Three Noteworthy Sectors: Gold, Food and Healthcare

In a bear market, we're always keen to spot anything that's outperforming its peers. Even the strongest stocks and sectors can get beaten down when panic selling or forced selling wreaks havoc on prices. It's a bit like boxing: even the toughest boxer can get rocked with a hard swing to the jaw. What sets apart the truly tough boxers is their ability to bounce right back up and continue the fight.

We've been discussing gold recently, primarily because it's the most proven store of value over time. You typically don't invest in gold to make money - gold's value is in preserving your wealth even as everything else burns around it.

We mentioned the HUI index last week as a possible investment vehicle, but investing in the HUI is rather awkward unless you like buying or selling rather illiquid index options on the NYSE Amex.

click to enlarge

However, there are better ways to get into gold:

1) GDX: a synthetic HUI options trading vehicle which is actually based on the GDM index (GDM tracks 32 gold and silver stocks, not just the 15 in the HUI, but is to all intents and purposes identical for performance purposes - see the chart below).

2) GLD: a gold-holding fund which tracks the metal itself, rather than gold mining shares.

As you can see, GLD has been outperforming the HUI and GDX for the nearly a year now. That's primarily because equities in general have been getting pounded to one degree or another and even gold stocks were not immune. However, unlike most other sectors, gold stocks have recovered from the worst of the beating and are already back to summertime 2008 levels.

In the face of continued financial chaos (almost a certainty considering government and central banking strategies to solve the ongoing crisis), gold itself (GLD) will definitely rise, as will its associated producers (GDX). In fact, GDX should outperform GLD at some point as miners begin reporting larger profits and more favorable P/E ratios.

But if that doesn't happen immediately, putting a portion of your "wealth preservation" funds into each vehicle would be a prudent hedging strategy. You’ll benefit both ways unless the gold bull is truly over, which we don’t believe to be the case at all. Even though the price is currently weak, it’s a well known bull market strategy to buy the dips.

How long will the weakness last? Who knows? But you can bet that the next government and central bank plan won’t do anything to boost the value of the dollar and that will only be good for the yellow metal.

An Appetizing Investment Sector

Some cynics have rightly pointed out that you can't eat gold during a time of crisis, no matter how pretty it looks. That's entirely true, of course. The only gold to pass our lips is the stuff making up the caps on our molars courtesy of the local orthodontist.

So for an investment you can really sink your teeth into, we'd suggest looking at food. In the face of a dire economy and insane monetary policy, it makes sense to buy things that

a) people absolutely have to have, and

b) are tangible products which can't be revalued to zero thanks to government shenanigans

Commodities in general don't look particularly attractive at the moment, although we think they'll be winners for the long term (see other articles on this site for detailed analyses). The fact that the CRB index is continuing to make new lows tells us that we’d like to see some kind of reversal signal before suggesting commodities as a group are destined for an imminent rise.

And we also aren’t overwhelmed with the performance of the food industry in general as indicated by the Dynamic Food & Beverage Intellidex Index.

But the 30 companies in the Food and Beverage Index include restaurants and “brand name” companies which we don’t anticipate doing well. After all, as this recession/Depression really bites, most people will be looking to cut back on restaurant visits and “expensive” brands in favor of home cooking and generic no-name brands. At least DZF hasn’t made a new low recently.

Therefore we did a comparison of several of the best known agricultural ETFs to evaluate their performance over the last while. We realize that “the last while” doesn’t sound very precise, but many of these investment vehicles didn’t exist even one year ago, as clearly demonstrated by the two year chart below:

The best performer by far is the PowerShares DB Agriculture ETF (DBA) which is equally weighted amongst corn, soybeans, sugar, and wheat.

The worst performer is the MLCX Grains Index ETF (GRU) which is unevenly weighted amongst wheat, corn, soy meal, and soy beans (with the largest holding being wheat).

From these results, it would seem that DBA's equal weighting strategy is superior as a 10% loss over the last two years (including a 60% gain until last summer) is a strong performance amidst the rest of the market carnage. DBA has consistently outperformed all its peers and compares favorably to gold stocks as well.

Good Health In the Biotech Field

This next sector certainly seems to fly in the face of the ‘back to basics’ gold and food theme. But you can’t argue with performance and the biotechnology index has been delivering results. Yes, it’s still down from where it was, and it failed to break the confluence of its 50-week and 200-week moving averages, but it’s up substantially from its lows.

And what’s more, the best performing ETF in this sector would still be showing a profit over the last two years. The SPDR Biotech ETF (XBI) is still up 10% and holds healthcare stocks exclusively -- many of them are top performers and the fund's record is clear evidence of an excellent selection strategy.

That’s primarily because healthcare is another sector that should do well even in the worst of economic crises. It’s simply another basic need we can’t live without.

Rather than take the risks of individual biotech stocks, a well-managed ETF such as XBI would be the better investment strategy.

So there you have it: GDX (and/or GLD) for gold, DBA for food and XBI for biotechnology with a healthcare focus.

Disclosure: no positions

Comments

[Doc 224899:]

The healthcare sector has tanked after every new revelation by President Obama about how he is going to rescue and change and improve things. This pattern should tell everyone that he isn't willing to address the root cause of the high cost of healthcare: thieving lawyers and ridiculous torts that have abandoned causal relatedness and reasonableness so long ago that sane precedents are difficult to recall.

Healthcare providers offer a service that everyone, literally, can't live without. Lawyers provide a service we can hardly tolerate and clearly can no longer afford.

If we want to "reform" healthcare for the better, make practice conditions better for doctors and nurses, and protect the healthcare industry from being sacked again and again by trial attorneys.

Feb 27 08:30 AM

[GMiki1:]

Mad Hedge Fund Guy, You truly are insane for cutting and pasting your comments everywhere and not even doing cutting and pasting precisely. Cease and desist.

I think healthcare will fall off since if people can't afford the insurance and copays, etc., they will skip the doctors. As for the torts, people should be able to sue those who did them harm. I've never sued anyone in my life, but I think we need a legal provision for that.

Basic foodstuffs and gold will do well.

Feb 27 11:02 AM

[silver-bug:]

I agree. Food, agricultural, precious metals (gold & silver), basic materials, and energy are growth areas.

Any slack in prices in energy and basic materials will be picked up by the Chinese and Indian markets when they also stimulate their economies - they actually have a surplus unlike the US govt. That's 3-4 billion people driving the economy vs. the 300 million in the US. Once the consumption picks up in China and India, it's going to create a behemoth of a boom in commodity prices.


On Feb 27 11:02 AM GMiki wrote:

> Basic foodstuffs and gold will do well.

Feb 27 01:54 PM

[jroe:]

There is a better way than tort lawsuits -- mediation. I am 68 and have been in and out of hospitals for myself and with my family for many decades. Recently, I have noticed doctors and nurses are constantly asking for feedback . Getting feedback early and acting on it can prevent lawsuits. This is where mediation comes in. If hospitals want to prevent lawsuits, they should ask patients to sign a contract to agree to first mediate before litigating. Many contracts have this provision -- e.g., credit cards, architect contracts, etc.

Another fallout of the lawsuits though is that care providers have to spend way too much time record-keeping (for possible lawsuit defense) and personal one on one time with the patient suffers.

Otherwise, consider lawsuits another form of feedback.

Feb 28 08:32 AM

[craigdude11...:]

Silver-bug------ why will China and India's consumption pick up if we are into a world wide depression which has just started?- Just a question-I am enlightened by your facts about surpluses in their economies and the sheer numbers of the people.it makes sense that tthe sheer numbers will cause buying increases- but their economies are in trouble also- why will their consumption increase over what it is now as we head into deeper depression worldwide? Thank you

Feb 28 08:35 AM

[Cesato:]

Gold and food are indeed recession proof, the problem with healthcare is not president's Obama plan, it is that it became a business-for-profit concept only so that Doctors, Drug Manufacturers etc actually need to make as much money as they can without having a sensible approach to what "healthcare means". I agree with User 224899 and GMiki's regarding attorneys, we got use pay USD 400/hour to an attorney (regardless of their qualifications) just because he would be able to get the money back one way or the other, and businesses became used to not recognize citizen's rights unless there is an attorney involved, vicious circle. The original concept of healthcare needs to be understood, if citiizens are healthy they will still pay their monthly premiums, but if you need 100 / USD 100.000 surgery / year (needed by the patient or not) to make money out of the business then your values are wrong. Management and a good effort not to become a WS-like enterprise is what the Country needs. Citizens needs to play a role on this by making sense of the way we use healthcare services, but in the end, either good or bad, healthcare is here to stay otherwise the Government would be in serious trouble down the road.

Feb 28 08:51 AM

[yellowhoard:]

The best thing that could happen for India, China and the world in general would be for them to back their currencies with gold or silver. As the purchasing power of their currencies exploded, consumption would rise greatly as the average citizen could realize bargains in goods and services previously unatainable.

Feb 28 09:34 AM

[Vuke:]

Buying a little gold or silver on dips and holding is a conservative strategy in in these fragile times. As governments everywhere print the value of your investment gradually rises while simultaneously acting as an insurance policy against catastrophic events. Admittedly, the actual wealth building process is slow, but it is steady, and requires no constant monitoring or adjustment.

As the presses slow and new investment opportunities appear savings will have been preserved for more dynamic investment opportunities.

Feb 28 10:25 AM

[pansyed:]

There is much talk about the adding of gold to the GLD etf. This gold should be traceable through the COMEX. I cannot find the transfers nor to my knowledge can anyone else. So that leaves leasing or paper transactions. Do we really want to deal with a fund that infers they have gold when it appear to be an illusion?

There are no provisions for an audit of the gold.

This fund is apparently controlled by the same big bankers in need of a baleout.

And then we have Madoff and others. So my mind wanders to what happens in a crisis.

Feb 28 11:06 AM

[abhunter:]

I appreciate all the chat on gold being the wise buy in these tough times...who can suggest when you dump it? what will the indicators be before it tanks back?

Feb 28 11:37 AM

[BigOlDave:]

You say,

"The only gold to pass our lips is the stuff making up the caps on our molars courtesy of the local orthodontist."

For the record, orthodontists don't cap teeth: DENTISTS do.

Feb 28 12:29 PM

[Mad Hedge F...:]

Panic buying of gold coins continues to overwhelm coins dealers around the world. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year, more than it sold in all of 2007 at prices 40% lower. Retail investors fleeing paper assets, like plummeting stocks and bonds, are paying 5% premiums over face values. The same phenomena is appearing in other countries were gold coins are available to the public. Does this have a toppy feel to it?

Feb 28 03:16 PM

[Turnipseed:]

I hate to throw water on gold, but Casey Research reported today that India imported no gold in Jan. Likewise, many peple are cashing in jewelry, coins, etc, creating at least temporarily an oversupply of gold. I do hold stock in gold miners because I believe gold is in an upward trend. However, with the vast amount of gold in private hands, there are built in constraints on rapid upward price movement. In fact, if this recession/depression continues to worsen, gold prices may be negatively affected by those forced to liquidate their gold postions.

Feb 28 05:17 PM

[ATWshop:]

Wow...Some really un-knowing facts being given here. 1st... there is not enough Gold in the entire world to act as a backup to any one currency (the gold standard is a dead concept)
2nd... This is NOT the time to be buying Gold or Silver. The time to have been buying was 3-5 years ago. NOW is the time to be selling to the suckers that are running in fear of world financial collapse.
3rd... If you are really worried about the financial world coming to an end, I would suggest you buy several truck loads of Campbell's Soup. When everyone is starving you can trade soup for their real property... try trading a gold bar to a starving man.
4th... There is simply no way to anticipate what the Gov and Lawyers will end up doing to our Health care system...but you can always shoot in among the flying ducks in hope of hitting one. Good Luck.
5th.. The only really safe play for people during these hard times are in the Food sector.
6th... Why has no one mentioned Electric Utilities or Coal company stocks. The other item that is used and needed by everyone...even those without jobs... is electricity and most plants are coal fired...just my take and where I am currently putting most of my investments.
Howard

Mar 01 05:21 AM

[AdamSmith37:]

WOW is right. The sequence is such that one would first take some of their silver or gold and purchase paper cash which one would then utilize to purchase goods and/or trade to the starving man who may then buy his soup cans or visit the nearest soup-mobile. Virtually all of the gold ever mined is sitting somewhere in storage or is in the form of trinkets or jewelry or coins, etc. (about a 60 foot cube if it were all in one chunk). Conversely much of the silver has been and continues to be used and used up which begs the true value question. Silver is still very cheap but will not be in years to come. It may all be used up within the next 15 years or so if we are not careful. The pure silver mining plays will have been tapped and it will begin to only show up as a by-product of other types of mining -- only a small amount is ever recovered or recycled. Geologically silver mostly ended up on the earth's crust. The economic elasticity is such that primary uses use very minute amounts per application so even if silver were valued at several thousand dollars per ounce, the end result is that the applications go up only cents per usage. Try searching for info at Wikipedia for invaluable silver or gold facts. About the time the real breakthroughs show up which will solve many of the worlds problems ranging from water purification to the nano-tech applications which will wipe out most all known viruses, etc., the remaining above ground supplies of silver will become quite valuable as a multi-industrial consumable. Paper currency needs really to be backed by something other than faith, even if it is only a percentage factor. That may be in the form of gold or silver but could also be other precious metals and even strategic metals and minerals or even ???. How about a Federal Rhodium Note? Or a Federal Iridium Note? How about this for a brainstorm -- If we want to take the real estate market out of the doldrums, try backing the currency with Federal Real Estate Notes or even Federal Stock/Bond Corporate Notes since that is basically what is going on anyway -- it simply extends the idea to something concrete which people can understand and support. It need not even be liquid although that can be worked out in numerous ways if one wants to exchange their paper note for the underlying backing. Perhaps shares of a REIT or a large bank or any of numerous other things our government is busy accumulating in order to avert worldwide disaster. Paper money can be subject to insane levels of manipulation so if you want to use your gold and silver or any other real money to purchase un-backed fiat paper, then that is your prerogative and everyone would have to exchange some from time to time in order to enjoy daily commerce. Just bare in mind that the fallacy is that most people think, because of the way the systems are set up, that they are buying gold and silver with paper money when in fact it is the other way around and has been for thousands of years which is why gold is considered a preservation of wealth rather than an investment. An ounce does not grow or shrink but is still an ounce tomorrow, next week or a thousand years from now. It truly is time honored real wealth but will certainly fluctuate in the amount of comparable paper that people and governments are willing to exchange and/or print/manipulate for it. To that end, timing of buys and sells is for temporary day or short term traders and if the value exchange is such that it takes less fiat paper money to acquire more precious metal, then that is good overall because it gives one more time to convert more paper into real money. On the economic front, I think we will see the beginnings of a bear market rally within the next month or two, perhaps weeks, which could last for several months or could be the outskirts of the actual turnaround. I look for neither a V shaped nor an L shaped turnaround but more likely a lazy V which could last for two to four years. Ultimately, when the bottom hits and everything looks like there will be no tomorrow then that will be the time that the stock market will perk up and in some ways we are nearly there, but the rest of the world will hold us back because they have to go through the same thing we have. Within four to six months of that time, the economy will start to perk up and within one year of that time, employment will begin to regain a solid footing and we get to start all over again. The US dollar will strengthen as the world reserve currency since it is better than most, maybe all others, but eventually things will get better and hopefully we all will have learned valuable lessons from the experience. Perhaps eventually the evolved version of the dollar will become the world currency which could then be backed by baskets of generalized items such as commodities or even things pertinent to given geographic areas or nations. The G-20 are probably already researching this and all of the ramifications of how to implement such so as to make it a favorable transition for all. What an immense amount of revaluation must take place and all the calculations for exchange and conversion from each local fiat currency to the revised backed reserve currency. Collectors from all over the world will want to gather one from each of the 200+ nations so much of the paper will be set aside much like our own coin and currency collectors do today. Then they will naturally want a silver note from each, and a gold note, and a cocoa note or whatever the designated backing happens to be which will be only as endless as the imagination. Yet each will be a refreshing piece to have as opposed to everything now in existence. Well I just spent too many hours solving the worlds problems and must sign off though there is much more to add. Technological innovation will save our bacon for everything from energy to health to longevity to supplying food to the world etc., etc., but it will not keep fellow nations from going to war over nonsensical things like cultural gap or greed and avarice. Will save that for another time. Hope you all enjoyed this little dissertation. Suggest e-forwarding it to your favorite e-forwardee or even the folks at the central bank -- they are welcome to use as necessary and as expeditiously as possible.

Mar 02 08:17 AM