The rally in commodity producers is well under way and set to move sharply higher into the spring. As a hedge fund manager, it's my job to analyze and evaluate data thoroughly so that the actions we take to grow our capital base have the highest probability of success. The upside potential has to far outweigh the downside risks to open positions and in order to become fully invested, the future outcome needs to be clear. Now is one of those times when stepping up to the table and going "all-in" makes sense, at least from my perspective.
While the media continues to obsess about the "Fiscal Cliff," safe haven assets like the US dollar and US treasuries (TLT) have been setting a bearish pattern of lower highs. If an equity plunge were truly imminent, the dollar and treasuries would be trending the other direction. And since the US treasury market dwarfs the equity markets in size, we can expect the exit from treasuries to continue to push equity markets higher.
The reason I expect the commodity sector to outperform over the next few months is because it has a reliable history of doing just that. For instance, this chart shows the five-year performance of a coal-mining fund (KOL) versus the S&P 500 index. Notice how exaggerated the highs and lows for KOL are in comparison. Also notice where we sit right now on that chart.
Even more compelling is that many commodity-related funds have set three year lows over the past few months. While this was happening, corporate insiders were aggressively buying shares in their own companies. Corporate executives have a great track record of buying low and when they're willing to risk their own personal money to invest in their own companies, it's generally wise to follow their lead. Since their recent lows, several commodity funds have already rebounded 20 to 30 percent and have been setting bullish patterns of higher lows.
In related news, "Helicopter Ben" Bernanke was at it again this week, pledging to flood the markets with more Federal Reserve Notes. Where the Fed gets this "money" is an interesting story in itself, thoroughly covered in The Secret of Oz, but I digress. The point is that the Fed is inflating an additional $45 Billion per month to buy Treasury bonds. This is on top of the action it took just three months ago, buying $40 Billion worth of mortgages per month. Since the financial crisis began in 2008, the Fed has injected about $450 Billion per year. Now they have stepped up their inflation efforts to $1 Trillion per year. Why do anything half way, right?
Gold is perfectly set to take another serious run at $2,000/ounce in 2013, but instead of buying the metal itself with a fund like (GLD), I suggest focusing on gold stocks. As this excellent article points out, right now gold stocks are historically undervalued relative to the price of the metal. The article goes on to mention that the two largest gold producers in the world, Barrick Gold (ABX) and Newmont Mining (NEM) are currently trading at approximately 60% of the value of their gold reserves. This data gives us a great opportunity to buy low so we can sell high later.
In particular, I believe the gold mining fund (GDXJ) is presently a best buy below $21 and will likely yield a return of more than 30% by spring. And if GDXJ were to regain its 52-week high, the gain would be 45% from today's levels. To see other funds I've recently loaded up on, read my last article, "Take The Bull By The Horns Now."
While I have no doubts that we will enter another crushing bear market, perhaps as early as next summer, the market is sending a clear signal that it is headed higher over the next few months and that commodity funds will be among the biggest winners. My investment clients are up 29% year-to-date and I expect the next few months to be even more profitable, which is why this hedge fund manager is "all in" for the commodity rally.