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Investing in Commodities


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Gundlach, in his conference call Tuesday, identified ‘commodities’ as a top investment idea for 2018. He said that late in the economic cycle commodities tend to significantly outperform equity market averages.

 

So how does an investor get exposure to ‘commodities’? Is there an ETF or a fund that serves as a proxy? I am not looking to play oil or agriculture or metals... rather I am looking for something that captures the price change in the underlying commodity prices and aggregates everything together (i.e. I am not trying to pick the sector winners).

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I think you could achieve that via an etf or a basket of them but by and large they hold options, rather than the physical underlying, and you'd need to be comfortable with that. Google throws up a number of lists e.g. this one: http://etfdb.com/type/commodity/all/

 

Alternatively/additionally you could own equity etfs with commodity exposure. I have a small position in copx, for example, and there are lots of oil/gold/silver equity etfs.

 

You might be interested in the work these guys do and especially in the chart at the top of this piece: http://www.gorozen.com/static/assets/pdf/ql/GRAQuarterlyLetter2Q2017.pdf

 

Jeremy Grantham has strong views that EM is the only remaining cheap asset class (second half of this piece: https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=50). Since EM is correlated to commodities to some extent, an EM index might give you two ways to win. E.g. Latin America is a big commodity exporter so a) there are commodity stocks in the Latam index and b) Latam economic growth and especially its currencies tend to be correlated to commodity prices.

 

 

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It seems like the price action in a lot of commodities has already been very good and a lot of equities associated with those commodities have lagged. I find this to be the case in microcaps in particular where many names trade at less than 3x cash flow.

Any particular names?

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It seems like the price action in a lot of commodities has already been very good and a lot of equities associated with those commodities have lagged. I find this to be the case in microcaps in particular where many names trade at less than 3x cash flow.

Any particular names?

 

Based on 2018E and not all have analyst coverage but GCM.TO (gold), ASND.TO (zinc), JAG.TO (gold), and PPR.TO (oil). PPR also has a few other catalysts with respect to Quebec shale assets which currently have zero booked reserves.

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I'd mention Nzuri copper (NZC) which trades on the ASX. Gives exposure to copper (a Tesla consumes 5-7x as much copper as a conventional car) and cobalt (not enough cobalt in the world for more than 35% EV penetration), both benefiting from EV boom. Arguably the highest grades, lowest cash costs/t, lowest capital intensity/t in the world for Nzuri. Jurisdiction is Congo which is a risk but the geology and the team are just exceptional. 90%+ shareholding tightly held with a PE controlling the majority of it. A proper full stage, fair payability driven NPV is many multiples of the current EV. Project IRRs are ridiculously high. A Chinese entity just bought a minor stake here. Advanced stage of development: 12-18 months away from first production (unlike most other projects which are years away). Some exploration upside as well with drilling results due shortly (sits a few Kms from the Kamoa Kakula discovery, the copper find of the century, led by the maverick resource billionaire Robert Friedland).

 

http://nzuricopper.com.au/wp-content/uploads/2017/12/171130-Resource-Rising-Stars-December-2017-Final-1.pdf

 

My knowledge of commodities is very little - but according to Dazel, who seems to have some experience with it, the Chinese are the dumb-money and you want to run when you see them. Comment was fairly recent in the Altius thread.

 

No thought on NZC myself - just thought it would be worth mentioning as the contra-side of the argument.

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...the article considered whether investors could swap exposure to the S&P GSCI commodities futures index for similar exposure to commodity-like stocks. Noting that the S&P GSCI was composed 70 percent of energy exposure and 14 percent metals, Israelsen wondered if you could combine an energy sector fund and a precious metals sector fund and achieve the same type of returns.

 

http://www.hardassetsinvestor.com/images/stories/links/israelsen_july2007_quasi_commodities.pdf

 

Short answer: yes.

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It seems like the price action in a lot of commodities has already been very good and a lot of equities associated with those commodities have lagged. I find this to be the case in microcaps in particular where many names trade at less than 3x cash flow.

Any particular names?

 

Based on 2018E and not all have analyst coverage but GCM.TO (gold), ASND.TO (zinc), JAG.TO (gold), and PPR.TO (oil). PPR also has a few other catalysts with respect to Quebec shale assets which currently have zero booked reserves.

 

ASND.TO just put out 2018 guidance this morning. The company has a market cap of US$45m and their guidance is EBITDA of US$32-40m and FCF of US$14-20m. I’m not sure what the right multiple is but it seems too low right now or even up 50% from here.

 

https://web.tmxmoney.com/article.php?newsid=6899444052652449&qm_symbol=ASND

 

 

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  • 1 year later...
  • 11 months later...

I am considering adding to my portfolio exposure to a broad basket of commodities through an ETF (tracks the Blooomberg commodity index)

the goal is:

1) to diversify the portfolio, and I am not interested in commodity stocks as those have their own risks (debt, costs above budgets, damage to the environment, etc, etc)

2) to hold an asset class that may do well if we get inflation, currency devaluation/currency wars, etc

 

I could go for just gold, loved to actually, but I feel the price of gold is a little bit too high for me at this stage (and, luckily, I already hold gold!)

on the other hand, commodities are down and hated (returns have been negative for the last 10Y and pretty consistently so during that time - YTD -20%)

 

Anyway, anyone has an opinion as to whether commodities may good for reason 2) mentioned above? Thanks!

 

 

Bloomber commodity index target composition for 2020

https://www.bloomberg.com/company/press/bloomberg-commodity-index-2020-target-weights-announced/

 

 

 

 

 

 

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If you don't know much about commodities, just do a PASS.  You don't need diversification or hedging to do well.  Do your own research.

 

I have no position but if you study 5000 years of copper, you can short copper.

 

maybe I should have added that I am not a trader

I have a hopefully balanced portfolio, but I am sure it can be improved, and precisely as part of my research I wrote the above post in this great forum, where you can find very good answers. some times!

 

 

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Be very clear on your risk appetite, and your ability to risk mitigate, before you look at commodities.

Pick a few majors, in different industries, and use the SML to determine what you need to earn for the UNLEVERED risk that you are taking.

 

Chinese money isn't dumb money, it's multi-cycle, long-term money, aimed at assured future supply for the lowest possible cost. Their optimal solution is a large enough stake to put an industry into permanent oversupply, keeping price low, and biasing it downward. They just play a different game, and they play it extremely well.

 

SD

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Be very clear on your risk appetite, and your ability to risk mitigate, before you look at commodities.

Pick a few majors, in different industries, and use the SML to determine what you need to earn for the UNLEVERED risk that you are taking.

 

Chinese money isn't dumb money, it's multi-cycle, long-term money, aimed at assured future supply for the lowest possible cost. Their optimal solution is a large enough stake to put an industry into permanent oversupply, keeping price low, and biasing it downward. They just play a different game, and they play it extremely well.

 

SD

 

thank you for your answer

commodities would be a small part of my portfolio. will neither make it, nor break it. even considering that I rebalance the portfolio.

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I would add more capital to your highest conviction idea instead of adding commodities to your portfolio.  Your biggest winner will make the majority of your earnings in the long run.

 

LOL - "Gold is money, everything else is credit." JP Morgan 1912

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I would spend more time investigating your underlying assumptions:

 

1) to diversify the portfolio, and I am not interested in commodity stocks as those have their own risks (debt, costs above budgets, damage to the environment, etc, etc)

2) to hold an asset class that may do well if we get inflation, currency devaluation/currency wars, etc

 

Look for historical data to see which commodities respond to the risk factors you mention in the method that provides the diversification benefit you are aiming for.

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