Daily Gains Letter

The Next Big Risk to Investors

By for Daily Gains Letter | Mar 8, 2013

DL_Mar_8_2013_MitchellThe commodity price cycle still exists but many raw materials remain in correction. Gold, silver, and oil prices are all taking a break for their own reasons. Although I wouldn’t be buying them now, I still believe that gold should be a part of a well-balanced portfolio, especially as we enter a period of rising inflation.

In terms of gold-related investments, there are only a handful of gold miners even worth considering in this market. Costs for gold mining companies have being going up significantly, accelerating the decline of many gold stocks.

Oil prices aren’t going anywhere, with very slow growth in the U.S. economy and stable economic growth in China. In addition, the production boom in domestic oil and natural gas is holding these commodities down and should continue to do so for quite some time.

There is not a lot of new action for investors to be taking on right now. Those with large-cap equities should be benefitting from the rising stock market, which by the numbers, is not expensively priced. It is difficult to be a new buyer in an environment like this. Nobody likes buying stocks at their highs.

We should get a meaningful correction in the stock market soon and, if we do, I hope it’s a big one in that it will be an opportunity to buy dividend-paying blue-chip stocks.

Gold is likely to remain in a consolidation mode for quite some time. The better bet on its upside is the commodity itself, not gold stocks. Oil prices recently dipped below $90.00 a barrel, and while that’s good for consumers, it still represents the market’s view that the U.S. economy is stuck in a period of very slow growth. Recent private-sector jobs growth was encouraging, but oil prices (and natural gas) have a lot of fundamental reasons why they shouldn’t be going up, at least over the near term.

The consolidation in resources is healthy, but virtually all gold stocks are down. Small- and mid-cap oil producers are also down, but the large-cap integrated companies are trading right near their highs due to refinery margins and gasoline prices.

Near term, I don’t see any breakouts in most commodities. My expectation is that gold prices have almost hit a bottom, along with most gold stocks. Unless we see surprising data regarding the U.S. economy, the production boom should keep oil prices subdued for the near future.

The commodity price cycle is probably two-thirds of the way complete. What we know as consumers is that there is plenty of inflation in the economy, even if government statistics say there isn’t. The real inflation that’s in the Main Street economy will actually be tempered by weaker spot prices for many raw materials, and we should see this in the data over the next several months.

But when the cycle turns for many commodities, especially oil, then the fans of inflation will really be blowing. It’s not here yet, but I firmly believe it is on the horizon.

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