DBC - Legendary Investor Says Buy Commodities: Our Top Picks

2023-10-13 07:00:00 ET

Summary

• A legendary investor recently made a strong case for investing in commodities.
• We discuss the macroeconomic and geopolitical catalysts for commodities.
• We also share some of our top commodities picks of the moment.

Legendary investor Jim Rogers recently sounded the alarm bells for investors on the dollar and advocated investing in commodities. In this article, we will explore the key points raised by Jim Rogers, share our own thoughts, and also share a few of our top picks to profit from what could be a bullish environment for commodities moving forward.

Why The Dollar Is Doomed

Jim Rogers based part of his bullish outlook on commodities on the dire state of the United States' financial health, stating that the nation has become "the largest debtor nation in the history of the world." The alarming level of U.S. debt has raised questions about the nation's economic stability moving forward, and Rogers emphasized that no nation in history has amassed such debt without negative consequences.

He pointed to historical cycles, noting that no currency has maintained its dominance for more than 100 to 150 years. In this light, he predicted the eventual decline of the U.S. dollar's reign, thought he believes the dollar's dominant status will not disappear overnight. While he sees the Chinese yuan as a strong potential competitor for the dollar, its ascension to global dominance depends on China's full deregulation and universal accessibility, something that does not appear to be on the near-term horizon.

Still, with the U.S. government saddled with debt, it is inevitable that eventually the dollar will have to be devalued and ultimately face its demise as the world's reserve currency. This paints a bullish picture for real assets like commodities which tend to hold their value over long periods of time, particularly relative to fiat currencies.

Macroeconomic Catalysts For Commodities

In addition to the inevitable demise of the dollar, there are other macroeconomic reasons to be bullish on commodities. For example, Mr. Rogers pointed out that many asset classes globally appear to be overvalued. Stock markets worldwide are hovering near record highs, bond markets are only now just beginning to unwind their massive bubble that formed due to historically low interest rates, and real estate markets in numerous countries are showing signs of being in a bubble phase as well. Amidst this backdrop of inflated assets, commodities - particularly precious metals - stand out as undervalued assets right now. As a result, Rogers stated that commodities are currently the "cheapest asset class" he knows, with silver and sugar in particular remaining significantly below their historical peak prices.

Another reason to be bullish on commodities, ranging from agricultural products to silver to copper to energy is that the demands for these products is expected to soar in the coming years for a variety of reasons, yet production of these assets has been significantly underinvested in:

• While global population growth in many developing countries is exploding, the global supply of farmland is declining while the global food supply is currently being disrupted by the war in Ukraine.
• Silver is facing a massive supply deficit due to its growing use in various industrial applications even as new supply of it is dwindling.
• Copper has been termed the "metal of the future" due to its essential role in electrification of the global energy network, yet the world is currently battling a severe copper shortage.
• Energy production is also lagging demand thanks to OPEC controls, the war in Ukraine involving major oil exporter Russia, and chronically lagging investment in the sector by the West.

When combined with the rapid economic development taking place globally with the relentless advance of technology and the overall growth of the global population, the demand for commodities has never been greater even as its production appears to be lagging.

Geopolitical Catalysts For Commodities

Beyond the macroeconomic factors, there are also geopolitical catalysts for commodities. In times of economic turmoil and geopolitical unrest, precious metals like gold and silver tend to outperform traditional stocks. With the possibility rising of a significant global conflict involving the world's largest economies (the United States, China, and Japan as well as possibly other major economies like South Korea, Great Britain, France, and Germany and major commodity suppliers like Russia, Iran, Saudi Arabia, Canada, and/or Australia), the appeal of these safe-haven assets could intensify in the coming years.

Such a conflict - especially if it involved the semiconductor production capital of the world (Taiwan) - could have far-reaching economic implications, with estimates suggesting immediate damages of $2.6 trillion and potential global depression. In such a scenario, the confidence in the U.S. dollar might erode, rendering gold and silver even more attractive as safe-haven assets.

Additionally, commodity supply chains could be significantly disrupted, causing the prices of commodities like food, energy, and even copper and other industrial metals to soar.

Investor Takeaway

With so many potential tailwinds for commodities right now and their valuations in general not appearing to be in any way at bubble levels, the risk-reward profile for the sector is generally quite attractive. With that said, how should investors consider gaining exposure to the sector?

One popular approach is through exchange-traded funds, or ETFs. Some of the most popular ones include:

• Energy Select Sector SPDR® Fund ETF ( XLE ) : This fund tracks the performance of companies in the energy sector and has a very low expense ratio of 0.10%.
• iShares Gold Trust ( IAU ) : This fund invests in gold bullion and has a reasonable expense ratio of 0.2%. Two other popular precious metals ETFs are the SPDR Gold Shares ( GLD ) and the iShares Silver Trust ( SLV ). While these have a bit higher expense ratios than IAU, they also have more liquidity and give investors access to options trading with low bid/ask spreads.
• Invesco DB Commodity Index Tracking Fund ( DBC ) : This fund tracks the performance of a broad basket of commodities, though it has a bit higher expense ratio of 0.85%.
• United States Oil Fund, LP ( USO ) : This fund invests in crude oil futures contracts and has a fairly high expense ratio of 0.60%.
• iShares S&P GSCI Commodity-Indexed Trust ( GSG ) : This fund tracks the performance of a broad basket of commodities and has a high expense ratio of 0.75%.
• abrdn Physical Precious Metals Basket Shares ETF ( GLTR ) : This fund invests in a basket of precious metals such as gold, silver, platinum, and palladium, but its expense ratio of 0.60% is higher than that of many other precious metals vehicles.
• Invesco DB Agriculture Fund ( DBA ) : This fund tracks the performance of agricultural commodities such as corn, wheat, soybeans, and sugar and has an expense ratio of 0.85%. While the expense ratio is relatively high, the exposure it gives investors to these commodities is harder to replicate with other publicly traded products.
• Abrdeen Bloomberg All Commodity Longer Dated Strategy K-1 Free Fund ( BCD ) : This fund tracks the performance of a broad basket of commodities with longer-dated futures contracts and has a reasonable expense ratio of 0.30%.

While there are a plethora of other commodities ETFs, this list should give you a rough idea of what is available for investors who want to take a more passive and/or diversified approach to investing in the sector.

While ETFs can be a good approach and we ourselves invest in some ourselves, we prefer investing in individual stocks that pay out attractive dividends whenever possible. For this reason, we have significant exposure to energy through high yield, investment grade midstream infrastructure ( AMLP ) stocks like Energy Transfer ( ET ) and Enterprise Products Partners ( EPD ), among others.

We also have significant exposure to precious metals, copper, and other base metals by investing in a variety of miners ( GDX ) at various times, depending on the current state of markets. Some miners we either hold at present or have held in the past include Rio Tinto ( RIO ), Southern Copper Corp ( SCCO ), Barrick Gold ( GOLD ), and Newmont Corp ( NEM ).

Finally, a great way to gain access to agricultural commodities is through buying either farmland REITs ( FPI , LAND ) or through buying shares of major fertilizer companies such as Nutrien ( NTR ).

By investing in these companies, investors can gain attractive leverage to commodities prices, since these commodities businesses often see their profits rise and fall at multiples of the change in price of their underlying commodities. Moreover, they generate cash flow that they return to shareholders, resulting in the benefits of steady passive income along with potentially outsized long-term returns as commodity prices possibly soar higher in the years to come.

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