If you have read my blog or my tweets on Twitter – you know that most of my stock trades are in commodities including precious metals, emerging markets or technology preferably related to the mobile internet. I have found that I can attain a slight edge by focusing on certain themes or trends. If Freeport McMoran (FCX) and BHP Billiton are both signalling a buy, from past experience I know that FCX has a little more giddy up. So, I would buy FCX. Without the sector specific knowledge, I would have to flip a coin if I couldn’t buy both.
The sector specific knowledge also empowers me to raise the BS flag when I here it. I’m willing to bet that the word “bubble” is espoused more than any other word on the various financial media outlets. The experts say Gold, Silver, Copper, Oil, Emerging Markets – all are in bubbles. Listening to them, one would think that almost anything that goes up is in a bubble. Interestingly, very few of the people calling for bubbles identified the two largest bubbles over th past 10 years – the internet and housing.
After awhile, you start tuning these people out and forming your own opinions. The following chart from US Global Investors tells me all I need to know about bubbles in Commodities and Emerging Markets.
You can see that the emerging world currently holds roughly half of the world’s population but less than one-fifth of its economic clout. Already we are seeing a tremendous transformation of the emerging world….
Most significant has been the doubling of the world’s population since 1970, with 40 percent of the world’s population being in China and India….
With this population surge and integration into the global economy comes a need for new and improved infrastructure. Did you know that when the U.S. built its Interstate Highway System in the 1950s it consumed roughly half of the world’s available commodities?
People in the Emerging Markets are no different than people in the developed ones. They want housing with running water and appliances. They want cars. They want their children to have a better opportunity than they had. The demand for copper is not going to subside just because some expert on TeeVee says prices have risen too fast. Unlike the internet or housing bubble – in commodities supply is not keeping up with demand. Most importantly, the supply of copper or oil or iron ore or “fill in the blank” can not be turned on overnight. It is getting harder and harder to extract these resources.
That being said, prices can’t just grow to the sky. There is a natural ebb and flow to prices. Once again, Frank Holmes nails it in his US Global Investors piece.
This table shows the monthly volatility based on 10 years of data for a number of different investments. You can easily see each asset class has its own unique DNA of volatility.
For gold stocks, it’s a normal event to see a positive or negative move of 11 percent over just one month’s time. For emerging markets, it’s just over 7 percent. Understanding this volatility is essential to removing emotional reactions and making the best investment decisions.
Recently, I’ve noticed many new faces on business television commenting about a bubble forming in commodities due to the Federal Reserve’s Quantitative Easing (QE2) policy and resulting weakness in the U.S. dollar. Both of these are a part of the commodity equation but focusing on them omits several long-term factors driving commodities.
Frank goes on to say,
I do not see a bubble at this time but our quant models are showing we are due for a short-term correction. Investors need to anticipate this correction and not lose sight of the long-term trend.
I don’t have any quant models, but my eyes are in agreement with Frank.
Notice the nice orderly increase in Silver prices since August. Now look at the volatility over the past week. It is simply one of those times for a pause to refresh. It has nothing to do with bubbles.