Grab This Big Yield in Commodities

02/17/2011 11:53 am EST


Curtis Hesler

Editor, Professional Timing Service

As gold takes aim at $2,000 and beyond, this PIMCO fund should keep providing nice returns, writes Curtis Hesler in Professional Timing Service. Plus, the best play on Mideast turmoil.

Could gold peak in 2011? It is not likely. I am looking for a blast through $1,420, and we need to begin talking about $2,000 gold.

Gold during the 1976-to-1980 period increased ninefold. From 1970 to 1980, it appreciated 24-fold, but that move began from an artificially depressed level. A ninefold increase in the current bull market would take gold from $250 to $2,250. That is not out of reason. Gold at $2,000 looks like a conservative estimate longer term. Bullion should easily hit $1,600 this year. My personal outlook calls for something in the neighborhood of $1,800 in 2011 barring any outright “black swan” calamities that would accelerate the market prematurely. Short term weakness is a buying opportunity.

The Dow/gold ratio, currently at almost 9, tells us that the lowest risk and greatest rewards will be found in tangible assets, and the CRB commodity index has broken over its pre 2007-08 crash highs. You don’t have to spread yourself thin and trade every commodity on the planet. If you stick to gold and energy, you can participate and even generate some income.

However, if you want a broad shot at the commodities market with a little income tossed in, take a look at the Pimco Commodity Real Return Strategy Fund (PCRAX). Morningstar indicates the yield at 8.49%, which is not bad, but I would gamble on a correction bringing the price back to $8.50. [The fund was priced at $9.12 as of Wednesday’s close-Editor.]

This year looks like it is shaping up as an exciting one for commodity prices overall. The Pimco fund--although not the only way to buy into a broad commodity run--is a well-managed fund with a decent, although fluctuating, dividend.

I talk in terms of the “A” class shares; but if you are purchasing this for the first time, you should review the various share classes and decide what might be the best fit for you. I would also reinvest the dividends.

Oil Loves Mideast Unrest
Apache (NYSE: APA) shares have come off due to the oil driller’s exposure in Egypt, and this may well lead to a good buying opportunity. Apache has unique talents in exploiting played-out oil fields, and the Egyptians will need them regardless of what occurs politically there. I still hold that Apache is the only major you should own. Raise the buy price to $110. [Shares traded a bit below $118 early Thursday after earnings fell short of Wall Street estimates.—Editor]

I have often talked about the potential for unrest in the Middle East to upset the energy markets, and perhaps this is the seed of such an event. At some point, a surprise among the oil-producing countries is inevitable. The Sunni versus Shia civil war is just beginning.

Crude oil is going to move much higher by late year regardless of the American economy. In fact, the odds are good that higher energy prices will be just another step toward a new normal of domestic economic malaise. Another reason not to trade your investment account is that surprise events can change the game quickly, and any changes in energy will be extremely bullish for crude prices. Sit tight on your energy positions.

[Hesler is not alone in his allegiance to energy stocks, though other top pros have their own favorites. Gordon Pape recently recommended the oil sand producer Suncor (NYSE, Toronto: SU). Jocelynn Drake has argued that ExxonMobil (NYSE: XOM) is not done steaming north. Mark Skousen has opted for two high-yielding plays in the gas infrastructure space—Editor.]

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