Goldman's report on commodities

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An interesting PDF written by Goldman Sach's Investment Strategy Group (Jan 2010).

I admit I haven't read everything yet (I'm at work), but so far, it's been quite insightful.

I also want to state that, as of right now, I still have a very large position with Conoco Philips, so it's not like I have some kind of agenda to try to make commodities look bad.

But this report illustrates in pain-staking detail what I have tried to describe in my own inadequate words about the risks involved in commodities.

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Well, hey!!!! You can't challenge my sacred cow!!!

No, honestly when you look at downside risk of precious metals. . .there does seem to be some moderate for gold, less so for silver but still there honestly.

I can't see too much downside risk in oil at $50-60/barrel though, if you can hold for awhile.

I like the article actually but I think he perhaps upplays history too much and downplays the future. Our global population is exploding and that continues to place demands on oil, grain, copper, any commodity really, esp. with China and India going "developing."

I mean just look at Haiti - what do they need now? Food, water, oil. . .their forrests are entirely depleted, down from 60% to 2%. They are commodity poor.

I would have liked to have seen more focus on fundamentals rather than technicals, charts, and esoterics like Contango but overall, I do think the article was very good.

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Like I said before, I've got a large stake betting long on energy as well, so reports like this doesn't exactly help me either.

By the way, the price of crude oil right now is $78 per barrel, not $50 to $60. I would say it's starting to get on the expensive side. I'd definitely be buying more if it was $50. On price alone, now is actually a good time to jump to something else if you're not interested in an oil play (which even though I am in, it's certainly not the only play that's out there).

Looking at the history is inevitable if the thesis is that precious metals are a good store of value. You just can't have a conclusion like that without some back-testing, you know? It's like cars. How do we know, say, a Honda Civic is a reliable car without looking at its past track record?

As for forward fundamentals, I agree. Only thing is, it's expensive right now. Not only that but spot gold lately is actually at an all-time high (specifically 1200 resistance, 1100 support). We've gone through this before, but even if something seems like a good idea conceptually, if it's too expensive, sometimes it's enough to make it NOT a good idea.

There are several factors for the price of gold being where it is right now, but if you think about it, there are plenty of other ways to play it besides gold. TIPS if you're worried about inflation. Potable water if you think Haiti is a good example of crisis commodity speculations (because that's what they're trading on the streets right now, not precious metals).

I'm not trying to take cheap shots against anybody by constantly bringing this up either. The truth is, there is still a huge precious metal run right now, and I do think reports like these are a good, sensible counterbalance to the frenzy. And as another reminder, this report is published just this month, for Jan 2010.

But for what it's worth, I hope oil keeps going up!

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Others have said that if we revert to the pre-1971 gold standard without a dollar
devaluation, gold would have to be priced at over $6,400, given the size of the US Treasury’s gold reserves and the stock of US dollars as
measured by M1. These price projections remind us of oil targets of $200 to $400 two years ago.

Wasn't Goldman the ones that were calling for $200 oil two years ago?

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I'm not trying to take cheap shots against anybody by constantly bringing this up either.

No need to be overpolite. . .I think investing is always an evolution of discussion and it does make me think to put a "bottom" under my silver. . .I try to make investment decisions not so much on upside potential but rather downside risk.

I try to theorize/speculate. . ."Well, how low could this go?" "In the short term?" "In the long term?"

I know at the beginning of the article he kind of "poo-poos" the theory that if Scenario A happens, then you win and if Scenario B happens, then you win, dismissing it as a ridiculous assumption.

Wellllll. . .yeah, it is a ridiculous theory. . .unless some forces perhaps conspired against precious metals to basically have it artifically low where it is. The silver bugs maintain that the market was manipulated esp. during the subprime debacle. Frankly, I am not sure what to beleive when I hear of it. . .the "shorting" of silver and it not really being there in inventory.

And then there's beyond the "inventory". . .yeah, there are oil reserve fields - how fast can you get it out when there's demand?

One thing I tend to conclude - commodities are best to trade and not buy and hold.

Trade is such an evil word in investing and maybe with stocks, buy and hold is better. . .I am starting to conclude with commodities because of the sometimes cyclical nature of the commodity, when you have a profit. . .better to take it.

Just some random musings on our ongoing discussion.

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Wasn't Goldman the ones that were calling for $200 oil two years ago?

Hehe, well, they might have. I don't recall seeing them saying $200 a barrel, but they were very bullish during the bubble. Truth be told, even the typically stodgy Warren Buffet was extremely bullish, and later lamented that it was one of the biggest miscalculations he's ever made in his career.

And that partly explains why I still have a big stake in oil. The truth is, the fundamental story that could make oil go back up to $100+ a barrel is still there. What's more, it's shifted now, away from lithium ion, which I didn't think made any sense, to nat gas, which does make sense to me. That makes oil plays (with moves into nat gas) a much more compelling trade, which is where I am right now.

Unlike the earlier bullish calls that they might have made, I do think the this report is a lot more sensible.

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One thing I tend to conclude - commodities are best to trade and not buy and hold.

I agree with that, although when we speak about these things, I am typically talking from the perspective of trading... because if it's just buying and holding, I've stated many times in the past that you can hold 10%, maybe even as much as 25% of precious metal in your passive portfolio as a diversifier. I've never had a problem with that.

The thing is though, some gold bugs don't use it as a diversifier, but rather as a value store or leverage. Their opinion is that stock markets are doomed, and gold and silver is the only way to go. Kiyosaki, for example, only has 10% in the stock market (as his idea of a diversifier) whereas the bulk of it is in precious metal, although he's also building up oil now.

To me, anything above even 25% is not diversification. And please remember, stocks come in all shapes and sizes, where as commodity ETFs are just, well, it's just that one commodity. Maybe you can mix it up with certain commodity service companies or commodity exchange notes in that ETF, but by and large, more gold is just more gold. That's not diversification.

So, yeah, all I talk about here then is trading. And as trade, precious metals are on a big run. Great time to sell, not a good time to buy. That's why I keep advising people to sell now.

Seriously, if anyone has ANY shred of belief that this economy is going to recover, then they need to sell, and soon. Because what happens when an economy rebounds? Stocks go up, Commodities go down. Stocks may only maintain current levels sure, but I'll bet that commodities will fall down hard.

Except maybe oil.

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Except maybe silver

IF the economy rebounds, companies are going to need the metal for semi-conduction and it's bacteriocidal properties.

That's why I am a "mini-" silver bug. . .I do find the metal a fascinating investment.

[kv968]

Thanks BA for what looks to be a very interesting article. That is when I get the time to read it

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Unlike the earlier bullish calls that they might have made, I do think the this report is a lot more sensible.

I agree it was very sensible. A lot more sensible than all the people who are calling for hyperinflation.

I think any kind of serious inflation is nearly impossible with 10% unemployment.

[KTP]

I agree it was very sensible. A lot more sensible than all the people who are calling for hyperinflation.

I think any kind of serious inflation is nearly impossible with 10% unemployment.

I kind of agree with this which is why I am not too scared about buying intermediate term municipal bonds. Sure, I could lose 10% of my investment if inflation jumps to 7% or 8% really fast but with a 10% unemployment it would be a total disaster for the country (many more defaults and bankruptcies would thrust us back into a depression). I think it more likely that we get a slow creep up to 5% inflation over the next 5 to 10 years.

[jefffou]

I kind of agree with this which is why I am not too scared about buying intermediate term municipal bonds. Sure, I could lose 10% of my investment if inflation jumps to 7% or 8% really fast but with a 10% unemployment it would be a total disaster for the country (many more defaults and bankruptcies would thrust us back into a depression). I think it more likely that we get a slow creep up to 5% inflation over the next 5 to 10 years.

I tend to agree with your last statement......

If inflation is by definition an increase in money and credit, then I think it's gonna be a while before we see any huge jump in inflation...

The Fed can print all they want.

The banks can offer loans all they want (however, currently, they're not)

The problem with beating the inflation drum right now is the fact that nobody WANTS to borrow.

I don't know what it's like where everybody else lives, but consumers and small businesses are not in the mood for borrowing and the risk associated with it right now.

Money can be printed, credit can be offered, but until there is an increase in appetite for risk, I believe inflation will wait.

Jeff

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Right on the money, Jeff *rimshot*

And what happens when the economy goes into a deflationary state? It typically makes commodities that much less compelling.

And yet, commodities have been going up, to a record high in some cases.

The combination makes commodities in general a rather dangerous play.

On the other hand, perhaps the credit freeze is finally thawing? Take a look at the latest update on the rate of inflation. Looks we bottomed in July 2009 and as of November, we've swung back into inflation territory.