Still Biased to Commodities

 |  Includes: DBC, GSG
by: Kevin Stecyk

In my last post Still Believe In The Commodities Bull Markets, I discussed Barron's article Commodities: Who's Behind the Boom? (subscription required), where Gene Epstein provided a compelling argument that the commodities bubble is about to burst. I further wrote that I am a commodities bull and referenced Jim Rogers. As luck would have it, Lawrence C. Strauss wrote a feature article in this week's Barron's Light-Years Ahead of the Crowd: Interview With James B. Rogers, Private Investor (subscription required).

Below is an excerpt from the article where Jim Rogers comments on the recent Barron's commodities article.

Our colleague Gene Epstein argued in a recent Barron's cover story that there is a huge speculative element pushing up commodities prices.

But where is the oil coming from that's going to drive down prices and keep them down? We are going to have corrections, as was the case in 2001 after 9/11. Is there speculation in commodities? Of course. Whenever you have a bull market, it draws money. If the fundamentals are right, investors make money and they want to make more. But people were buying commodities for 20 years in the 1980s and 1990s and nothing happened, because the fundamentals weren't right yet. Now that the fundamentals are right, more money is going into commodities. It will end in a bubble and hysteria. But in 2018, or whenever this bubble finally starts to peak, if I'm lucky you will call me up and I'll say it's time to sell commodities.

So you expect commodities prices to keep running up.

Absolutely. Look, if somebody discovers a gigantic oil field in Chicago or Berlin, then we will maybe have to start reassessing. But remember that all the great oil fields are in decline, including those in Alaska, Mexico and the North Sea. And I'm not just talking about oil. You can't go into your garage, snap your fingers and bring a new zinc mine to market. It takes on average 10 years to bring on any new mine.

Again, as mentioned in my prior post, if you look at the graphs of the commodities indexes on Bloomberg's website, you will note that, while commodities have become more volatile recently, they are still up on the year. In fact, the various indexes have essentially recovered from their prior swoon two weeks ago. Oil prices remain near record highs at about $110 per barrel. Not so very long ago, we wondered when oil would break the one hundred dollar barrier. Now the question is, will oil hit $120 per barrel this summer? Natural gas remains strong, along with agricultural products. You may wish to view my prior article, referenced near the top of this article, for links to gold and silver charts.

Last Friday certainly was an interesting day with the earnings release of GE (GE). I bought some GE near the bottom as a trade. While I think GE is an outstanding company, I am uncertain as to how deep and how long this recession will be. Initially, I did not expect this much damage. While I was aware of the housing bubble, I did not anticipate this much fallout. And according to some, we might be early in the game.

That said, I am not sure how much further down we could go. Are we vulnerable to a much further drop? While I hope not, I am far from certain. Reality is, like most investors, I am waiting and watching events unfold. As the earnings season progresses, we should gain more clarity. However, the companies themselves might not be well positioned to offer much insight, because they too are waiting and watching. Does the housing problem continue to spiral downward and spread throughout more of the economy, or do we begin to stabilize?

I have not made many trades recently. For the most part, I am content to watch my positions. I remain biased to commodities, with particular emphasis on oil, gold, and silver. Outside of commodities, I continue to have a well diversified portfolio, including some stocks that are being hit. We will just wait and see how events unfold.