Market Overview
Commodious opportunities
We’re not ignoring higher prices and pretending they’ll just go away. Inflation is here and, even if doesn’t get any worse than we’re seeing right now, it’s high enough to trigger an update to your retirement strategy. That means you might want to look for a strategy to mitigate its effect on your portfolio.
While money market accounts and inflation-indexed bonds have their place, they shouldn’t be your only hedges against a devaluing dollar. Even if you’re dialing down your equities investments, there are still sectors – including banking, tech and pharma, according to CNBC’s Jim Cramer – that offer opportunities amid rising prices and interest rates.
You might also consider commodities – both those you might have bought last time you faced inflation, and some new ones that have come along since.
In with the old
We’ve already spoken our peace about gold as an inflation hedge. We don’t know if it’s going to go on another run like it did from 2007 to 2011 and, if it does, we don’t know what support level it will fall to. Still, if a weakening dollar is your greatest concern, you should at least be thinking about investing in this benchmark precious metal.
And let’s not forget the main driver for the current round of inflation: energy. Two of the three most widely traded futures, as we reported here in 2019, are Brent crude oil and West Texas intermediate crude oil. Gold is No. 7 on the list, a list which also includes industrial metals such as steel and agricultural products such as soybeans.
Livestock futures – pork bellies, live cattle and so on – are more thinly traded, and probably require more expertise than most investors or even their financial advisors have. For that matter, commodity futures trading is quite a different animal from the more familiar stock trading; commodity brokers require different licensure than stockbrokers and must comply with rules set by an entirely different federal regulator.
It might be advisable instead to stick to commodity funds that trade on stock exchanges. One iShares ETF, for example, exposes its participants to 20 different commodities in the energy, metals and agricultural segments.
In with the new
If we were to pick one segment in which the most has changed since the early 1980s, it would be an easy choice: industrial metals. We’re not just talking about steel, copper and aluminum anymore.
For a long time, palladium was literally as well as figuratively the shiny new object in this space. First traded on futures exchanges in 2005, it has risen from $300 per ounce to around $1,900. We’re not sure of its long-term prospects, though. Palladium is a key ingredient in catalytic converters, which control emissions of fossil fuel-burning vehicles. If you believe electric cars are the future, then maybe palladium is already past its peak. Meantime, if you have a gas or diesel vehicle, you might want to put a clamp over your catalytic converter. One of the key sources of palladium supply today is thieves who roll under parked cars in the middle of the night.
But there are 17 so-called rare-earth metals – with names like yttrium, praseodymium and dysprosium – that are worth investors’ attention. Some of these go into EVs, others into phones, computers, LED lights, flat-screen TVs, wind turbines, robotics, Air Force fighter jets and other things not commonly found in the 1970s and 1980s, when we last saw inflation at this level.
Much of the rare-earth mining is based in China, which is problematic for any number of reasons. Just because China has an abundance of these ores, though, doesn’t mean nowhere else does. That’s why the Defense Department is funding domestic production.
While Brazil, Russia and Vietnam all have thriving rare-earth industries, nowhere is this business growing faster than here, according to U.S. Geological Survey data. Such companies as MP Materials – which came out of nowhere in 2020 to emerge as the world’s largest publicly traded rare earth producer by market cap – are tapping veins throughout the western U.S. The Defense Department awarded MP $9.6 million to improve processing and separation capabilities at its Mountain Pass, Calif., facility.
Names like MP or lower-scale miner Energy Fuels might be the best way to gain exposure to these elements.
“At the moment, you can't buy futures for rare-earth elements like you can with other commodities such as gold, copper, wheat or corn,” Matt Whittaker writes in US News & World Report. “So, investors should seek exposure to the rare-earth industry using more conventional means.”
He also suggests that investors who aren’t comfortable picking individual stocks could invest in rare-earth funds, many of which are exchange-traded.
“Moving to the other end of the supply chain, investors may want to consider rare-earth recyclers,” according to Whittaker.
Panning out
All investment is risky to some degree – something to remember before you buy something you can’t spell.
"Commodity prices are always volatile – in this sense, rare earths are no different from oil and gas – and that translates into choppy revenue and earnings," US News quotes Pavel Molchanov, analyst with Raymond James & Associates.
To help you refine these metals into something that fits into your portfolio – given your tax situation and your short- and medium-term forecast for inflation, consider having a year-end chat with a trusted financial professional.
