Posts filed under ‘Commodities’
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 4, 2016). Subscribe on the right side of the page for the complete text.
Did you enjoy your New Year’s festivities? If you were like me and ate excessively and drank too much egg nog, you may have decided along the line to take a nap. It’s not a bad idea to recharge those batteries before implementing those New Year’s resolutions and jumping on the treadmill. That’s exactly what happened in the financial markets this year. After six consecutive years of positive returns in the Dow Jones Industrial Average (2009 – 2014), stock markets took a snooze in 2015, as measured by the S&P 500 and Dow, which were each down -0.7% and -2.2%, respectively. And bonds didn’t fare any better, evidenced by the -1.9% decline in the Aggregate Bond ETF (AGG), over the same time period. Given the deep-seated fears about the Federal Reserve potentially catapulting interest rates higher in 2015, investors effectively took a big yawn by barely nudging the 10-year Treasury Note yield higher by +0.1% from 2.2% to 2.3%.
Even though 2015 ended up being a quiet year overall, there were plenty of sweet dreams mixed in with scary nightmares during the year-long nap:
INVESTMENT SWEET DREAMS
Diamonds in the Rough: While 2015 stock prices were generally flat to down around the globe (Vanguard Total Word -4.2%), there was some sunshine and rainbows gleaming for a number of segments in the market. For example, handsome gains were achieved in the NASDAQ index (+5.7%); Biotech Index – BTK (+10.9%); Consumer Discretionary ETF – XLY (+8.3%); Health Care ETF – VHT (+5.8%); Information Technology ETF – VGT (+4.6%); along with numerous other investment areas.
Fuel Fantasy Driven by Low Gas Prices: Gas prices averaged $2.01 per gallon nationally in December (see chart below), marking the lowest prices seen since 2009. Each penny in lower gas prices roughly equates to $1 billion in savings, which has strengthened consumers’ balance sheets and contributed to the multi-year economic expansion. Although these savings have partially gone to pay down personal debt, these gas reserves have also provided a financial tailwind for record auto sales (estimated 17.5million in 2015) and a slow but steady recovery in the housing market. The outlook for “lower-for-longer” oil prices is further supported by an expanding oil glut from new, upcoming Iranian supplies. Due to the lifting of economic sanctions related to the global nuclear deal, Iran is expected to deliver crude oil to an already over-supplied world energy market during the first quarter of 2016. Additionally, the removal of the 40-year ban on U.S. oil exports -could provide a near-term ceiling on energy prices as well.
Counting Cash Cows
Catching some shut-eye after reading frightening 2015 headlines on the China slowdown, $96 billion Greek bailout/elections, and Paris/San Bernardino terrorist attacks forced some nervous investors to count sheep to fall asleep. However, long-term investors understand that underpinning this long-lived bull market are record revenues, profits, and cash flows. The record $4.7 trillion dollars in 2015 estimated mergers along with approximately $1 trillion in dividends and share buybacks (see chart below) is strong confirmation that investors should be concentrating on counting more cash cows than sheep, if they want to sleep comfortably.
Creepy Commodities: Putting aside the -30% collapse in WTI crude oil prices last year, commodity investors overall were exhausted in 2015. The -24% decline in the CRB Commodity Index and the -11% weakening in the Gold Index (GLD) was further proof that a strong U.S. dollar, coupled with stagnant global growth, caused investors a lot of tossing and turning. While bad for commodity exporting countries, the collapse in commodity prices will ultimately keep a lid on inflation and eventually become stimulative for those consumers suffering from lower standards of living.
Dollar Dread: The +25% spike in the value of the U.S. dollar over the last 18 months has made life tough for multinational companies. If your business received approximately 35-40% of their profits overseas and suddenly your goods cost 25% more than international competitors, you might grind your teeth in your sleep too. Monetary policies around the globe, including the European Union, will have an impact on the direction of future foreign exchange rates, but after a spike in the value of the dollar in early 2015, there are signs this scary move may now be stabilizing. Although multinationals are getting squeezed, now is the time for consumers to load up on cheap imports and take that bargain foreign vacation they have long been waiting for.
January has been a challenging month the last couple years, and inevitably there will be additional unknown turbulence ahead – the opening day of 2016 not being an exception (i.e., China slowdown concerns and Mideast tensions). However, given near record-low interest rates, record corporate profits, and accommodative central bank policies, the 2015 nap taken by global stock markets should supply the necessary energy to provide a lift to financial markets in the year ahead.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions VHT, AGG, and in certain exchange traded funds (ETFs), but at the time of publishing had no direct position VT, BTK, XLY, VGT, GLD, or in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
When it comes to Lent, most Christian denomination followers give up a vice, such as food, alcohol, or now in more modern times…Facebook (FB). Since Lent began on Ash Wednesday this year (February 22, 2012), investors have given up something else – gold (GLD). As a matter of fact, the shiny metal has declined by about -8% since Lent began. Stocks, on the other hand, as measured by the S&P 500, have outperformed gold by more than 10% over this period (the Lent period damage is even worse, if you look at the NASDAQ).
If you go back further in time, the underperformance is more extreme, once you account for dividends, which gold of course does not provide. For example, since the peak of the financial crisis panic in March of 2009, S&P 400, S&P 600, and NASDAQ stocks have outperformed gold by more than +40%. Yet, I am still waiting for the sign-spinning guy at the corner of First St. & Main St. to advertise stock trade-in opportunities. Contrarians may also get a kick out of the top investment CNBC survey too.
Last Friday’s jobs data was nothing to write home about, so gold cheerleaders might wait for more fiat currency debasement to come in the form of QE3 (i.e., quantitative easing or printing press). But once again, while this potential added monetary stimulus may not be bad for gold, let’s not forget that stocks still outperformed gold under QE1 & QE2.
As I have always stated, I can’t disagree with the inflationary pressures that are brewing. Stimulative monetary and fiscal policies, coupled with emerging market expansion and undisciplined government spending don’t paint a pretty inflationary picture. So if that’s the case, why not focus on other commodities that provide real utility besides just shininess (e.g., agricultural goods, copper, aluminum, oil, and even silver).
The gold bugs may still have a little post-Lent party, until rates start going up and panic insurance premiums go down, but once the Fed’s easing policy stance changes (see Paul Volcker Fed Chairman era) and fiscal sanity eventually returns to Washington, investors may look to another vice to gorge on.
See also some other items to gorge on: CLICK HERE
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including small cap ETFs, mid cap ETFs, energy ETFs, commodity ETFs) , but at the time of publishing SCM had no direct position in GLD, FB, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Ask any average Joe off the street what investment category is at or near record all-time highs, and a good number of them will confidently answer “gold,” as prices recently eclipsed $1,600 per ounce. But of course this makes perfect sense, right? The Fed is printing money like it’s going out of style, the dollar is collapsing like a drunken sailor, inflation is about to sky-rocket to the moon, and China is on the verge of becoming the world’s new reserve currency. Never mind that Greece, Portugal and Ireland are in shambles with the Euro on its death bed. Or Japan has achieved a debt to GDP ratio that would even make U.S. vote grubbing politicians blush. A sub-3% 10-Year Treasury Note doesn’t appear to discourage fervent gold-bugs either.
While gold has experienced an incredible sextupling in prices over the last decade and hit new-all time highs, believe it or not, there is an unlikely asset class that is reaching new historic highs and has outperformed gold for almost 2.5 years. Can you guess what asset class star I am talking about? If I said U.S. “stocks,” would you believe me? OK, well maybe I’m not referring to large capitalization stocks like Johnson & Johnson (JNJ), Microsoft Corp. (MSFT), Wal-Mart Stores (WMT), Intel Corp. (INTC), and AT&T Inc. (T), all of which have effectively gone nowhere in the 21st Century. However, the story is quite different if you look at small and mid capitalization stocks, which have received about as much respect as Rodney Dangerfield.
As a matter of fact, the S&P 400 (MidCap Index) and S&P 600 Index (SmallCap Index) have more than doubled gold’s performance since the lows of March 2009 (SmallCap +149.0%; MidCap +145.1%; Gold/GLD +71.0%). Given the spectacular performance of small and mid-sized companies, I’m still waiting with bated breath for a telemarketer call asking me if I have considered selling my small and mid cap stock certificates for cash – since everyone has melted their gold chains and fillings, a new hobby is needed.
Has the fear trade ended? Perhaps not, if you consider European sovereign debt and U.S. debt ceiling concerns, but what happens if the half empty glass becomes half full. The early 1980s may be a historical benchmark period for comparison purposes. An interesting thing happened from 1980-1982 when Federal Reserve Chairman Paul Volcker began raising interest rates to fight inflation – gold prices dropped -65% (~$800/oz. to under $300/oz.) from 1980-1982 and the shiny metal lived through approximately a 25 year period with ZERO price appreciation. Since there is only one direction for the Fed’s zero interest rate policy (ZIRP) to go, conceivably history will repeat itself once again?
In hindsight gold was a beautiful safe haven vehicle during the panic-filled, nail-biting period during late-2007 throughout 2008. Since then, small and mid cap stocks have trounced gold. Like stocks, Rodney Dangerfield may have gotten no respect, but once fear has subsided and rates start increasing, maybe stocks will steal the show and get the respect they deserve.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including small cap and mid cap ETFs), and WMT, but at the time of publishing SCM had no direct position in JNJ, MSFT, INTC, T, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
It’s amazing how quickly the long-term secular growth winds can reverse themselves. Just a week ago, nuclear energy was thought of as a safe, clean, green technology that would assist the gasoline pump pain in our wallets and purses. Now, given the events occurring in Japan, “nuclear” has become a dirty word equated to a life-threatening game of Russian roulette.
Despite the spotty information filtering in from the Dai-Ichi plant in Japan, we are already absorbing knee-jerk responses out of industrial heavyweight countries like Germany and China. Germany has temporarily closed seven nuclear power centers generating about a quarter of its nuclear capacity, and China has instituted a moratorium on all new facilities being built. How big a deal is this? Well, China is one country, and it alone currently accounts for 44% of the 62 global nuclear reactor projects presently under construction (see chart below).
As a result of the damaged Fukushima reactors, coupled with various governmental announcements around the globe, Uranium prices have dropped a whopping -30% within a month – plunging from about $70 per pound to around $50 per pound today.
Where does U.S. Nuclear Go from Here?
As you can see from the chart below, the U.S. is the largest producer of nuclear energy in the world, but since our small population is such power hogs, this relatively large nuclear capability only accounts for roughly 20% of our country’s total electricity needs. France, on the other hand, manages about half the reactors as we do, but the French derive a whopping 75% of their total electricity needs from nuclear power. According to the Nuclear Energy Institute, Japanese reliance on nuclear power falls somewhere in between – 29% of their electricity demand is filled by nuclear energy. Like Japan, the U.S. imports most of its energy needs, so if nuclear development slows, guess what, other resources will need to make up the difference. OPEC and various other oil-rich, dictators in the Middle East are licking their chops over the future prospects for oil prices, if a cost-effective alternative like nuclear ends up getting kicked to the curb.
As I alluded to above, there is, however, a silver lining. As long as oil prices remain elevated, any void created by a knee-jerk nuclear backlash will only create heightened demand for alternative energy sources, including natural gas, solar, wind, biomass, clean coal, and other creative substitutes. While we Americans may be addicted to oil, we also are inventive, greedy capitalists that will continually look for more cost-efficient alternatives to solve our energy problems (see also Electrifying Profits). Unlike other countries around the world, it looks like the private sector will have to do the heavy lifting to solve these resources on their own dime. Limited subsidies have been introduced, but overall our government has lacked a cohesive energy plan to kick-start some of these innovative energy alternatives.
Déjà Vu All Over Again
We saw what happened on our soil in March 1979 when the Three Mile Island nuclear accident in Pennsylvania consumed the hearts and minds of the country. Pure unadulterated panic set in and new nuclear production ground to a virtual halt. When the subsequent Chernobyl incident happened in April 1986 insult was added to injury. As you can see from the chart below, nuclear reactor capacity has plateaued for some twenty years now.
The driving force behind the plateauing nuclear facilities is the NIMBY (Not In My Back Yard) phenomenon. The Three Mile Island incident is still fresh in people’s minds, which explains why only one nuclear plant is currently under construction in our country, on top of a base of 104 U.S. reactors in 31 states. I point this out as an ambivalent NIMBY-er since I work 30 miles away from one of the riskiest, 30-year-old nuclear plants in the country (San Onofre).
The Sendai disaster is home to the worst Japanese earthquake in 140 years, by some estimates, but history will prove once again what unintended consequences can occur when impulsive knee-jerk decisions are made. Just consider what has happened to oil prices since the moratorium on offshore drilling (post-BP disaster) was instituted. Sure we have witnessed a dictator or two topple in the Middle East, and there currently is adequate supply to meet demand, but I would make the case that we should be increasing domestic oil supplies (along with alternative energy sources), not decreasing supplies because it is politically safe.
Time will tell if the Japanese earthquake/tsunami-induced nuclear disaster will create additional unintended consequences, but I am hopeful the recent events will at a minimum create a serious dialogue about a comprehensive energy policy. If the comfortable, knee-jerk reaction of significantly diminishing nuclear production is broadly adopted around the world, then an urgent alternative supply response needs to occur. Otherwise, you may just need to enjoy that bike ride to work in the morning, along with that nice, romantic candle-lit dinner at night.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and alternative energy securities, but at the time of publishing SCM had no direct position in BP, URRE, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Warren Buffett is kind enough to occasionally grace investors with his perspectives on a wide range of subjects. In his recently released annual letter to shareholders he covered everything from housing and leverage to liquidity and his optimistic outlook on America (read full letter here). Taking advice from the planet’s third wealthiest person (see rankings) is not a bad idea – just like getting basketball pointers from Hall of Famer Michael Jordan or football tips from Pro Bowler Tom Brady isn’t a bad idea either.
Besides being charitable with billions of his dollars, the “Oracle of Omaha” was charitable with his time, spending three hours on the CNBC set (a period equal to $12 million in Charlie Sheen dollars) answering questions, all at the expense of his usual money-making practice of reading through company annual reports and 10Qs.
Buffett’s interviews are always good for a few quotable treasures and he didn’t disappoint this time either with some “gold fondling” and “elephant hunting” quotes.
Buffett on Gold & Commodities
Buffett doesn’t hold back on his disdain for “fixed-dollar investments” and isn’t shy about his feelings for commodities when he says:
“The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
Here he equates gold demand to fear demand:
“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”
Buffett goes on to say this about the giant gold cube:
“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven Exxon Mobils (XOM), and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”
Although not offered up in this particular interview, here is another classic quote by Buffett on gold:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
For the most part I agree with Buffett on his gold commentary, but when he says commodities “don’t do anything for you,” I draw the line there. Many commodities, outside of gold, can do a lot for you. Steel is building skyscrapers, copper is wiring cities, uranium is fueling nuclear facilities, and corn is feeding the masses. Buffett believes in buying farms, but without the commodities harvested on that farm, the land would not be producing the income he so emphatically cherishes. Gold on the other hand, while providing some limited utility, has very few applications…other than looking shiny and pretty.
Buffett on Elephant Hunting
Another subject that Buffett addresses in his annual shareholder letter, and again in this interview, is his appetite to complete large “elephant” acquisitions. Since Berkshire Hathaway (BRKA/B) is so large now (total assets over $372 billion), it takes a sizeable elephant deal to be big enough to move the materiality needle for Berkshire.
“We’re looking for elephants. For one thing, there aren’t many elephants out there, and all the elephants don’t want to go in our zoo…It’s going to be rare that we are going find something selling in the tens of billions of dollars; where I understand the business; where the management wants to join up with Berkshire; where the price makes the deal feasible; but it will happen from time to time.”
Buffett’s target universe is actually fairly narrow, if you consider his estimate of about 50 targets that meet his true elephant definition. He has been quite open about the challenges of managing such a gigantic portfolio of assets. The ability to outperform the indexes becomes more difficult as the company swells because size becomes an impediment – “gravity always wins.”
With experience and age comes quote-ability, and Warren Buffett has no shortage in this skill department. The fact that Buffett’s investment track record is virtually untouchable is reason enough to hang upon his every word, but his uncanny aptitude to craft stories and analogies – such as gold fondling and elephant hunting – guarantees I will continue waiting with bated breath for his next sage nuggets of wisdom.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including commodities) and commodity related equities, but at the time of publishing SCM had no direct position in BRKA/B, XOM or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Shhh, if you listen closely enough, you may hear the sound of your portfolio disintegrating away due to the quiet killer…inflation. Inflation is especially worrisome with what we’ve seen happening with commodity prices and the drastic fiscal challenges our country faces. Quantitative Easing (read Flying to the Moon) has only added fuel to the inflation fear flames.
Whether you’re a conspiracy theorist who believes the government inflation data is cooked, or you are a Baby Boomer just looking to secure your retirement, it doesn’t take a genius to figure out that movies, pair of jeans, a tank of gas, concert tickets, or healthcare premiums are all going up in price (See also Bacon and Oreo Future).
Companies are currently churning out quarterly results in volume and seeing the impact from commodity prices, whether you are McDonald’s Corp. (MCD) facing rising beef prices or luxury handbag maker Coach Inc. (COH) dealing with escalating leather costs, margins are getting crimped. Investors, especially those on fixed income streams, are experiencing the same pain as these corporations, but the problem is much worse. Unlike a market share leading company that can pass on price increases onto its customers, an investor with piles of cash, and low yielding CDs (Certificates of Deposit), and bonds runs the risk of getting eaten alive. Baby Boomers are beginning to reach retirement age in mass volume. Life spans are extending, and this demographic pool of individuals will become ever-large consumers of costlier and costlier healthcare services. If investments are not prudently managed, Baby Boomers will see their nest eggs evaporate, and be forced to work as Wal-Mart (WMT) greeters into their 80s…not that there’s anything wrong with that.
Every day investors are bombarded with a hundred different scary headlines on why the economy will collapse or the world will end. Most of these sensationalist scare tactics distort the truth and overstate reality. What is understated is what Charles Ellis (see Winning the Loser’s Game) calls a “corrosive power”:
“Over the long run, inflation is the major problem for investors, not the attention-getting daily or cyclical changes in securities prices that most investors fret about. The corrosive power of inflation is truly daunting: At 3 percent inflation – which most people accept as ‘normal’ – the purchasing power of your money is cut in half in 24 years. At 5 percent inflation, the purchasing power of your money is cut in half in less than 15 years – and cut in half again in 15 years to just one-quarter.”
In order to bolster his case, Ellis cites the following period:
“From 1977 to 1982, the inflation-adjusted Dow Jones Industrial Average took a five-year loss of 63 percent…In the 15 years from the late 1960s to the early 1980s the unweighted stock market, adjusted for inflation, plunged by about 80 percent. As a result, the decade of the 1970s was actually worse for investors than the decade of the 1930s.”
Solutions – How to Beat Inflation
Although the gold bugs would have you believe it, we are not resigned to live in a world with worthless money, which only has a useful purpose as toilet paper. There are ways to protect your portfolio, if you are properly invested. Here are some strategies to consider:
- TIPS (Treasury Inflation Protection Securities): These government-guaranteed tools are a useful way to protect yourself against rising inflation (see Drowning TIPS).
- Equities (including real estate): Bond issuers do not generally call up there investors and say, “You are such a great investor, so we have decided to increase your interest payments.” However, many publicly traded stocks do exactly that. Wal-Mart Stores (WMT) is an example of such a company that has increased its dividend for 37 consecutive years. As alluded to earlier, stocks are unique in that they allow inflationary pressures placed on operating profits to be relieved somewhat by the ability to pass on price increases to customers.
- Commodities: Whether you are talking about petroleum products, precious metals (those with a commercial purpose), or agricultural goods, commodities in general act as a great inflationary hedge. Another reason that commodities broadly perform better in an inflationary environment is because the U.S. dollar can often depreciate, which commonly increases the value of commodities.
- Short Duration Bonds: Rising rates are usually tied to escalating inflation, therefore investors would be best served by reducing maturity length and increasing coupon.
There are other ways of battling the inflation problem, but number one is saving and investing across a broadly diversified portfolio. If you want to secure and grow your nest egg, you need to use the silent power of compounding (see Penny Saved is Billion Earned) to combat the silent killer of inflation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, WMT, TIP, equities, commodities, and short duration bonds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
The say keep your friends close, and your enemies even closer. Nouriel Roubini, professor of economics and international business at the NYU Stern School of Business, is not an enemy, but I think his fluctuating views (see previous story) and Armageddon expectations are off base. Perma-bears like Roubini and Peter Schiff (view article) have gloated and danced in the media limelight due to their early but eventually right calls. Over the last seven months or so, their forecasts on the U.S. economy and markets have been off the mark. With that said, even those with competing views at times can find common ground. For Nouriel and I, we currently share similar beliefs on gold (see my article on gold).
Here’s what Professor Roubini has to say:
“ I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.”
My thoughts on oil are less bearish, but nonetheless more cautious given the massive price bounce to around $80 per barrel. Could I see prices coming down to $50 like Roubini feels is appropriate? Certainly. With the $100+ per barrel swing we saw last year, I cannot discount completely the possibility of that scenario. However, unlike gold, oil has a much stronger utility value, and based on the slow adoption of more expensive alternative energies, this commodity will be in strong demand for many years to come. The pace of global economic recovery, especially in countries like China, India, and Brazil provide an underlying demand for the petroleum product. In order to understand the underlying bid for this economic lubricant, all one has to do is look at the appetite of emerging economies like China when it comes to this black gold (see my article on China).
And where does Roubini think markets go from here?
“If the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.”
Perhaps Roubini’s “double dip” fears will eventually come true – and he leaves himself plenty of room with vague loose language – however, I follow the philosophy of Peter Lynch: ‘‘If you spend more than 14 minutes a year worrying about the market, you’ve wasted 12 minutes.” Great companies don’t disappear in challenging markets – they become cheaper – and new innovative companies emerge to replace the old guard.
As much as I would like to be right all the time, that’s not the case. In order to learn from past mistakes and continually improve my process, it’s important to get the views of others…even from those with clashing perspectives.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct long or short positions in gold positions, however accounts do have long exposure to certain energy stocks and ETFs. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.