How to Add Some “Oomph” to Your Commodities Market Gains

Sean Brodrick
by Sean Brodrick, Resource Strategist, The Oxford Club Market Trends Market Trends
commodities markets

The big, bad commodity bear died in June.

That’s when, after five years, commodities officially entered a bull market.

Unofficially, though, the good news started months ago. Prices of oil, gold, zinc and many other “hard assets” have trended higher since early in the year.

Just look at this chart and you’ll see what I mean.

commodity crb index

Commodity prices move in cycles. This pattern is the result of a time lag between supply and demand. Supply needs time to react to changes in demand and vice versa.

Most recently, years of low prices caused marginal projects to be shut down. New exploration ended. And that resulted in a supply squeeze.

Commodities don’t move in lockstep. Agricultural commodities, which depend on the weather, can experience much shorter cycles. But when it comes to the hard assets like energy and metals, it takes years to get new projects online.

That’s why commodity bull markets typically last for years.

This new bull is being led by the nose - led by metals prices. Even metals that shouldn’t be doing well aren’t doing badly.

Take copper for example. It’s said to have a Ph.D. in economics because of its ability to predict the markets. (It tends to top at economic peaks and bottom at economic troughs.) Copper bottomed on January 15 and is up 12.8% since.

This is despite the fact that one bank after another has warned we’ll have a copper surplus this year.

Now let’s turn to zinc, silver and gold - three metals actually experiencing a supply squeeze. The rally is much bigger.

Since January 15, gold is up 24%... zinc is up 36%... and silver is up more than 48%.

You can ride this trend the usual ways - investing in companies that produce oil, gas, gold, silver and more. But if you want some extra oomph with lower risk, consider investing in “commodity currencies” via specific country ETFs.

I’ll explain.

You see, the currencies of certain nations are pushed around by rising or falling commodity prices. That’s because the economies that back those currencies are heavily dependent on one or more commodities.

Some examples:

  • Canada: Oil, natural gas, and precious and industrial metals
  • Russia: Oil and natural gas
  • Chile: Metals of all types
  • Peru: Metals, and particularly precious metals
  • Brazil: Oil, gas and agricultural commodities.

With commodities in a new bull market, it’s no surprise that Russia’s stock market is pushing to a new 52-week high - the first since 2011. Brazil’s stock market has pushed to its first new 52-week high since September 2014.

Let’s see how some of these countries are doing since the new bull market began.

performance of commodity-dependent countries

In this chart, I’m tracking commodities through the CRB Index, a benchmark basket of 19 important commodities. It’s weighted toward crude oil (23%). So I also charted energy stocks, as tracked by the Energy Select Sector SPDR ETF (NYSE: XLE).

You can see that the S&P 500 is up 16.2%. Not bad. Commodities are up 18%. Energy stocks are outperforming commodities, up 28.5%. You’d expect that, because companies that produce or traffic in a commodity are leveraged to that commodity.

But you want to talk about leverage?

Russia, tracked by the VanEck Vectors Russia ETF (NYSE: RSX), is up 47.3%. And Brazil, tracked by iShares MSCI Brazil (NYSE: EWZ), is up 75.8%. Peru, tracked by iShares MSCI All Peru (NYSE: EPU), is up a stunning 81.7%.

So you can see what I mean when I say “extra oomph.”

The beauty of ETF investing is that you’re not investing in a single stock. In each of the ETFs listed above, you are buying baskets of stocks based in that country. This lowers your risk.

At the same time, the upside is very good. Especially considering this bull market is just getting started.

That’s not to say there isn’t any risk - or that you shouldn’t do your research. For example, Turkey’s stock market, as tracked by iShares MSCI Turkey (NYSE: TUR), dropped more than 8% on Monday. That was due to the attempted coup in that country over the weekend.

So before you invest in a country, you’ll want to check out the recent news on sites like Bloomberg, the BBC and even CNN International. Research the latest developments to see if these issues are long-term problems or just short-term setbacks.

If it’s short term, you could be looking at a great buying opportunity.

Good investing,

Sean

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