Now is a common time for bloggers to list their expectations for 2012, so I figure I may as well join in on the fun. Below is my outlook for 2012, as well as which investments I believe are most promising.
It's 2007 All Over Again -- But Worse
2007 and into the first half of 2008 was a time when we saw a bubble of sorts appear in the commodities market; gold, wheat, and oil saw their prices rise sharply. The chart below, for wheat, tells the story.
Though the credit crunch in 2008 and since then has helped put a cap on commodity prices, this is not a cap I expect to last for long. This is primarily for two reasons:
- Central banks are still engaging in extremely aggressive expansion of the money supply. As the big player here is Ben Bernanke and the Federal Reserve -- whose monetary policy is often replicated by central banks of smaller economies -- it is worth tracking the MZM money supply measure from the Federal Reserve. And in fact, MZM has increased over 8% thus far in 2011. I interpret rising MZM as a sign that this expansion of the money supply may fall over into commodities.
- More and more countries are taking a protectionist attitude towards their commodity production, and are reducing or cancelling exports entirely. India is reducing iron exports. Sabre-rattling in the Middle East continues, as Iran is threatening to block oil transportation through the Strait of Hormuz and the US is issuing its own counter-threats. China plans to limit exports of many commodities in 2012.
From this I'm reaching a simple conclusion: Monetary inflation and supply constraints will send prices higher for many commodities, like we saw in 2007 and 2008.
So what's the best way to play this? Here are my favorites:
1. Gold. Put me in the gold bug camp as I think 2012 will be another stellar year for gold -- and especially mining stocks. I've shared many of my favorite gold stocks here on Seeking Alpha before, although the one I am quickest to recommend for those looking for a safe way to grow their income is Goldcorp (NYSE:GG) -- a major producer with a very low cost of production, as well as a stock price with a low beta for those who are not interested in the psychological headache of great volatility.
2. Silver. I have mixed feelings about silver largely because of how volatile it can be and how complex the psychology if its participants is, but if the financial earthquake I believe is coming is in fact on its way, the upside to silver can be explosive. I view silver as a bit more like buying an educated lottery ticket. SIlvercorp Metals (NYSE:SVM) is a company I feel comfortable investing in, as I previously noted.
3. Uranium. While the global sovereign debt crisis is the primary obstacle facing the world economy, a close second is the global energy crisis: I don't doubt that the time to switch away from fossil fuels is upon us, as the pollution, geopolitics, and impending supply shortages are simply too much to bear.
The energy situation is complex and filled with great disagreement. Personally, I'm convinced that the world needs as much energy as possible, and that a combination of nuclear, solar, wind, geothermal, and biomass are needed. Nuclear has an important role to play and is the one I find most compelling as an investment opportunity (though I remain eagerly on the lookout for new solar opportunities). Cameco (NYSE:CCJ) and Uranium Energy Corporation (NYSEMKT:UEC) are stocks that I think are extremely promising here, with the potential to generate great wealth for their shareholders while making a positive contribution to the future of energy.
Hyperinflation and a break down of the world financial system are more likely than ever in 2012; in my opinion, the MF Global collapse shows just how much danger we are in. Physical gold, and perhaps some silver if you like, are thus necessities. The government response to a panic run out of a currency will be restrictions capital movements; in this world, the black market that gold and silver coins offer may prove to be necessary insurance -- and thus perhaps the most important part of a financial portfolio in 2012.
Disclosure: I am long SVM, GG, UEC.