An investment in commodities is not speculative, nor can it truly be called an investment. Commodity players looking to hedge themselves against inflation are not investing or speculating but instead bracing themselves for the day that inflation truly becomes priced into the market. Holding hard assets like gold or silver may seem like an investment, but it won’t pay off until a growing money supply and unchecked Fed powers are truly priced into the metals.
The rapid decline in the value of commodities seems a bit out of tune with reality. Though the economy of the United States is faring better than that of Europe and Japan, there is still much work to do to restore full value to the US dollar. Investors are fleeing the Euro and the Japanese Yen for the US Dollar which is comparatively performing well but the operative is comparatively. The US markets are facing the same problems and delimmas as that of the European and Asian economies, it just so happens that recent numbers showed that the US wasn’t doing as bad as Europe but still doing poorly.
It should come to a surprise to any investor to see the great drop in commodities that has shaken the market the past few weeks. Certainly it should have been expected that oil would fall from its highs, too many hedge funds and leveraged investors were snapping up oil without considering its intrinsic value as energy and not as a speculative investment. This is the same kind of thinking that brought homeownership from a necessity of survival to a highly leveraged investment vehicle.
Though commodities are well off their highs, we believe that the bull market has truly just begun. This coincides with the belief of famed investor Jim Rogers that the commodities market is just a few years in to what will amount to a historically repetitive 20 year bull market run. What is happening with commodities is that investors are turning to assets rather than currency and instead of buying truly hard assets in the form of physical metals instead hedging themselves with exchange traded funds and mining stocks. Paper assets are beginning to reflect the price for hard assets. Try going to a bullion broker to buy physical gold or silver, chances are that its almost impossible to find.
Another reason for the fall may be a return to naked shorting of practically every metal across the board. For a very long period of time, institutions and investment banks were holding more silver short than could possibly actually exist, creating phantom ounces of silver and gold and driving the price down. Physical metals are indeed in a shortage due either to limited mining or a craving from investors. Either way, the fundamentals that generally drive commodities prices are being ousted by paper trading on the worlds markets rather than consideration for hard assets.
As commodities continue to fall this looks like a great time to build a long term position into a bull run that will continue as soon as the world sees the lack of value in currencies and the value of commodities. With gold under $800 and silver at the $12 level, investors need little outside reason to consider building a position.