Tuesday, March 20, 2012

Commodities vs. Hard-Asset Exploration ETFs - TheStreet.com

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (ETF Expert) -- U.S. dollar strength has kept a number of commodities range-bound, including gold, silver, copper and agricultural grains. Yet industrial metals tied to economic expansion appear to be gaining strength on signs that China may loosen monetary and fiscal policy, while oil/gasoline continue to surge on Middle East uncertainty.

In aggregate, commodity investing has been mildly beneficial in 2012. The iPath DJ UBS Total Commodity ETN (DJP) is up 3% year-to-date, but that pales in comparison to the 10%-plus on shares of corporate stock.

One might be quick to assume that Jim Rogers has it all wrong. He has passionately argued against the U.S. dollar's viability in a world where the Federal Reserve electronically creates currency out of thin air. Yet, the U.S. dollar has been hanging tough in the face of 0% rates and quantitative easing.

Moreover, Rogers' preference for commodities over corporate shares didn't work out so well in 2011, nor has it appeared beneficial here in 2012.
Of course, sometimes it pays to look a little bit closer. For example, over the last three months (12/14-3/13), Gold (GLD) has garnered about 6.5%. The Gold Miners ETF (GDX)? Close to 0%.

You can see the weakening of the miners relative to the metal in the price ratio (GDX:GLD).

Is it merely a precious metal problem? Hardly. PowerShares DB Oil (DBO) has lifted investor spirits by 20% over a 6-month period. SPDR Oil Exploration & Production (XOP) logged about 14% in the same time frame. Once again, the price ratio (XOP:DBO) demonstrates the imperfect direction of oil explorers relative to the underlying commodity.

These examples do not conclusively support the notion that it is better to own the commodity than the corporations that mine/explore. And while Mr. Rogers has been quoted as preferring actual "stuff" over owning the shares of hard asset producers, he might be the first to say that different time frames may favor one asset type over the other.
That said, are we in a near-term period where underlying commodities may beat out resource-related exploration firms? Or is it just a matter of time before commodity price inflation sends the shares of Gold Miners (GDX) and Oil Exploration/Production (XOP) skyrocketing

Jim Rogers

Warren Buffett

Nouriel Roubini