ETF Expert

I haven't seen any arguments against an inevitable surge in commodity prices. And that worries me.

When everyone says that something is going to happen, it usually doesn't. Take a barrel of crude oil. I don't know of a single "professional" that didn't implicitly or explicitly agree with the Goldman Sachs view that crude was on its way to $200. At most, some suggested that crude might fall to the $110 per barrel price before resuming its "inevitable march to record levels."

That's why, back in June of 2008, I wrote scores of features like this feature about $150 per barrel returning to a $75 price point. I didn't predict it… I merely suggested the strong possibility. And I had no inclination that it would fall into the mid $30s, dropping an ungodly 75% from its intra-day "peak."

Don't get me wrong… the arguments for commodity prices surging are quite compelling. Any economic improvement will increase demand for "stuff." And the ways in which producers have been slashing supply, it's not difficult to see that demand will increase at a faster pace than supply can meet.

And there's more. There's the incredible amounts of money being printed worldwide, which tends to devalue currencies and simultaneously ignite inflation. Since we're committed to a course of avoiding a genuine global depression, we're acknowledging a willingness to accept some level of inflation during an economic recovery.

Another factor? How about the increased availability of access to commodities via ETFs. The demand for commodity ETFs hasn't slowed one iota; in fact, commodity ETF inflows are greater in Europe than for any stock ETF or bond ETF. You even have the uber-guru Jim Rogers all but assuring legions of followers that commodities are the key to wealth creation.

So why does the seemingly obvious make me a bit skeptical. For one thing, we've seen some pretty significant inflation in an unregulated hedge fund world already. That's why we witnessed a commodity bubble. That's why witnessed a commodity collapse. And that's part of the reason I believe capital appreciation will be much slower and steadier on the next go-around. 

Will commodity prices go up? Yes, I think that they will. When premier total commodity tracking indexes like the PowerShares DB Commodity Fund (DBC) drop a stunning 62% from high-to-low, I would expect prices to climb.

I'd also expect stocks that have been trading with single-digit P/Es to be strong investments as economies begin to turn. Moreover, I'd expect corporate bonds with extraordinary yields to find their prices appreciating as the yields come back down to historical norms.

What I am saying here is that all assets should rise… eventually. However, commodities can't make a substantial move higher until a major economic force — developed nation or emerging country — gets out from underneath the economic malaise. And even when commodities do rise, there will be greater regulation to offset the monstrous gains seen in the speculative past.

Don't give up on commodity exposure… just don't bet the entire "farm" on steel, soy, wheat, potash, gold, silver, gasoline or crude.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.