Cashing In on the Commodity Collapse

Commodity prices are going down. Boo, right? But not everybody loses. In fact, some stocks are real winners.

You can read more of my thoughts on this -- including ways to play this trend -- HERE.

Chart of the Day: Commodity Prices in the Bernanke Era

source

They say a picture is worth a thousand words. What does this picture tell you?

Also, Janet Yellin is expected to be a Ben Bernanke clone. What does that tell you?

Have a great Friday.

How Commodities Made America Possible -- Extended Director's Cut

This past week, I turned in a story straight from a conference in Boston. I love Boston, I love history, I find commodities fascinating, and so this article combined all three.

As usual, my article ran on WAY too long for Investment U.  Bob cut it down, as is his thankless task.

However, this is my blog -- here, stories can run as long as I want them to. So, here's the extended director's cut of "How Commodities Made America Possible." 

This week, I went to Boston to speak at an Oxford Club Private Wealth Seminar. Boston is one of my favorite towns thanks to its strong historical links to liberty, American independence, and commodities.

How do commodities figure into American history?  Let me tell you a story about a little tea party.

Tea was a big commodity in pre-revolutionary America. The people of that time thought drinking tea prevented horrible ailments including dysentery and cholera.

Sure, it was boiling the water for the tea that killed the germs. The pre-revolutionary folks hadn't figured out germs yet. So it made perfect sense that drinking tea prevented dysentery.

They just didn't like to drink tea. For their health and the health of their children, they thought they NEEDED to drink tea.

Now consider that other treatments for dysentery included mercury, strychnine, lead and silver nitrate. Y’know, tea would look pretty good to me, too.

Enter the East India Company. It had a special license to bring tea to the colonies. This was part of a tax the British levied to help pay for the French and Indian War.  

In Boston, a city of then-15,000 people, only 11 people had a license to import tea.  Boy, did that get the colonists boiling mad. 

The Sons of Liberty

So, in 1773, a group called the Sons of Liberty disguised themselves as Mohawk Indians. They boarded three ships moored in Boston Harbor and subdued the guards. Then they dumped 432 crates of tea overboard. The tea was worth 18,000 pounds sterling, roughly $3 million in today’s money.

Along with poisoning all the fish in the harbor, they struck a blow for American liberty.

Boy, was the British Parliament upset about that! So, it passed one punitive measure after another. Each one drove more and more colonists into the camp of the separatists.

In a few years, America was feeling downright revolutionary. But the British outmatched the Americans in guns, powder, money, and just about everything else. Where in the heck was George Washington going to get material to fight a war?

A wily group of smugglers and riff-raff stepped forward with an answer – “from British ships.” 

On March 23, 1776, the Continental Congress passed an act that formalized privateers. They’re basically pirates who take sides in a war.  And every colonist who could shove off in a leaky rowboat suddenly set to sea in search of riches.

A letter of Marque, or privateer license

The seas between America and Europe became a hunting ground for “wolf packs” of privateers that preyed on British merchant fleets.

What did they plunder?  Guns, powder, cotton, linens, foodstuffs, copper, tin, sugarcane, molasses, rum, whiskey, manufactured goods, jewelry, cash, documents and the ships themselves.

Over the course of the war, nearly 800 vessels commissioned as privateers. Privateers captured or destroyed more than 600 British and loyalist ships.

Those privateers saved the American revolution. The British had 100 ships of the line. The Americans had none. The Continental Navy fielded at most 31 ships, most of them only worth scrapping.

Without the privateers, American sea trade would have been strangled, and the American Revolution along with it.

Revolutionary hero Paul Revere was one of the top investors in the privateer Minerva. It bagged a cargo worth $80,000. But fortune was fickle. Later, Revere joined a privateer raiding party that ended in defeat and disgrace. Revere was cited for “unsoldierlike behavior tending toward cowardice.”

But many shrewd investors made a fortune without setting foot in a boat.

• Robert Morris was the so-called “Financier of the Revolution.” He had a hand in every significant strategic decision made by the Continental Congress. He also invested heavily in outfitting privateers.
• Benjamin Franklin helped create a dummy French corporation for the American privateers. This company used privateer profits to help fund and supply the revolution.
• John Hancock was Boston’s richest merchant. He was also in the privateering scheme up to his eyebrows. He arranged for one of his protégés to be named Congress’ prize agent in Boston. That man quickly announced that all prize ships that came into Boston had to be settled and sold at Hancock’s wharf.

So, Hancock made a nice cut off a huge pirate's plunder in cargoes and ships.

Massachusetts privateers made Hancock filthy rich

Those privateers had an effect. American privateers racked up $18 million in damage to British shipping by the end of the war. That’s about $315 million in today’s dollars.

The privateers have long since hung up their tri-cornered hats. But we can take important lessons for today.

• Seize Opportunities Early. Men who made some of the biggest fortunes as privateers jumped in the game early. 
• Profits Are a Powerful Motivator. If it weren't for private enterprise, America’s high-seas rebellion never would have left port. 
• Don’t Put All Your Eggs in One Basket.  Those that did best from America’s revolutionary privateering were financiers who backed multiple voyages for different vessels. If one ship got caught by the British, the other voyages could still turn a profit.

Commodities remained entwined with America’s destiny.

The Civil War

Shortly before the war, in 1859, prospectors discovered a huge deposit of silver ore in Nevada. The Comstock Lode was the biggest discovery of precious metals since the California Gold Rush.

It couldn’t have come at a better time for America.  War clouds gathered on the horizon, then broke over the states in a blood-red storm.  Wars are expensive. Luckily for Abraham Lincoln, the Comstock Lode contributed $400 million worth of silver when the U.S. needed it most. That was back when $400 million was real money!

The South had more great generals. But the North had more of everything else. And Nevada silver paid for a lot.

Once again, commodities shaped the history of the United States – and even saved it.

Fast-Forward to Today

Commodities continue to shape America’s destiny.  You’ll find that truth in the grain fields of America’s heartland. You’ll find it in America’s revived oil and gas industry. And you’ll find that back in those Nevada hills. There, new bounties of gold and silver are being discovered and turned into mines.

Nevada is one of the best mining districts in the world. That’s a fact.  That’s why I’ll soon check out five up-and-coming mining companies in Nevada. They all are developing new projects.

Will any of them be then next Comstock Lode? Stay tuned and see. The best is yet to come.

Potential Breakout in Commodities? Check Out This $DBC Chart

We're looking at at a potential breakout in the DB Commodities Tracking Index, or DBC.

Updated chart

You can see that DBC already broke out of one consolidation area. Now, it is up against strong overhead resistance from a weekly downtrend.
Will it break out? I think so -- powered by oil, precious metals, and agriculture.

Commodities ended up big yesterday (DBC up 1%) as worries over Syria resulted in big rallies in the  precious metals and energy. Another piece of stronger-than expected Chinese economic data (industrial profits were better than estimates) and a weaker U.S. dollar also helped push commodities higher, but really yesterday was all about Syria. 
Although commodities have lagged badly this year, that trend may be ending.

While most major global stock markets are down around 2% so far this week, the commodity ETF DBC is up 2.3%, to a 4+ month high.

The DBC is very liquid -- an average 1.8 million shares per day. The DBC tracks an index composed of Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar.

US Dollar Tests Important Support ... Charts!

The US Dollar Index just recently bounced from support around 80.50.  Then it tried to get back above its 200-day moving average, and so far it has failed. A failure here would bring another test of support, and potentially a breakdown to test 78.92.

(Updated chart)

But there is even more at stake. The USD Index is also testing a rising trendline drawn under its 2011/2013 lows. A decisive close below that line would end the dollar uptrend that's been in effect for the last two years. 

(Updated chart)

If the US dollar breaks that support, what would that do to commodity prices? To the price of oil ... silver ... and gold?

If the US dollar breaks that support, you ain’t seen nothin’ yet.