The stock market has had a spectacular bull run over the last ten years, helping investors reap the rewards of one of the longest bull markets in history. However, this can’t last forever, so many astute speculators are seeking other asset classes that will outperform in coming years.
Commodities are largely ignored by many investors, in part because of the false belief that you can only approach them through futures contracts and options. Even when used, they typically only occupy 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.) China- Soybeans, Corn, Wheat, Hogs, Energy
The story over the last few years has been the China trade war and if the U.S. and China can compromise on a deal. Late last year, the Phase 1 trade deal was finally agreed upon, unlocking pent up demand from the two biggest economies in the world.
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 was $12.5 billion of agriculture goods and 18.5 billion in energy goods.
This purchase of ag and energy products is a tailwind for commodities such as soybeans, wheat, livestock, corn, and specialized energy products. Considering the pent-up demand over the last few years and considering recently depressed commodity prices, there is a tremendous opportunity coming.
2.) Normalization – Copper, Crude Oil, Natural Gas
There has been a systematic risk at play that has stalled the move higher in commodities. This is of course the Coronavirus outbreak in China that has also been a drag on equity prices.
The selloff has brought down prices to levels that has created a wonderful buying opportunity for those interested in commodities. When the environment normalizes, I expect bullish trends to resume, especially in commodity markets as China comes back online.
A regression to the mean could offer double digit returns for those ahead of the turnaround. For longer-term investors the payoff could be massive as global growth returns once the virus fears have dissipated.
Continued . . .
Notice to Zacks Members
Investors make big money on commodities – 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.
Zacks is now launching a new, easy, and low-risk approach to commodities investing. You don’t have to be a billionaire speculator in futures or options to take part.
We only recommend easy-to-trade stocks and ETFs covering oil, gold, gas, grains, currencies, and more. Each buy is closely monitored by a technical and Zacks Rank expert who combs for new developments and innovations. This brand-new portfolio aims for +20% to +40% short-term jumps and long-term triple-digit booms.
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3.) The Fed – Gold, Silver, Platinum
People can 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 are impacted, but other metals are available to savvy investors as well. In fact, the little-known metal Palladium had an almost 30% up move in January. While most of the move has 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 big performers over the last three years:
Natural Gas: -46%
As you can see there is a lot of movement. But keep in mind that risk management is always important when investing, and 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 big 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 the trade war and now the Coronavirus will create amazing value in the commodity space.
When China comes back online, global growth will be a tailwind for commodities. Investors should be increasing exposure, not only to individual commodities, but to stocks and ETFs that are exposed to commodities price swings as well.
That’s just one reason this 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:
- Significant oil discovery in offshore Suriname.
- Gold jumps on news of Iran crisis.
- Palladium triples over 3 years with improved catalytic converters.
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 first moves are about to be posted, but the audience for them will be restricted to make it easier to profit.
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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.