I know, we are supposed to not let emotions get in the way of investing. It’s the biggest reason why investors buy high and sell low thus losing money. Right now, the commodities sector is in a unique position. It is that one sector in which both the bears and the bulls are moving into. Why is that? Because this is the sector where heads I win, tails you lose. And it is also a sector that I both love and hate.
Firstly, Why the win/lose sitaution? Let’s take the bull’s perspective. The global economy is on a mend. China’s rise is unstoppable and inevitable. China’s thirst alone for oil (just look at how their car market has exploded) will drive oil, and other commodity prices up. It’s a long term trend. Even the shorter-term trends are positive because with the recovery in the global recovery, total demand for commodities will surge back up again. Hence, the bulls like the commodities sector.
You would think bears would always be the opposite of bulls. But now we have a situation where bears disagree with everything the bulls say, but they come back to the same conclusion – buy the commodities sector! Why is that? How can it be so? Let’s look at the bear’s perspective.
The bears feel that the global economic recovery is fake. That we are in for Global Depression II. They believe that US printing so much money will end up bankrupting the country and plunging it and the rest of the world into a crisis that will make the US financial storm look small. They predict that the US dollar will crash, and inflation will zoom away. Here’s the key, because hyperinflation will set in, the most valuable things will be the things that will still hold their value even when money becomes worthless. And these will be commodities. Everything from oil, to soybean, to gold. Thus, we have come full circle, and the end conclusion of the bears, is that they love commodities too.
That seems to make the commodities sector ironically the one sure bet whichever way you think the global economy will play out in the next few years. I belong to the optimist camp, and I believe recovery is on the cards. However, the current situation which has both bulls and bears favoring resources funds, commodity funds, energy funds, etc makes me uncomfortable.
For one, although I should be driven by just the motive to make money from investments, I can’t deny that if the rush into commodities by speculators and investors alike will push commodities prices up. It will become a self fulfilling cycle. However, what disturbs me is that while there will be investors who make money from this, there will be far more ordinary people who will be hurt by surging commodity prices.
The rich, the affluent can take commodity prices rising 100%. The poor, though, will be very miserable. Also, an over the top surge in commodity and energy prices will end a recovery prematurely before it even starts to take hold.
Hence, I watch the rise of commodity prices with both interest and with caution. I have a metals fund, and I even have a Russia equity fund as a play on oil price. But I personally do not wish to see oil revisit USD150 per barrel. These will translate to gains to a relatively small pool of investors who are in commodities, but much hardship to the millions of people in Asia who have no way to benefit from this, but just see their living costs spiral upwards.
I would rather make money from a natural expansion of Asia’s economic growth through which the entire Asia is lifted up, including its people. Hence, the love hate relationship I have with commodities right now.
And the more attention focused on this sector, the more hot money will flow into this sector. This also explains why in comparison to my total holdings, energy and commodities related funds are a relatively small part of my holdings. I would rather make money in other ways, even if this seems like a sure win since both Bears and Bulls end up liking this sector.
But I have stated the current situation with energy and commodities, and also my own internal dilemma. In the end, as Do-It-Yourself investors one and all, the power of choice is in your own hands, Fundsupermart investors.
Ah commodities, how I love/hate you?
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