The Commodity Investor Q&A
With Matt Badiali
December 24, 2008
Q: What is the safest way to buy oil and gold? I feel the upside is unlimited in the future, but how can I avoid getting stopped out with the dips? My commodities account is dwindling, and I don't want to miss the run. – S.S.
A: The safest way to buy oil is to buy oil... You have no exposure to accounting frauds, refinery accidents, nationalization, or stock dilution.
You can bet directly on a commodity through the futures market or through an exchange-traded fund (ETF). The U.S. Oil Fund (USO) tracks oil, while the SPDR Gold Shares (GLD) follows the price of gold.
If you want exposure to companies that produce the commodities, then the safest answer is to buy big and diverse. Luckily, index funds will do exactly that.
An index fund owns a basket of companies within a given sector. So it allows you to buy into a trend without taking on the risk of an individual stock. Spreading your investment among several companies smoothes out the daily volatility. And if you own a multibillion-dollar fund, you won't hit your trailing stop in a "dip."
At least four large index funds track the oil industry: IYE, IXC, VDE, and XLE. These funds invest mainly in the big, integrated oil companies like ExxonMobil, Chevron, and ConocoPhillips. Gabelli Global (GGN), a $235 million fund, invests in both oil and gold. And finally, the Market Vectors Gold Miners Fund (GDX) is a $2 billion fund that holds both gold and silver miners. Its top-five holdings are Barrick Gold, Gammon Gold, Newmont Mining, Pan American Silver, and Agnico-Eagle.
Which brings me to our next question...
Q: Is it better to buy commodity ETFs rather than individual stocks. In any case, do you have some top picks in this testy gold and silver market? – D.W.
As I said above, the pure commodity ETFs offer more safety: GLD or the Central Gold-Trust (GTU) for gold, the iShares Silver Trust (SLV) for silver. You can buy miners through GDX or GGN.
I don't think you can go wrong with any of the bullion or precious-metal mining funds right now.
Individual companies offer higher risk... but some will outperform the sector. The difficulty comes in picking which companies.
The qualities I'm looking for in gold and silver mining companies are low debt, low-cost production, and fully funded projects. Avoid companies that carry heavy debt or need to borrow a lot of money to build a mine.
Q: What's the story with TimberWest, the Canadian REIT with all the finest timber on Vancouver Island? Played it to be a safe haven, i.e., the trees keep growing. Unfortunately, the stock hasn't. – R.W.
A: Timber stocks are linked directly to housing and real estate. Unless you have been living with the bushmen in Australia for the last year, you know that is a troubled sector. Additionally, the Toronto Stock Exchange (where TimberWest trades) fell almost 50% since its peak in May 2008.
It doesn't matter a whit how great the trees on Vancouver Island are. When real estate tanks, timber demand tanks, AND the entire market nosedives, TimberWest is going to take a hit.
By definition, a stock is never a "safe haven." You are always subject to the whimsy of the market when you invest in a public company. If you wanted to own timber as a safe haven, you should've bought the actual timberland.
But you're right that the trees keep growing. I don't know much about TimberWest's situation, but in general, the best way to realize the value of timberland stock is to be patient.
Good investing,
Matt
P.S. Drop me a note over the holidays. I'll be back next week answering your commodity questions. |
