Why the Commodities Bull Market’s a Keeper

I have a real sense that this decade will be characterized as the decade of the commodity. The real resource. The real goods. Right now, we have across-the-board price strength in precious metals (not just gold and silver, but a whole range of other metals); oil prices are off their records but are still holding up strong, and most big integrated producers are reporting declining production volumes. And, finally, we have agricultural commodities currently experiencing a combination of factors (like high demand and bad weather), creating major increases in these required raw materials. The spotlight on commodities continues and the show is only getting started.

Natural gas has been going through a lull lately and that’s okay. I love the buy-low/sell-high investment strategy and I’d be looking at natural gas and oil investments in this market right now. For any reasonably balanced equity portfolio this decade, solid exposure to commodities is a good bet, because the price action is based on global demand, not just economic growth in the United States. In fact, I’d allocate a quarter to a third of a balanced equity portfolio to commodity-related investments. The business cycle in Asia is the determining factor.

We’ve seen some fantastic returns from large-cap stocks over the last two years and, yes, a lot of the comparable performance was due to the lows set during the financial crisis. But it’s been an impressive recovery nonetheless and I still don’t see the broader stock market as being expensively priced.

Not only have we seen tremendous stock market returns from large, brand-name companies like DuPont (NYSE/DD), Caterpillar Inc. (NYSE/CAT) and 3M Company (NYSE/MMM), but we’re also seeing the oil and gas group generating impressive stock market performances, while paying large dividends. Even though a lot of these stocks have already gone up in price, I’d consider a ConocoPhillips (NYSE/COP) or a TOTAL S.A. (NYSE/TOT) as income plays with the potential for decent capital gains. Quite simply, if an individual investor wants to have some commodity price exposure in their portfolios, you can just buy a commodity-related index, even though they’ve already done very well.

All financial markets exist because of speculators. Without them, there would not be the liquidity in the marketplace for investors to place their bets. Frankly, a lot of institutional equity investors were so shaken by the subprime mortgage meltdown and the almost collapse of Wall Street that a lot of the so-called “smart money” is allocating more exposure to commodity-related investments. This is contributing to the bull market in this sector.

The fact is that we are awash in debt and a lot of investors still want to be against the dollar. There’s a reason why gold prices awoke out of a long period of mediocrity and it’s about the store of value or, rather, the lack thereof.

Right now we’re in a Fed-induced inflationary period and it’s going to last for a number of years. The commodity price cycle, in my view, has a lot further to run and new speculative money should be placing their bets.
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