Shifting Asset Classes for 2013: The Case for Precious Metals & Commodities

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In reviewing possible trades, my model analyses their potential based off of current macro-economic trends, the fundamentals of the stock, and how the company's chart looks from a technical aspect. Using the results from this analysis, I decide whether or not to move forward with the trade.

Over the weekend, I came to the conclusion that in the Fed announcement this Wednesday, the most likely scenarios are that Bernanke will either continue the current QE3 program or expand this program. Based off this assumption, I looked into buying some precious metals and other commodities as they would benefit from this extended fiat currency movement. Other macro economic indicators that I assessed are the current situation in Europe, which seems to continue to deteriorate, the Chinese recovery, the US housing recovery, and recent tensions in Egypt. I find all of these conditions to be bullish for precious metals.

After making this deduction, I moved on to fundamentals. In this area, it was clear that the miners have been extremely undervalued for quite sometime and are trading at relatively low P/E ratios. This is likely due to the uncertainty of gold prices. After reviewing different options I settled on the Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ). Silver could be another option, as it offers similar investment potential and has functional value as well. Historically speaking, silver has tracked gold quite closely, but there has been some serious divergence since gold started its run in 2003.

This ETF invests in many small developmental miners, and is probably one of the most high beta and high yield ways to play gold. They are also paying out a nice dividend at the end of this month. Included in this portfolio of companies is Sandstorm Gold (NYSEMKT: SAND). Sandstorm is a young and budding gold streamer. These streamers provide funding for other gold miners in return for a stake in their gold. This model allows them to make huge potential returns. While many analysts rate it as a speculative buy, I will go one step further and say this stock is a buy as long as gold continues its run, which is what my indicators conclude will happen.

Technicals show that many metals hit previous levels of resistance last week and bounced higher. Technicals for the miners show that prices have been oversold and that they also bounced off of trend lines last week.

In order to stay diversified within the commodity arena, I recommend exposure to oil and other metals as well.  All of these asset classes will benefit from further easing, which will result in a weaker dollar. One company that appears to be of good valut at the present time and will expose you to a multitude of different commodities is Freeport McMoran (NYSE: FCX)

Freeport McMoran is one of the major gold and copper miners in the US. With their recent acquisitions the company now has exposure to energy. While their stock dropped due to the acquisitions, they are now very attractively valued and offer a strong and diverse mix of commodities. When looking to invest in the energy field, I tend to go with the large cap international firms. One firm I recently picked out as a potential strong investment idea is Total SA (NYSE: TOT). A couple notable reasons this company is bound for strong returns are its infrastructure in Africa and growing capacity, but it also pays a strong dividend.

In conclusion, it may be a good time to ensure that your portfolio is diversified among asset classes so that you don't miss out on any big rallies!


MastodonCap has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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