Slowly but surely, commodities have been coming back to life.
It appears to have begun in soybeans early this year, followed by
corn, wheat, and crude oil. Now
gold and silver
have been starting to follow as well. We've covered the trend
heavily on our
service, which started getting inundated with upside trades in
the energy space about two months ago.
In and of itself, a rally in a single commodity means nothing. It
could result from a bad harvest here or a mine accident there.
But the coordinated move that has taken shape in the last few
weeks suggests that something bigger is underway that could make
all of us a lot of money in coming months and years.
It's important to put the recent strength into context to see how
unusual it truly is. In early 2009, for instance, energy
rallied but foodstuffs were weak. Then last year the opposite was
true. Now we have both climbing at the same time--something that
hasn't happened since before the subprime-mortgage crisis.
Secondly, this nascent rally started forming when you would least
expect it: as everyone panicked about sovereign debt worries in
Greece and Spain. The chaos in Europe, after all, scuppered risk
appetite and caused economists everywhere to lower estimates for
global growth. The dollar rallied and the euro tanked, yet
commodities were undeterred.
This is especially interesting because items such as oil and gold
often move in unison with the euro--especially when big hedge
funds pile into momentum trades. So far, those kinds of
leveraged, follow-the-leader indexed bets have been absent. But
the recent strength could be more sustainable because it appears
based on "real" demand and could turn into something even more
impressive if big institutions start to follow.
I put the word "real" in quotes because commodities trade
according to their use value and their speculative value. The
U.S. drought, for example, has significantly increased the use
value of corn, soybeans, and wheat because there is less
inventory for normal consumption needs. In addition, food demand
will increase much faster than population as people around the
world adopt American-style consumer habits.
Consider the historical precedent where U.S. consumption of corn
for food and animal feed rose 109 percent between 1960 and 2000,
compared with population growth of less than 60 percent. The
reason is that we became more reliant on packaged goods and
eating out, especially as women entered the workforce. Precisely
the same thing is now happening across the world, and it's a
structural shift that won't reverse any time soon.
Most readers are aware of this process, which is part of a
long-term trend that some analysts have dubbed a commodities
"super cycle." What's new is that this sleeping giant has been
rousing from a four-year slumber. The bears tried everything they
could to knock it down, and they have failed. Now could be the
time that we see the second phase of the rally that began around
Then throw in the euro, which made a higher low in July versus
where it troughed in 2010. If it continues to climb, that will
also do nothing but help commodities. One or two positive
headlines from Athens or Madrid, combined with some short
covering, could be all it takes.
There are plenty of ways to play this move, but one idea could be
fertilizer and seed stocks
such as Intrepid Potash (IPI), Agrium (AGU), Mosaic (MOS), and
Monsanto (MON). Not only have earnings been strong, but their
price/earnings and price/book ratios are also less than half the
levels of 2007 despite profitability improving, and they've
started outperforming the S&P 500 in the last three months.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Aug. 22.)
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