Monday, October 31, 2016

Commodities may have bottomed out

I am spending a lot of time thinking that the current financial system, that we can all agree is not sustainable in the long run. 

The big question is how will it all unwind? Will it unwind with a breakdown of democracy, with a breakdown of law and order? We just do not know. But one of the potential significant problems that may occur is what the Fed and other central banks actually wish for and that is inflation. There is a good chance that commodity prices have bottomed out and that inflation in general will accelerate. 

In other words, people’s cost of living will start to go up more than what is desirable. And that will depress real earnings, but it will be good for assets such as commodities, especially precious metals. Obviously, very negative for bonds and probably negative for equities when yields go up. So, I want to own some commodities. If you look at sectors in the US or globally, what is inexpensive? 

Gold shares have rallied 100 percent from the lows, but they came down before by 90 percent, so they are still relatively inexpensive. You look at basic stocks that are producing copper or aluminium, these companies are not terribly expensive from a long-term cyclical point of view. So there, I see some value and that is where I would put some of my clients' money. If you come with USD 1 million, I am not going to buy and put it all in gold and gold shares, that would be irresponsible. But I would tell you, maybe you should have at least 25-30 percent of your money in an asset that cannot be printed by central banks.