Getting “Real” With Our Investment Strategies

As I shared on Monday, I’m devoting this week of The Bleeding Edge to an exploration of new investment strategies that will help subscribers weather these volatile markets.

The first half of this year has not gone as I expected. I did predict that many technology companies that were clearly overvalued would fall hard… And they did exactly that.

But I believed that the high-quality growth companies that were trading at reasonable valuations would weather the current market volatility…

I forecasted that the Fed’s aggressive talk would soften into the spring to a series of smaller rate hikes that wouldn’t hurt the markets…

And I felt that the Fed wouldn’t take actions that would crush the equity markets, our retirement accounts, and the housing market; especially considering the upcoming mid-term elections.

I was wrong.

I didn’t foresee the speed and viciousness of the current sell-off. And I didn’t anticipate that it would drag down virtually all growth companies to multi-year lows.

I know readers are hurting right now. When we look at our portfolios and see a sea of red, it can feel like all hope is lost.

I can’t think of a time in my entire life when I was more concerned about the world that we’re living in.

We’ve been through hell the last two years. We’re witnessing the worst monetary, fiscal, and economic environment I’ve ever seen in my lifetime, and inflation that I thought I would never see. These things all weigh heavily on me every day. I’m sure they weigh heavily on our readers.

Growth and technological advancement will return to us. And with it will come a recovery of our investment portfolios. I can’t guarantee it will happen immediately… But I know it will happen.

But until we return to healthier market conditions and get out of the briar patch, our usual strategy of investing in growth companies will not serve us well.

For now, we’ll need to make adjustments and play the cards that we’ve been dealt.

A strategy I’d like to share with subscribers is something I had incredible success with nearly 20 years ago. And I believe we can replicate this strategy for ourselves in 2022…

A Technologist Invests in Commodities

I’ve devoted my entire life to studying, working with, and investing in high technology. So, it might come as a surprise that immediately after the dot-com bust, I became an avid commodities investor.

I bought physical gold and silver with the intention of holding them for an extended period of time. I also spent hundreds of hours studying the mining and exploration industry, and I invested extensively in private placements of junior exploration companies.

And it wasn’t just precious metals. I invested in other industrial metals like palladium, platinum, and copper. I also did a lot of trading in the energy complex, like crude oil, natural gas, and even heating oil.

One of my favorite areas to invest was in agricultural commodities: Corn, cattle, soybeans, lean hogs, wheat, and even a few contracts in cocoa and orange juice.

But my past success as a commodities investor doesn’t matter today. What matters is replicating this success for subscribers in 2022.

I believe we can… but not surprisingly, things are a bit different today than they were 20 years ago, so our approach will be adjusted to meet today’s environment.

Why I Expect Gold to Underperform

Things were simpler in the world of commodities trading in 2000.

There was a clear policy in place after the dot-com bust. By late 2000, the Fed Funds rate was set at 6.5%… And the government set out on a slow and consistent policy to lower the rates to re-stimulate the economy.

Knowing all of this is what made investing in commodities so attractive at the time. With a consistent policy in place to reduce interest rates, it was easy to understand that the U.S. dollar would decline in value relative to other currencies.

And that meant that commodities, priced in U.S. dollars, would increase in price. The easiest way to understand the impact of this policy is for us to look at a chart of the U.S. dollar index (DXY):

We clearly see a consistent decline in the dollar from mid-2001 all the way through to the end of 2004. 2005 was an exception, but then the slide continued through to the global financial crisis in 2008.

That window between 2001 and 2004 was a fantastic time to be a commodities investor. And investors who understood the supply/demand dynamics for any given currency could determine which commodities to invest in at any given time.

As the dollar strengthened in 2005, that tailwind became a headwind. And I largely stepped aside from commodities investing.

The difference between the early 2000s and today is that the dollar is not weakening, it’s getting stronger.

Rising interest rates directly impact the value of the dollar as compared to other currencies. The dollar – as measured by the U.S. Dollar Index – is at a 10-year high.

All else equal, a stronger dollar means weaker gold. And if the Federal Reserve gets really aggressive and raises the Fed Funds rate to 5% or even 8%, gold will fall significantly.

For any of my readers who are gold bugs, I know what you’re thinking… It feels great to hold gold in our hands. It’s safe, enduring, and out of the hands of the government.

However, it might come as a surprise that gold has not performed as well as we might have expected. It is down 14% since March and about 3.5% year to date.

Of course, that’s significantly better than what we’ve seen in equity markets. But it’s not what we likely expected given that inflation is at 40-year highs.

With all that said, there’s nothing wrong with owning precious metals “just in case,” as long as the time horizon is long (years or more than a decade).

But it’s not the best investment strategy I’d like to share today…

Invest in Real Assets to Beat Inflation

One of the best strategies we can deploy now is to have exposure to key commodities. And we won’t need futures options or futures contracts that require daily attention.

There are plenty of publicly traded companies and funds that can provide normal investors exposure to underlying commodities.

The reality is that we’re in a very different environment than we were back in the 2000s. For starters, we have the geopolitical conflict between Russia and Ukraine.

This has largely backfired on the E.U., as energy prices have soared. Russia found new buyers for its oil and natural gas in India and China, and the ruble is stronger than ever.

All of this geopolitical conflict is obviously having a direct negative impact on commodities supply chains. Weak currencies and inflation, combined with supply chain problems, result in higher commodities prices.

While all commodities are being impacted, energy and agriculture are my top two areas to gain exposure to.

Oil, natural gas, and heating oil are all being impacted – not just by the conflict with Russia, but also bad economic policy. The U.S. went from being a net petroleum exporter in 2020 to a net petroleum importer this year. And that means higher prices.

Just this month, I recommended a best-in-class oilfield service (OFS) company to readers of The Near Future Report. (Paid-up readers can find that here.)

From my perspective, it is an inevitability that domestic supply will increase to offset the declines in production in 2021 and 2022.

And with the invasion of Ukraine, I predict, sadly, that the world is on the verge of serious food shortages. In developing countries especially, we could be looking at a literal famine in late 2022. That’s because Ukraine and Russia together supply roughly one-quarter of the world’s wheat.

All of this tells us the prices for agricultural products are about to go higher… perhaps much higher.

While these conditions persist, my team and I will continue to analyze and research companies that have exposure to these trends.

2022 has not gone as I had hoped or expected. Times like these are humbling.

But these are the cards that we have been dealt, and we’ll need to play them as best we can.

My commitment has always been to my readers, through thick and thin. And pivoting to companies – and potentially funds – that have leverage to these trends is a way to build diversity into our portfolios as we weather the volatility together.

Regards,

Jeff Brown
Editor, The Bleeding Edge

P.S. Do readers have questions about commodities in the current environment? If so, please write in to feedback@brownstoneresearch.com.