The market giveth and the market taketh away.
Commodities, oil and precious metals have been on a torrid pace for quite some time now, surpassing the expectations of many investors. Many, including myself, were waiting for the day that the run up in these areas would begin to slow. Not only have some of the precious metals and oil slowed, instead there has been a large pullback in both. Oil has gone from about $113 per barrel to less than $100 in the past few weeks, while materials and precious metals like gold and silver have also pulled back substantially. With these sectors of the economy making up such a large part of the Toronto Stock Exchange, their recent fall in value has caused the TSX to lose most of it gains for the year. What can we expect going forward for the rest of 2011? Will this market continue to follow the lead of these stocks?
The simple answer, in my opinion, is yes. Commodities, oil and precious metals will remain front and centre with respect to the stock market's performance, both here and in the U.S. I base my answer on the continuing easy money and stimulative policies the U.S. Federal Reserve and the Bank of Canada currently have in place. Bank of Canada chief Mark Carney recently made remarks that many would consider negative regarding the state of the U.S. economy, which in turn will put the Canadian economy’s growth more in doubt, since most of our exports go to the U.S. on a daily basis.
Thus in my opinion, a significant rise in interest rates is not in the cards in the near future. The Bank of Canada may raise interest rates, but at a slow pace. In the U.S., some analysts are not expecting rates to rise until the end of the year at the earliest, while others believe rate increases won’t happen until 2012 or 2013. So with interest rates remaining low both here and in the U.S. for the foreseeable future, the U.S. dollar will remain weak relative to other major currencies around the world. I believe this will cause investors to continue to pile into investments such as gold as a U.S. dollar alternative. Add in the fact that gold and oil, for example, are priced in U.S. dollars, and a weak dollar means more gold and oil can be purchased.
The market will remain volatile as investors struggle to time of the end of the Fed's easy money policies. As of June of this year, the Federal Reserve is expected to cease injecting money into the economy by stopping its purchase of mortgages and other vehicles, something Investors are concerned about. Will the U.S dollar strengthen at that time and if so, could the end to the rally in commodities, oil and precious metals priced in U.S dollars stop? This is a question on the minds of many and that is what is causing the volatility on the major North American exchanges. Some analysts believe the U.S. dollar has bottomed already, and therefore the rally for commodities and oil may already be over. This thought has caused some investors to fear hard asset investments like gold and silver, and these investors have caused the market to fluctuate quite substantially over the past few weeks.
As an advisor, my advice is to stay quite simple. We do not know when the party will come to an end for the commodities and precious metals space. The momentum has clearly slowed down recently. However, will gold and silver rebound? Will oil move well above $100 per barrel again? None of us have that crystal ball to be able to say for certain. However, what you do want to do is if you can handle the risks involved in buying into these sectors of the market, you want to own some. Perhaps no more than ten per cent of your portfolio in these areas of the market.
That way, if the rally continues, you are a part of it. When the rally ends, the hope is that other sectors of the economy you have investment exposure to will pick up the slack. Stay diversified. Do not chase the hot sector. Invest wisely. This is the best way to invest in a market that has been and will remain very volatile for the foreseeable future.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.