Interested in the commodities bull?

[anxvariety]

I subscribe to a newsletter by a guy named Adam Hamilton. He has lots of essays on his site that are free..

If you’re interested in learning more about commodities, or “gold bug” perspectives I highly reccomend checking it out.

The link I’m posting below is to an essay titled ’21st Century Commodities Bull’ by another writer on his site.. the synopsis is ‘Growing world population and demand are putting great supply pressure on hard commodities, driving up their prices. Investors can capitalize on this.’
http://www.zealllc.com/2006/21bull.htm

[lewman]

Thanks for posting this site.

I read through a number of articles online and found them to be very well written. I do believe that a secular bull market for commodities, especially good, has started. This information will help me fine tune my trading strategies.

I also found the newsletter written by the Aden Sisters (www.adenforecast.com) to be very helpful as well.

Lewis

[anxvariety]

I’m glad that you enjoyed and responded. I really enjoy the site as well.. I was hoping my message didn’t come across as “spammy”.. but the site has so many free essays that well written as you said, I thought it was worth posting..

I’ve only been a member of the subscription for about 6 months.. and have been following his stock picks, and they are pretty damn impressive..

If you get a chance, check out the essay on uranium mining.

[powayseller]

Can you and leung_lewis give a synopsis of what’s going on in those websites. I have limited time for reading, and it sounds like you are knowledgeable already. The benefit to a forum here is that each of us can share the unique perspectives and pockets of knowledge. I’d also be interested in your long-term outlook of the economy, and where to invest.

[anxvariety]

Powayseller, let me first say.. the writer on that site is AMAZING.. he has a huge list of accolades. I’d reccomend you check out some articles.. They are succinctly titled, and all offer synopsis(that even someone with ADD will love)

The real rough overview from someone who doesnt write much(me).. Zeal LLC are self-described ‘contrarian investors’. I’d say their perspective cautiously aggressive and almost exclusively detailing hard and soft commodities and related companies.

Most of what they are suggesting at this point are.. Mining companies, refineries, drillers, explorers.

They advise on sort of a pyrmaid investing structure depending on what your goals are.. Exactly what the balance is you’d have to read.. but from what I’ve read you’re either trying to keep you dollars safe with modest gains ahead of inflation or you’re a little more speculative/aggressive and are investing in producers of commodities you expect to rise.. Some examples of stocks they have been talking about for a while are NEM, NG, SSRI, URIX..

I’ve read about 10% of what is on that site in total.. so don’t consider my perspective too accurate.. just one persons snapshot.

[lewman]

thanks powayseller for the nice compliments; happy to share my thoughts

I picked up 2 views of the Zeal writer that I agree to. Disclaimer: I’m not a convert because I already held the same view so understandably I’m biased.

Firstly, the Zeal writer thinks that US stock market has entered into a secular bear market that will last a number of years until valuations undershoot the other way. Check out http://www.zealllc.com/2005/longwave2.htm and at least read the 1st chart where he shows if you use PE as the judge, over time the market tends to oscillate around a mean of 14x. It last peaked at 44x before the tech bubble bursted and last trough was 6x in 1982 which was right before the greatest bull run we’ve seen in our life time so far (well, my life time anyway). Conclusion: stay away from the stock market unless you think you’ve got a winning strategy that allows you to go against the tide.

Secondly, he’s a commodity bull, which I am somewhat. For a quick summary of his view, try this article http://www.zealllc.com/2006/21bull.htm. If you have more time I also recommend reading Jim Rogers’ book Hot Commodities. Basically he thinks that we’re in a secular bull market that started around 2001, and commodity bulls usualy last something like 10, 15 years so there’s a long way to go. And one way to jump on this band wagon is to buy gold (which is probably the easiest commodity for the average joe to get into; as long as you have a stock account you can buy gold by investing in ETFs (GLD and IAU).

Re: economy. I’m somewhat undecided. Key is what the Feds will do with rates. If Ben continues raising rates, the commodity bulls could face some hiccups. If not, hard assets will go off the roof. But the tricky thing is since they stopped publishing M3, they could be doing something sneaky like continue to pump money into the system without lowering rates. So this is a tough one.

Re: investment. Bulk of my portfolio is in a few low risk asian equity hedge funds. I’ve been increasing allocation to gold since late 2004 and will continue to do so. For long only equity, the only sector I’m betting big on and will continue to add to is China (again I’m extremely biased on this one). My US stock exposure is down to single digit but no plan to totally get out yet. Am also looking to build up on foreign currencies if US rates stop increasing.

Cheers,
Lewis

[powayseller]

If the derivatives market and GSEs and banks have a really bad quarter, and possibly collapse, wouldn’t the stock market also be at risk, and the ETF would be unable to be accessed? Also, I read that the gold investing could be risky, if the mining company doesn’t find any success in mining. Some recommend holding gold buillon, but I can’t see that we are going to pay our rent and gas in gold. How do you hold an asset without worrying about your asset holder (brokerage account, bank, stock exchange) going under?

[lewman]

Gold is risky but probably no riskier than stocks. As a student of modern portfolio theory, I tend to look at risk from a portfolio perspective. Let say 10% of your portfolio is in gold and it goes down by 10% then your portfolio loss is 1%, hopefully it will be offset by gains in your other investments (including money sitting in deposits). A real example is I put money in two hedge funds that I bought at the same time. Two years later one is down about 10% the other up 40%. So they net off to be about a 15% gain. No complains there.

Re: mining company. You’re absolutely right on that and that’s company specific risk you will face if you only invest in one company. Similar to the above, the easiest way to reduce this risk is to buy a bunch of them so if one “didn’t find any success” in mining, it will hopefully be offset by another that did. I assume you’re not into stock picking (neither am I). Take a look at stock symbol ASA which is a closed end fund that invests in a bunch of mining companies. In case you’re not aware, you buy closed end funds like you would an ETF or ordinary stock, i.e. through a broker like Schwab.

As for “hold an asset without worrying about your asset holder”, truth is there’s always going to be some exposure. However, take GLD the gold ETF as an example (or funds in general). They are generally set up such that the assets are ring fenced and held separately from the assets of the companies invovled(custodian bank, trustee, fund management company, broker,etc). If let say the fund mgt company go the way Barings did a few years back, there will be no impact on your claim to the shares of the ETF.

In general I don’t like gold buillions because of the high transaction cost. No idea how much really but I’m sure it’ll be higher than the $8 Ameritrade charges for buying the gold ETF. And you’ll probably store it in a safe deposit box then when you want to sell you have to drive down to the bank, pick them up, risk getting robbed between the bank and the shop where you can sell the bullion, etc etc. Too much trouble.

[powayseller]

Why are you bullish on China?

Their trade surplus is only $12 billion. They are voracious consumers. “China’s exports in the first two months of 2006 rose 25.5 percent from a year earlier to $119.2 billion, while imports rose 27.4 percent to $107.2 billion, producing a trade surplus of $12 billion.”

When the US consumer’s housing credit card (incorrectly called the housing ATM) is out of credit, to whom will China sell their products? As the US goes into recession, won’t China follow suit?

[Jim Brubaker]

You need to change your perspective.

Gold doesn’t go up and down in value, it is a measure of value. When you see gold go up in value, what you are viewing is the appeared value of the dollar.

They cannot print gold but they can print money. In the late 60’s when gold went up quite a bit, it took about 175 ounces of gold to buy a house (350/oz $61250 house) If you reverse the logic today you would come up with a value for gold of about 3,500 per oz (house value 600,00175=$3428 per oz)

If the US government was to devalue the dollar, it would not affect gold, it would appreciate in price.

If you want to hold gold, take delivery and put it in a safe deposit box.

Remember, there are a billion people in China that might also want to own one ounce of gold. That could seriously affect the price of gold

[powayseller]

Could you make that comparison to something that is not overvalued like housing? How much gold did you need to buy a car in 1960, and how much gold do you need today?

How had gold fared against other currencies, such as the euro or swiss franc?

Since 75% of gold demand is from jewellers, how can we be sure that a worldwide recession won’t reduce jeweller demand? Would that be offset by increased investor demand? If only 25% of gold is bought by investors, does that tell us that not too many people think of gold as a store of value, and how does that affect its price? Is the recent rise in gold price because commodities is the next hot fad, or because there is really something to it?

As far as the different ways of holding gold, there are varying opinions. I’m just trying to learn more about how much I should even buy in the first place. Have a book – Hot Commodities – that just arrived. Hopefully that will answer these questions that I have.

[Jim Brubaker]

Lets pick the car I bought in 1969 a brand new Pontiac convertible for $3,000 (I’ve still got it–much to my wife’s dissapointment) That would convert to 8 1/2 ounces of gold at $350 oz back then.
Now if you pick a car at todays prices, say $25,000 and divide it by 8.5 gold should have a value close to $3,000.

Now I’m not a gold bug, but in that same span of time from 1969 to now, the M3 money supply has increased by more than a factor of 10.

Inflation has to be perceived by the masses or it doesn’t exist. It is a tax on people who save for their retirement. The borrower loves this arrangement, borrow expensive dollars today and pay them back with inflated ones later.

My suggestion was to protect your back side with a 10% investment in gold and silver. The decimal point on gold and silver has to move one digit to the right just to keep up with the volume of paper printed. Oil just did it and nobody blinked an eye.

Probably 95% of the worlds gold is in a bank vault. From that perspective, its hard to compare it to the jewelry consumption of current gold production.

I agree that in todays world, our perception of gold is, as a commodity. That view is just not supported by the last 10,000 years of history.

Now lets take the rule of 72. Take the interest rate and divide it into 72. You get 3% in the bank so its going to take 24 years to double your money. Of course the government is going to stop printing money and the Tooth Fairy will be found alive living in downtown Chicago.

Here is an interesting link on M3 (the figure that the government has stopped releasing)

http://www.gold-eagle.com/editorials_04/paulos020504pv.html

Take it with a grain of salt

[powayseller]

Interest rate is 5% now, and going up. So it takes 14 years, not 24 years, to double your money.

I understand the rest of your points. It is a good deal for the government – they lend us money, and then keep printing money so they can pay us back with inflated dollars.

I read that the US has secretly been selling off its gold reserves, and that not too much is held in bank vaults anymore.

There seems to be some behind-the-curtain stuff going on with the government and gold. They probably want us all to keep thinking of it as a scary, unknown. The government doesn’t want us all to fear inflation and hoard gold. The economy and banking system (fractional reserve) work only as long as confidence is high. That is one of the most important components of the economy: trust in the Fed, trust in the banks. Without that, the system cannot work. Imagine if everyone realized that their money is not really in the bank,but lent out to people who bought overvalued homes. Consumer rush to the banks to get their money out, and of course w/ the fractional reserve system, only a few % of the deposit is actually there. Voila, the whole system collapses.

So the government must paint rosy employement and inflation reports, speak about the flexible economy, downplay the importance of gold (whose rise is linked to inflation and loss of confidence in the Dollar). This is necessary to keep optimism and trust in the system. And there’s nothing wrong with that, as long as it keeps working.

But if we all think it will stop working, we can’t be misled by government data.

[Author]

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