Investing in Commodities: The Three Greenest Economic Shoots of All
Commodities / Gold & Silver 2009 Jun 08, 2009 - 12:17 PM GMTBy: Q1_Publishing
This is how a recovery begins.
A few months ago it seemed like there was no end to the downward spiral. More than 20,000 people were losing their jobs every day. The stock market was steadily falling. Panicked consumers were cutting back aggressively. The government pushed through $787 billion in emergency stimulus spending under the guise of getting the economy going again.
Here we are a few months later and a few things appear to be turning around. Everyone is spotting those “green shoots” the Fed Chairman told us to look for a few months ago.
Consumer confidence has risen for three months in a row, albeit from exceptionally low levels. The stimulus spending is finally starting to reach the economy (although less than 6% has been spent so far). Home sales are picking up and lining the pockets of realtors, mortgage brokers, and banks while allowing a few people to get out from underneath their mortgages.
Most importantly though, the market rally continues to hold on to past gains and add more. Remember, the wealth effect created by the stock market is incredibly strong when 70% of adults own stocks directly or indirectly.
Now we’re seeing the first glimmers of it all starting to pay off in the real economy, specifically in employment. On Friday, the Bureau of Labor Statistics reported an estimated 345,000 jobs were lost in May as the unemployment rate marched up to 9.4%. Granted, the loss is still far from good, but it’s a welcome relief to the 500,000+ monthly losses reported almost every month since last November.
It’s like the old saying goes; you’ve got to start somewhere. And right now the economy is slowly getting restarted.
Investing In Commodities: Window of Opportunity
All of that is a big reason why I’m continuing to recommend to buy stocks. It’s not because I believe this is going to be a true economic recovery where in two years we’re right back to partying like the 90’s. I don’t think it’ll be even close. There are just too many hurdles in the long run.
The auto bailouts are the perfect example. I’m confident they will prove to be an absolute disaster. Mega-mergers merely hide problems. The mergers rarely fix any of them and, quite frankly, there’s no reason to expect this time to be any different.
Just think of how well the last time Chrysler merged. The creation of DaimlerChrysler was a decade of headaches which never helped anything.
And then there was the Ford buyout of Jaguar and Land Rover. There were early “successes” through immediate cost savings and synergies, but that ended up in failure too.
Although they’re always touted as “this time is different,” big mergers rarely work out. Whether it’s the combination of cultures, political jockeying in the boardrooms, or any other number of factors, they mostly all end up the same way. Mergers are not a solution. They’re merely a temporary, quick fix which just delays dealing with the real problem.
Of course, it’s not just the autos though. There’s still a big and growing problem with unemployment. Despite yesterday’s relatively good news, unemployment is still on the rise.
At the current reduced rate, the headline unemployment rate should be over 10% by the end of the summer. Then add to that the “real unemployment rate” with discouraged workers (people who just gave up looking for a job) and underemployed workers (those who are working part time or in a different field), and you’re looking at 15% or 16% of the country without jobs.
Basically, there’s no way to get back to the days of 3% or 4% annual GDP growth rate which facilitated very high-paying jobs and a risk-taking entrepreneurial culture with unemployment so high.
Then there’s the next wave of mortgages, the sharp spike in interest rates and the eventual impact on the housing market, Eastern Europe heading for a meltdown of Icelandic proportions, and on and on.
But here’s the thing. The market doesn’t look that far into the future. Wall Street is very short-sighted. Too many individual investors don’t look that far forward either. After all, two years (about 500 trading days) is a very long time for folks who check their stocks every day. That’s why I try to look both at the short-term for when to buy into something and the long-term for what to buy.
And right now, I’m as bullish as ever on these three sectors for the short term and the long-term.
The Ag (Re)Boom – This one is going to be big. If you recall the food riots of late 2007 and early 2008 and the speculative bubble in all things agriculture which followed, all I can say is, you haven’t seen anything yet.
Over the next few months everything is in place for a massive run in agriculture. As we discussed a few weeks ago, the perfect storm for agriculture stocks is quickly approaching due to:
1. Record low stockpiles: The cupboard is bare. Stockpiles of corn and soybeans are already at record lows. A truly great crop year last year helped partially offset a surge in demand, but stockpiles were largely sold off to take advantage of crop prices at multi-decade highs over the last couple of years. They were the “buffer” against shortages and high prices. Right now, that buffer is smaller than ever.
2. Apprehensive farmers: Almost everyone took a hit during last year’s credit crunch. Farmers may have fared better than most, but they were not immune. This year, they’ve had to hold back. They’re planting less and using less fertilizer. So even if the weather is perfect and everything comes together, we’re not looking at another year of record agriculture production to meet the new levels of demand.
3. A terrible harvest: Finally, farmers are way behind. A drought in South America has decimated Argentina’s crop production. In North America, conditions are terrible. Corn, soybean, and wheat plantings are dangerously behind schedule. So the crops which are planted aren’t going to produce nearly as much as they have in years past.
As usual, this boom will culminate in headline stories about food riots, soaring food prices, and another big run in agriculture stocks.
Hi-Ho Silver – Gold gets all the headlines, but at this point, it looks like silver is where you’ll make a lot more money in short and long term. As we looked at a few days ago, silver’s run has a long, long way to go. Silver is tremendously undervalued relative to gold.
Most importantly, silver’s dual-purpose as both a precious metal and an industrial metal puts it in perfect position to benefit from increasing inflation fears as well as the early start of an economic recovery.
It’s already started to happen. Last month silver prices climbed the fastest in 22 years. Despite the rise, we still haven’t reached anything close to the euphoric highs of a true bull market.
Consider this. A few days ago, a colleague of mine asked, “What do you like out there?”
I answered, “Silver.”
He thought for a second and told me this quick story about how to know when precious metals get too high. This was at the height of the precious metals bull market in the late 70’s/early 80’s.
When he was a teenager, his family saved up enough cash to buy three ounces of silver. As the eldest son, he was in charge of buying it. As the story goes, his Mom handed him some cash and he was off.
The thing is he didn’t walk down to the local coin store, throw the cash on the counter, and ask for three ounces of silver coins. That wasn’t an option back then. He had to wait in line for a few hours to buy silver – if there was any left by the time he got the front of the line! He likened it to waiting in line for concert tickets.
That’s a true bubble at its height. When you see a line-up of folks buying silver at lofty prices, you know a top is near. Just think of how long people would have waited in line to buy tech stocks a decade ago if you had to go to a store to buy them.
Although you may have to wait a few days to get physical silver today, we’re still a long ways away from that point.
A Junior Awakening - Finally, the one sector which looked completely dead when we looked at it back in December is junior resource stocks.
You may know the ones I’m talking about. Those penny stocks which own some abandoned gold mine in Zimbabwe that trade for about 11 cents each. Most of them trade on the TSX Venture Exchange.
Normally, these stocks are the easiest way to lose money. They’re incredibly volatile. They’re very thinly traded. They’re the last to move up in a bull market and first to nosedive in a bear market. Worst of all though, most of them end up pretty much back where they started from, at around five or 10 cents per share over the long run.
They can create massive fortunes overnight. Every few years there’s a massive discovery of a new gold or oil discovery which makes its founders multi-millionaires overnight.
But here’s the thing. Despite all those risks, these “junior stocks” can be exceptionally profitable at the right times. Right now is looking like one of those times.
I’ve always looked at it like this. The TSX Venture market is a market fueled by greed or hope.
Hope sets in when all the fundamentals are in place for commodities. Right now, with copper up 50% this year, gold knocking on the door of $1,000 an ounce, silver catching up to gold fast, and oil well above $60 a barrel, it seems like the commodity boom is rolling on.
The combination of an economic recovery and inflationary fears has made hard assets “cool” again. And junior resource stocks are the most leveraged way to make money on these rises.
Hopes, to say the least, are high.
Then there’s greed. Greed sets in when these penny stocks start doubling and tripling over night. That is starting to happen too.
In a market fueled by hope and greed, there is a lot of money to be made or lost. And right now, the trend is up, hope is strong, and greed is growing. Those of us looking in this speculative area can see how a lot of money can be made in junior resource stocks in the next few months.
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Investing in Commodities: Brave Now, Fearful Later
Those are just three sectors shaping up for a big run this summer and probably into fall.
Frankly, there’s a lot to be excited about right now. The Fed’s aggressive money printing and handing over hundreds of billions of dollars to banks is showing its true simulative effects.
The next step of this “recovery” is just kicking into gear too. Earlier this week Vice President Biden promised to “ramp up” the stimulus spending. With another $400 billion or so of checks left to write, any ramping up here will help fuel this turnaround.
In the end, I think this is all a giant Band-Aid. The bleeding may stop for a while, but there is so much healing which needs to be done. No amount of government directives, handouts, or new policies will be able to do any of that.
The next decade will see a massive shift in the economic way of life. We’ll see a steady decline in the value of the dollar. Which will have a high short-term price, everything will get more expensive, but it will also go a long way to helping make U.S. made goods affordable again.
But Wall Street doesn’t look at things that way. And that’s why I believe the next few months will be an exceptionally profitable ride for those of us who do the toughest thing to do as an investor, take what the market gives us.
Right now, the market is giving us plenty of green shoots. As a result, I can’t help but be speculatively bullish on the greenest shoots of all.
Also, we can't forget the market overshoots every time. It overshoots to the low side and overshoots to the upside. Right now, all signs point a window of opportunity in select spots. Regrettably, it may be one of the last truly big opportunities to the upside in long time. Take advantage of it while you can.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
P.S. That’s not the case for agriculture though. The way things are shaping up, there could be a tremendous short-term opportunity in agriculture on top of the exceptional long-term prospects. More to come in the weekend edition of the Prosperity Dispatch.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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