Over the last couple of weeks, we’ve looked at why the greenback’s future looks bleak. The flip-side is that as it falls, it has a positive effect on the price of dollar-denominated commodities like wheat and gold.
Getting in on the right commodities investments now gives you the chance to make some easy money…
Let’s just use the simple example of a barrel of oil...
Here’s how it works...
Imagine a petrol exporter with two barrels of oil to sell. Let’s just say that it’s the Saudis. And let us say that there are two potential buyers for the oil – the Americans and the Europeans. The key thing to keep in mind is that oil is bought and sold in US dollars.
Let’s assume that on the 1 January 2009, the US dollar and the euro were of equal value. So one dollar would buy one euro and vice versa. And let us say that on that date a barrel of oil sells for $100 on the international market. Oil is traded in US dollars. So if the European wants to buy a barrel of oil, he exchanges his 100 euro for 100 dollars and gives it to the Saudis.
Now imagine that a year later the value of the US dollar has fallen sharply. So the exchange rate is now two dollars to the euro. In that situation, the price of a barrel of oil would rise sharply to compensate for the loss in value of the dollar.
To see why that is, remember that there is an international market for oil. Demand for it comes from all over the world. And because there is a genuine need and demand for it, it has an intrinsic value.
So now on 1 January 2010, the European buyer is still willing to pay 100 euros for a barrel of oil. Because he still has the same need for oil that he did a year earlier. But remember that 100 euros is now worth 200 dollars, because the dollar has lost value. So the European buyer is now quite happy to pay up to $200 per barrel. Because in terms of his own currency, it doesn’t cost him anything more than it did a year ago.
For the American buyer, this is a real price increase. But he will have to match the European’s price if he wants the Saudis to sell him oil as well. So the international market price of a barrel of oil rises to, say, $200.
That’s good news for commodities prices
Of course, the situation is always slightly more complex in the real world. You aren’t dealing with just two currencies. Changes in the value of the dollar are measured against a whole range of currencies. So you don’t get a one-to-one match between changes in the value of the dollar and the prices of dollar-denominated commodities.
There are also other factors that affect the international price of commodities such as supply and demand, transport and storage costs. But changes in the value of the dollar are a major factor in the price of many commodities. That includes most metals, fossil fuels and agricultural commodities traded on international markets. These should all benefit from the long decline of the dollar.
That doesn’t mean that you should rush out and buy every commodity though. As I said, there are other factors that affect their price as well. Understanding the supply and demand situation for each of them is critical when investing in these markets.
Here are my two top commodity picks
My two favourite commodity plays on the falling dollar right now are crude oil and gold. Gold is the classic hedge against the falling value of the dollar. And as fears about the dollar’s future grow, rich investors have been snapping it up. In fact, they’ve bought so much of it, the Financial Times reports that there was a shortage of physical gold last November.
This is just for starters though. Once again, the rich are ahead of the game. But when the general investing public catch on to the outlook for the dollar, that trickle is going to turn into a flood. Buy in and hold on.
And then there’s oil. I believe its price will rise sharply in the second half of this year. Because apart from the falling dollar, the OPEC oil cartel continues to reduce supply. The latest figures show that OPEC reduced oil production by almost a million barrels in February and there are still more reductions to come. This will continue to add upward pressure to the oil price. I think that every investor should have bit of oil in their portfolio right now.
Happy Easter,
Manraaj Singhs
For The Right Side
Editor’s recommendation: Manraaj Singh is Chief Investment Strategist at Profit Hunter. As he explains, when the dollar falls, oil goes up. Click here to receive his latest smart way to play the “oil rebound”.
MARKET NOTES
Brace yourself as the earnings season kicks off
BY SHIVVY ARORA
Tis’ the season for earnings, and it’s far from jolly. Market indices have dropped this week on investor pessimism ahead of first-quarter results. But earnings weakness is not fully priced in yet, so they’re likely to fall further.
Up until Tuesday, the markets had been on their most fiery four-week rally in more than 7 decades. But the ‘rally’ is likely to lose steam and things are going to get ugly. Let’s look at the past eight years as a guide…
Take a look at the chart below. It shows in percentage terms how an investment in the S&P 500 at the start of earnings season has performed compared to months with no earnings announcements.
The green line shows that the ‘off-season’ – months with no quarterly earnings announcements – has been a better time to buy. Returns during the earnings season (blue line), typically lasting six weeks, have lost investors close to 30%.
Investing during the earnings season doesn’t bode well...
As you can see from the chart, buying the S&P 500 on the first day of the earnings season and selling on the last day would have lost investors 27%. Meanwhile, doing the opposite would have made a positive return of 7%.
And this time around could be just as bad. The consensus from analysts is for earnings to fall by as much as 37% on the previous year. They also see all ten groups in the S&P 500 taking a big hit in profits for the first time in a decade.
Until companies make positive, forward-looking claims for upcoming quarters, things won’t improve. And this is a farfetched expectation. Unstable market conditions, continued write-downs from bad investments and severe falls in demand mean earnings will remain dismal.
So, curb your enthusiasm for now... or at least, wait until the “off-season”.
The Daily Reckoning – Waiting out the correction
BY BILL BONNER
Buenos Aires, Argentina
Thursday, 9 April 2009
The Dow rose 47 points yesterday. Not much. But the rally is still on. More or less. But don’t trust it... keep moving up those stops.
Not much movement in oil, $50, the dollar, at $1.32 per euro, or gold, now at $885.
We just came from Los Angeles. In LA, we saw how the worst financial crisis since the ‘30s was affecting Americans.
Not much so far, or so it appeared. The restaurants were full. In the streets, people ambled around, apparently buying things. The freeways were clogged with expensive autos.
What has changed?
Nothing we could see.
But California recently joined the 10% Club – states with greater than 10% unemployment. Maybe they are mostly outside LA’s old neighborhoods.
And, the rate is probably much higher than 1 in 10.
This from MSN Money:
“The official US jobless rate, now 8.5%, excludes millions of people -- among them those who have given up on finding work and those forced into working fewer hours than they'd like.
“An 8.5% unemployment rate is unmistakably bad. It's the highest rate since 1983 -- a year that saw double-digit unemployment, nearly 30 commercial bank failures and more than 15% of Americans living below the poverty line.
“But the real national unemployment rate is far worse than the U.S. Department of Labor's March figure, announced today, shows. That's because the official rate doesn't include the 3.7 million-plus people who are reluctantly working only part time because of the poor labor market. And it doesn't include the workers who have given up scouring want ads for seemingly nonexistent jobs.
“When those folks are added to the numbers, the unemployment rate rises15.6%. In March 2008, that number was 9.3%. The Bureau of Labour Statistics began tracking this alternative measure in 1995.
“The situation out there is very grim,” says Heather Boushey, a senior economist at the Center for American Progress, a left-leaning think tank. "We have seen the mounting of job losses faster than any point since World War II. I have never seen anything escalate this bad."
“Even the Department of Labour's expanded unemployment measure doesn't fully capture how difficult the job market is for American workers. It doesn't include self-employed workers whose incomes have shriveled. It doesn't look at former full-time staff employees who have accepted short-term contracts, without benefits, and at a fraction of their former salaries. And it doesn't count the many would-be workers who are going back to school, taking on more debt, in hopes that an advanced degree will improve their chances of landing a job.
“Here's another way to look at the unemployment figures: More than 5 million people have lost their jobs since the start of the recession in December 2007. And more than 13 million people are unemployed. That's the highest number the U.S. has seen since it began tracking unemployment after World War II. For every job out there, more than four people are competing for it, says Boushey.”
People who have no jobs, or fear losing their jobs, are poor consumers. They hesitate. They procrastinate. They make do.
That’s why retail shop vacancies are at a 10-year high. If people aren’t buying, you don’t need space to store merchandise that you won’t sell them.
And you don’t need shop clerks either. Which causes unemployment to increase further. And it causes prices to fall…
Read on...
To read the Daily Reckoning in full, click here.
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