Two weeks ago, Barron’s ran a cover story with this emphatic headline: “Commodities: Time to Buy.”
Unfortunately, they forgot to put a question mark at the end.
Yes, oil has tumbled 30% since late June and is off nearly 60% over the past 13 months.
Gold is closing in on $1,000 an ounce, nearly half its 2011 high.[ad#Google Adsense 336×280-IA]Silver, copper, iron ore and natural gas are all in the dumper, as well.
Is it time to put on your contrarian hat and buy? Maybe.
Let’s take a closer look at what is going on in this sector-specific bear market.
The decline in natural resource prices is variously blamed on the slowdown in China, weak demand in Europe and/or oversupply in the United States thanks to the Shale Revolution.
Indeed, these are all factors.
But there’s something more fundamental going on here, too.
The bullish case for investing in commodities is often not just simple but simplistic. It generally goes something like this: Natural resources are limited. Human needs and wants are limitless. And the world population is growing by tens of millions of people a year.
Ergo, invest in raw materials.
However, innovation and technology often undermine prices for commodities. We’ve seen this in agriculture, where irrigation, mechanization, genetic modification, and new pesticides and fertilizers have all boosted productivity.
We’ve seen this in the oil and gas industries where new technologies like fracking and horizontal drilling have made previously inaccessible reserves available, boosting supply and weakening prices.
Today many utilities, factories and truck manufacturers are switching from inexpensive oil or coal to even cheaper natural gas.
You won’t find many folks getting gold teeth or silver fillings any more either. People prefer far cheaper – and whiter – alternatives.
Yes, raw materials’ prices generally surge during war or financial or political turmoil, when manufacturers worry about obtaining the supplies they need and investors seek the safety of tangible assets.
But you just can’t bank on calamity every year.
On the plus side, natural resource stocks are excellent portfolio diversifiers. Historically, commodities have rallied when stocks and bonds are falling. (Although that has decidedly not been the case lately.)
And commodity stocks are inherently volatile. That means they can put on sudden, short-term rallies that traders find highly profitable.
The rub, of course, is the timing.
Everyone who has bought commodity stocks because they were cheap over the past year has only regretted not waiting a while longer.
Since prices could conceivably go lower still, what is the best way to buy natural resource stocks today? My answer is BlackRock Resources & Commodities (NYSE: BCX), a closed-end fund.
Recall that closed-end funds are not like Fidelity or Vanguard mutual funds. Like ETFs, they trade on an exchange and can be bought and sold throughout the day, not simply redeemed at the closing price like open-end mutual funds.
Closed-end funds see their prices fluctuate well above or below their net asset values (NAV). When a fund trades above its NAV, it is said to be selling at a premium. When it trades below the NAV, it is selling at a discount.
There is no easier (or more obvious) buy or sell signal than to buy these funds when they trade at big discounts and sell them when they go to a premium.
Right now BlackRock Resources & Commodities is a bargain at its current 16% discount to NAV.
Buy a few shares and you’re picking up an interest in Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), Rio Tinto (NYSE: RIO), BP (NYSE: BP), BHP Billiton (NYSE: BHP), Syngenta (NYSE: SYT), Monsanto (NYSE: MON), CF Industries (NYSE: CF) and Archer-Daniels-Midland (NYSE: ADM) – all among the fund’s 10 largest holdings – at a 16% discount to their already depressed prices.
You don’t have to hold off – and miss a potential rally – by waiting for these stocks to sell off further. You can buy them 16% cheaper now. (And if you end up holding the fund longer than you expected, it’s reassuring to know it has a reasonable 1% annual expense ratio.)
Yes, commodity stocks – and BlackRock Resources & Commodities – could go lower before they go higher.
But when they do turn around, this fund is likely to experience a slingshot effect, as resource stocks rally and the discount evaporates… and perhaps even goes to a premium.
In my view, BlackRock Resources & Commodities is the best, cheapest and safest way to take advantage of the current bear market in commodities.
Source: Investment U