Oxstones Investment Club™I know you’ve heard it before, but the 10-year, sixfold price run of gold may finally be over. At the very least, it seems clear that the major gains in the metal have already been achieved and investors would be wise to look for another commodity — even another precious metal — for more upside returns.
Gold, along with oil, has been the commodity leader in the last decade, showing the way and proving a point about the value of hard assets compared to the financial value of paper assets such as stocks and bonds. Whereas trading and investing in any commodity was considered specialized and strange even a few years ago, it has become far more mainstream for gold and oil (and for a rapidly increasing number of other commodities).
Gold has been the leader in this movement for many good reasons, mostly its high value and density, which makes it relatively easy to stockpile and store. Indeed, of the $6 trillion of nominal gold above ground today, more than $3 trillion is in the form of bullion, designed singularly for stockpiling.
Gold has also been subject to the first experiments of financial engineering on commodities, with vicious and obvious results. The SPDR Gold Trust ETF is by far the largest commodity ETF in the world, with a market cap of well over $55 billion. The ability for investors to gain proxy physical ownership of bullion — which the GLD in essence does — with the simplicity of clicking a mouse in any stock trading platform has created a Ponzi scheme of buyers into the precious metal that wouldn’t otherwise exist.
I’ve been nothing if not consistent: I’ve consistently (and wrongly) hated the gold trade since it broke $900 late in 2009, and I’m not about to suggest that gold is headed back to that level, either — I’d just rather have my money in some other commodity. To me, gold doesn’t have the key commodity driver that I need to stay excited: It doesn’t get used up. Only 16% of gold is used industrially, and whether the rest goes into the vaults of central banks or made into watchbands for Rolexes, it still remains as part of global inventory. On CNBC last week, I was asked if gold and oil would continue to price in lock step. I said that ultimately gold is really only good for adorning your wife’s ring finger, while oil is a necessity that needs to be constantly burned.
I’ve admittedly missed out on just about all of the big money to be made on the gold trade, but that’s OK. In the game of chasing bubble trades and momentum hype, I’ve happily heeded the words my trading mentor told me almost three decades ago: “There’s never a greater fool around when you need one.” With gold now under pressure, the stockpiling effect of the big ETFs like the GLD will have to be turned around, and they will be forced to sell bullion back into the market, an activity the fund managers haven’t had to do much in the past two years. I wouldn’t be waiting around to see the outcome of that reversal of Ponzi direction. It could be orderly and there could be buyers waiting, but then again…
Don’t get me wrong: I love the commodity trade. I just hate this one. I still believe oil is underpriced here and hasn’t made nearly the percentage move that virtually all the others made in 2010 — even hovering at $90, oil is up barely 20% since the start of 2010, a small move compared to copper or corn or coffee or cotton.
And in my search for the commodity that hasn’t yet participated in the commodity boom, I’ve found one other that I keep banging the table about: aluminum. With very strong fundamentals, low stockpiles and an industrial thesis as strong as copper’s, I think it’s ready for a big move of its own.
No dedicated aluminum ETF exists, and I’m not much for commodity ETFs anyway for the retail investor (as you might have guessed). Instead, I have continued to recommend Alcoa as an unfairly beaten-down stock that will benefit big time from an aluminum price rally. If you prefer a China play (and I don’t), the equally huge Aluminum Corporation of China is being equally ignored by the market and analysts.
And those are the types of stocks and commodity plays I like — the ones that haven’t yet found a bandwagon and don’t rely upon a greater fool than you to keep you solvent.
Tags: ACH, alcoa, aluminum, aluminum corporation of china, Asia, base metals, China, chinese stocks, commodities, Equities, ETFs, gold, oil, U.S. stocks, U.S.A.