Why I Don't Own Commodities

Includes: DBC, DJP, GCC, GSC, GSG, GSP
by: Dan Weiss
I read a report from Strategas yesterday that showed the price moves of various commodities over the past year against various currencies, and thought it was worthy of discussion. As you know, members of the Vestopia community have differing views on commodities from very bullish outlooks due to supply/demand issues as well as thoughts that this could be a secular bull market in commodities to those who are more negative on commodities due to the large increases in prices and the historical cyclicality of the area. Below, are highlights of the commodity price changes over the past year.

Wheat - US $ +104%, Euro +76%, British Pound +102%, Yen +72%
Crude Oil- US $ +70%, Euro +47%, British Pound +69%, Yen +44%
Gold- US $ +37%, Euro +18%, British Pound +36%, Yen +16%
Silver- US $ +27%, Euro +9%, British Pound +26%, Yen +7%
RBOB Gasoline- US $ +46%, Euro +26%, British Pound +45%, Yen +24%
Soybeans- US $ +60%, Euro +38%, British Pound +58%, Yen +35%

The one clear takeaway from this in my opinion is that clearly the fall in the dollar is not the only (or in many cases even the primary) reason for the increased prices. In Euro or Yen terms, the basket of commodities listed above is higher by double digit percentages with the exception of silver. Another item that is interesting is that both crude oil and gold sold off once they reached approximately 2 standard deviations from their 200 day moving average while the yen/dollar relationship has broken below this level.

My own opinion of commodities is that their are pockets such as agriculture that may do well in the short term, at least until ethanol requirements are changed, while some areas such as the energy complex seem over-extended even at current levels. My investment philosophy is to invest in companies with a two year time horizon, and therefore I am not currently invested in the area. I am finding better opportunities in other areas such as in a software company in the plastics area which is trading for an enterprise value/earnings of less than 10 and generates 85% of sales internationally, in a defense company experiencing rapid increases in backlog and an asset manager that is trading at an enterprise value/ebitda well below 4 and a price/book of less than 0.6.

Disclosure: No Positions