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The fiscal cliff “solution” sets markets up for a commodities rally

posted on January 2, 2013 at 3:40 pm
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copper wire

A weaker U.S. dollar, stronger growth in China and the rest of Asia (yes, maybe even Japan), (temporary) relief from macro worries over the U.S. fiscal cliff and the euro debt crisis…could this be time for a commodity rally?

Sure looked that way today with pretty much everything—with the exception of natural gas—moving up. The Brent crude benchmark price climbed 1.3%. Copper was up 2.2%. Gold rose 0.66%.

A weaker dollar pushes up the price of commodities traded in dollars since it takes more dollars to buy an ounce of gold or a barrel of oil. The end of worries over the fiscal cliff and the euro debt crisis, even if only temporary, would reduce demand for dollars and other safe haven currencies such as the yen (and assets priced in them such as U.S. Treasuries) because investors feel more comfortable about the risk of owning assets priced in the Brazilian real or the Canadian dollar. (Both the Brazilian and Canadian stock markets were up today, 2.9% and 0.6%, respectively.)

With the twin U.S. fiscal cliff and euro debt crisis worries out of the way, commodities get another boost as investors are now freer to focus on growth stories in economies such as China. The stories aren’t new but while investors fretted over the possibility that either of these crises might take down the global economy, relatively few investors felt able to put their money behind these stories. But now it’s far less risky to put money to work in industrial commodities such as copper, aluminum, or iron ore—and the shares of companies that produce them.

You can put commodities and commodity producers into two categories on this basis.

First, there are the commodities that will benefit from weakness in the dollar. I’d put gold in this category and suggest taking a look at lower cost gold producers that are expanding production such as Goldcorp (GG) and Yamana Gold (AUY). (Both stocks are members of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) Goldcorp was up 1.85% today as of 2:30 New York time and Yamana Gold was up 0.52%

Second, there are commodities such as copper and iron ore that will benefit from weakness in the dollar AND the growth story in Asia. I’d suggest taking a look at Vale (VALE) in Brazil, Thompson Creek Metals (TC) in Canada, Southern Copper (SCCO) in Peru and Mexico, and Jiangxi Copper (358.HK in Hong Kong or a very thinly traded JIXAY in New York) in China.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares Goldcorp, Jiangxi Copper, and Yamana Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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  • bsorge on 2 January 2013

    How about the DBA commodity ETF? Easier then just trying to pick a sector or specific commodity winner.

  • Jim Jubak on 2 January 2013

    DBA (Powershares DB Agriculuture ETF) will give you solid exposure to agricultural commodities such as sugar and soybeans. I don’t think those are the commodities moving up most strongly at this stage of a China-growth rally. (Right now that’s more industrial materials.) Although if the China story runs for a while agricultural commodities should join the move.

  • jaxle on 3 January 2013

    Can you please update your thoughts on holding ABT and what would you do with ABBV?

  • Jim Jubak on 3 January 2013

    Working on that post right now (7 p.m. January 3). Will have it up tonight.

  • eremmell on 3 January 2013

    Last time I checked, VALE had a HUGE delinquent tax bill to pay to the government of Brazil. So, I would stay away from that company. Also, VALE made a very bad mistake to invest in all those VLOCs that China doesn’t let dock at their ports, they are so big (and they increased the already terrible oversupply problem in the dry bulk sector, that may be the main reason they aren’t allowed to dock). Generally, I think it is safe to assume that South American socialist governments will mess with/steal/tax a significant part of the company’s profits, which obviously isn’t good for investors. I recommend avoiding PBR for the same reason.

  • goatstock on 4 January 2013

    Hi Jim, Can you tell us anymore about Thompson Creek Metals? Thanks

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