Hard Assets ...

11/26/2004 12:00 am EST


John Murphy

Head Market Analyst, Stockcharts.com

"Since 2000, commodities have outperformed stocks by the widest margin since the 1970's," says John Murphy. "This suggests a generational swing from paper assets (bonds and stocks) back toward hard assets (commodities)." Here's how to invest in this shift.

"There are a lot of similarities between the current situation and the early 1970's--a falling dollar, rising commodity prices, a spike in oil, and rising interest rates. It was a good decade for hard assets such as gold and other commodities. It was a bad decade for the dollar and bonds, and a flat decade for stocks. Overall, I continue to believe that gold will be the shining star of this decade.

"If this decade favors ‘hard assets,’ how can an investor put that information to work? In my opinion, the best way to do that is with stocks related to commodity markets. An investor can buy individual gold or energy stocks, for example, or stocks tied to industrial commodities such as aluminum, copper, and steel. Many mutual fund families offer sector mutual funds that cover basic materials, precious metals, or natural resources that would accomplish the same thing. There are also energy-related exchange-traded funds (ETFs) such as the Energy Select Sector SPDR (XLE ASE) or the Oil Service Holders Trust (OIH ASE). There's also a SPDR Materials Select Sector (XLB ASE), which has been climbing with commodity prices since 2002. The XLB includes stocks tied to aluminum, copper, chemicals, gold, and steel.

"There are even mutual funds that allow you to own commodities without having to buy the commodities themselves. The Oppenheimer Real Asset Fund (QRACX) is based on the Goldman Sachs Commodity Index, which has a heavy energy weighting. That's why it looks stronger than the PIMCO Commodity Real Return Fund (PCRAX ). The PIMCO fund is based on the Dow Jones AIG Commodity Index, which is more evenly weighted and closely resembles the trend of the CRB Index. The PIMCO Commodity Fund and the CRB Index bounced off their 200-day moving averages during September, while the Oppenheimer Fund was being pulled much higher by surging oil prices.

"There doesn't seem to be too much on the horizon to stop the major bull market in gold. Gold is trading at more than $440, which is the highest level since 1988. Chartwise, the next major upside target for gold is its 1987 peak near $500. In my opinion, gold stocks have a lot further to go. During the 1990's, when gold was out of favor, gold stocks did worse than the commodity. Since the end of 2000, however, gold stocks have actually been outperforming bullion. That usually happens in a bull market. It's another good reason why I believe that gold stocks are the better way to play the gold market.

"I’d also note that a new gold exchange-traded fund has been launched. It's called streetTracks Gold Trust Shares (GLD ASE). After dipping on the first day of trading, the GLD has moved to new highs today. Each share of the GLD is worth one-tenth of the actual price of bullion. That means it follows the price of gold exactly. As I'm writing this, the GLD is trading at 44.87. That means that gold is trading at $448.70 today. Interestingly, the Gold/Silver (XAU) Index, which has been leading gold higher, dipped in price when GLD started trading. That's probably due to the fact that some investors have been switching out of the XAU into the GLD. It's also true that the XAU is near potential chart resistance at its early 2004 peak, which may be causing some profit taking. I'm generally reluctant to recommend any new vehicle until it's developed a trading history and has a suitable level of suitability. But, if you want to own some gold bullion, you can now do it by buying GLD.

"I'm not suggesting that all of an investor's money should be in commodity-related hard assets, but Wall Street is finally waking up to the idea that there's more to invest in besides bonds, stocks, and cash. I believe that having some portion of one's investments in gold or energy is less dangerous than not having some exposure to those markets. That's especially true in a decade that is likely to see a deteriorating American dollar. How you choose to participate in a hard-asset boom is up to you, but some of the ways to do so are explained above."

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