Buy Gold—And Commodities ETFs

August 04, 2010

Call me a gold bug, Matt, but you’re crazy.

You may not “get” gold, as you said in your blog Sell Gold, Buy Stocks, but I think owning a bit of gold is sensible.

We can quibble as to whether one should Keep 10 Percent In Gold, as Jon Nadler said when we spoke recently, but his point of having some in your portfolio might be wise at a time when inflation, in my opinion, is already in our midst.

When I talk about inflation, I’m not waiting for the CPI to print some scary high number or for bond yields to head through the ceiling, though that day may well arrive before long. What I’m talking about is things like the price of oil and other commodities at surprisingly high levels at a time when the economy is slogging through its worst crisis since the 1930s. Oil is at more than $80 a barrel.

Maybe I’ve been dying to pick this fight about rising commodities prices with you for awhile, but it seems to me that we should get used to materials getting more expensive. To that extent, gold-related securities like

State Street

’s SPDR Gold Shares (NYSEArca: GLD) are just one piece of preparing for the next big wave of rising commodities prices.

Owning materials and agricultural ETFs, say the iShares S&P North American Natural Resources Sector Fund (NYSEArca: IGE) or the Market Vectors Agribusiness ETF (NYSEArca: MOO), makes a whole lot of sense too. Notice I’m talking equities here.

I’m not prepared to negotiate the rugged straits of contango in commodities markets that would eat into returns, as would be the case with a futures-based commodities ETF such as the United States Oil Fund (NYSEArca: USO).

What I’m arguing is that it’s undeniable that demand from places like India, Brazil and especially
China
is a huge part of the price of oil and other materials. China may be heading for some near-term correction as it grapples with hard-to-fill skyscrapers in cities like Shanghai, but it seems to me the writing is on the wall.
China
is here to stay, and it will tax supplies of critical resources, most conspicuously oil.

The other piece of the petroleum story is that it’s getting harder to find. I’m not exactly buying into the peak oil theory geologists such as Kenneth Deffeyes have been describing, but I think it’s fair to say finding and extracting whatever oil there is on the planet is getting more expensive.

Ask yourself how is it that a well a mile deep in the
Gulf of Mexico has been spewing oil for the better part of three months? Answer: Hard to reach. Expensive places to develop like that are the only choices we’re left with.

Now consider that oil is priced in dollars and the Chinese yuan is again slowly appreciating against the dollar. That means that over time,
China
will be buying more of the oil it needs for less money while we start progressively paying more for it.

It may humor you that I found myself agreeing with Jim Rogers when he spoke to us a few months back in a piece called This Bull’s Horns Just Got Longer, but I can smell oil prices at $150 a barrel just around the corner. The stubbornly high price of oil right now suggests to me that that future has already begun rearing its head.

To that extent, I have no big problem with Jon Nadler’s 10-percent-in-gold view. I only think you’ll need a bit more than gold in your portfolio to weather the higher costs of just about everythingstarting now.

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