Doug Casey on a Rare Opportunity in the Most Cyclical of All Markets

International Man: What are the speculative opportunities you see in the commodities markets?

Doug Casey: I’ve traded commodity futures since the mid-seventies. I don’t recommend futures for most investors. It’s not that commodities are more volatile than stocks—they’re not. But it’s very easy to overleverage with the margin available; I’d say 95% of the public loses money. That said, if you bet the right way on a big move the results can be breathtaking.

But let me start by saying that—unknown to the public—commodities have been in a bear market for the last 5,000 years. Most people treat them like growth stocks and just go long, expecting them to rise.

In fact, the price of commodities—whether we’re talking livestock, grains, tropicals, energy, or metals—has been falling in real terms since the dawn of civilization. And that trend will continue.

In primitive times we had sticks and stones, wild animals and plants. If you found a little piece of metallic iron from a meteorite, you were the equivalent of a caveman billionaire. The corpse of a dead deer to fend off starvation for another week made you a Big Man. Finding a berry bush was as big a deal as owning a supermarket today.

You needed commodities to live—but they were rare and unprocessed. The whole path of civilization since the end of the last ice age 12,000 years ago has been about developing technologies to increase the amounts—and lower the costs—of commodities. The Agricultural Revolution that marked the end of the Neolithic Age started the actual Ascent of Man, to use Jacob Bronowski’s phrase. Commodities are the raw materials of civilization.

Starting with the Industrial Revolution in the 1800s, the amounts we could produce skyrocketed and their costs plummeted. Both of those trends are going to accelerate—radically—because of things like genetic engineering, robotics, artificial intelligence (AI), and space exploration. When nanotechnology—the creation of machines at a molecular level—is perfected and comes on stream over the next decade or so, commodity prices will fall to trivial levels. These new technologies are going to make raw materials super abundant and super cheap.

Commodity prices will accelerate their multi-thousand-year-long collapse. They’re basically headed toward zero.

So why would anybody possibly want to be in commodities if they’re in a perpetual bear market? It’s a seeming paradox.

The answer, however, is that along the way there are explosive rallies to the upside. Commodities are highly cyclical and can be highly volatile. That, in turn, creates opportunity. Right now, there’s a huge opportunity to the upside. The long-term historic trend is very important to keep in mind—but it’s not very relevant to what will happen over the next five days, five months, or five years.

Why do I expect commodities are entering one of their relatively rare but explosive bull runs? Because most are not only selling at or below the cost of production but also at clear cyclical lows. Commodities are now very cheap in both absolute and relative terms.

These are the limiting factors to the downside. Unlike stocks, commodities can’t go to zero. Right now, most commodity producers are just breaking even at best. Most are losing money.

That can’t continue for too long, or producers will go bust and production will collapse. As the building blocks of civilization, you need them to survive. The world uses more of them every year. That’s partly because the world’s population is still growing. Partly because it tends to get richer.

And partly because new uses are found for most commodities every year. A hundred years ago, gold was used for money, artwork, and dentistry; now dozens of new uses are discovered annually in technology, taking advantage of the fact that, among other things, it’s the most ductile, malleable, and inert of all metals. The 17 rare earth elements were only curiosities 50 years ago; now they’re critical for hundreds of uses. There are 92 naturally occurring elements on the periodic table. Everything in the universe is made from them. A century ago, only half of them had uses; now they all have many uses.

But the development of new uses isn’t the main short-term price driver I’m looking at—that’s been there since Day One. Other factors should interest a speculator now.

Any number of forces majeures loom over the markets. Political upsets and wars typically make commodities soar; there’s a long list of things in those categories. Weather conditions or disease can create shortages in the agriculturals; we’re seeing that right now with the African swine flu, which has already wiped out half of the Chinese hog population and appears to be working its way across the globe. These are among the macro reasons I think commodities will head higher over the next five years.

Commodities last peaked back in 2011. Many of them are still down 50%. Could they go lower? Anything is possible, of course—we could have a credit collapse deflation, for instance. But that’s unlikely with today’s massively inflationary monetary policy, which puts upward pressure on all prices.

Let me put it this way: As a historian and a technologist, I’m bearish on commodities. But right now as a speculator, I’m very bullish on commodities.

I like to buy things when they’re demonstrably cheap, and that’s true of commodities right now. They’re about the only area of the financial world that’s not in bubble or even hyper-bubble territory.

International Man: What makes commodity prices and resource stocks so volatile?

Doug Casey: Commodity prices fluctuate for all sorts of reasons. The same is true—on steroids—of mining stocks, and resource stocks in general. They have to be viewed as speculations, as opposed to investments. They’re rarely heirlooms; it’s better to view them as trading sardines, not eating sardines.

But that can be a good thing. For example, many of the best speculations have a political element to them. Governments are constantly creating distortions in the market, causing misallocations of capital. Since mining is among the most capital-intensive of businesses, it’s easily affected.

Whenever possible, the speculator tries to find out what these distortions are, because their consequences are predictable. They result in trends you can bet on. It’s like the government is guaranteeing your success, because you can almost always count on the government to do the wrong thing.

The classic example, not just coincidentally, concerns gold. The US government suppressed its price for decades—while creating huge numbers of dollars—before it exploded upward in 1971. Speculators who understood some basic economics positioned themselves accordingly.

As applied to metals stocks, governments are constantly distorting the monetary situation. Gold in particular, being the market’s alternative to government fiat money, is always affected by that. So gold stocks can be a way to short government—or go long on government stupidity, as it were.

The bad news is that governments act chaotically, spastically. The beast jerks to the tugs on its strings held by its various puppeteers. So, it’s hard to predict price movements in the short term. You can bet only on the end results of chronic government fiscal, monetary, and regulatory stupidity.

The good news is that for that very same reason, mining stocks are extremely volatile. That makes it possible, from time to time, to get not just doubles or triples but 10-baggers, 20-baggers, and even 100-to-1 shots.

That kind of upside makes up for the fact that these stocks are lousy investments and that you will lose money on most of them if you hold them long enough. Most are best described as burning matches.

International Man: All the new currency central banks have created has caused an “everything bubble.”

It seems like almost nothing is cheap right now. The one exception is commodities.

Why do you think all this easy money hasn’t found its way to this asset class yet?

Doug Casey: All governments, big and small, are printing up currency units by the bushel basket.

But almost none of that new money has ended up in commodities so far. They’re basically the only asset that’s still cheap.

Nobody cares about commodities now. They’re not “hot.” Tech stocks are the current flavor of the day.

If you want to make money, you’ve got to buy straw hats in winter. You need to buy umbrellas when it’s sunny, not when it’s raining.

If you chase momentum and excitement, if you run with the crowd, buying when others are buying, you’re likely to get trampled. When everyone is talking about these stocks on TV, when your neighbor mentions them at a cocktail party, you know the masses are interested. That means they’ve gone to a level at which you should be a seller, not a buyer.

That makes it as much a game of playing the psychology of the market as doing securities analysis. In fact, these stocks don’t lend themselves to conventional securities analysis, because there are usually just too many imponderables. Benjamin Graham never considered them; neither does Warren Buffet.

All financial markets rotate. They’re all cyclical. But commodities are by far the most cyclical of all markets.

That’s the basic argument for buying commodities now. In five years, I expect to be saying it’s time to sell them, when commodity prices are at manic highs.

The only commodities that have been strong lately have been gold and silver. I suspect the reason for that is because gold is a monetary metal. Silver is also a monetary metal to a lesser degree, though it’s mostly an industrial metal. As the economy slows down, heading into the Greater Depression, most commodities—notwithstanding what I said earlier—could go even lower. Why? Because people will be forced to cut back consumption. Meanwhile, gold should skyrocket, because everyone’s afraid of paper money.

At this point, a lot of shrewd players are getting rid of paper and getting into gold and silver. I think it’s going to flow from there into the other commodities.

Commodity prices will go way up if we have a major war. And the clock on the wall is telling me that a major conflict is in the cards. I’m not talking about another sport war like the ones the US has been having in recent years, either.

International Man: How rare is the current opportunity in the commodities market? What will happen if people wait to act?

Doug Casey: It’s a rare opportunity when almost all commodities are selling substantially below the cost of production. It’s the type of thing that happens roughly once every decade.

The problem is the public buys these things only after the opportunity is over.

In other words, the public generally buys mining stocks only when they read about them on the front page of the newspaper. They hear about the millions of dollars that have been made in the business. They think that since it’s established a great track record, they should get in. But they’re buying at the top. They’re providing a market for the people who bought at the bottom to sell their stocks to.

When the public gets the bit in its teeth and wants to buy gold stocks, it’s going to be like trying to siphon the contents of the Hoover Dam through a garden hose.

Gold stocks as a class are going to be explosive. Now, you’ve got to remember that most of them are junk. Most will never ever find an economic deposit. But it’s hopes and dreams that drive them, not reality; even without merit, they can go 10, 20, or 30 times your entry price. And the companies that actually have the goods can go much higher than that.

Editor’s Note: Doug Casey just released an urgent video which outlines exactly how he’s positioning to profit from this rare opportunity in the commodities markets.

He discusses how this situation has played out numerous times in his career and why even a small amount of money put into the right mining stocks today could deliver life-changing rewards. Click here to watch it now and see how you could join him in making enormous profits.


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