Tuesday, January 31, 2012

Is Water the New Gold? Part 1

The next hot commodity for investors could be one you think is everywhere, but which in reality is increasingly hard to find: Clean, fresh water.

Economics professors love to haze dewy-eyed freshmen with the diamond-water paradox. It goes like this: Why, if water is so vital to life, is it essentially free? While diamonds, merely rocks with aesthetic qualities, cost a fortune. You can die of thirst. But you won't die if you don't have sparkly things on your fingers.

The answer, of course, is water is nearly free because it's plentiful, while diamonds are prized for their rarity. But if all the wells were to run dry, you'd happily trade all your worldly possessions for a single glass of water. It's all about survival.

Can we solve the global water shortage?

Here's the rub: As a consequence of population growth, industry and agriculture, fresh, clean water is about to become a lot harder to find. Sure, most of the world's surface is covered in the wet stuff. But 97% of it is full of salt. And most of the remaining 3% is frozen in glaciers or dusting the tops of mountains. Of what remains, a tiny amount is easily accessible in freshwater lakes, rivers and reservoirs.

The rest is held in ancient underground reserves such as the Ogallala Aquifer beneath America's heartland. And like fossil fuels, it is essentially a nonrenewable resource that is being rapidly depleted. That's because this "fossil water" is being extracted much faster than it's being replenished by rainfall.

The law of supply and demand makes this a scarcity story, just like copper, crude oil and gold. But unlike all of those resources, there is no substitute for clean water.

In an era of alternative investments, with even staid portfolio managers looking at things like timberland and physical gold as they fight a decade of flat returns in the stock market and ultralow yields in the bond market, water could be the next great commodity play.

And unlike those who invest in diamonds or gold, a water investor will never have to justify the practicality of his investments. It's as simple as this: You drink it or you die. The stakes couldn't be higher. Ismail Serageldin, the World Bank's leading environment expert, warned that the "wars of the 21st century will be fought over water."

Trading Water

First, I'll outline the scope of the problem. Then, we'll look at ways to profit from what is likely to be the defining natural-resource problem of the next decade.

Author:  Anthony Mirhaydari of MSN Money