The stock market has had a spectacular bull run since the panicked sell-off in March. After a ten-year bull market, some thought it was all over after the pandemic hit. But those that doubted this market or the Fed were very wrong. There’s likely more upside to go for this new bull market.
However, stocks aren’t the only game to play. Some astute speculators are seeking other asset classes that might outperform in the coming years.
Commodities are a largely ignored asset class that is typically used as a small percentage of an investor’s portfolio. While 10-15% as a percentage is widely accepted, there is reason to believe that right now is the perfect time to increase exposure.
In fact, due to recent events, there is a case that investors should become directly involved in individual commodity plays.
The Case for Commodities
1) Normalization - Economies reopen and demand comes back
While the virus still lingers in America and a few hotspots around the globe, economies continue to reopen and vaccine progress is giving investors hope that things can normalize.
If coffee shops open and foot traffic increases, coffee prices can spike higher on demand.
If restaurants open, livestock demand for hogs and cattle will help prices higher.
When people start driving more, gasoline prices will rise.
You get the picture, but I want to stress that the move higher in price might be amplified by the fact that supplies have been cut to adjust to current virus market conditions. If demand fully comes back, there will be pressure for prices to move higher.
2) Demand from China
We have already seen demand resurface in China, which is helping prices in copper, steel, and iron ore move up. If the tensions between the U.S. and China can settle down, we could see aspects of the trade deal start to materialize.
One of the exciting elements of the trade deal was that China agreed to purchase an additional $200 billion of U.S. goods over the next two years. According to CNBC, this could take total U.S. exports to $263 billion in 2021 and $309 billion in 2021. Included in the deal were $12.5 billion of agriculture goods and $18.5 billion in energy goods.
This purchase of agricultural and energy products is a tailwind for commodities such as soybeans, wheat, livestock, corn, and specialized energy products. Considering recently depressed commodity prices and the pent-up demand over the last few years, there is a tremendous opportunity coming.
Continue . . .
Historic Opportunity for Zacks Members
Investors make big money on commodities by making their move at the right time – why not you? George Soros won a billion-dollar bet against the British pound. John Arnold raked in billions on natural gas. Louis Bacon cashed in big on oil by predicting the Gulf War.
Now a new opportunity is at hand – and you don’t have to be a billionaire speculator in futures or options. Zacks’ newest investment approach uses only easy-to-trade stocks and ETFs to ride big moves in gold, gas, grains, currencies, energy, coffee, and more.
When this terrible pandemic subsides, pent-up demand for these essential products will be unleashed. Add momentum from new trade deals to the mix and we expect short-term jumps of +20% to +40% and long-term triple-digit booms reaching +100%, +200%, and beyond.
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3) The Fed – Gold, Silver, Platinum
Many people tend to forget the impact the Fed can have on the economics of commodities. When interest rate policies shift, the flow in and out of the dollar can force big price swings in the metal space. Both silver and gold have been impacted and have seen significant moves higher, but other metals are available to savvy investors as well.
In fact, the little-known metal Palladium had an almost 70% move up from the March lows. While some of these moves have been attributed to supply/demand issues, a dovish Fed policy is a big tailwind for the metal space.
Let’s take a look at some of the prominent performers over the last few months:
• Silver: Up 130 % from March 2020 to August 2020
• Crude Oil: Up 100 % from March 2020 to August 2020
• Platinum: Up 76 % from March 2020 to August 2020
• Copper: Up 48% from March 2020 to August 2020
• Gold: Up 41% from March 2020 to August 2020
If we look at moves over the last few years, they can be even bigger!
• Palladium: Up 282% from August 2018 to January 2020
• Lean Hogs: Up 76% from Feb 2019 to May 2019
• Lumber: Up 55% from January 2017 to May 2018
• Coffee: Up 45% from October 2019 to December 2019
Those are some nice moves, but we can also profit from certain commodities going down thanks to inverse ETFs. The energy space has been very weak over the last year, but mainly natural gas, which fell 60% from 2019 highs to 2020 lows. The leveraged inverse ETF KOLD goes up as natural gas goes down and has benefited with a move from $10 to $87 during the natural gas sell-off.
As you can see, there is a lot of movement both up and down. Risk management is always critical when investing, but in commodities, it is paramount. With strict discipline, investors can limit downside risk while maximizing the upside reward.
Speculation and Value
Commodities are all about speculation. Factors that move markets can include an increase in demand, a shortage of supply, economic growth, or lack thereof. Moreover, the weather is a major catalyst for agriculture. While we might not be able to determine which way the wind blows, investors have tools that let them gain an edge. Technical analysis combined with analysis of individual markets can give an investor a good idea of where price may go.
In times of market shock, selling pressure can create tremendous long-term value. As I mentioned above, the pent-up demand that has been created by COVID-19 will create amazing value in the commodity space.
When the world fully comes back online, global demand will be a boost for commodities. Investors should be increasing exposure, not only to individual commodities but to stocks that are exposed to the price swings of commodities as well.
My approach with the new Zacks Commodity Innovators portfolio is to capitalize on the current opportunities in commodity markets. We will minimize our risk without being exposed to the futures market while keeping the same potential rewards. Utilizing the Zacks Rank, we will have a plethora of ETFs and stocks to choose from that will allow us to capture this profit potential.
Now is the perfect time to look into our unique brand-new portfolio service, Zacks Commodity Innovators.
Breaking news and innovations with high-profit implications are popping up all around us. For example:
- Silver sets multi-year high.
- Gold prices hold well above $2,000 mark.
- Precious metals on fire.
My approach with the new Commodity Innovators portfolio is to capitalize on the current opportunities. We will minimize our risk without being exposed to the futures market, while keeping the same potential rewards. With the Zacks Rank working for us, we will have a plethora of ETFs and stocks to choose from that will allow us to capture this profit potential.
We aim for short-term moves of +20-40% and also ride trends that could carry us for months and years to gains of +100% and more.
Our next moves are about to be posted, but the audience for them will be restricted to make it easier to profit.
So, don't miss your chance to be the first to see our next postings. The deadline to gain access is Sunday, August 23rd.
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Jeremy Mullin is a technical expert with 15 years’ experience pinpointing the best times to buy and sell commodities. He is the editor of Zacks’ newest portfolio, Commodity Innovators.