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  • All Roads Lead To Commodities 2 comments
    Nov 11, 2009 11:40 AM | about stocks: GLD, SLV, EWZ, EWC, EWA, FXI
    Three seemingly disparate news items last week strongly suggest that the investment world is bifurcating into commodity and non-commodity investments – or if you will long-term winners and long-term losers.
    First, India's central bank announced that it had bought 200 tons of gold from the International Monetary Fund. That's half of the total amount the IMF had planned on selling. For a relatively small central bank to buy that much in one fell swoop is a big deal. It promotes gold from the status of a “barbaric relic” to that of an alternative reserve currency. Moreover, it leaves China – and other Central Banks – with egg on their face.
    If India does not buy the rest (and they have not ruled that out) it is almost certain other Central Banks, Sovereign Wealth funds, all those who are underinvested in precious metals to join a prospective scramble for gold et al. that far exceeds what the IMF is willing to sell. No wonder. Money supply in so-called non-inflationary countries have climbed 15 fold in the past generation or so while the total value of all above-ground gold has only doubled.
    But we are not just bullish on precious metals. The second announcement was Warren Buffett's biggest investment of his career...
     
     
    BUFFETT'S BET ON AMERICA (READ COMMODITIES)
     
    Ten years ago, if someone had suggested Warren Buffett would pour nearly $26 billion into a capital-intensive company in the middle of a recession almost everyone on Wall Street would have laughed out loud. 
    Yet that's exactly what he did last week when he purchased Burlington Northern railway outright. In fact, it is the biggest purchase Buffett has ever made.
    We have to confess we made an error. Some time ago, we discussed Buffett's interest in Burlington and described it as a company leveraged to commodity prices.
    When we recently did a search for companies that, over the past ten years, had annual returns of 10% or more, Burlington made the list. However, because its returns were so outsized, we dismissed it as an anomaly. Turns out those returns may not have been anomalous.
    According to his own words, Buffett's intent was to place a bet on America. Maybe so. But he's not betting on the U.S. stock market. He's betting on commodities.
    Burlington Northern is leveraged to commodities in several ways. Commodities are its primary cargo. It also benefits from higher oil prices because railways use fuel more efficiently than trucks. Plus, if we compare Burlington's stock to the performance of the stock market and overall commodity prices, it clearly tracks commodities far more closely. As our chart indicates, BNI is a leveraged bet on commodities – and at least in terms of stock performance is completely divorced from broad market averages.
     
     
     
    Last week's third important news item was the rise in unemployment to 10.2%. Even more striking is that the underemployed rate (which includes those who have only found part-time work or given up looking for work) now account for 17% of the population. That's 1/6 of all the people in America who can't get a job.
    Why is high unemployment good news for commodities? Because it means that unlike 2008 the Fed will not be able to check the inflation that higher commodity prices engender. Keep in mind high commodity prices whether oil or copper are both inflationary and deflationary. Circa 2008, if you try to fight inflation you risk deflation. On the other hand, if you fight deflation by stimulus and more monetary easing, commodity prices go higher still. This potential vicious circle is likely one reason precious metals are rising in synch with other commodities.
    Put all these announcements together, and the conclusions are pretty clear...
     
    THE AGE OF COMMODITIES IS AT HAND
     
    The investment world from now on will be increasingly dominated by commodities – both industrial and precious. The signs are all around. Gold hit another new high this morning at over $1,100 an ounce. Oil is about 150% above its lows. And while some like to argue that this is the result of speculation, the same certainly can't be said for iron ore, which has been on a similar bull run these past ten years. Iron prices are negotiated between producers (Australia and Brazil) and users (most notably China), with no element of speculation. Why would oil or any other surging commodity be any different?
    The authoritative IEA will soon lower its expected growth in demand for oil. This is not a positive for it simply says we can only consume what we have – and in terms of oil it is much less than the world has been led to believe. And this is still another reason to believe that worldwide growth will be ever high commodity prices. 
    For the foreseeable future the real money will be made by either direct investment in commodities or investments that are leveraged to commodities. Buffett, for instance, bought a railroad rather than a silver mine. If you want to enjoy high returns, you want either indirect or direct investments in commodities.
    One way to do this is to invest in resource-rich countries as well as particular commodities through the vehicle of exchange-traded funds (ETFs): for example, GLD for gold, SLV for silver, EWZ for Brazil, EWC for Canada, EWA for Australia, and FXI for China.
    One speculative stock we like (if you can call a company with a £12 billion market cap speculative) is Eurasian Natural Resources (EURNF.PK). The company is located in Kazakhstan, which is extremely rich in resources (including iron ore) and only a train ride from China. In fact, we would not be surprised to see China make a bid for the company, especially with India getting out of the iron ore export business.

    Stocks: GLD, SLV, EWZ, EWC, EWA, FXI
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This post has 2 comments:

  •  
    Excellent Post,

    so good to see your work again, PF was never the same without you! The case for commodities is clear enough - can you suggest some income plays tied to them so that investors can get steady income while riding the long term commodity uptrend? Especially if they're tied to AUD, EUR, NZD or Yuan appreciation.

    Don't know if I'll have time for a post on the topic, so I hope someone will!

    As Chief Analysit for AVA FX, I like these for the long tern as a USD diversification that anyone heavy in USD must consider.

    I (and others) have already written extensively in prior posts on Canadian energy, energy infrastructure, and power trusts. Seeking similar income vehicles with REAL diviidents in precious metals, agriculture (besides TNH).

    Your thoughts would be welcome by all of us. Thanks again, Cliff
    Nov 12 01:28 AM | Link | Reply
  •  
    Buffet is so smart. He manages to bet on America by making money from other people paying the inflation price rise/s.

    BRILLIANT!
    Nov 13 09:27 AM | Link | Reply
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