Managing Editor

Deathwatch Redux: Oil Over $111

Thanks, all, for your comments. I stake no claim to a crystal ball, Phil. There are lots of pundits making oil forecasts (several are interviewed on HardAssetsInvestor.com).

One particularly prescient forecast was made back in 2005 cheaper, when a Wall Street investment house called for a $105 per barrel top. Noting that "oil markets may have entered the early stages of what we have referred to as a super-spike period," the firm's analysts predicted oil entering a "multiyear trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return."

The prediction was met with a fair amount of skepticism. A move to $105 would have represented a jump of more than 75% from mid-2005 price levels.

Here's the fun part: Analysts cast the possibility that their prognostication could actually lowball oil's ultimate price. Back in the late '70s and early '80s, gasoline spending was a much higher percentage of consumer spending than it is today, which for some observers explains the lack of impact that seemingly high crude oil and gasoline prices had on the economy. "Our new super-spike range," the doomsday forecasters said, "assumes a level of gasoline spending relative to the economy and consumer spending that is still below the heights reached in 1979–1981, suggesting our new range could prove conservative."

Now ... you tell me where you think black gold peaks.

The Long and the Short of Silver and Gold

Nate, the HAI article linked to this story ("What's Better: Gold or Silver?": hardassetsinvestor.com...) contains a table tracking the gold/silver ratio through the 20th and 21st centuries.

If you want finer grain detail of modern-day prices, try the historical statistical archives of the London Bullion Market Association at www.lbma.org.uk.

The Long and the Short of Silver and Gold

Misterchan, DGZ and DZZ are exchange-traded notes (ETNs) issued by Deutsche Bank that track the 1x (DGZ) and 2x (DZZ) the inverse of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold.

ETNs differ from exchange-traded funds (ETFs) in that they are senior, zero-coupon debt instruments rather than representing a portfolio of futures like the PowerShares DB commodity funds.

As zero-coupon notes, they pay no interest. Issued at $25 pe back in February, their value fluctuates based upon the return of the underlying index. The are tradeable intraday and price-transparent as are ETFs.

At present, there's no tax consequence for holding these ETNs (until liquidation, that is), giving them a decided advantage over gold ETFs like DBG and grantor trusts such as GLD or IAU.

More information can be found at: dbfunds.db.com/notes.

Hard Assets Investing: An Interview With Brad Zigler

Taking the absolute route to complex matters such as commodity pricing is, I think, dangerous. The tendency to mean reversion didn't evaporate overnight.

Technological improvements, too, have to be factored in.

Don't get me wrong: I'm not saying that there isn't scarcity. Some of what we see, however, isn't population-related.

From a trading and investment standpoint, there are very few straight lines.

Hard Assets Investing: An Interview With Brad Zigler

Thanks for the feedback.

With respect to the cyclicality of commodity prices, mlasky, let's not forget the statistical tendency towards mean reversion. Yes, populations are growing, but growth RATES can vary significantly. Look at UN Population Division projections for China, as an example, to see an arc leading to stabilization, then decline. Couple that with infrastructure improvements -- woefully ignored during the past two decades of disinflation -- that increase supply and you have the ingredients for price mitigation. Prices may stabilize at higher levels, but GROWTH in prices is like to moderate, meaning those investors who jump on the commodities bandwagon later see less upside potential realized.

As for the "beginner's" allotment to commodities, User, five percent of total assets in a broad-based commodity index-based investments, such as exchange-traded products GSP, GSG, DBC and RJI, are comfortable starting points for most financial advisors and their clients. Shading the allotment upward is a matter of taste and familiarity with portfolio theory.

You're right, Eric, about Swensen's aversion of a commodities allocation in his model. I'm inclined to think he did so because he advocated the use of Vanguard index (or index-like) mutual funds as exemplars of his strategy. Vanguard's low cost (expense ratio wise) and accessibility through dollar cost averaging (systematic investment of fixed dollar amounts over time), together with its ownership structure, were answers to the protestations he leveled against most other mutual funds in "Unconventional Success." You can find a working example of the Swensen portfolio in my Registered Rep. article, "Illiquidity Is Beautiful For Some," registeredrep.com/inve...). There were simply no Vanguard commodity index mutual funds extant when Swensen wrote his manuscript.
Of course, a well-diversified portfolio of ETFs/ETNs -- including an allocation to commodities, as outlined above -- can be used in lieu of mutual funds, but the dollar-cost averaging issue must be addressed for those still in the portfolio-building stage. An account with Zecco.com, though, can be used by retail investors to get commission-free ETF/ETN trades, facilitating the process.

Based on Total Returns, DBO Beats Other Oil ETFs

The $1.28/share distribution made by DBO in December 2007 was characterized as a non-taxable return of capital (keep in mind that DBO is organized as a commodity pool; holders receive K-1 returns).

The Good, the Not-So-Bad and the Ugly Commodites ETFs

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned" oil ETFs/ETN when the market's in contango.

Wheat in the Teens?

Société Générale, for obvious reasons, didn't disclose the positions Jérôme Kerviel undertook. Given his position, it's more likely he dealt in financial, rather than agricultural, contracts.

Monthly Oil ETF Check

The table here has been truncated from the original version on Hard Assets Investor. The comparative aspects of USO and USL can be found in the original version at: hardassetsinvestor.com....

An expanded look at DBO's performance, too, can be seen in a follow-up commentary at: hardassetsinvestor.com....

The Good, the Not-So-Bad and the Ugly Commodites ETFs

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.