Why we follow the resource sector... What you need to know before investing in commodities... The best opportunity today... Why gold prices could jump 50% overnight...
Longtime Digest readers know we keep a close eye on the resource sector.
But if you're new to Stansberry Research, you might wonder why... or you might be unsure about how to safely include commodities in your portfolio.
The short answer is they can be a valuable part of a proper asset allocation plan. When used properly, they can be a great way to diversify a little money outside of the stocks, bonds, and real estate most folks are familiar with.
Our colleagues Brian Hunt and Ben Morris shared a great example of this with their DailyWealth Trader subscribers last month...
Commodities can go through spectacular booms that can come when stocks are rising, falling, or moving sideways. For example, as stocks stagnated in the 1970s, gold and silver experienced run-ups of 1,129% and 2,428%, respectively. The price of oil shot 1,034% higher. In the last nine months of 1973 alone, wheat prices soared 145%.
In other words, commodities can "zig" when stocks "zag." Shifting money into commodities was a great way to survive and thrive during the 1970s bear market in stocks. Legendary traders like Michael Marcus and Bruce Kovner (interviewed in our favorite trading book, Market Wizards) used commodities during this time of lackluster action in stocks to massively increase their wealth.
We could see something similar in the next bear market...
As we've discussed many times, the prices of nearly all commodities have been crushed over the past few years. And in the "boom and bust" resource market, low prices inevitably lead to high prices.
At the same time, governments all over the world are devaluing their currencies to boost their economies and gain a temporary advantage over each other. While a period of deflation is possible in the near term, we believe these "currency wars" could eventually trigger massive inflation, which could push commodities even higher.
But before you put even one dollar into the resource market, there are a few things you need to know.
First, it's important to keep in mind that the "long term" trend in commodity prices is down. New technologies have made it easier, cheaper, and more efficient to find and produce commodities. And that trend is only accelerating.
The recent U.S. shale oil boom – and the resulting crash in oil prices – is a real-time example of this trend in action.
Ultimately, this is great news. Cheaper commodities improve everyone's standard of living. But it means you must view resource investments differently than other investments. Here's more from Brian and Ben...
Owning a commodity is much different from owning a high-quality business. A commodity like corn or silver doesn't produce cash flow like a high-quality business or a rental property. It won't pay dividends. A commodity just "sits there."
For these reasons, it's not useful to view commodities as long-term investments. It's much more useful to view them as trading vehicles. Or, as we often say, it's best to "rent... not buy."
The supply/demand of a commodity like silver or corn can cause commodities to double or triple in value in a short time. But after making these gains, the trader should start looking around and noting where the exits are. A commodity that doubles or triples in price in a short time can fall 50% in the same amount of time.
Second, because most commodities are priced in U.S. dollars, it can create some confusion for new resource investors...
A big move in the greenback can affect all commodities. A move higher for the dollar means your dollar can buy commodities for less. In other words, commodity prices go down. This price action leads to most people thinking about commodities as a group. They'll often say things like, "Commodities went down today," or "Commodities are a great buy right here."
But when it comes to placing actual commodity trades, those generalizations aren't useful. Individual commodities move according to their own supply/demand dynamics. Cotton is a different market from gold. Copper is a different market from corn. Sugar is a different market from cattle. They should be viewed and traded accordingly...
When it comes to putting money to work, the broad generalization of "it's time to buy commodities" is no more useful than saying, "The weather in America is going to be nice today." Sounds good, but we need more information.
If you'd like to learn more about investing in the resource sector, pick up a copy of our book, Secrets of the Natural Resource Market. This comprehensive guide is designed to give readers a world-class education on natural resources, explain what you really need to know to make big, safe returns in commodities, and teach you how to profitably trade the sector for the rest of your life. Click here to claim your copy for just $19 plus shipping.
Again, the price of nearly every commodity has plunged over the past few years. Sentiment in general is terrible. And signs of a potential "bottom" are popping up in several areas of the resource market.
But as Brian and Ben explained above, investors need to look at individual commodities separately.
For example, regular readers know our stance on oil. In short, prices have plunged from more than $100 per barrel last year to as low as $38 last month. But oil production isn't falling, and there are reasons to believe it won't anytime soon. So while we may see short-term "oversold" rallies along the way, we believe the trend for oil prices remains down.
Another example is copper. Copper – and other "base" or industrial metals like nickel and zinc – has also experienced a dramatic bust over the past several years. But unlike the oil market, low prices are influencing production. Companies are producing less, expensive mines are being shut down and sold, and few new mines are being built.
As we've discussed, these are the necessary conditions that lead to a significant bottom in a commodity, and set the stage for the next "boom" in prices. But there's more to consider today...
While we don't think the turmoil in China is a major concern for U.S. stocks or the economy, the country is the world's biggest importer of copper. If the Chinese economy is slowing, this could reduce demand further.
Given the dramatic declines we've already seen, we would be surprised to see prices fall sharply from here. But this "tug of war" – between falling production and supply on one side, and potentially lower demand from China on the other – could mean prices drift lower or move sideways for some time.
So where do we think the biggest opportunities are today?
Perhaps the best opportunity is in gold and gold stocks. Several Stansberry Research analysts believe we're close to a significant bottom today. As we explained in the August 6 Digest, this is rare... and something we always pay attention to...
Longtime Digest readers know one of the things we're most proud of here at Stansberry Research is the independence and quality of our research. Unlike many other research firms and banks, we are not beholden to advertisers or the companies we're analyzing. We work only for you, the subscriber. We've hired some of the best analysts in the world, and we allow them to share their true opinions.
But this means our analysts sometimes have differing opinions... and this can be confusing for new readers. Often what seems like a conflict may simply be a difference of time frame or strategy. (For example, some of our trading services may take shorter-term positions that appear to contradict recommendations in our advisories with longer-term investment focuses.)
But sometimes our analysts disagree even on individual stocks. And while it may occasionally be difficult to balance these opposing views, it ultimately allows us to provide you with the best research possible.
On the other hand, when several of our analysts agree on an idea... it means you should pay close attention.
This week, our colleague Matt Badiali – Stansberry's resident commodities expert – explained why he's getting bullish, too. From the September issue of his Stansberry Resource Report...
When the U.S. stock market opened on August 24, the Dow Jones Industrial Average plunged 1,089 points. Stocks regained some of that by the end of that day, registering a 588-point loss. That's the largest drop in more than four years.
Investors are beginning to worry this could be the beginning of a major stock market collapse. You're probably wondering how I can pick this moment to come out strongly bullish on an asset as notoriously volatile as gold stocks.
It's hard to see through the general market madness... but some of the few bright spots we see right now are gold and gold stocks.
Gold is up nearly 5% since the August issue. And gold stocks – as measured by the Market Vectors Gold Miners Fund (GDX) – are up more than 4%. And while most of the market was falling... gold and gold stocks moved higher. This is an important development. It's a sign that we're reaching the end of the sector's multiyear downtrend.
In addition, Matt says an important relationship between gold and gold stocks has changed, and it's another good sign gold stocks could be ready to "turn around" and head higher, too...
For years, there was a strong correlation between the gold price and the Venture Index. Whenever the gold price rose, investors got hopeful about the junior mining sector... and bought junior mining stocks. But whenever the gold price fell... investors lost faith in the sector. And junior mining stocks plummeted as everyone sold them. You can see this in the chart below:
Since 2012, the gold price and the Venture Index have moved together more than 60% of the time. However, lately the two have been moving in opposite directions. Since late July, gold prices have rallied around 5%... but the Venture Index has continued falling around 10%.
This is the most dramatic "divergence" between the gold price and junior miners in years. And it shows investors have given up on the junior mining sector. But that's great news for us... Once everyone leaves junior miners for dead, things will get less bad... and these stocks will boom.
But that's not the only reason Matt is bullish on gold and gold stocks today...
Incredibly, he says it could be news from China that sends gold much higher.
Given the recent turmoil, you might find that surprising. But what if China could halt its stock market decline... boost its economy... virtually guarantee its inclusion in the International Monetary Fund's basket of global reserve currencies... and destabilize the U.S... with one simple announcement?
Matt says it's not only possible, but that it could happen in the next 12 months. And if it does, the price of gold could jump 50% or more overnight... and gold stocks could soar.
Matt put together a presentation explaining all the details. Click here to see for yourself.
New 52-week highs (as of 9/2/15): National Beverage (FIZZ).
In the mailbag, one question about our Top 10 and another about short-selling. What's on your mind? Send your questions and comments to feedback@stansberryresearch.com.
"Dr. Eifrig recently recommended that his subscribers sell their McDonald's shares. It is now a closed position, for subscribers to that Stansberry Research newsletter. Why is it still listed in Stansberry Research's Top 10 Open Recommendations?" – Paid-up subscriber Pauline
Brill comment: Doc recommended shares of McDonald's at different times (and for different reasons) in his Retirement Millionaire and Income Intelligence advisories. He recently recommended Retirement Millionaire subscribers lock in gains of approximately 56% in their McDonald's position because shares looked slightly overvalued.
However, the "World Dominating Dividend Growers" in Income Intelligence have a longer-term investment horizon. The goal with these is to continually reinvest rising dividends and allow those gains to compound over time.
"Could you provide me with the definition of a 'short sale' or shorting stock? Thanks." – Paid-up subscriber Eric B.
Brill comment: Shorting a stock – or "short-selling" – means you borrow shares of a stock you expect to decline and sell them into the market. To close the trade, you buy back the shares. If you pay less to buy the shares back than you received for selling them, you make a profit.
Some professional investors have made a career shorting stocks. Hedge-fund manager Jim Chanos' short of Enron is one famous example. But for individual investors, the real value of shorting stocks is as a "hedge" to protect your portfolio from market corrections like we've seen recently.
You can read a great introduction to short-selling in our free report in the Stansberry Research Education Center right here. And Stansberry's Investment Advisory lead analyst Bryan Beach explained the strategy in detail in the August 22, 2014 Digest.
Regards,
Justin Brill
Baltimore, Maryland
September 3, 2015
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