ETF following on January 11 of this year. For the year ending June 30, the notional Stowe Index was up over 106%. Not shabby, but also not something any of us owned. Going forward, if the market for coal remains tight and pricey, you'd expect KOL to remain a solid investment. The plus side of KOL is: 1) It's an ETF. I can buy it or short it pretty much at will, even in my IRA. 2) It's global coal exposure. Only 57% of the index's assets are concentrated in American coal companies. A full 15% of assets held in Chinese companies, and the rest are sprinkled around the other big coal countries - Indonesia and Australia being the biggest. The downside is that it's a pick-and-shovel play. My problem with all pick-and-shovel plays is that I'm no longer just buying the Economy 101 supply-and-demand story (with or without all the currency and speculation overlays). Now I'm buying people. Just because coal is up 140% does not mean that Joe's Coal Mine is all of the sudden 140% more profitable. Production, delivery, hedging, management, resource development, astrology - any number of factors come into play here. And even if Joe's Coal Mine did profit in direct proportion to the price of coal, there's no guarantee that the price of Joe's Coal Mine shares would track. But I can also tell a story about how mining stocks and their mined ores should exhibit mean reversion, and plenty of traders have made and lost money betting that mining stocks will catch up to runaway commodity prices (or conversely, that the commodity will revert to the miner's performance). Further, in the case of coal, each company has its own unique quirks: Are they mining coal for steel, or coal for boilers? Are they well funded? Are they in dangerous or stable parts of the world? Those are questions worth asking - but at least in KOL, we have a way to buy the whole basket and sort out the details later. Links Coal prices surge as investor interest grows FT.com July 22, 2008 How Coal Shortages in China Will Spark More Foreign Takeovers of U.S. Assets Money Morning July 21, 2008
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2 Ratings
