By Martin Hutchinson
Contributing Editor
Money Morning
In normal recessions, commodities prices fall - and stay down for the count - as mines, farms and oil wells continue to expand production, even as demand is flattened by the economic malaise.
Well, not this time around. And that figures to make commodities a profitable defensive investment. Indeed, we’ve uncovered four of the very best ways to profit from this trend.
Let me explain.
The Journal of Commerce commodities price index leaped 9.5% in May, the largest one-month gain since the index was first compiled back in 1985. Oil prices, which bottomed in the $30-a-barrel range, are pushing once again towards $70 a barrel - not the all-time record of $147 touched last year, but still very high on a historical basis. And gold is trading at roughly $980, close to its all-time peak and extremely high by historical standards.
So what’s going on with commodities? And how can we, as investors, make money out of whatever it is that we’re watching unfold?
This recession differs from traditional recessions - even global ones - in three ways:
- First, governments have been much more aggressive in implementing “stimulus” packages, and are running much larger budget deficits than was traditionally thought acceptable.
- Second, monetary authorities have expanded the money supply much more aggressively, holding short-term interest rates negative in real terms and operating proactively in the market to buy government bonds and other assets.
- And third, previous recessions haven’t involved the nationalizations of major players - as we’ve seen this time around with General Motors Corp. (NYSE: GM) and Chrysler LLC. By contrast, the 1979 Chrysler Corp. bailout was almost entirely debt-oriented, with no government control. However, the economic effects of these latest nationalizations are both diffuse and long-term, with no obvious investment implications.
Banking crises have happened before - the worldwide crisis of 1931 serving as perhaps the most notable example - but they did not cause commodity prices to soar, nor is there any reason why they should have.
