Hold On To Those Commodities

According to the Fed, inflation is virtually non-existent in the US. Overcapacity, slack demand, high unemployment all point to a weak environment for prices. Is that right? Since most commodities are priced in US Dollars, it’s been a fairly easy trade to make. When the Dollar goes down, prices go up and the inverse is also true. And, of course supply and demand plays a part too, as well as expectations.

Well, lately the Dollar has been getting stronger and so have commodity prices. Oil just hit a new 52-week high; prices for iron ore and steel are poised to rise by double digits after an already impressive run. Even copper prices are on the move in the face of dead housing market. And, let’s not forget about gold and silver, both trading near their highs as well.

What gives? No inflation? Right.

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Last week Lihir Gold turned down an $8.4 billion bid from fellow gold miner Newcrest. On the same day China’s state-owned Bright Food Co. raised its bid for CSR Ltd.’s Sucrogen sugar and renewable-energy business to 1.75 billion Australian dollars ($1.6 billion) bid. And, to add further commodity price concerns, several companies in the iron-ore space pushed through increases as high as 90%. Two major players, BHP Billiton and Rio Tinto are considering merging their huge ore operations, which will lead to even greater price pressure.

The scary part is that one of the biggest consumers of commodities, the US, is still experiencing stagnant growth from the consumer sector. Auto companies, which are amongst the biggest buyers of steel, are running about 35% behind peak production. And, let’s not talk about the housing sector. My friends, there is NOTHING BUT INFLATION coming down the pipeline and the pressures causing this inflation are neither in our hands nor in our control.

No, my friends. While the US is still the 800lb gorilla, commodity prices are set at the margins and there is huge demand from emerging markets, which are now in control of pricing and the cost structure of first-world countries. How can you profit and protect yourself from this coming tide of higher prices?

Fortunately there are many ways to prepare. But, you must understand at the same time that commodity prices, while in a solid long-term bull market, can fluctuate in the short term. It is during these fluctuations that you need to be a buyer of commodity stocks. The tops on the list are:

Arcelor Mittal (MT-NYSE), the world’s largest steel company and the most efficient consolidator in the industry.

BHP Billiton (BHP-NYSE)- Australian based miner that has its hands in everything from Iron-ore to uranium to gold.

Statoil (STO-NYSE)- a Norwegian based oil and gas play – mainly oil. Run very well and continues to make investments in oil field outside its region. A plus here is that shares are priced based on the Norwegian Krone, which should outpace the US Dollar.

Oil-Bama

In an about face, the Obama Administration opened the way for more drilling in US territories, much to the chagrin of the Green movement. In a play right out of the Republican playbook, our neo-environmentalist President is now pushing for more drilling off the Atlantic Coast and The Gulf of Mexico…could ANWR be far behind?

And, even in the face of this announcement the price of oil continued its rise. Petrobras, the Brazilian oil giant announced that it is selling non-core assets to fund its multi-billion-exploration program. You may not have heard, but PBR has made significant oil discoveries off the Brazilian coast. One field, Tupi is estimated to have between 5 and 8 billion barrels of oil.

It doesn’t take a rocket scientist to conclude that oil prices should be going lower based on all of these news. But, they’re not. Yesterday, Goldman Sachs released this information:

“We believe oil markets may have entered the early stages of what we have referred to as a “super spike” period — a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return,” Goldman’s analysts wrote.

Hmm, I wonder if they went “long” gold in their proprietary trading accounts last month when oil dipped? Not good news for cash strapped consumers. While in Californian a couple of weeks ago, I saw prices for Regular at the $3.40 mark…something we’ll likely see on the East Coast in the near future. The play here would be the beaten down refiners. Western Refining comes to mind (WNR-NYSE)…maybe that’s why insiders were piling into the shares late last year!

Folks, higher commodity prices are here to stay. And, if you needed any more proof, just look at your bills. Worse still, demand in the US has not picked up at all. With the government stimulating the economy and planning huge infrastructure investments (the stimulus money that was approved has NOT yet been spent) the wise move today would be to reallocate your portfolio on any corrections and start taking positions in commodities to offset the higher prices you are going to be paying for a long time to come.

Our mantra is simple. Don’t wait until you see the headlights before getting out of the way… be the driver instead!

Best regards,

Kevin Raymond


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