...and the next year....and
the year after that!
For several years now,
commodities have garnered attention because of their prolific appreciation.
The price of oil has climbed by over $80/barrel during this first stage of
this bull market, gold prices have more than tripled in price, and soybeans,
corn, wheat and coal have suddenly become part of the investor's vocabulary.
At the same time, however, it seems that while investors are now more
familiar with commodities (in the general sense), they are still apprehensive
about finally taking the steps to add commodities to their investment
portfolios. The reasons vary, but it has a lot to do with the fact that most
investors focus on the fact that prices are too high (gold at $800/ounce, for
instance). As a result, the average investor feels more comfortable waiting
for the next bull market in commodities, rather than being the fool that buys
in at the "top".
Interestingly enough, not
only is it not too late to invest in the commodity bull market, but it is also
perhaps one of the best times to start investing. In this article, I will not
list the fundamentals for why I believe we are still in the first half of
this commodity bull market. I have written about this topic on various
occasions, and I write about it in detail in my new book,Commodities for Every Portfolio: How You Can
Profit from the Long-Term Commodity Boom. I recommend buying this as a
Christmas gift for yourself or your skeptic friend!
Instead, I will make the case for why I believe this is probably the best
time (since the start of this bull market in 2001) to actually allocate a
portion of your portfolio to the commodity markets.
The
Last Seven Years
I fully realize that most
people will initially scoff at my belief that now is a much better (and
critical) time to buy commodities. How could I possibly believe that buying
gold today( when it is trading at $800/ounce) is better than buying gold
seven years ago (when it was trading around $250/ounce)? Or how could I argue
that oil at $90/barrel is a better investment than oil at $15/barrel? Indeed,
if one were to look simply at the price of commodities, my argument would not
make sense. However, if you look at the bigger picture, it becomes clear that
investing in the second leg of this bull market is much more important.
Consider, for instance, the
potential investments (and their returns) of the previous seven years. There
is no question that the commodity markets have tallied significant gains. But
so have other investments. For instance, while commodity bulls point the gains
they made investing in the energy sector, real estate investors can readily
point to the appreciation that they experienced by investing in housing.
While gold bugs boast about the massive gains that they accumulated by buying
gold at $300/ounce, stock market investors simply point at the fact that
Google has moved from just over $100 in 2004 to over $700 today.
Indeed, it is clear that
those that have missed the "boat" during this first stage of this
bull market have had ample opportunity to ride other crafts to financial
gains. In a sense, the financial opportunities of this decade have been ample
and widespread. However, this unprecedented and goldilocks scenario is
clearly coming to a screeching halt. As a result, investors can no longer
afford to ignore the benefits of holding commodities in their portfolio.
The
Next Several Years
The economic environment of
tomorrow paints a picture that is polar opposite to
what has transpired in the previous years. Whereas investors were able to
profit from real estate gains (via the real-estate bubble), they are now
realizing losses (via the real-estate burst). Whereas investors were able to
profit from a rising stock market (due to consumer spending), the housing
decline and upcoming recession will inevitably result in a bear market in
stocks. And while the skewed and archaic fed data (think: the core CPI) has
failed to warn investors about inflationary pressures, the massive printing
of money to finance the war in Iraq, Afghanistan, and other government expenditures
will undoubtedly lead to inflationary pressures that will erode the wealth of
many investors.
In short, the benefits of
commodities can serve as a remedy for the problems of tomorrow. While I have
always espoused the profitable reasons for investing in commodities, I
believe it is now more a question of protecting your wealth. In other words,
the intrinsic benefits of holding commodities in your typical stock and bond
portfolio far out way the potential gains you might see. Now don't get me
wrong. I still believe commodity prices will soar for another decade or so,
but if you are concerned about inflation, a bear market in stocks, and the
inevitable recession -- commodities make sense.
Why
Commodities Belong In Your Stocking
So why exactly do commodities
still make sense? And why do they belong in your stocking? Well consider the
following study conducted by a couple professors and the gifts (or benefits)
that commodities provide investors this holiday season.
In 2004, Professor Gary
Gorton of University of Pennsylvania
and K. Geert Rouwenhorst
of Yale School of Management published "Facts and Fantasies about
Commodity Futures". In the study, the two professors examined the
long-term relationships of these three different asset classes. Their results
were groundbreaking on a number of levels. First, the study shattered several
ongoing myths about commodity futures. One of these myths was simply that
commodities are more volatile than stocks. Looking back over a period of 45
years, the professors found the opposite to be true; the risk premium for
stocks was greater than that for commodities.
Gift
#1: Commodities provide investors with a hedge against a bear market in
stocks.
In addition to debunking
several myths about commodities, Gorton and Rouwenhorst
concluded that over a prolonged period of time, commodity futures were
negatively correlated to stocks and bonds. This, of course, makes perfect
sense. Consider for example the effects higher commodity prices have on
companies. As the price of commodities rise, companies have to pay more to
make those products. In turn, they will have to pass on those costs to the
consumer. Since the price of the product is now more expensive, not as many
consumers will buy the product. The end result is lower earnings, and lower
stock price.
Gift
#2: Commodities provide investors with a hedge against rising inflation.
In addition to commodities
being negatively correlated to stocks (and thus serving as a hedge against a
bear market in stocks), the study as mentioned that commodity futures were
positively correlated with inflation. In other words, commodity prices
increase with rising inflation and decrease with declining inflation. Again,
this makes perfect sense. Throughout the 1980's and early 90's, a period of low
inflation, commodity prices were in a decline. Today, commodity prices are
increasing in the midst of rising inflation. For instance, as the price of
corn, soybeans, and other food products rise in price, you will have now have
to pay more for your food products (See Food Inflation Article). While rising
inflation erodes the purchasing power of your dollar (and subsequently
diminishes your wealth), investing some of your wealth in tangible real
assets can counteract the inflationary pressures.
Gift
# 3: Commodities provide investors with the opportunity to profit from the
greatest generational bull market of our time.
Of course, commodities can
still provide investors with the opportunity to profit from the greatest
generation bull market of our time. While there might be pullbacks and
consolidation along this bull ride, the sheer demand for commodities from China, India, and other emerging
economies will continue to push commodity prices higher. Additionally, while
many investors continue to focus on how high commodities prices have risen
over the last 7 years, they fail to realize that commodity prices were in a
bear market for the previous 20 years. And if you look back at the history of
commodity bull markets, they have all lasted longer than 15 years.
It is becoming evident that
commodities should have a place in an investors' portfolio. It is no longer
simply a matter of whether or not you believe that we are in a bull market or
a bubble, but it is a matter of properly diversifying your investments. While
diversification might not seem as important when most every investment is
going up, it becomes increasingly important during times of economic
uncertainty. Hopefully this Christmas Santa will bring you some coal....or
oil...or gold. Personally, I prefer gold.
Say tuned for the official
launch of www.commoditynewscenter.com in early 2008. With commodity news,
pertinent commentary, quotes, and trading tools, CNC is poised to become your
home for commodities online. I will also be launching a daily blog and send my subscribers a free report on which
commodities to own...and not own...in 2008!
If you are interested in
receiving this report .. You can sign up for a free
newsletter here.
Emanuel Balarie
Jabez Capital Management
www.commoditynewscenter.com
Emanuel Balarie
is President and CEO of Jabez Capital Management.
In addition, he is also editor of www.commoditynewscenter.com
and the author of Commodities For
Every Portfolio: How To Profit From The Long-Term Commodity Boom.
Mr. Balarie's industry experience ranges from
commodity stocks to futures to alternative investments. He is a highly
regarded advisor to clients and institutions on the commodity markets, and
has had his research published all over the world. In addition to being a
regular guest on CNBC, Balarie is frequently quoted
in financial publications such as, The
Wall Street Journal, Reuters, Marketwatch
from Dow Jones, and Barrons. Mr. Balarie is a graduate of UC Berkeley.
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