Commodities: 14 Top Investments for the 'Stuff' Bull Market

by: Hedgephone

For the past year I have been warning readers that the increase in the Money Supply and the Federal Reserve's balance sheet would lead to higher prices for almost all raw materials priced in dollars. Sure, the prices for some things-- such as real estate-- have not risen, and may not rise for a very long period of time, but clearly commodities have skyrocketed over the past year.

Not to worry says the Fed; the prices of some things are actually falling, and inflation is under control. When asked about inflation during a Q&A session after a speech at the Queens, NY Chamber of Commerce, the New York Fed's William Dudley replied, "today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful." An audience member, who apparently has never worked for Goldman Sachs, said in disgust "I can't eat IPAD."

Looking at the prices for things we actually need, the story is a little more disturbing. Oil prices have risen 20% in the past three months, while the prices of food and gasoline have seen a similar jump. While it is true that wages have not gone up, inflation created by the easy money pro-bailout policies have created a problem by which higher inflation could actually lead to higher unemployment, subdued economic activity, and lower wages going forward. Margin compression is real, and as companies try to keep their stock prices up they are left with few options aside from freezing employee wages and slashing benefits whenever possible. The almighty bottom line requires many company CEOs to cut wages, raise prices, and to buy back stock when possible, to keep stock options in the money and to impress Wall Street analysts or risk losing premium stock market multiples.

All in all, this is a period of stagflation mixed with hyperinflation for certain commodities. At current prices, I am personally more interested in investing in things that people need than things that people merely want. As a result, I am looking toward shares of businesses that do well in recessions, commodities that people need to survive, and metals that serve an industrial as well as a monetary function.

Here are my top fourteen commodity ideas ranked by level of need, economic importance, and attractiveness as a longer term investment. Remember, if the U.S. debt ever stops being monetized by the FED, these investments should be watched closely for a correction (the failure of the FED to announce QE3 could provide headwinds for higher prices). With that said, I do feel that any correction in stocks will simply lead to more money printing, rather than the structural reforms that we so desperately need. Some of these reforms include taxing companies based on revenue per employee, closing the tax loopholes that let some companies pay little to no income tax, cutting defense and entitlement spending, and breaking up the TBTF banks.

Chart forSPDR Gold Shares (NYSEARCA:<a href='' title='SPDR Gold Trust ETF'>GLD</a>)

1. RJI -- The Rogers Raw Materials Index may be the best way to play a weakening dollar and to invest in the commodities that people need everyday to survive. The index is widely diversified, with oil making up around one third of the index weighting. This index has outperformed the S&P 500 for the past ten years by a very wide margin.

2. RJA -- The Rogers Agricultural Index is the best way that I have found to play agricultural prices. This fund has actually been clobbered recently, down around 10% from the highs of the year due to Chinese speculators being wiped out, better than expected crop yields, and likely government intervention for political reasons.

3. GCC -- The Greenhaven Commodities Index is a diversified index of raw materials. The fund does a good job of staying diversified and invests across the back and front month futures contracts to avoid the nasty negative roll yield that comes from "contango" in the futures markets, which can be seen clearly in Soybeans and other agricultural commodities at present.

4. PALL -- The Palladium ETF has not risen alongside gold or silver this year, and I think the White Metal is a better option for many hard asset investors looking to start new positions in precious metals. The Index is off of its highs by a solid 15%, and just recently broke above the 100 day moving average.

5. SGG -- Sugar futures have been knocked around lately, with SGG falling from around $100 to around $70 recently, even as the dollar has been crushed in recent months. Look to buy this fund with a fairly tight stop loss and ride the next bull wave (just remember that this is one commodity actually in a short term bear market, so investors should scale into the position or take a full position with tight stops.)

6. DJP-OLD -- The Dow Jones UBS Commodity Index is an interesting basket of commodities with oil at 16%, Natural Gas at 10%, Gold at 10%, Soybeans 7.35%, Corn at 7.35%, etc... The fund is widely diversified, which I like. DJP is a futures based product, but most of the commodities traded in the fund are in backwardization, which actually helps investors earn money due to positive roll yield.

7. FCX -- Freeport is a cheap stock with undervalued reserves. Doctor Copper has not enjoyed the strong gains of Gold and Silver, but FCX is a cheap stock and a good play on rising asset prices. FCX trades for around 9X forward earnings.

8. TOT -- Total is a cheap oil and gas company, and at 8X earnings has zero ties to the U.S. Dollar, which is in a bear market. TOT looks to be a good way to invest in the stock market while currency risks are associated with U.S. companies.

9. VALE -- Like TOT and FCX, Vale trades for around 8X earnings and has vast reserves of undervalued hard assets. In my view, these hard asset value plays are a good way to leverage the bull market in commodities. Vale has not moved at all in recent months, so investors can capitalize on this name given that the earnings have grown, the dollar has fallen, and the company's assets in the ground have grown in value while the stock has stayed in the place.

10. DBA -- The Deutsche Bank Agricultural Index is another interesting way to capture the bull market in "stuff", and especially in the stuff that people need everyday, like food. Contango is a problem right now in many of the agricultural commodities, which means that DBA may suffer from a negative roll yield. Investors could consider buying farm land directly, which is an investment thesis that hedge fund superstar Dr. Michael Burry has publicly advocated.

11. GLD -- Gold has not run as much as silver this year, which is why I am slightly more of a gold bug right now than a silver bull, although I like both. The best way to play GLD is to buy the front month (May or June) two or three strike in the money call options, as these calls provide unlimited upside potential with a built in stop loss order, in case the dollar catches a bid in overnight trading and metals eventually gap lower. That being said, I feel that gold is a solid long term investment when compared with cash or treasury bills for a portion of an investor's holdings. A 10% allocation to Gold, for example, could protect an investor from hyperinflation, while a severe crash in the metal would not drastically hurt one's overall portfolio.

12. SGOL -- This is another gold index fund which stores physical gold in a bank's vault in Switzerland, giving U.S. investors worried about confiscation a little more peace of mind, although owning actual gold in your safe is likely the best way to play the yellow metal. Remember, gold is the money that you can't just print at will like the U.S. Dollar. SGOL is highly liquid, although the options have a fairly wide bid and ask spread. I view SGOL and GLD as pretty much interchangeable investments, with SGOL possibly being the safer alternative if the government ever decides to confiscate gold and silver as they did in the Great Depression.

13. PSLV -- The Sprott Physical Silver Index has been on a tear, but the reasons for the run are still in tact -- rampant expansion of the monetary base by the U.S. Federal Reserve. PSLV trades at a hefty premium to the spot price in Silver, but investors looking to hold physical silver have to take into account storage and shipping fees, as well as the risk of theft involved in holding physical precious metals at home. PSLV is interesting because investors have the option of redeeming cash by selling shares or by taking delivery of physical silver bullion instead.

14. STO -- Statoil is another 8X earnings name which holds vast reserves of oil and gas. The Norwegian Krone is a better currency to own than the dollar, which makes STO an attractive investment along with the core business trading at a reasonable price.

Disclosure: I am long VALE, FCX, RJA, TOT, GLD, SGOL.

Additional disclosure: I am long the Rogers Index through the private fund