By Mitchell Clark, B.Comm.
The key in this bear market with stocks is to stick with resource stocks if you’re a speculator. I like large, blue-chip companies that pay high dividends for long-term investors. For risk-capital equity traders, the best action remains with gold stocks, and some of the best value now is in oil.
There isn’t much wind at your back in this market. Lately, the shorts have been winners. The trading action is choppy and trendless, reflecting investor sentiment that doesn’t have high expectations for the future. The current stock market malaise should be with us for a while longer, but the market is developing some decent values and the earnings outlook remains solid.
I’d be a buyer of new gold investments as the spot price corrects. There’s just too much strength in the fundamentals for gold for it to be ignored. In a world without growth, producing gold mines are some of the best businesses around. If you have a mining company with growing production and unhedged exposure to the spot price of gold, you have the makings of a very profitable enterprise…and the kicker is that business will just get better and better as the underlying spot price of the commodity rises.
We’ve been harping on gold for a number of years now and the trade has worked big-time. But, I also think it’s fair to conclude that the trade will keep on working with the growing likelihood of increased price inflation around the world. Global investors, even central banks, are looking for a store of value and there isn’t much in the way of anything that pays a decent return. Treasury yields are very low. The returns on cash are negative if you factor in the rate of inflation. The gold sector remains one of the best for speculators. The trading action in technology, biotech and most other stock market sectors just isn’t as good.
I mentioned oil because I like to consider investments when prices are down. Oil and natural gas are now trading at levels that I think are highly stimulative to the economy. Some exposure to this sector is warranted. And, as we see the commodity price cycle migrate into agricultural commodities, a couple of positions in this sector should also do well over the coming years.
As I say, I think equity speculators should have solid exposure to real resources going forward. Economic growth in most of the world’s mature economies is at a standstill. But emerging economies like China and India still have burgeoning appetites for raw materials. When mature economies start to accelerate, there is going to be a big squeeze on commodities and prices should skyrocket. Think of the state of the domestic economy now and consider the current prices for gold, copper, oil, corn, soybeans and sugar. Then consider the demand side of the commodity price equation when things get better. The supply side is quite stagnant. In my mind, the resource bet makes a lot of sense.