Resource expert sticks with mining and refining

Although he has been accurately forecasting a correction in commodities, Curtis Hesler remains bullish, asserting that for longer term investors, "the right asset class is commodities."

Indeed, in his Professional Timing Service, he forecasts, "Over the next five years, commodities will double while stocks wil lose big." Here, he looks at gold and oil, and some favorite ideas in these sectors.

"Commensurate with the upside adjustment in the stock market, the commodity market began a downside correction in mid-March, and I look for another leg down in the Dow Jones AIG Commodity Index.

"Gold is following the index lower. Gold began its correction late, but that is the problem with cycles and seasonal tendencies. Cycles tend to be early or tardy, and seasonals are but average tendencies. Both techniques are useful, but they are not pinpoint accurate.

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"Nevertheless, the correction in gold is finally under way, and I think there is more time (perhaps several more weeks) and lower prices ahead before it is over. The best strategy at this point is to hold your positions and gamble on a final break in gold to $825-$840.

"Concentrate on the major producerst. My favorites are Agnico-Eagle (NYSE: AEM), Yamana (NYSE: AUY), and Kinross (NYSE: KGC).

"Meanwhile, there is something suspicious happening in the oil patch, and it may be political. Although up from $2.00 wholesale last summer and peeking at new highs currently, gasoline prices have woefully lagged behind the price of crude oil.

"This may be similar to when the big kids manipulated gasoline prices prior to the last election in 2006. Something is not right here. There is a ratio between the price of gasoline and the price of crude that normally runs about 1.25.

"This means that the price of a gallon of gasoline is 1.25 times the price of the crude oil that it took to make that gallon of gas. It reflects a 25% profit to the refiner. The ratio today is less than 1.00 - at about .95. It has been below 1.00 for the last six months.

"Bottom line, the refiners are losing money on gasoline, which is one reason that their stock prices are down. The ratio has not remained under 1.00 this long since 1999. With the summer driving season coming on, it is due to recover.

"When it does, it will take refining profits back up with it. Purchasing Valero (NYSE: VLO) at current prices looks like an excellent long term play for $160.00 oil.

"Rhetoric aside, rising commodity prices and weak consumer demand will continue to squeeze corporate profits, and the stock market’s drop from its October highs has not adequately discounted future earnings declines.

"The stock market is in for further adjustment, and it is vulnerable - more so today than before the March-April rally began. I encourage you to use strength to clean out financial stocks from your portfolios.

"Further correction in energy and precious metals will give you an opportunity to reinvest this money into commodity-advantaged holdings. The S&P 500 can fall to 1,200, with little effort. I think we will see 800 before the commodity bull is over.

"On the up side from here, 1,400 is stiff overhead resistance. On the other hand, gold will certainly see $1,600, at the very least. Crude oil will hit $160 if there is no exogenous event from the geopolitical arena that restricts world supply and propels it further."