Best Investments for Stagflation

Best Investments for Stagflation

My macroeconomic forecast for the next 3 to 5 years which I unveiled in my blog of April 12, 2010 predicts stagflation. This week's blog outlines which investments are the best for stagflation, focusing on commodities, precious metals and gold. Other suitable investments will be discussed next week.

As always, be sure you understand the tax consequences of your investments, how the investment works and what your exit strategy will be.

Best investments for stagflation: Commodities, precious metals or gold (see blogs Gold - January 2, 2010 and Natural Gas - February 8, 2010).

The following are methods for investing in commodities, precious metals or gold:

1. Commodity producing companies. Examples of commodity producing companies are coal and Natural Gas (NG) producer Consol Energy Inc. (CNX) and gold, silver and copper producer Goldcorp Inc. (GG). Consol Energy is the largest coal exporter to China for steel production. Canada Goldcorp is one of the largest gold producers in the world. I own the following commodity producing companies:

+ Lundin Mining Compnay - LUNMF.PK

+ Advantage Oil and Gas Ltd. - AAV

+ Pegrowth Engery - PGH

+ Penn West Engery - PWE

2. Future Based Commodity ETFs. Before you buy future based commodity ETFs you may want to read the following article “Commodities are a Rock in a Hard Place”:
http://www.morningstaradvisor.com/articles/article.asp?docId=17924. Before buying a future based commodity or commodity index you need to understand the contango and backwardation effects (you should also understand the tax consequences of a taxable account). Two famous future based commodity ETFs are States Oil (USO) and United States Natural Gas (UNG). These funds have been influenced by the contango effect in the future energy market. UNG lost over 50% of its stock value in the last year. A worthwhile article on the contango effect on UNG is “What’s Wrong With UNG?” http://etfdb.com/2009/whats-wrong-with-ung.

3 . Exchange Traded Funds (ETFs) or Mutual Funds (MF) index of commodity producing companies. For a very good article on ETFs of commodity producing companies indexes see http://seekingalpha.com/article/195688-the-benefits-of-equity-commodity-etfs. You can buy selector based ETFs, for example metals and mining (XME), global coal (PKOL), steel (SLX), etc.

4 . ETFs index of commodities. Before you buy a commodities index ETF in your taxable account you should read the following article about tax consequences of ETFs: http://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp.

+ Powershare DB Commodity Index Tracking Fund - DBC

+ Dow Jones AIG Commondity Index Fund - DJP

These ETFs have about 20 commodities in the index. They include, for example, oil, NG, heating oil, gold, corn, wheat, etc. These ETFs have large total assets of over 2 billion dollars and at the same time large bid / ask spreads (also very high fees for ETFs). These funds all use future contracts and made also be affected by the contango effect.

5 . ETFs or MFs index of commodity producing countries. These also have currencies implications. I own the following ETFs and MFs indices of commodity producing countries (each of these funds has about 50% commodity stocks within its index):

+ S & P BRIC 40 SPDRS - BIK

+ Claymore/BNY BRIC - EEB

+ DWS Latin America - SLA

6. Real commodity assets (owning a forest or mine). If you have a lot of money like the Yale Endowment Fund (http://www.yale.edu/investments/Yale_Endowment_09.pdf) you may want to buy real assets such as a forest, large commercial building, or oil or natural gas fields. The Yale portfolio manager, David Swensen, one of the top investors in the world for the last 25 years, has been increasing his holdings in real assets over the last 3 years. It is an investment category through which you can take advantage of pricing efficiencies. One of the best ways forthe average investor to buy real assets is by buying Real Estate Investment Trust (REIT) companies. For example, Timberland has been one of the best investments for the last 20 years. Its return during the past two decades has been 12.8%. There are a number of Timberland REIT companies that own extensive timberland acres. For example, Plum Creek (PCL) owns over 7 million acres and has a yield of 4.3%.

In next week’s blog I will put forward best investments for EU countries. Please chime in with comments about my future economic forecast and best investment opportunities for that economic environment.

© 2010 Paul Cusick

Paul