That glass of water in your hand is worth more than the price you paid for it
Between gold and water, the latter offers a lot more utility to us, yet ironically, it is gold that commands a higher price. In the near future though, that could change with the growing concern for environmental issues, and water becoming an important agenda for governments across the world.
A water crisis is the top global risk according to the 2016 Global Risk report by the World Economic Forum. In China, for instance, 90% of fresh water has already been polluted without any hopes of reversal. Water wars have also erupted as 260 river basins are shared by two or more countries in the world. Water shortages in various countries are clearly pointing towards a crisis.
As of today, around four billion people in the world are facing severe fresh water scarcity, which brings problems of crop failure and low crop yields, and leads to higher prices, famine & starvation.
Most of us take fresh water for granted depending on which part of the world we live in. Many believe that water scarcity is unlikely, as the Earth is made up of 70% water and 30% land. It is important to know that fresh water only makes up 2.5% of that 70% of water. Furthermore, a mere 1% of that freshwater is accessible as the rest of it is trapped in glaciers and snowfields. That means, only 0.07% of the total available water on Earth is to be shared by 7 billion people.
The problem will also continue to exacerbate in the coming fifty years, as the world population is expected to grow by another 40 to 50 %. Population growth along with industrialization and urbanization will lead to an increasing demand for water.
While reverse osmosis technologies are able to convert sea water into fresh water, the technology remains costly and is not environmental friendly as it can cause damage to aquatic ecosystems. Other technologies such as solar desalination, graphene & nuclear desalination have their own challenges, particularly in the areas greenhouse gas emissions.
Could water prices overtake gold?
Gold continues to be an important commodity for global economies, and is sought as a hedge against declining exchange rates and volatile currency It current trades at about $1,232.
However, if Benjamin Franklin is right when he said, “When the well is dry, we know the worth of water”, then water could soon become the new gold.
In fact, over the past ten years, the S&P 500 Global Water Index has outperformed gold indices. The blue line in the graphic below shows the S&P Global Water Index TR against the S&P GSCI Gold TR in green.
Today a bottle of water costs over $1 and an ounce of gold costs over $1200. So gold is 1,000x times more valuable if we compare 1 bottle of water with 1 ounce of gold. But this comparison doesn’t tell us the huge hidden opportunity available to create wealth using water as investments.
Back in 2014, Bank of America Merrill Lynch estimated that water was a $600 billion business, and its value could swell to $1 trillion. Investments made in fresh water infrastructure are soon going to be a long-term investment theme. In fact, Michael Burry the person who first predicted subprime crisis, is now focusing only on trading one commodity: water.
So how can investors take advantage of this trend to invest in water?
There are a number of ways to do it:
- Purchase of water rights
Purchasing water rights gives you a right to draw water from a water source such as pond, river or ground water. As an investor you can make money by selling the rights at higher price in future. However, a right to water is a highly litigious and political issue and water laws can further complicate the issue.
- Investments in farmland that have abundant water
When compared to water rights and water pipelines, this idea is more viable. Growing food in areas having abundant water and selling in areas where water is scarce is not litigious and most sustainable method for distributing water. However, due to the high capital investment outlay, this would not be viable strategy for an average investor.
- Investments in water utilities, infrastructure & equipment
Huge numbers of companies having water related business are present in the market. An investor can make money by investing in them. However, an investor will have to do a thorough research and learn on functioning of the industry or appoint resources to do this work for him, before committing capital.
- Investing in Water focused funds
This is the easiest way to invest in water. Huge investments have already been made by Investors in water related funds.
The top performing water funds in US for 2016 were:
Total Assets (USD in mn)
PowerShares Water Resources Portfolio ETF
Guggenheim S&P Global Water Index ETF
First Trust ISE Water Index Fund
Summit Water Infrastructure Multifactor ETF
Water related investments are already outperforming gold, oil, stock markets and this trend is expected to continue for years to come.