Money Supply And The Commodity Boom

Commodities tend to zig when the equity markets zag. – Jim Rogers

Investors always are on the lookout for the next great thing. But more often than not, the next great thing in markets is just one of the old great things. I’m talking about commodities here, not because they are in vogue or are necessarily doing well as a whole, but because the conditions for commodities to rally are looking enticing. In my tweet above I referenced the movement in commodities against a look at G4 economies and their monetary base. There’s definite correlation there to prices, and guess what – the monetary stimulus happening right now is extremely bullish for commodities as a whole. What that means is we could be in for a bull run in commodity prices, for better (yay diversification!) or worse (inflation is coming).

We’ve already seen some movements in commodities that are outsized, including silver and gold (as measured by GLD and SLV). That might just be the beginning. Overall, commodities remain extremely depressed as global demand has been shot, reducing GDP in several developed nations. But where there’s smoke, there is usually fire, and the precious metal moves in the past four months are your smoking gun in this sector. Silver alone has gained 54% in the last year, while gold has rallied almost 28%. Those are excellent return profiles if you’re looking to diversify away from stocks at extended valuations.

One thing that the expansion in monetary base, especially in the US, is doing is devaluing the dollar. Good thing we can’t travel abroad – it would cost us 10% more since the March pullback in equities. The US dollar index is struggling to find a bid right now, and for good reason. The Fed doesn’t want it to, they are printing as fast as the printers can go. Of course, they’re running out of change. No matter, keep printing those hundy’s. Not only is the Fed trying to avoid a widespread depression, but they also are trying to stoke inflation, something that hasn’t happened in a very long time. But with that, if inflation does pick up, you know what will be driving the bus – commodities.

If you don’t think there’s upside left, look again. Commodities overall have not held up despite the monetary base increases in the G4 nations. Don’t wait too long, though, as these prices move extremely quickly when they get wind of it. It might not be as fast as Tesla (TSLA), of course, but let’s not go there. For me, when investing, I’d much rather buy a depressed asset with conditions for a rally than something like the S&P 500 which just rallied 50%-plus off the lows and is one of the most expensive in history, as measured by the Shiller PE Ratio (chart below). I’d much rather invest in something that is trading at depressed levels, like commodities overall, when the factors are shouting upside.

Source: multipl.com

We haven’t talked about oil yet, but it’s coming. With capex on oil supply being cut aggressively as demand tanks, and production growth slowing, we could get the opposite imbalance we are seeing now. Eventually, as commodity producers in oil stop finding and using new oil reserves, the world will catch up and start to demand more. If you think developing nations are about to go 100% green, try traveling to them. That’s a pipe dream, at best, in most countries around the world. And as supply cuts happen and demand increases with a global economic rebound, what does that tell you is going to happen with the price? Commodities are the new stocks, as they were in times of old.

How do you position your portfolio then? Well, diversifying properly is a good start. If you had some exposure to gold and / or silver this year, you probably are patting yourself on the back. Continue to hold that exposure and add some if you don’t have any. In addition, place some researched bets on commodity-related companies to get a leveraged effect in your portfolio. After all, if Warren Buffett can 180 on his gold exposure without so much as a nod to it, you probably should too. Of course, that might mean the top is in for gold. Regardless, you don’t have to just buy gold – there are plenty of other commodities out there to own. DBC might be a good place to start, looking at their top 10 below:

2020 will be a year to remember for the markets, and we still have about four months to go. Will the rally continue here, and will commodities play a major catch-up role? Or will the stock market continue to march forward with the massive stimulus in the global economy right now? I think that the commodity spike is coming given what the conditions in the market are telling me. It would be wise to diversify into some of these areas, instead of blindly buying the S&P 500 and hoping for the best. After all, that’s not really that diversified anymore.

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