Why I'm Still Bullish On Commodities
Gold and silver markets were downright ugly today with gold plummeting $40 an ounce, and silver taking a $1.40/ounce haircut. Even with this short-term correction, I still like commodities over the long term. Here are my reasons why:
1) Commodities are still in the early to mid-stages of a secular bull market. Stocks and commodities run opposite of each other, and Wall Street had its days in the sun from 1982-2000. Historically, commodity and stock bull/bear markets run about 16-18 years in length. Gold was trading around $260 an ounce back in 2001, and is still at $560 after today's bloodletting. Silver was around $4-5 per ounce in '01, and trades today around $9.80.
2) The short-term correction is due to contraction in money supply by the Fed and Japanese Central Banks, and won't go on forever. I believe that American and other central banks are working together in coordinated actions to help out the US. Bernanke wants to skip a rate hike at the next meeting, but can only do this if inflation is perceived to be under control. The latest inflation numbers were a little higher than the Fed and other experts wanted to see, but with the recent plunge in commodities, they may be able to claim to Congress and the American people that inflation is in check and don't need to hike rates another quarter point in the short term.
3) America's glorious Empire of Debt. The US is swimming in government, corporate and household debt, and will need to inflate the money supply in the long run to attempt to pay this debt down in cheaper dollars. The problem with this is that American's purchasing power will be significantly decreased, and foreign central banks will accelerate their flight from dollar-denominated investments - namely stocks and Treasury notes.
4) The supply of commodities is finite, the supply of fiat-based money can be almost infinite. The world is entering the era of Peak Oil, where supplies and production of cheap, easily-accessible Black Gold are declining. Same goes for gold, where new discoveries of high-production mines are declining. However, the Federal Reserve - and other foreign central banks - can print money on a whim, and increase the supplies of their currency as much as they want. With more dollars in circulation, it'll take more of these dollars to buy commodities such as gold and silver.
5) Decreased confidence in financial paper assets. Stock markets around the world have been in decline, especially Dubai and Saudi Arabia. I believe we're entering a time where investors and governments will be more confident in tangible assets such as precious metals, and less confident in stocks, bonds and certain currencies. History shows that when confidence is lost in paper assets, it takes a long time for that confidence to come back - if it ever does. Couple of prime examples are shares of Enron or MCI/Worldcom stock. I don't think any prudent investor would think about investing in either of these stocks.
It may take a while for gold and silver to resume their bullish trends in earnest, you'll still be much safer investing in gold than in shares of Google. I also believe that long-term (over a year) call options on certain commodities are a good speculative play as well. Consult with a competent commodities professional before investing any money or executing a trade.
Here are a few good sources of investing news and articles online:
www.InvestmentRarities.com
www.Kitco.com
www.TheBullionDesk.com
www.DailyReckoning.com
www.321gold.com
www.PrudentBear.com
If you don't have or know of a good commodities broker, check with Nell Sloane and NS Futures: www.NSFutures.com. They're good people that know their business well.
Investing in commodities does carry risk, but will give investors a hedge against inflation and potentially good rewards for being patient. Don't just throw your money blindly into ANY investment. Take the time to do your research, talk with at least one (and preferably several commodity brokers) and know what your short, medium and long-term investing goals are.
I'd recommend buying physical gold and silver with 15-25% of your investment portfolio, holding some in non-US Dollar cash, a portion in gold stocks, and another small portion in well-selected (longer than a year) commodity options. Options are a way to use more investment leverage with minimized risk.
Again, this blog post is solely my opinion and may or may not be applicable to your investment situation. Conduct your own due diligence and consult with one or more investment professionals before making ANY investment decision.
1) Commodities are still in the early to mid-stages of a secular bull market. Stocks and commodities run opposite of each other, and Wall Street had its days in the sun from 1982-2000. Historically, commodity and stock bull/bear markets run about 16-18 years in length. Gold was trading around $260 an ounce back in 2001, and is still at $560 after today's bloodletting. Silver was around $4-5 per ounce in '01, and trades today around $9.80.
2) The short-term correction is due to contraction in money supply by the Fed and Japanese Central Banks, and won't go on forever. I believe that American and other central banks are working together in coordinated actions to help out the US. Bernanke wants to skip a rate hike at the next meeting, but can only do this if inflation is perceived to be under control. The latest inflation numbers were a little higher than the Fed and other experts wanted to see, but with the recent plunge in commodities, they may be able to claim to Congress and the American people that inflation is in check and don't need to hike rates another quarter point in the short term.
3) America's glorious Empire of Debt. The US is swimming in government, corporate and household debt, and will need to inflate the money supply in the long run to attempt to pay this debt down in cheaper dollars. The problem with this is that American's purchasing power will be significantly decreased, and foreign central banks will accelerate their flight from dollar-denominated investments - namely stocks and Treasury notes.
4) The supply of commodities is finite, the supply of fiat-based money can be almost infinite. The world is entering the era of Peak Oil, where supplies and production of cheap, easily-accessible Black Gold are declining. Same goes for gold, where new discoveries of high-production mines are declining. However, the Federal Reserve - and other foreign central banks - can print money on a whim, and increase the supplies of their currency as much as they want. With more dollars in circulation, it'll take more of these dollars to buy commodities such as gold and silver.
5) Decreased confidence in financial paper assets. Stock markets around the world have been in decline, especially Dubai and Saudi Arabia. I believe we're entering a time where investors and governments will be more confident in tangible assets such as precious metals, and less confident in stocks, bonds and certain currencies. History shows that when confidence is lost in paper assets, it takes a long time for that confidence to come back - if it ever does. Couple of prime examples are shares of Enron or MCI/Worldcom stock. I don't think any prudent investor would think about investing in either of these stocks.
It may take a while for gold and silver to resume their bullish trends in earnest, you'll still be much safer investing in gold than in shares of Google. I also believe that long-term (over a year) call options on certain commodities are a good speculative play as well. Consult with a competent commodities professional before investing any money or executing a trade.
Here are a few good sources of investing news and articles online:
www.InvestmentRarities.com
www.Kitco.com
www.TheBullionDesk.com
www.DailyReckoning.com
www.321gold.com
www.PrudentBear.com
If you don't have or know of a good commodities broker, check with Nell Sloane and NS Futures: www.NSFutures.com. They're good people that know their business well.
Investing in commodities does carry risk, but will give investors a hedge against inflation and potentially good rewards for being patient. Don't just throw your money blindly into ANY investment. Take the time to do your research, talk with at least one (and preferably several commodity brokers) and know what your short, medium and long-term investing goals are.
I'd recommend buying physical gold and silver with 15-25% of your investment portfolio, holding some in non-US Dollar cash, a portion in gold stocks, and another small portion in well-selected (longer than a year) commodity options. Options are a way to use more investment leverage with minimized risk.
Again, this blog post is solely my opinion and may or may not be applicable to your investment situation. Conduct your own due diligence and consult with one or more investment professionals before making ANY investment decision.
posted by Brian Ochsner | 4:24 PM
2 Comments:
I agree with most of your analysis, but I'm not sure I agree with the fundamentals of commodities you describe and how it will affect pricing. I agree that inflation will be inevitable going forward and that it will be required to reduce the US debt. However, why do you believe money can be forever stored away in commodities. To me, this sounds like the theory of the bigger fool. If there is no fundamental demand for the commodities such as gold, then how will the price continue to rise?
Again, I hate to disagree with such an obviously rigorous analysis, but I can't help but wonder what happens when the demand for jewelry dries up at higher prices and we're left with nothing but rock.
I think I see where you're coming from. To a point, you're equating the commodities bull market with the dot-com mania/bubble of the late 90s. The dot.com stocks were mostly companies that never made a dime of profit, and were never going to. The increase in their values were based on good stories and Wall Street PR.
Eventually, the commodities bull market will turn bearish, I'm not saying they'll go up forever - no market ever does. Investors and central banks around the world are re-investing their funds in tangible, hard assets that will at least hold their value and be a hedge against inflation. Gold and silver have been stores of value for thousands of years, and are considered money just about anywhere on earth.
Russia, China and Sweden's central banks are diversifying their currency reserves out of US Dollars, because they don't want to be the 'greater fool' holding Treasury notes that are declining in value. There is solid fundamental demand around the world for gold, and not just in jewelry or trinkets. Central banks around the world are all devaluing their currencies - look at the back pages of the Economist, where the rates of increase in money supply are listed in each issue.
When countries devalue their currencies, people and investors that hold wealth in these currencies are losing wealth and purchasing power. Reinvesting these holdings in gold and silver acts as a hedge against high and hyperinflation.
Jim Rogers, billionaire investor and former partner of George Soros with the Quantum Fund, also says that we're in the early to mid-stages of a commodities bull market. Here's a link to his recent CNBC interview on this very topic: http://tinyurl.com/qvj3n
Thanks for the comments, I really appreciate them. Always good to get feedback, keep me on my toes and sharpen my thinking.
Tell friends, neighbors and co-workers about my site, feel free to add more comments - Thanks Again!
Brian
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