The fiscal cliff "solution" sets markets up for a commodities rally

01/02/2013 3:40 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

A weaker U.S. dollar, stronger growth in China and the rest of Asia (yes, maybe even Japan), (temporary) relief from macro worries over the U.S. fiscal cliff and the euro debt crisis…could this be time for a commodity rally?

Sure looked that way today with pretty much everything—with the exception of natural gas—moving up. The Brent crude benchmark price climbed 1.3%. Copper was up 2.2%. Gold rose 0.66%.

A weaker dollar pushes up the price of commodities traded in dollars since it takes more dollars to buy an ounce of gold or a barrel of oil. The end of worries over the fiscal cliff and the euro debt crisis, even if only temporary, would reduce demand for dollars and other safe haven currencies such as the yen (and assets priced in them such as U.S. Treasuries) because investors feel more comfortable about the risk of owning assets priced in the Brazilian real or the Canadian dollar. (Both the Brazilian and Canadian stock markets were up today, 2.9% and 0.6%, respectively.)

With the twin U.S. fiscal cliff and euro debt crisis worries out of the way, commodities get another boost as investors are now freer to focus on growth stories in economies such as China. The stories aren’t new but while investors fretted over the possibility that either of these crises might take down the global economy, relatively few investors felt able to put their money behind these stories. But now it’s far less risky to put money to work in industrial commodities such as copper, aluminum, or iron ore—and the shares of companies that produce them.

You can put commodities and commodity producers into two categories on this basis.

First, there are the commodities that will benefit from weakness in the dollar. I’d put gold in this category and suggest taking a look at lower cost gold producers that are expanding production such as Goldcorp (GG) and Yamana Gold (AUY). (Both stocks are members of my Jubak’s Picks portfolio http://jubakpicks.com/ ) Goldcorp was up 1.85% today as of 2:30 New York time and Yamana Gold was up 0.52%

Second, there are commodities such as copper and iron ore that will benefit from weakness in the dollar AND the growth story in Asia. I’d suggest taking a look at Vale (VALE) in Brazil, Thompson Creek Metals (TC) in Canada, Southern Copper (SCCO) in Peru and Mexico, and Jiangxi Copper (358.HK in Hong Kong or a very thinly traded JIXAY in New York) in China.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares Goldcorp, Jiangxi Copper, and Yamana Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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