Repricing the Planet
COMMODITIES, IF YOU HAVEN'T NOTICED, are hot. And it's not just oil and other energy items but a broad array of stuff from metals to grains. So far, it hasn't entered the general zeitgeist as in the 'Seventies or the early 'Eighties, when everybody gained a firsthand acquaintance with soaring prices while waiting in gasoline lines or watching prices get marked up before their eyes in the supermarket. Commodities were as much a part of that misbegotten era as Watergate or Jimmy Carter's cardigan, much like tech stocks in the late 'Nineties or, until recently, real estate. Of course, by the time Hollywood gloms onto a market trend, you know it's history. So by 1983, when Trading Places -- the movie in which Eddie Murphy and Dan Aykroyd implausibly made a killing in orange juice futures by getting advance word of a crop report -- the bear market in commodities was well under way.
Commodities aren't the subject of cocktail-party chatter -- yet -- but they have been attracting serious money from institutional investors, such as pension funds and endowments. That's according to a report from Bridgewater Associates, the highly regarded institutional management firm led by Ray Dalio, who was the subject of a Barron's Q&A last year ("Bipolar Disorder," June 13). Endowments have allocated an estimated 3.6% of their $299 billion to natural resources, as of year end, while pension portfolios had 4.1% of their $6 trillion in assets in "other" investments. The key, says the Bridgewater report: While there's been a big dollar increase in institutional investments in commodities, it's still a small slice of the pie.
But the report says the share is apt to increase, since commodities have become "respectable" as an asset class, since they help dampen the risk of a securities portfolio via diversification and since many institutions have yet to allocate a penny to commodities. Strong global growth and loose global liquidity conditions underlie the bull case for commodities, which Market Semiotics' Woody Dorsey dubs the Repricing of the Planet. We would also add that rich valuations of equities and paltry bond yields add to the attractions of commodities.
This hasn't caught on with the man and woman in the street as it did three decades ago, but it soon may. Unless you opened a futures account, individuals' main commodity plays were related stocks or mutual funds. That is, until a month ago, when the DB Commodity Index Tracking Fund (ticker: DBC) came to market. The exchange-traded fund is based on the Deutsche Bank Liquid Commodity Index, which consists of 35% crude oil, 20% heating oil, 12.5% aluminum, 11.25% each for corn and wheat, and 10% in gold.
So far, the ETF is off less than a buck from where it bowed, at around 23.85. But the introduction of other commodity ETFs has been a pretty good buy signal for those commodities, according to Market Intelligence Report, a North Oaks, Minn., newsletter. If you'd bought bullion when the first gold ETF was announced in 2002, you'd have ridden bullion up from $330 an ounce to $565. To back the popular streetTracks Gold Shares (GLD), its sponsors have had to buy upwards of $6 billion worth of gold -- 300 tons at an average price of $500 an ounce, or one and a half-to-two months' world gold production. That doesn't include the smaller iShares Comex Gold fund (IAU.) An even bigger hit has been the Toronto-traded Uranium Participation Corp. (U.TO), which is up a sweet 43% since it started trading last May.
Just the anticipation of a silver ETF sent prices of that metal last week over $10 an ounce, a 22-year high. Barclays Global Investors has been seeking clearance for the fund from the SEC since mid-2005 (when silver traded around $7), but has been fighting resistance from industrial users who fear there won't be enough of the metal around if a big slug of it is locked up to back the ETF. Ironically, the prospect of such a supply squeeze can only make silver bulls' hearts beat faster.
There's no doubt that demand from investors who heretofore had avoided the commodity pits is giving the bull market extra oomph. But they wouldn't be interested in the first place if the fundamentals weren't positive. In other words, the tail isn't really wagging the dog.