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The Case for Commodities: D Rosenberg


Viking
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DR put our a 22 page report today that I really enjoyed reading... well thought out. To get the full report you need to sign up (no cost): [ftp=ftp://www.gluskinsheff.com/]www.gluskinsheff.com/[/ftp]

His conclusion:

"HOW TO PROTECT THE PORTFOLIO IN A FALLING USD ENVIRONMENT"

 

Remember, this is a premise. We are just conjecturizing. But it is interesting that the dollar is the only financial metric that is at the same level today as it was two years ago, and we are of the view that the risks are high that the greenback will be on a significant downward path in the coming year. In addition, it does look as though Asia’s secular growth dynamics are intact, and that is also critical to the constructive view on commodities and the Canadian dollar. With that in mind, investors should be thinking of how to hedge or protect the portfolio against this not-so-remote possibility, namely:

1. Commodities

2. Gold

3. Canadian dollar

4. Resource sectors of the stock market

5. U.S. sectors that have high foreign exposure (materials, tech, staples, health care)

6. Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

7. Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed-income returns)

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Guest Broxburnboy

Funny how he says "decoupling worked, up until Lehman".

I don't know how you can say that there is any decoupling in the global economy when China's exports are tied to US consumption.

 

What is happening today IS the process of decoupling.. the trade balance is beginning to reverse, China needs (and is) to start spending and the US needs to start saving and reverse the flow of jobs and capital to China (and others). The US dollar HAS to weaken in such a dynamic and indeed  wages (and hence consumer spending, and general standard of living) NEEDS to go down in the States (these trends have been in effect for a number of years, masked somewhat by the inflation of the USD).

Sovereign entities have been competing in the devaluation of their currencies in a vain attempt to avoid the inevitable appreciation against the buck. As nations such as Japan and eventually China, let free markets decide the exchange rate, the USD will continue to depreciate.

In such an environment currencies are not a reliable US dollar hedge, because they are subject to intervention by the central bank. In the long run equities (as always, in great companies) in foreign jurisdictions are probably superior. Commodities prices should keep trend with inflation, but this sector is subject to protectionist tarrifs and policies that favour domestic producers at the expense of domestic prices. Investments in Canadian lumber or Canadian beef have felt the sting of US protectionism... there are other commodities whose prices are so affected.

Commodities like Potash (fertilizer) has been a popular investment, but is subject to the rapid expansion of production in response to recent high prices. The price run up may be over.

Precious metals (particularly gold) remain the most reliable store of value.

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