Commodities started a bull market in the early 2000’s to 1999 timeframe. China and India are both going through their industrial revolutions and as such the demand for commodities from that region will be high for the foreseeable future. Countries that export large quantities of commodities will fare better than those who do not in the upcoming downturn, but make no mistake that they also will feel the pain of a global economy in turmoil. The key is finding who is going to e hurt the least if you’re looking for something or somewhere to invest your money. Reason I even mention somewhere is because the US is uniquely positioned to be completely stripped of its title of THE world superpower due to its excess and from my studies I’m finding that commodities in all its forms are what are going to do well in this coming downturn.
Countries that have a strong export presence and low unemployment will be good places to look at. Recently Peter Schiff and Axel Merk did an interview where they commented on their five favorite currencies to invest in. That is a good place to start if you are planning on investing abroad as they give insights to not only economic issues, but political issues, which as we can see with the Eurozone and Greece right now is a big deal for investors domestically and abroad.
I love Peter Schiff’s commentary on bubbles. If you notice on any of the news agencies they call bubbles all the time. Lately it is more prominent in commodities due to their meteoric rise over the last decade. What’s sad is that there are those who correctly predicted and profited off of the last bubble bursts of the last few years and they’re saying that we aren’t close to popping in commodities.
For example, throughout time the gold to silver ratio is around 12:1. Now it is about 51:1. Over the last century, when we were on the gold standard, the ratio was around 47:1. Historically the Dow to gold ratio has been about 4:1, but right now the Dow is overvalued at a ratio of about 7:1. If you are familiar with statistics and means this means that gold is undervalued and the Dow and even real estate are overvalued. To get back to the mean we have to shoot past the mean in either correcting direction in order to get back to the mean (average).
An interesting sign with bubbles is the speculation that occurs with companies involved in the underlying asset that is in its bubble mania. For example, the Internet was invented/gained traction and revolutionized communication. The Internet didn’t really hit a bubble though, as far as investing in companies on the web is concerned at least because certainly it is still growing, until people started speculating on the companies involved in the Internet, hence the dot.com bubble and subsequent burst.
We’ll know we’re in bubble territory for commodities once speculators start going nuts for commodity producing companies. This means for gold specifically we’ll know that it is in a bubble when people are buying into gold stocks just like they bought into dot.com stocks in one of the last bubbles that occurred in the stock market. People will speculate on the different types of gold mining stocks and some will be good bets and others not so much. When taxi drivers and the average joe start buying gold and silver you’ll know it is in a bubble and that is far from the case right now. Central are barely becoming net buyers instead of net sellers of gold right now. What would be interesting to find out is if those big investment banks ever offer any CDS on the speculative or even large gold mining companies.
Specifically with gold and silver these still have a ways to go till they top off because of demand. Silver is the most widely used commodity in the production of goods with thousands of different uses, some of which will continue indefinitely as some are related to medicine, batteries, and mirrors. As the BRIC countries continue through their industrial revolutions demand for all commodities are going to continue up. To ramp up production though requires a lot of capital-intensive investment, which takes time. Limited supply of a commodity then will lead to increased prices in the underlying asset, which in turn leads to more demand, which leads to more investment in production until demand falls, at which point production capacity will have been over extended and some of those companies that were great will turn out to be duds and the bubble will start to fall for the equities and commodities involved.
This blog post makes me want to learn more about oil. Peter Schiff says that oil should be about 1/10th the price of gold. Well gold is about 1750, but oil is only around 90 bucks a barrel. We also know the 7 billionth baby was born recently and so demand for oil is going to go up. I wonder what huge macro economic consequences are going to result from HUGE increases in the price of oil. To be continued…
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