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Natural Gas: The Ultimate Contrarian Play for 2012

Back in January, I said that natural gas was perhaps “the most hated commodity in the world.” Believe it or not, the commodity’s become even more hated!

Since the beginning of the year, prices dropped another 40% or so, hitting their decade low on April 19 at $1.90 per million British thermal units.

If we adjust for inflation, natural gas hasn’t been this cheap in almost 20 years.

What gives? In two words: hydraulic fracturing (or “fracking” for short).

The technology is revolutionizing how we extract natural gas (and oil) from the ground. It’s turning unconventional shale formations into rapidly producing assets. The end result? Natural gas supplies keep piling up.

And like with any commodity, as supplies increase faster than demand, market prices fall. Or in this case, collapse.

Now, it’s true natural gas prices have rebounded about 20% over the last week. But few investors believe it’s going to last. In turn, they remain on the sidelines. Frightened.

I can’t say I blame them, either. After all, “brave” investors have gotten clobbered in the natural gas space in 2012.

Major natural gas producer Chesapeake Energy (NYSE: CHK) is down 26.3% for the year, for example. And low-cost producer, Ultra Petroleum (NYSE: UPL), is down 35.4%. That compares to a 9.6% rise for the S&P 500 Index in 2012.

Despite the bloodbath, though, my research says we’re witnessing a historic buying opportunity. I’m not alone in my contrarian stance, either.

Eric Nuttall, lead Portfolio Manager of the Sprott Energy Fund, says we’re on the precipice of the “Investment Opportunity of the Decade.”

How can that be? It’s simple, really. When it comes to commodities, low prices are the cure for low prices. By that I mean cheap prices end up encouraging more widespread use. And once cheap prices generate enough new demand, supplies drop and the market price rises.

The good news is we’re already witnessing the early stages of this phenomenon take hold in the utility sector.

Power production in Texas for one of the nation’s largest natural gas utilities is up as much as 50% recently. Why? Because for the first time in years natural gas is just as affordable as coal to produce electricity.

This is just one example of how cheap natural gas prices are changing demand characteristics. Others will follow. And before long, natural gas prices are going to rebound.

The problem for investors, of course, is predicting when. Time it wrong and you’re guaranteed to be nursing losses or waiting impatiently just to get back to break even.

In the latest issue of WSD Insider, though, I provided an ingenious solution. It’s a way to pocket a monthly dividend, equal to a 9.3% annual yield, while we wait for the inevitable turn in natural gas prices.

And once prices start to climb, the price of this unique investment should leap higher, too, making it a rare, dividend-paying growth opportunity.

For full details, all you have to do is sign up for a risk-free trial here and you’ll be granted immediate access to our latest issue. So what are you waiting for?

Ahead of the tape,

Louis Basenese