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The Death of Commodities?

The Death of Commodities?

By    |   Thursday, 13 July 2017 03:10 PM

In 1979, Business Week magazine posted a cover story called “The Death of Equities.” In plain English, they spelled out the trouble the stock market had been going through since peaking in 1968. And how it had never fully recovered from the brutal bear market of 1973-1974, which was the biggest percentage decline since the Great Depression (only recently replaced with the housing market crash).

The article was excellent in all respects except for one little, nagging detail: it was dead wrong. It was a classic case of rear-view mirror investing. Yes, in hindsight, stocks were about the worst place to invest in. Bonds weren’t any better either. With rising interest rates, buying long bonds meant losing money as yields crept up.

All that was about to change. In 1980, stocks would finally get back to their 1968 peak. And they’d pretty much rally from there, with the DOW soaring from 1,000 to over 21,000 today.

The Business Week debacle shows the danger of looking at the recent past and extrapolating current fears forward indefinitely.

Look, I get it. We’re human beings. It’s in our nature to try and find patterns and trends. It’s how our cavemen brains found regular supplies of food and water, knew the best time and ways to hunt, and so on.

But it’s the digital age. And patterns can be far more dynamic today. In financial markets, we have big moves up and down—the bull and bear markets. But we also have long sideways trading patterns, and even countermoves, like the mini-rallies and declines that occur within the broader trend.

Right now, we’re in a broad rally for stocks. It hasn’t been impacted too much by the start of higher interest rates, but it could. Bonds are priced for perfection, and stand to offer investors higher yields in the future, but holding them at today’s prices is far too risky.

That brings us to commodities. A growing number of voices are coming out calling for the death of commodities, just as Business Week tried to nail the coffin on equities in 1979. Yes, commodities are generally out of favor. Just a few years ago, oil was over $100 per barrel. Now it’s under $50. Gold peaked at $1,900 in 2011, six years later it’s down to $1,200 and change.

If these trends continue, it won’t be long before oil is free. And give it a decade or two, and gold might be as well.

Except… we’re not talking high-flying stocks here. We’re talking commodities. As in, useful, tangible things. It’s great that our economy is becoming more ethereal in nature. Today, we’re doing more and more things via the Internet than before. And in the next few years everything from cars to fast-food service will become automated, leaving people more time to think up even more innovations, we still need these tangible things.

These changes may mean some trouble in the job market at the lower end, but innovation has always led to the creation of newer, higher paying jobs before. Moving from a farm job to a factory job was an innovation, and one that ultimately made society better off as a whole. The jobs will come. And commodities won’t die along the way, either.

Think about it this way: Today, you can’t have a bitcoin without the computing power it took to process it. That took electricity, which, in turn, is made from expending commodities. It doesn’t matter whether that power is generated from coal, uranium, natural gas, wind, or wheat-fed hipsters on penny-farthing bicycles. It took something tangible to create something intangible.

Yes, technology is improving. Between hybrid and electric vehicles, we’re saving billions of gallons a year in gasoline, and that number will only improve. Fantastic! That could mean permanently lower prices at the pump, sure. But it also means we can stop burning oil to simply move ourselves from one place to another, and use it more in other areas where it’s useful, like specialty chemicals and plastics.

Likewise, gold looks out of favor now. But its use in electronics has exploded in recent years, after being used for jewelry, money, and other, more preservative forms of wealth throughout human history. It will likely come back into favor at some point as well.

Commodities also have another advantage over stocks as an investment. Their supply can drop rapidly. That can come from inventory reductions, or from a lack of new supplies coming to market. That way, even if demand permanently shifts lower, the price won’t completely collapse. Imagine if corporations took advantage of low share prices to buy them back and reduce the supply to keep the price from falling further. A few companies have successfully done so, but most either buy back shares indiscriminately, or issue so many options that they keep increasing the supply instead. Some even do both at once.

In short, I don’t see the commodity space dying. Are there challenges ahead? Definitely. But as we develop as a society, we keep finding more ways to use the resources we have. That’s something to embrace, not fear. Commodities will keep going along for the ride. And since their supply can fluctuate wildly, they’re also capable of the big percentage moves that can make investors a huge fortune.

But we’re not at that point yet—there hasn’t been a big “Death of Commodities” story yet. When there is, it’s time to buy.

When it comes time to buy, I’d focus first on the best-of-breed names, ideally the dividend-paying ones too. A new rally in commodities may take time to get going. Once it starts, however, the smaller, more exploratory companies will have the biggest percentage returns. That’s because of capital flow. Imagine trying to get all the water and pressure from a firehose through a curly straw. That’s where the big money is made. We’re not there yet, but every day the fears of new technology and sluggish commodity pricing continue, the closer we get.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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Yes, commodities are generally out of favor. Just a few years ago, oil was over $100 per barrel. Now it’s under $50. Gold peaked at $1,900 in 2011, six years later it’s down to $1,200 and change.
commodities, stocks, market, investing
Thursday, 13 July 2017 03:10 PM
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