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Saturday, 12 June 2010

If Gold's Too Pricey, Other Commodities are a Steal

by Myra P. Saefong

With its record-high prices and reputation for volatility, gold may no longer be a bargain — but a few other commodities might be a steal.

Of course, traders probably need a little convincing.

"As attractive as the story is for gold, there is no guarantee of safety," said John Person, president of Nationalfutures.com. "Prices can and do fluctuate wildly."

The most-active gold futures contract hit a record close of $1,245.60 an ounce Tuesday — the highest since gold futures starting trading on Comex in the 1970s.

And it wasn't too long ago when gold prices tumbled around $250 per ounce in less than 14 trading days in October of 2008. More recently, prices dropped nearly $180 from peak to trough in December 2009 to February of this year, Person said.

"These wild swings can give the faint-of-heart investor less comfort than what they are looking for," he said.

Instead, investors can consider other commodity investments, but shouldn't expect to find any "substitute" to gold.

As a hedge against political turmoil or lack of faith in paper currency, "there are no true alternatives since gold is in a league by itself," said Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter.

People invest in gold for different reasons at different times, he said. It's used as a "portfolio diversification tool," an inflation hedge or as a hedge against a declining dollar.

Right now, "gold is the only asset up-trending in the world of any market, commodity and currency," said Cary Pinkowski, chairman of CP Capital Group. "It will remain this way until governments solve their debt problems and create true visibility into economic growth and surpluses every year."

Out of reach

But with gold at record-high prices, it's certainly not cheap.

And "problems in Greece have created a new environment of fiscal austerity, which implies a deflationary environment and eventually rising interest rates" which would be "the kiss of death for gold," said William Gamble, president of Emerging Market Strategies.

Besides, "my rule of thumb is short anything at an all-time high and go long when there is a new low," he said.

Ned Schmidt, editor of the Value View Gold Report, even goes as far as saying "investors should not be buying gold," given the "untenable current price level and growing risk of a technical failure."

Many investors and analysts would say that's blasphemy.

"Gold is the only metal that is truly money," said Brent Cook, author of the investment letter Exploration Insights, adding that "all the rest are commodities" and "silver is a hybrid." See last month's story on silver, gold's 'ugly sister'.

Even so, gold isn't the only metal to choose from and invest in. "Alternatives should be considered," Schmidt said.

Metal picks

Among the choices, there's rhodium.

Investor activity in this "rarest of precious metals" is low, "giving it considerable price appreciation potential" as investors move into the metal, said Schmidt, adding that's what lifted prices to about $10,000 an ounce a few years ago. Kitco Metals Inc. said it reached that record price in 2008.

The current rhodium price is around $2,600 per ounce, though Schmidt said a "reasonable immediate target" for the metal is $6,000.

For those interested in physical ownership, Kitco offers what it calls a "rhodium sponge," a grayish fine rhodium powder bottled in 1-ounce, 5-ounce and 10-ounce containers — and right now, "it is pretty much the only way to invest into physical rhodium," said Jon Nadler, senior analyst at Kitco.

He warns, however, that before investing in the metal, people should realize that rhodium prices are "quite illiquid" and it's "inadvisable to actively trade" it given its volatile price movements.

Uranium's another potential pick. Prices have dropped about 70% from their highs in 2007. Read more about uranium and how to invest in it.

"The demand curve for uranium is very attractive with all the new nuclear plants being built and in the planning stages," said Chris Mayer, a contributor to The Daily Reckoning and editor of Capital and Crisis. "My bet is that the price of uranium tracks higher over the next several years."

Rare earths are also a good prospect. "These obscure metals are so critical to our modern world that they are as strategically important as oil, copper, uranium, natural gas and coal," Tony Sagami, editor of Asia Stock Alert, said in a May newsletter.

Essentials

Then of course, it's hard to see how you can go wrong by investing in life's essentials.

"One arena to enter this time of year that has stellar performance is in fact within the agricultural complex," said Nationalfutures.com's Person.

The factors driving the food sector, which include corn, wheat and soybeans, are the loss of agricultural land to development and rising worldwide incomes, according to Sagami, who's also president of Harvest Advisors.

"The first thing a family that rises out of poverty [does] is to increase the quality of their diet, mainly by adding more protein," he said.

Wheat, corn and soybeans have "all completed breakdowns from higher price levels and have moved into often quite rewarding lateral patterns," said Schmidt, who's also editor of the Agri-Food Value View report.

Futures prices for all three saw record levels in 2008 on the Chicago Board of Trade.

Soybeans, once the sales of the South American harvest are completed, will be in a short supply situation until the fall of 2011, said Schmidt. And "wheat, which could produce the most dramatic price gain in the next year, has less than four months of supply globally."

Scott Capinegro, president of Barrington Commodity Brokers, said corn would be his "first buy" given all the demand that could develop from China and ethanol, but he also warned that it would be best to buy corn after the harvest pressure is over with. "Crop conditions are great right now and we may see record yields."

Quenching thirst

Then there's the stuff we drink.

"If oranges were a bird, they would be on the endangered species list," said Todd Hultman, president of DailyFutures.com, pointing out that oranges for juice are grown in basically just two places in the world — Florida and Brazil.

In Florida, commercial orange groves occupy the smallest amount of areas since 1986 and the crop is "under attack from citrus greening disease, hurricanes and the occasional freeze like Florida experience in January," he said.

Also, the U.S. Department of Agriculture said late last year that Brazil's orange juice exports in 2009-2010 will be the lowest in eight years, Hultman said.

And even more essential to life is water.

"Some are starting to refer to water as 'blue gold' because it is something that people will pay any price for it they don't have any," said Sagami.

He mentions three water exchange-traded funds as a means to invest in the sector — the First Trust ISE Water Index Fund (NYSEArca: FIW - News), Claymore S&P Global Water Index ETF (NYSEArca: CGW - News) and PowerShares Water Resources Portfolio (NYSEArca: PHO - News).

But despite all the choices out there, some investors say they really don't want any commodity other than gold right now.

"Assuming we are going into a future riddled with fiscal and monetary uncertainty ... and you told me I couldn't own gold, I'd rather own a portfolio of high quality blue chips and real estate properties before a bushel of wheat, corn, or a bunch of cows," said Ed Bugos, director of mining finance at Strategic Metals Research & Capital.

Myra P. Saefong is MarketWatch's assistant global markets editor, based in Tokyo.

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