Has the Commodities Bubble Popped?


I like this.


Mr. Gao co-found and became the CFO at Oxstones Capital Management. Mr. Gao currently serves as a director of Livedeal (Nasdaq: LIVE) and has served as a member of the Audit Committee of Livedeal since January 2012. Prior to establishing Oxstones Capital Management, from June 2008 until July 2010, Mr. Gao was a product owner at Procter and Gamble for its consolidation system and was responsible for the Procter and Gamble’s financial report consolidation process. From May 2007 to May 2008, Mr. Gao was a financial analyst at the Internal Revenue Service’s CFO division. Mr. Gao has a dual major Bachelor of Science degree in Computer Science and Economics from University of Maryland, and an M.B.A. specializing in finance and accounting from Georgetown University’s McDonough School of Business.

When I read recently that people were lining up to cash in their sterling silverware and heirloom silver tea services, I figured the end must be near: the end of the silver bubble and, more broadly, the long-running bull market in precious metals and commodities.

Have we actually been in a precious metals bubble? Having lived through the recent Internet and real-estate bubbles, you’d think it would be easy to tell. But bubbles are all but invisible until they burst. Soaring prices seem rational—fueled by rising demand from India and China, for example—until they don’t. But lately the silver market has certainly shown many telltale signs.

After more than doubling in the past year and hitting a 31-year-high last Friday, silver prices plunged nearly 30% this week, falling below $35 per troy ounce on Thursday. They dropped a dizzying 12% in just 11 minutes after Asian markets opened Sunday evening eastern U.S. time. Then the Wall Street Journal reported that prominent hedge-fund investors like George Soros were dumping silver, which triggered more selling.

The silver panic spilled over into gold and copper as well, though to a much smaller degree. Yet precious metals, even silver, are still showing healthy gains for the year. In my view, the recent turmoil suggests it’s time to take some profits, or at least reduce precious metals and commodity allocations to prudent levels.

I don’t own any gold or silver per se, and have never recommended speculating in precious metals. But I do own and have recommended a variety of inflation hedges, including broad commodity funds and exchange-traded finds as well as shares of Australia’s BHP Billiton (NYSE: BHPNews), the world’s largest diversified commodity producer. As I’ve pointed out before, some country-specific ETFs, such as Brazil and Russia, are really commodity plays. None of these funds have been anywhere near as volatile as silver or the iShares Silver Trust (NYSE: SLVNews), but their values have swollen beyond my targeted allocations.

BHP has buoyed my portfolio over the last three years, surging from $32 a share in 2009 to a peak of $101 last month. I’ve never sold a share, and in the process it’s become my second largest holding (after Google). Despite the recent commodities selloff, its shares have dropped just $8, to $96. The Brazil ETF I own— iShares MSCI Brazil Index (NYSE: EWZNews) —has 35% of its holdings in just two companies: oil producer Petrobras and commodity giant Vale. Since peaking at nearly $82 a share in November, the ETF’s shares have dropped over 10% to about $73. Even so, shares have more than doubled since their 2009 low. I believe it’s time to prune both positions.

This doesn’t mean I know the commodity market has peaked. Hedge-fund investor John Paulson, now legendary for shorting the subprime mortgage market and for betting on gold, remains a big gold bull. I’m even less inclined to predict the future direction of commodity prices than I am the direction of the stock market. What I do know is that these assets have had huge run-ups, at rates that simply can’t be sustained over long periods of time.

I still maintain that all investors should own hedges against the possibility of future inflation, and commodities and stocks of commodity producers provide such protection. But in my view they shouldn’t exceed 10 to 20% of a portfolio for most investors—and now is the time to rebalance.


Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting