‘Why is it that the Asian central bankers continue to support the dollar, the American economy, and the huge American structural deficits?’ I recently asked Dr Marc Faber, editor of The Gloom, Boom and Doom Report. ‘Don’t they have better places to invest their money, like their own economies, for example?’
‘Of course they do,’ Dr Faber replied. ‘But most central bankers are idiots. That won’t change. But I tell you this; a grand exit from dollar-denominated assets is already underway.’
A few days later, Faber delivered a similar message to a packed, but mostly lethargic, roomful of professional money managers. For many investors, dire warnings about the imminent demise of the dollar serve merely to garnish a polite conference lunch of braised lamb and red wine. Surely, such warnings are not to be taken seriously. But for some people — let’s call them contrarians — the dollar’s decline is a tremendous opportunity.
A currency only retains its value if its issuing government is not a deadbeat borrower. The US government is not exactly a deadbeat borrower…at least not yet. (After all, Moody’s and the other two American credit-rating agencies all agree that the US is a AAA-credit).
Even so, a few investors around the globe are beginning to notice that America borrows a lot more money each year than it repays. In other words, it looks like the rest of the world is catching on that US government bonds, even at higher yields, might be a lot riskier than America’s AAA credit-rating would imply.
Profit from the falling dollar: the shift into real assets
Meanwhile, the shift out of debt-based assets into real assets is gaining momentum. Want some evidence? Try this:
– Gold and silver are at 20-year highs
– Oil is back above $70
– Ten-year US Treasury notes are over 5% and 30-year mortgage rates are over 6%.
What’s happening? Those ‘stupid investors’ and central bankers in Asia are getting smarter. They are buying fewer US government and mortgage-backed bonds, and investing more in commodities. Global capital flows are shifting away from the United States and — for the time being — shifting into commodity and resource stocks and funds…which brings me to the Deutsche Bank Commodity Index Tracking Fund.
DBC is an exchange-traded fund (ETF) that holds futures contracts on six highly liquid commodities: light sweet crude, heating oil, gold, aluminum, corn, and wheat. The amount invested in each of the six commodity classes (the weighting) is pre-determined and reset annually as follows: 35% light, sweet crude oil, 20% heating oil, 12.5% aluminum, 11.25% corn, 11.25% wheat and 10% gold.
Thus, this particular ETF provides a very focused, if somewhat quirky, play on commodities – both those have suffered large corrections recently, like crude oil, heating oil and gold, as well as the agricultural commodities, like corn and wheat, that have not yet produced big gains during this commodity bull market.
Profit from the falling dollar: the most interesting ETF
DBC, which debuted in early February, isn’t the only commodity ETF, but it may be the most interesting, given its particular commodity exposure. It holds a smaller energy weighting (55%), for example, that the Goldman Sachs Commodity Index, which commits more than 70% of its assets to energy-related futures.
Therefore, the Deutsche Bank Commodity Index has been holding up better than the Goldman Index during the recent selloff in the energy complex. This divergence would likely continue if crude oil continues to lag behind the newly resurgent agricultural sector.
Of course, DBC is not without risk. Perhaps, for example, we’re on the doorstep of a simultaneous crash in all assets (excepting cash), and commodities will begin to correlate closely with stocks, bonds, and real estate. There is also the risk that the hot and fickle money of global capital markets causes what I call a ‘flash bubble’ in stocks like DBC. The money rushes in chasing a quick return, and rushes out just as quickly, ignoring the long-term bullish commodity trends.
But I would prefer this risk to the risk of investing in homebuilding stocks or mortgage lenders or any of the other industry sectors that are just beginning to face serious difficulties.
The long-term bull market in commodities remains intact, even if it stumbles from time to time.
By Dan Denning for The Daily Reckoning. You can read more from Dan and many others at www.dailyreckoning.co.uk.
And for more on the commodities supercycle, read the report below…
Category: Economics