The One Sector to Buy Now

When investors panic they create opportunity.

It is when others are selling…not when others are buying…that real money is made.

No matter how many academic papers you read that say the contrary, at times the market is deeply irrational. That’s because when people are wildly fearful they sell assets they would otherwise hold on to. And when people are wildly greedy they buy things they normally wouldn’t.

That this is a bad idea is something most investors can’t get into their heads. Most investors buy stocks when others are buying and sell when others are selling. They don’t know it. But they are simply following the herd.

The bottom line is the markets are plain dumb sometimes. The herd often does the wrong thing. And when it does, you need to step up to the plate and do the opposite.

Investing against the crowd is called being a contrarian. And as resource broker Rick Rule is fond of saying, “You’re either a contrarian or a victim.”

Rick is a dyed-in-the-wool contrarian. He is also a big energy guy. He makes money by snapping up energy producing commodities when they are cheap and hated and selling them when everybody loves them and they are expensive. Then he uses his profits to buy more cheap and hated assets.

Rick is one of the best in his business. I had the pleasure of meeting him at a small meeting of investors in France last year. Although the meeting only lasted a couple of days, Rick was able to teach me the most important lesson of commodities investing: that investors need to be very aggressive in bad times and cautious in good times.

That’s because commodities are cyclical. The more prices rise, the more money gets put into extracting commodities from the ground. This increases supply to the point where prices crash. Once this happens investment into extraction dries up, supply plunges and prices rise again.

That’s why you need to be cautious when the rest of the world is buying. It means that the cycle is nearing a crash phase.

Following the horrific earthquake in Japan and the ongoing nuclear crisis there, investors are scared. And true to form, they are dumping their stocks and commodities and running to the relative safety of cash.

Check out the recent action of Cameco Corp. (NYSE:CCJ), the so-called “Exxon Mobil of uranium producers.”

Pretty scary stuff. But is it justified?

Probably not.

Nuclear energy generates about 16% of global electricity supply. There have been some shutdowns of reactors in Germany. And big nuclear power station builder China has suspended construction of new nuclear plants pending the results of a safety review.

Even crude oil sold off in the wake of the news out of Japan.

This makes absolutely no sense. Libya is in flames. This has resulted in a major (1.1 million barrels per day) of crude oil supply outage.

Meanwhile, Saudi Arabian troops have crossed into neighboring Bahrain to brutally crack down on Shia-led protests. If the Shia minority in Saudi Arabia’s oil-rich Eastern Province rise up in sympathy with the Shias in Bahrain, the 1.1 mbpd supply outage in Libya will look like child’s play.

Here’s what you won’t find on CNN or in USA Today…

Absolutely nothing about the quake and nuclear crisis in Japan is bad for commodities over the long run.

In fact, the renewed political pressures facing the nuclear industry plus the need to rebuild Japan are bullish for things like steel, copper, crude oil and natural gas. And the Gulf of Arabia and North Africa remain a tinderbox, putting crude oil prices on a hair trigger.

Commodities still look like a buy to me, despite the panic selling that says otherwise.

Two weeks ago (This Lie Could Send Oil Prices Dramatically Higher), I suggested you consider adding exposure to higher oil prices either directly through the United States Oil Fund LP (NYSE:USO) or indirectly through the Energy Select Sector SPDR ETF (NYSE:XLE), which tracks some of the strongest companies in the oil patch.

And on Friday, I recommended you consider buying shares of the First Trust ISE Revere Natural Gas ETF (NYSE:FCG). This is a low-cost way of tracking natural gas explorers and producers.

Nothing has changed the investment case for these recommendations. Any further selling is a great time to buy.