Commodities are still in a roaring bull market. While the price of gold is up from $250 an ounce to $1750 an ounce over the past decade, the prices of oil, timber, farmland, and foodstuffs have not risen in nearly as dramatic a fashion and in my view they should catch up with rising metals prices in due time. It is my view that the rise in the price of oil from $30 a barrel in 2004 to the current price of $99 is not the makings of a bubble as much as it is a reflection of the erosion of the U.S. dollar's purchasing power over that same period of time. The Fed's asset base has more than quadrupled over that time period, and inflation may just be starting to creep back into the market for items like raw land, timberland, lumber prices, oil prices, etc...
Even though most investor believe record low interest rates are bullish for stocks and the economy; many Austrian economists, macro traders, hedge fund managers, and experienced investors strongly believe that low interest rates and increased monetary "easing" will ultimately result in higher prices for commodities, farmland, and raw materials. Total collapse of our current monetary system is likely inevitable according to some economists like Peter Schiff, Michael Pento, Nassim Taleb, Marc Faber, Jim Rogers, Ron Paul, Eric Sprott and others.
Sticking with the hard asset theme, some good investment opportunities exist in the following ETFs even though these investments don't actually hold and store physical commodities themselves. The first two own stocks of commodity-based companies, while the last one owns a basket of commodity futures. While my first choice would be for readers to go out and learn to be farmers, I realize that for most of us this is simply not an option -- storing a thousand pounds of soybeans in my back yard because I'm worried about inflation is simply not going to work, although I almost had to take delivery of some grain shipments back when I first started trading commodity futures and was still green to settlement and delivery procedures at the NYBOT.
These three investments make a good deal of sense for investors looking for diversified exposure to hard asset markets. If you don't want to buy things that are already bid up like gold, investors should consider these investments because they represent a diversified approach toward investing in what all of us need to survive -- food, shelter (timber) and energy.
Keep in mind that stocks have performed well during periods of currency devaluation, such as in Wiemar Germany (though not as well as gold), but that commodity stocks performed quite well in periods of stagflation such as the 1970s markets in America. The research tells us that during periods of currency collapse, owning the means of agricultural production served as one of the very best hedges against capital loss due to high rates of commodity price inflation because food represents almost 90% of expenditures when printing currency as a strategy hits the proverbial fan.
Market Vectors Agribusiness Index (MOO) -- is currently a very cheap way to invest in hard assets, including Potash, which is a scarce resource and in tight supply. MOO's top 10n holdings include Monsanto (MON), Potash (POT), Deere (DE), Archer Daniels (ADM), Mosaic (MOS) and others and the fund is fairly concentrated as far as index funds go with 57% of its holdings invested in the fund's top 10 positions. MOO trades at just 11X earnings and with a low .55% expense ration, this fund looks like a solid long-term investment for investors seeking a bargain in the agriculture market along with a low-cost fund to hold over the longer term.
The I Shares Global Timber and Forest ETF (WOOD) -- is one of my favorite investments currently, because timber investing has historically been a recession resistant means to collect a reasonable yearly income from yield (timber harvesting) and annual price appreciation via inflation of both land and wood prices. Weyerhauser, Rayonier, and Plum Creek Timber are the fund's largest holdings and together make up about 25% of WOOD's holdings. Wood's investments have an average price-to-cash-flow ratio of just 7.6X, an average price-to-book value of just 1.34X, and an average PE ratio of around 17 times earnings. Wood's .48% expense ratio looks attractive as does the 2.3% dividend yield. As for Wood's objectives, "the underlying index is comprised of approximately 25 of the largest publicly traded companies engaged in the ownership, management or upstream supply chain of forests and timberlands." While WOOD seems fairly valued at current levels, we look at timber investing as more of a utility type of cash flow stream.
Timber has long been a favorite investment for those with tremendous wealth because owning the raw land has tremendous strategic benefits from development potential, firewood harvesting, and lumber production. Land values rise over time, and dividends collected from responsible timber harvesting are compounded into the investor's total return. I feel the same objective can be achieved in shares of WOOD, though investors may want to wait for some type of further pullback in the ETF before "going all in." As heating oil costs rise, Americans are increasingly turning to wood to heat their homes because the cost of burning firewood is some 60% less than the cost of heating oil during the winter months. Lumber prices are catching a bid, and I expect prices to return to 2007 levels well before the housing recovery begins as people update existing homes, fix up commercial buildings, and generally improve existing homes, barns, ranches, etc...
The Rogers Raw Materials Index (RJI) -- is the grandfather of the hard asset index funds in some ways, as Jim Rogers started the index way back in 1998 before anyone really cared at all about commodity investing. Jim used to say that he wouldn't sell his commodities before CNBC was reporting from the cornfields of Nebraska, and the commodity market was more talked about than the stock market. While gold has certainly garnered the attention he alluded to five year ago, the other commodity markets have yet to ramp up into the stratosphere in tandem with the yellow metal. RJI is relatively low expense way to get into commodity investing and is tied to the prices of the actual commodities and not the stocks of companies that farm them or use them as raw materials. Raw materials pricing looks to be in a long-term bull market and we think allocating capital to such an investment program makes sense as a diversification tool as well as a way to make some money over time. The one concern investors must face here is the dreaded contango, which produces a negative roll yield from the pricing differences between front and back month futures contracts. While the Rogers Raw Materials Fund holds a basket of futures and does not take delivery, the fund can capture outsized returns in bull markets, because many times bull markets exhibit Backwardization, which means that investors actually make a positive return from holding the futures as they are rolled over into the next monthly contract. Also, finding a fund that physically stores commodities can only be done economically with gold, silver, and platinum because the cost to store commodities is simply too high for such a strategy to be viable, although various traders like "Copperfinger" have tried this strategy in the past. While I would prefer investors own farms that produce income, this fund is a good way to guard against a falling U.S. Dollar.
We teach hedging strategies to the individual investor that we have learned over the years. One thing we believe in is diversification and we think stock investors need to buy at least 20 companies at a time on the long side. As for hedging, most traders should really only short index funds as a hedge against their long stocks using bear put spreads or bear call spreads or through buying outright protection when an impending sell-off is obvious or evident (though they seldom are). One thing is certain, over time the value of the dollars in your pocket decline. Investors have to have a game plan when going up against the specter of high inflation, and hard asset investing is one of the best ways to hedge your paper currency debasement risk.