Commodities: Where I Want to Be in 2011

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Includes: DBA, WPM
by: StreetAuthority

By Nathan Slaughter

Eight times a year in Washington, D.C., a dozen men and women sit down to vote on the economic fate of the United States. They come representing regions around the nation -- rural and urban, rich and poor -- and the power they wield is unmatched. Together, they make decisions that can put people to work, move the entire stock market, and change how American consumers and businesses spend their money.

This is the significant and very real power of the Federal Open Market Committee (FOMC), the group responsible for setting our monetary policy. Its power is humbling, and it even sometimes conjures fear and resentment that such a small handful of people can wield such enormous power over such a gigantic nation. But the fact is, if you're a savvy investor, you can use the cabal's power to your advantage. And at this point, the FOMC has all but sent up fireworks to announce a decision that will mean huge opportunities in one particular sector.

Creating the Ideal Environment

The committee made arguably its biggest move of the year with its second round of quantitative easing, designed to inject cash into the system, lower borrowing costs, stimulate bank loans and other economic activity. Essentially, the Federal Reserve plans to create money out of thin air and loan it back to the government by buying Treasuries. That money then provides funding for various government agencies (many of which rack up even more debt). How can this do anything but depreciate our currency and stoke inflation? That's why it is actually creating the ideal environment for commodities, which are usually priced in U.S. dollars. A weaker dollar usually leads to higher commodities prices, all other things being equal.

You might have noticed that everything from soybeans to copper and from corn to gold have taken off recently. (In fact, gold hit a record high of $1,422 per ounce on Monday.) And companies involved in growing, mining and distributing commodities have been on quite a run as well.

You see, the Fed is trying hard to stave off deflation with its moves. Official measures show inflation near 1% -- a historically low level. But if you've been to the grocery store... or bought gasoline... or invested in oil... you know that 1% inflation rate is deceptively low from what most of us are seeing. Add the Fed's loose monetary policy -- and don't forget the continued Asian and emerging market growth -- and you can see why I'm so bullish on the commodities sector.

In fact, I've been positioning my Market Advisor newsletter portfolios for a commodities run for months. Silver Wheaton (SLW) has been one of the biggest winners for my readers. I added the shares to my holdings a year ago and have seen a +135.8% run. Silver Wheaton is aptly named -- it's heavily tied to silver prices. Given that and its run, it is a riskier stock to buy.

If you want a more conservative way to profit from a rise in commodities, I mentioned PowerShares DB Agriculture (NYSE:DBA) last week. This fund is built around an index of the most liquid and widely-traded agricultural commodities (corn, soybeans, wheat, cattle, coffee, etc.). If inflation keeps hitting food prices, you better believe this fund will follow suit.

The commodities markets have been heated; I wouldn't be surprised by a pullback from the incredible rally we've seen. But I see this as likely a simple pullback, not a correction. Commodities are where I want to be going into 2011.

Original Post

Disclosure: No positions