Commodities Versus Stocks: A Decade Performance Review

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The French saying, 'the more things change, the more they remain the same' is an excellent description of the performance of the Dow Jones Industrial Average in the first decade of the twenty-first century. The Dow closed at 11,497.12 on December 31, 1999. It will close out 2009 at almost the same price. This lack of progress has been seen before between 1966 and 1982 when the Dow kept reaching the 1000 level, but couldn't break through it. While the Dow ultimately went sideways during the last decade, the S&P 500 was down approximately 23% and the tech heavy Nasdaq fell about 44%. So much for buy and hold. The small cap Russell 2000 was up 24%, but this was minimal compared to the money that could have been earned in commodities. Many emerging stock markets outperformed both the U.S. markets and commodities.

The CRB (Commodity Research Bureau) index, a broad basket of commodities, ended 1999 just above 200. It will close out 2009 around 490 for a decade gain of 141%. Copper, the leading industrial metal, was up 276%, substantially outperforming the overall sector. Oil traded at $26 a barrel at the end of the 1990s and closed out the 2000s around $79.00 for an approximate gain of 204% . Gold, the most inflation-sensitive commodity, was up approximately 279%. Silver rose around 220%.

It is easiest for investors to use ETFs and ETNs to get exposure to commodities, since these trade as stocks. There is no need to get involved directly with futures. DBC, GCC, GSG, DJP, and RJI offer exposure to a basket of various commodities. DBB offers a means to invest in industrial metals and JJC to invest in copper. Aggressive investors can buy BDD, a leveraged industrial metal ETF. Gold ETFs include GLD, IAU and SGOL and DGP, which offers an approximate 200% exposure to the movement in price of gold. For silver, SLV, DBS and leveraged ETF AGQ are good choices. Oil exposure can be gotten through OIL, DBO, USO, and USL.

While U.S. stocks were mostly flat to down in ten years of trading, a number of emerging stock markets had major rallies during that time. The Ukrainian PFTS Index was up around 900%. Two Russian indices, the RTS and MICEX, were up in the 700% range. The Lima General Index in Peru was up over 800%. While these may be seen as too risky by many investors, stocks on the more mainstream Hang Seng Index in Hong Kong were up over 500% on growth in China. Emerging markets definitely offered the stock investor much more opportunity for profit between 2000 and 2009 than did the American stock market.

It is not easy or even possible for the average investor to get exposure to many of these smaller countries however. Broad exposure to emerging markets can be obtained by buying EEM and VWO. EWH can be used to track the Hong Kong market. Investors should consider the big four emerging markets the BRIC countries are likely to continue to do well in the next decade - Brazil, China, India, and Russia. EWB, FXI, IFN, and RSX respectively can be used to invest in these markets. Commodity heavy markets such as Australia (EWA) and Canada (EWC) have the potential to do much better than the U.S. stock market in the next decade as well.

It should be kept in mind that markets are cyclical, so good performance in one decade doesn't necessarily mean a repeat performance in the next. Long-term trends in the market tend to last about 20 years though and the commodity rally has only lasted for half that time. So there is a good chance that commodities will outperform again in the decade ahead. The biggest gains are usually toward the end of a long move up. This doesn't mean that commodities will go up every year, there will certainly be periods where significant drops take place as happened in the second half of 2008. Only gold managed managed to still be up for the year back then. As of 2009, gold was the most consistently profitable asset during the first decade of the 2000s, having gone up nine years in a row. While buy and hold wouldn't have worked for U.S. stocks after 1999, it worked quite well for gold and a number of other commodity plays.

Disclosure: Long gold, silver.

NEXT: Blog Wrap Up for 2009

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gold Shining, Silver Lustrous

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gold traded as high as $970 in the futures markets yesterday. It is once again getting close to that magic $1000 level. Silver traded as high as $14.73, well above important resistance of $14.50. Meanwhile, the trade-weight U.S. dollar closed at 77.77. Tuesday was the second day below its breakdown level of 78.33. So far this morning it's trading lower.

A basic idea in technical analysis is that if a resistance point is tested enough, it will eventually be broken. Gold's all time high so far is $1032.70 set in European trading in March 2008. It broke 1000 again this February. It almost got back to 1000 again in early June. The end of the year starting in August is when gold is strongest seasonally. So, things look promising for the breakout from 1000 at some point fairly soon. A breakout after several tests is usually very bullish.

The fly in the ointment is of course the U.S. dollar. The key 78.33 level is the low during the late 1980s, early 1990s sell off. It was THE low for the trade-weighted dollar until it was broken in September 2007. The new low established after that sell off was under 72 when the dollar made a multi-month low between March and July 2008. While this is major support, there is some lesser support at 76.00. If gold is knocked down from the 1000 area again, that is where the dollar is likely to be trading when this happens.

In the long-term silver will do even better than gold. First though it has to break resistance as 16.00, which is bounced down from in the last rally and then it will head toward 21.00. Silver is both a monetary metal and an industrial metal. Economic recovery will increase demand (silver has been in a chronic shortage situation on and off for years as is). Inflationary worries will also increase demand. While silver ultimately outperforms gold, gold always moves first. Watch the yellow metal closely in the next few weeks.

NEXT: The Latest From Fantasy Land

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

More Oil Disappears; Gold Investment Demand Skyrockets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. government's weekly EIA storage report came out this morning and for a second week in a row there was a big drop in crude supplies. Gasoline in storage dropped even more. The less reliable industry report from the API, released Tuesday evening, showed an even bigger drop of oil on hand. The ever bearish (and wrong) oil industry 'experts' were quick to point out that demand wasn't rising, it's just supply that is falling, as if somehow this doesn't cause prices to rise. One area where demand is unquestionably rising is in gold purchases for investing. According to today's report from the World Gold Council, these more than tripled year over year. As was pointed out in the New York Investing meetup's 'Inflation Investing' class last night, investment demand is the key to future price rises in the precious metals.

While the mainstream media has continually (and inaccurately) trumpeted that there is a glut in oil supply in the last several months and twisted and even misreported recent EIA statistics to show that this was the case, the price of oil has been steadily going up since February 18th. Obviously the smart money and the insiders haven't believed a word of the bearish story on oil that the press has been telling the general public - nor should you. Oil in storage dropped by 2.1 million barrels last week, after a more than 4 million barrel drop the week before. At least this time analysts predicted a drop (of 1.5 million barrels), unlike last week when they predicted a big gain. Gasoline supplies dropped an eye popping 4.3 million barrels this time around. NYMEX oil closed at 60.10 yesterday and almost reached 62 early the morning, which represents a breakout to a new trading range.

A more significant report released this morning was the World Gold Council's supply and demand figures for gold in the first quarter. Investment demand more than tripled from Q1 2008. The current figure of 596 tons is up from 171 tons last year. Investment demand represented almost 60% of all demand for gold in the January to March period - and that percentage is likely to rise substantially in the next few years until it totally overwhelms all other demand categories for gold (jewelry, industrial, and medical). ETF demand by iteself exceeded jewelry demand, historically the biggest source for gold usage, for the first time. Industrial and jewelry demand both had sharp drops, so the overall demand increase for gold went up 'only' 38%. What supposedly prevented a major price rise in gold last quarter was a huge increase in gold supply from scrap (gold holders cashing in their gold). The scrap figures should be taken with a grain of salt however. Analysis of previous big rises in supply from scrap indicate that almost the entire increase came from just one country -India - and nowhere else in the world. This is suspicious to say the least since the rules of economics tend to work the same everywhere.

Gold and its companion silver have yet to start a new rally phase, but should be doing so soon. It's never possible to say exactly when. The new demand figures for the precious metal can only be described as extremely bullish. Oil's current rebound off its lows is well underway and should last minimally at least 5 to 6 more weeks (this is the most conservative estimate). In the best case, it could continue well into the summer. Seasonal factors will eventually cause selling in the fall/winter, but don't expect oil to return to the lows from last winter. It is much more likely oil will be returning to its highs from last summer. You will probably have to wait until 2010 for that though.

NEXT: Dollar Weakens; S&P British Outlook; TED Back From Dead

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.