April 15 unofficially ended gold’s 12-year bull run when the yellow metal dropped 9.1%, the largest one-day loss since 1983. Other commodities like silver, copper, and oil have seen their prices rise, as well. Investors who had bought virtually any commodity six months ago are seeing extremely large losses. Meanwhile, investors who purchased equities six months ago are likely seeing respectful returns.
As we can see above, all major indices (the Dow Jones industrial average, S&P 500 and Nasdaq Composite) are in positive territory, while major commodities (gold, silver, copper and oil) are all negative.
Many investors are wondering what the correlation is between the commodities sell-off and equities, and the answer is quite simply nothing. U.S. equities largely reflect the performance and expectation for both the economy and health of the corporate sector. Both are in fantastic shape based on extremely-recent data.
Economic data
On April 16, it was reported that US home builders broke the one-million mark in March for the first time since 2008. The gain was a clear indication that the housing recover is in full force. February’s building permits (an indication of future construction) hit an all-time high. All in all, the housing report clearly indicates that home building will contribute to economic growth in the form of job creations, as 18,000 jobs were added in March alone. Each home that is constructed creates an average of three jobs a year and generates $90,000 in tax revenue.
The Consumer Price Index showed that inflation fell from 2% to 1.3% in March. The Federal Reserve aims to keep inflation at around the 2% mark, and anything lower can have some negative side effects.
In the meantime, consumers and businesses can have some short-term relief when it comes to oil, gas, groceries and other expenses. Commodities, especially gold, have been known as a hedge against inflation. As the recent CPI index has shown, a strategy to hedge against a 1.5% inflation rate doesn’t make any sense.
Real rates have historically stayed at accommodating levels going back to 2009. Low rates are an indicator of a greater-monetary availability for consumers and businesses to finance activities.
It’s worth emphasizing again that commodities are not equities, and equities are not commodities. A sell-off in commodities can actually be a good thing for the equities market, especially companies that rely on commodities.
General Mills, Inc. (NYSE:GIS): Beneficiary of low commodity prices
General Mills, Inc. (NYSE:GIS) is riding on 52-week highs due to low commodity prices that help its bottom line. Investors in the maker of Cheerios cereal and other popular food brands are noticing that 2013 is a sharp contrast to 2012.
Just 1 year ago CEO Ken Powell was saying, “Fiscal 2012 has represented a challenging operating environment, with the highest level of commodity inflation that we’ve seen in 30 years.” General Mills, Inc. (NYSE:GIS)‘ bottom line is essentially held hostage by the performance of commodities such as corn and grain. Investing in companies such as General Mills, Inc. (NYSE:GIS) offers investors the opportunity to profit from declining commodity prices.
One commodity-based ETF to buy.
Shares of many major gold producers saw their stocks punished greatly during the commodities sell off. In fact, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) has been setting new 52-week lows since gold began its free fall around October of last year. One has to wonder how many of the gold-mining companies can continue to survive in an environment where their finished products are now selling for much less than they did a week, a month, and even a year ago.
This is where Direxion Daily Gold Miners Bear 3X ETF comes in to play. The ETF is a triple-leveraged inverse of the gold miners index. The miner’s corresponding index, the Market Vectors Gold Miners ETF, is down around 40% year-to-date, and more than 50% from the 52-week high. By contrast, the Direxion’s Daily Gold Miners Bear ETF is the best- performing ETF of 2013, up almost 60% year to date, and up nearly sixfold from the 52-week lows.
The Daily Gold Miners Bear ETF is a good buy to profit from a prolonged drop in commodity prices, particularly gold. However, given the fact that triple leveraged inverse ETFs are typically designed for extremely short term holdings, it might not fit in to the risk profile of many investors.
Many gold mining companies have overextended their reach by pursuing major gold projects worldwide while amassing billions in debt. Purchasing the Direxion’s Daily Gold Miners Bear ETF can prove to be extremely profitable.
Silver Wheaton Corp. (USA) (NYSE:SLW) is a buy? Seriously?
It might seem strange to recommend a commodity mining company, especially one with silver in it’s name. Silver Wheaton Corp. (USA) (NYSE:SLW) stands out amongst the commodity companies due to its extremely smart business moves to hold long- term contracts to purchase silver at prices substantially below the market price.
The company provides an upfront payment to miners for the right to buy their finished silver product. The deal is a win-win, as miners are happy to accept a lump-sum payment upfront, while Silver Wheaton Corp. (USA) (NYSE:SLW) benefits from the long-term viability over the lifetime of the mine.
Silver Wheaton Corp. (USA) (NYSE:SLW) has very recently gained a bargaining edge in negotiating its deals in this commodity-pummeled environment. Silver Wheaton can still earn a profit even with rapidly declining silver profits. The company at the very least should not be lagging physical silver, as it has over the past three months. Investors can reasonably expect the company’s shares to rise, reflecting the disparity between them and physical silver.
Conclusion
Commodities are likely to continue declining over the coming weeks and months. Equities are likely to continue increasing over the coming weeks and months. Investors that are able to profit from this trend will be rewarded generously. As mentioned previously, there is no correlation between commodities and equities, and it is within reason and perfectly normal to see commodities decline and equities rise.
The article Commodities Are Dead, But Equities Are Very Much Alive originally appeared on Fool.com and is written by Jayson Derrick.
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