01/18/11 Laguna Beach, California – “The dollar, yen and euro are all headed to zero…eventually,” Chris Mayer predicts in his essay “Better than Zero.” “But there is a journey of some length between here and there. In the between, you’ll be glad you own real assets like oil, natural gas and gold.”
But in the between, you’ll also be sorry you own real assets like oil, natural gas and gold. That’s simply the nature of financial markets. Even in bull markets, misery pays a visit periodically.
The recent history of natural gas prices makes the point. If you invested in natural gas at the beginning of 1999, you’re sitting on a plump 150% gain – or more than five times what the S&P 500 Index gained over the same time frame.
But if you happened to establish your long-term, inflation-hedging position in natural gas in late 2005, just after Hurricane Katrina caused nat gas prices to spike above $15/mcf, you’re nursing a painful 69% loss…five years later!
More recently, misery paid a visit to the oil market. After topping out at $145/barrel on Bastille Day 2008, the oil price plummeted more than $100 to $34/barrel. And the oil price still remains nearly 40% below its all-time high. But this monstrous collapse occurred in the context of an equally monstrous bull market. If instead of investing in oil in the summer of 2008 you had invested in oil in the summer of 1998, you would have watched your investment increase 8-fold!
So what’s the point?
Simply that large, long-term trends sometimes succumb to large, short-term corrections. As the gold price soared, for example, from $253 an ounce in 1999 to $1,367 today, it suffered a number of large, short-term corrections. Twelve times during this long bull market, the gold price retreated 10% or more. Twice, the gold price tumbled more than 20%.
In a bull market, such setbacks are buying opportunities. In bear markets, every price is a selling opportunity.
So what should we make of the current volatility in the commodity markets. Grain prices are soaring, as is the oil price. But at the same time, the gold price is languishing and the silver price is tanking.
Is the commodity bull market ending because gold and silver are going nowhere, or is the commodity bull market simply fanning out and/or taking a breather?
Let the reader decide. But before deciding, let the reader consider that each piece of paper currency that falls off a printing press costs the issuing government about one cent each to produce. By contrast, bushels of wheat and ounces of platinum demand much larger investments…and also require the cooperation of weather or geology.
If all goes well, massive investment combined with favorable conditions yields a bit of grain or a speck of precious metal. If not, not. That’s why precious metals are precious…and why generations of mankind have begged the Lord above to “give us our daily bread.”
In short, hard assets are precious because they are either rare or essential…or both. And hard assets become all the more essential to the extent that central bankers debase the currencies they purport to protect.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
I like this article. However, it costs the government more than one cent to print each piece of paper. I recently read that it costs the government 17 cents for each new $100 bill. As you know the first printing produced so many bad bills that the government can’t use any. So the ultimate cost, with mistakes priced in, could be more than double the 17 cents per bill. Hundreds of millions of dollars flushed down the toilet and nobody seems to care.
One thing I fail to understand is that why most analysts are recommending the purchase of Gold or Oil as a safe investment? The problem today is that the price of commodities is not derived by it’s physical demand or supply but more by the speculative positions standing long or short on the commodity exchange like any other traded commodity, stock or currency.
The basic mechanism of price discovery (based on demand and supply for actual use) of anything traded on an exchange has been terminally infected by speculators having access to unlimited funds and super fast computers for trading leading to volatile price swings. This has been made worse by the launch of ETFs for anything and everything under the sun by the financial community.
The price of everything including Gold and Oil is likely to suffer when the speculators unwind their positions due to some event that they have not anticipated or foreseen.
http://www.marketoracle.co.uk/Article24581.html
@Akhil
unforseen like with your 2010 forecasts of a stock crash??
An oracle that sees nothing is hardly an oracle….