How to Play Commodities

Q: How far can the price of oil go? What are good ways to play the commodities markets over the next 5 years?

A: I don't have any problem with the idea of $200 oil any more than I do $2000 gold. The only question is "When"? That will depend on supply, demand and the dollar. Hard to forecast the exact direction of all the variables for any point in time. But, I think it is safe to say that supply for raw materials / commodities is hard to quickly expand, due to the infrastructure required. So, any increase in demand due to an expanding global economy, will drive prices higher.

The dollar may or may not get much weaker. At some point, the other countries will defend their own currency by either buying dollars, dropping their interest rates, or both. Emerging markets dependent on higher employment rates to keep their citizens happy, cannot allow Americans to take back jobs due to a cheap dollar. So, there is a practical limit to dollar weakness, at least in the short and mid-term (one month to five years).

But we are seeing the beginning of a correction to commodities right now, so I would wait to make a move. The Fed's defense of our banking system and economy are supportive of the dollar. This action will move money from the defensive position of precious metals and oil back to the stock market, which will deflate prices over the next couple months (or however long the rally runs). I would be prepared to move money into commodities gradually, over a long time horizon.

As for vehicles, I have always like FNARX, which is Fidelity's natural resource fund. It has done very well. I am in GGN, but it has been a bit disappointing. DBA is a good way to play the ag market. OIH and IXC are a good way to play the oil market. And, of course, I am in love with VGPMX for precious metals and have been for more than five years. But it is closed now.