Sweep's Commodity Bust

[noppenbd]

Well, I guess we could be in for a bubble but do you guys really think we are going to see anything close like the bust in the 80's. I can't imagine seeing gold take a 50% plunge at these levels?

Look, gold is up 40% in the past year, and oil is 60% higher. We may even see higher oil prices this summer if we have any weather-based interruptions. Any time you see run ups like that I would expect a correction, regardless of what investment you are talking about. Unless you are playing with fun money, I think allocating more than 5-10% of your portfolio to commodities is a bad idea. Trust me, the minute we get some positive news on the economy you will not want to be heavy into gold (like this morning).

[noppenbd]

Go to Live Charts, Historical Data & Charts - Gold, Silver, Platinum, Palladium, Rhodium, Lease and Forward Rates and look at the historical chart from 1975-2008 for gold. Still think there is room for gold to go up?

[Broken Arrow]

Oil is... complicated. We are touching on several of its points, but most likely not all of it....

For example, oil prices seem high, but that's because our weak dollar is adjusted into that price. So, there's an inflationary factor.

Oil is high because of growing consumer demand in Asia. So, there's a global demand factor.

Oil is also high because supply is more or less dictated by our suppliers in the Middle East.... Supply control is also a factor.

Oil is also highly speculated right now. Speculation is yet another factor.

Personally, I do like oil. I really wanted to get into ExxonMobile back during the start of the second Gulf War.

However, because getting into it requires such a premium NOW, I just don't see why I should. Even with great companies and a product that sells itself, you can still lose money if you buy in at a time that may be overvalued from all the speculation frenzy.

There are reasons why oil is legitimately high, and that will likely remain so for the foreseeable future. However, there are also reasons why oil shouldn't be THIS high, and investors should be careful of a rising bubble.

As for oil being an economic indicator.... Yeah, I would agree that it's an important one. However, I don't think it's as good as the S&P for example.... Oil is only one (key) component in the supply-side process, and many other factors are involved in determining productivity. Contrast this with the S&P, which only measures the end result....

It's also worth mentioning that the United States is still far from "fuel-efficient" as an overall country. UK, for example, has been paying $5/gallon for quite some time now, and though they're not any happier about it, they're much more fuel-efficient than we are. So, there's an adaptation factor as well. Chances are good that our country, in the near term, can adapt to the oil prices by becoming more fuel-efficient as well. Some have already converted from SUVs to sedans....

I guess one final comment is I don't think oil moves quite the same way as precious metals.... However, I'm rambling from hunger now, and starting to lose my train of thought. So, instead, I'll refer you to a basic chart to help illustrate my point:

[tripods68]

I see "bubble" brewing in this sector perhaps.

[feh]

I sold my gold in February, when it was at $950. It went up to $1000 after I sold, but has come back down to the low $900s the last few weeks.

From what I've read lately, if the Fed is done (or almost done) cutting rates, the dollar is near a bottom, and the economy will start to strengthen in the second half of the year, the gold run may be over.

I'm not saying the price is gonna crash, but I wouldn't expect large returns any more.

[Scanner]

Well. . .as a person who has to mediate risk. . .I have to concede to sweeps/Broken Arrow that yes, at the first sign of an economic upturn, my silver (gold or maybe oil. . .oil behaves differently) is going to downturn.

But that's why I own positions in Blue Chips and International.

The way I see it, I don't know you cannot afford to have at least some of your portfolio in a commodity.

How much? Hard to say. . .I think more than the pundit's 5-10% just like I thought 10 years ago you should have more than 10% in International (the standing recommendation in 1997).

Little ventured. . .little gained. . .little hedged.

[Scanner]

Feh,

Again, all depends on oil. . .you could subsitute all college economics classes with the price of oil and you'd be more accurate than Keynsaian theories and so forth.

[jc3900]

I'm not saying the price is gonna crash, but I wouldn't expect large returns any more.

I think at the current prices, this pretty much hits the situation. We could have a big quick run up that would quickly become wiped out paper gains. However, those who got in early probably should expect their value to be fairly consistent in the near future.

[humandraydel]

A few words:

Look at the rise in price of oil in Euros. It's not nearly as impressive.

[jc3900]

Even more, look at the price of gas in gold. AAA to bad we arn't on the gold standard.

[Broken Arrow]

Q1 is next Monday, and people are expecting many more write-downs from the financials. Commodities will likely get a bit more boost....

I just wanted to point out that I was wrong about this prediction. Turned out Google and Citigroup ended up rallying the market today.

But I guess that also proves my point about the dangers of trying to guess the market's next move. And aside from idle conversations and stock simulations, this isn't a good way to make money.

[Broken Arrow]

Relevant article on oil's record high. I think it correctly points out the possibility, but not the certainty, of "the mother of all corrections".

Again, I'm speculating on the future, but only for conversation sake. So, please by all means don't take it seriously. I don't. But I believe that there will be a pretty significant correction. Don't know if it will be "the mother of all corrections", but nobody likes the idea of high oil prices... except OPEC and bullish speculators I suppose. That and interest rates are already very low... there isn't much more room left to go.

So, in my opinion anyway, chances are very good that these record highs are not sustainable.

[Scanner]

Broken Arrow,

I only stimulate these conversations also for conversation's sake and it would be totally wrong for me to not admit that you, Sweeps, et al. have a bonafide legitimate point.

And everytime I start to think. . .gee. . .maybe I should just take my profit now. . .there's a reason emerging for me to stay invested.

I have to go back to my original premise - what's my asset allocation.

It's not like I have 100% invested in oil, gold, silver or grain. It's only 33% of my portfolio and 25 years away from retirement.

Sure. . .there could be a short term crash of oil. Just last year the IEA said for the next 20 years, about $55-65/barrel is right for oil, except in certain global crises (Hurricanes, wars, etc.) Look at where it's at now. So either:

a. The IEA was talking out it's rumpus

or

b. Something is askew

That being said, I don't take a profit because frankly, if I sell off 33% of my silver. . .where do I stuff it? REIT's or financials as far as I can tell. . .not sure if I should do that. Bonds? Ha, ha, ha, ha, ha, ha, haaaaa. With the Fed lowering the interest rate to -5%? Bonds are too risky now.

Now. . .what could sustain oil at $100+/barrel? Well, we are back to the problem that America has been printing "funny money" since Nixon.

It now costs $.015 to make $.01 because of steel costs. You/we all may just kind of joke about this but this is a real problem, not being on any standard/having fiat currency.

The IEA may have not taken this into account when it issued it's prediction.

Years ago, they talked about "oil dollars", that $1.00 would stand for cashing in an oz. of oil let's say. It wasn't a bad idea as far as I can see because oil is a universal currency that carries intrinisic value. Just saying, "A dollar has the full backing of the US Gov't". . .well, that and 3 oz. of oil can buy you a cup of coffee.

Listen. . .to let you all know. . .and I am serious about this. . .I have been happy with my portfolio. My portfolio really seems to zig when the other zags. But as DisneySteve has pointed out. . .Vanguard's Total Bond Index returned 7.7% last year. . .while stocks fell. . .maybe for the risk incurred, that's better zag than my commodity zag.

I don't know.

[Broken Arrow]

Scanner, I promise I'm not trying to talk you or anyone out of their portfolio here. Honest. I thought it was just relevant to the conversation, and it specifically relates to oil.

The article touches on something that I believe as well, which is that oil right now is way over-valued. And the seeming lack of places to invest elsewhere is exactly why the speculation may be so high.... Kind of a lake-drying effect where all the fish is concentrated in one little spot.

Thing is, we're not fish, and I believe short-term speculators may be missing out on opportunities elsewhere, all the while losing their winnings by hanging on to oil for too long.

But again, that's just me.

Now, fiat currency... that's a different topic altogether.

[sweeps]

Once I say I've had it with missing out on this commodity bull run and I've put my money in oil and gold and silver, that's when you'll want to abandon ship.