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2015 Commodity Investing

3 Commodities to Own in 2015

Written by Geoffrey Pike
Posted January 2, 2015

We continue to live in highly uncertain economic times, and we shouldn’t expect anything different in 2015.

The Federal Reserve has, for now, stopped its quantitative easing, otherwise known as digital money printing.

Meanwhile, the other major central banks of the world are ramping up their monetary inflation, including in Europe, China, and especially Japan.

The Chinese economy is slowing, although we haven’t yet seen a burst of the stock and real estate bubbles there. And Japan and much of Western Europe are in recession or worse.

For 2014, this has meant a strengthening of the U.S. dollar. But it is important to remember that it isn’t so much that the U.S. dollar is great as that the rest of the major fiat currencies of the world have been very bad.

For 2015, I am counting on more monetary inflation by central banks around the world. Price inflation is starting to pick up in Japan, despite its bad economy.

Could we see the major countries of the world end up in some kind of an inflationary recession or depression?

Perhaps the 1970s in the U.S. will serve as a good example. This is the decade all Keynesians hope to ignore. They think there is a trade-off between inflation and recession. If the economy gets too weak, just print more money, they will say; you can always tighten when things improve.

But what happens when you have high consumer price inflation and a recessionary environment at the same time?

Just as in the 1970s in the U.S., people tend to buy hard assets, including commodities. So for 2015 and beyond, we want hard assets that will protect our wealth and even grow in real terms during a period of high price inflation.

While I like some of the agricultural commodities, there are too many variables with supply and demand. We will be better off going into things that more directly benefit when investors turn to hard assets for protection against depreciating currencies.

Here are my top three picks for 2015...

Gold

I believe gold should be part of every person’s financial portfolio at all times, regardless of the conditions. It is there for safety and as a hedge against disaster.

But now is an especially important time to add more gold to your portfolio. It is usually the first asset investors turn to when there is a fear of future inflation.

We must remember that this demand does not have to come from inside the United States. Even though the U.S. is still the wealthiest country in the world, there is a lot of money across the planet.

If the Japanese people start to get scared of holding Japanese government debt, more and more of them might realize they need to get some of their money in gold. It is the obvious first choice unless they decide to solely pile into stocks.

In terms of U.S. dollars in the past year, the price of gold has not gone down as much as the U.S. dollar has gone up. This is because there is still global demand for gold.

So we could see a scenario where the U.S. dollar and gold are going up simultaneously, indicating that the U.S. dollar is one of the least-bad fiat currencies (even if it is still bad). It indicates that some people are turning away from investing in instruments denominated in fiat currencies and protecting themselves with gold.

Of course, this is all under the assumption that the U.S. dollar stays strong. With sanctions against it, the Russian government is attempting to make more arrangements with other countries to cut out the U.S. dollar as the middleman.

In addition, what happens if there is a major slowdown in the U.S.? Or what if there is a major stock market crash? Do you really think Janet Yellen and company are going to sit there and do nothing? They will probably start up another round of so-called quantitative easing.

If that happens, this will only benefit the price of gold in terms of U.S. dollars. In a sense, the Fed has temporarily gotten away with its huge monetary inflation of the past six years due to the continued high demand to hold dollars and the lack of bank lending to multiply the money through fractional reserve lending.

It is hard to believe that there could be another round of major digital money printing without people starting to lose some faith in the dollar. This can only be good for gold.

Central banks will also likely help gold in other ways. They still hold gold for reserves, and these are likely to increase.

Up until about a decade ago, central banks were selling gold, particularly out of England and Switzerland. Now it seems most stories are about central banks wanting to accumulate more.

In addition to all of this, there are movements all over for countries to repatriate their gold held in foreign countries. If the Fed doesn’t have the gold it says it does (we don’t know because it isn’t audited), then this may trigger some kind of run on gold, similar to a bank run.

Again, this can only be good for the price of gold.

Silver

Silver is more of an industrial metal than gold, so I am a bit more cautious about it, particularly with a weak global economy. But the price has come down a lot more than gold, and it offers a much better upside.

Silver is higher risk than gold and far more volatile. This means when commodities and precious metals in particular start moving up, silver is likely to have a bigger run. You would currently make over 200% in gains if the silver price went back to its all-time high.

Silver offers most of the same benefits as gold, as stated above. One difference is that central banks don’t buy silver.

Since silver is more of an industrial metal and tends to follow gold, I recommend gold before silver. You may want to wait a little longer to invest in silver, as it could still see some downside with a weak economy.

But you also don’t want to wait too long, especially with the current low prices. Silver is something you could dollar-cost average into over the next several months, meaning you would buy small amounts every month or every other month.

When gold goes up, silver won’t be far behind. And given time, it will likely surpass gold in percentage gains.

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Crude Oil

This sounds crazy, as oil is currently in a full-fledged bear market. It has really been beaten down over the last few months, which is great for people filling up their cars at the gas station but bad for energy investors.

But I look at this as an opportunity. I don’t know if the low price is because of high supply or weakening demand, but I suspect it is a combination of the two.

It is interesting to look back at oil’s last fall in price, when it plummeted from over $140 per barrel to under $40 per barrel. This began to happen in the summer of 2008 — at the beginning of the Great Recession but before most people knew we were in a recession. The price started going back up just before the recession ended.

Unless there is some kind of a major energy breakthrough coming soon in the form of major new discoveries or mind-blowing technology, oil will continue to be in high demand. It is not going to stay down in the long run.

Much of the shale oil that is extracted costs upwards of $70 per barrel. These estimates vary widely, but it is a losing proposition now for many oil fields. If oil stays down for much longer, it will put some of these oil fields out of business.

There is a saying in economics that the best solution for high prices is high prices. It means that the incentives for less demand and more supply will eventually drive prices back down, assuming the high prices aren’t solely because of currency depreciation.

The reverse is also true, and it applies to oil right now. With prices low, it will mean higher demand and fewer people looking for new supplies. Prices will come back up, and you won’t go wrong investing in oil in 2015.

If prices don’t recover by the end of 2015, they will at some point. Add some oil or energy plays to your portfolio for the longer term, and you won’t be sorry.

For 2015, we should bet on more worldwide inflation. More people are going to wise up to the fact that they need hard assets to protect themselves.

We should start accumulating commodities in 2015, and gold, silver, and oil are great places to start.

Until next time,

Geoffrey Pike for Wealth Daily

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