Commodity Economies
One of the biggest drivers of the market right now has been the unprecedented fiscal and monetary stimulus deployed to battle the economic fall out of the COVID lock-down. In the US alone, the Federal government has done over $3 trillion in fiscal spending, meanwhile the Federal reserve has expanded its balance sheet by another $3 trillion. Much has been written about the potential side-effects of all this spending and printing; it forms part of the fundamental case for my gold position.
The thinking goes; printing tons of money is going to cause the value of things you can’t print more of to appreciate, like precious metals and land. Additionally, it’s possible this massive expansion of the money supply might finally cause some inflation. Gold tends to perform well during inflationary periods as a store of value. Continuing the case; this printing has crushed yields and made fixed income instruments unattractive to investors. Gold is more appealing when interest rates are low — the opportunity cost of holding a lump of metal is reduced when your money can’t be earning interest instead.
Each of these is bullish for gold — in addition to being bearish for the US Dollar. However, gold does have some challenges and I don’t what to put all my eggs in one basket. Also, I want to partially hedge against a weakening dollar caused by any further fiscal or COVID mismanagement.
Enter commodity economies.
Many of the bullish factors for gold can be directly applied to the rest of the commodity universe; such as ores, metals, and other raw materials. I feel that economies where commodities are a major contributor to GDP are going to be well suited to the post-COVID economic order. Should any run away inflation occur, commodities enjoy pricing power with non-variable cost inputs. As the dollar weakens, global commodities priced in dollars will naturally appreciate. There are a few countries that I have identified as being well suited to this play: Canada, Australia and Brazil.
The Canadian and Australian markets are very attractive to me in that commodities are central to their economies. Additionally they are both developed countries with world class financial, legal, and healthcare institutions. Furthermore, they both have their own currencies and independent central banks. While they have had their own fiscal stimulus and monetary easing, on a relative basis, it so far is a fraction of what the US has done. A final advantage to highlight is their comparative success in handling COVID.
I’ve also included Brazil — which is definitely a commodity economy as well. However, they have their own set of problems right now. A more prominent one is with COVID running rampant in the country. Compared to Canada and Australia they have (only slightly) less solid business/legal institutions. However, I think their COVID problem is a passing one, and actually has kept their stock market cheap. Additionally, they have a unique tail winds in that they recently cut rates to a level still far above those in developed economies. Lower rates on their own are bullish for the market, but some speculate this will trigger first ever wave of retail investing in the country. The thinking goes that a population long used to getting 7% in the bank, will now have to go to the stock market for returns.
Given this, I am going to sprinkle some of these ETFs into the portfolio, a smaller size for now.
