Goldman’s Call: Sell Commodities!

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Goldman Sachs sent a shock wave through commodities markets today as it advised clients to close several commodities trades it had previously recommended (a weighted basket of oil, copper, cotton, soybeans, and platinum, and individual bets on copper and platinum). Notably, the investment bank warned that, “at prices above $125 per barrel… the risks are becoming more symmetric, which shifts the risk/reward of being long oil.” (English translation: Owning oil now looks increasingly like a coin toss.) Here’s what you need to know.

The rule for buying commodities
I’m going to go in with Goldman on this call. Commodity markets are cyclical, and Bill Miller’s April 2006 assessment of commodities looks applicable today: “The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now.”

Individual investors who own commodity ETNs such as United States Oil (NYSE: USO  ) or the iPath GSCI Oil TR Index ETN (NYSE: OIL  ) , take heed. (In order to track these commodity ETNs using My Watchlist, click here.)

The rule for buying oil producers
Similarly, for oil companies, the time to buy their shares is not when the price of oil is hitting highs and they are gushing profits, compressing their price-to-earnings multiples. Opportunity arises when profits are depressed and their multiples look elevated.

If we consider oil majors Chevron (NYSE: CVX  ) , Royal Dutch Shell (NYSE: RDS-A  ) , and Conoco Philips (NYSE: COP  ) , all have beaten the S&P 500 over the following periods: 3 months, 6 months, 1 year, and 2 years. And they haven’t inched ahead; the gains above the index are substantial. Exxon Mobil (NYSE: XOM  ) has done the same, except over the 2-year timeframe. I’m not calling a top here; these shares have some room to run yet before multiples bottom out, but they are not compelling right now. (In order to track these shares using My Watchlist, click here.)

Goldman on gold
Finally, it’s worth noting that Goldman is recommending that clients remain long gold. Shareholders of SPDR Gold Shares (NYSE: GLD  ) may be pleased to hear that. That looks like a reasonable speculation in the short term, but gold is overpriced by historical standards and will correct at some point.

If you’d like to track these the commodity ETFs/ETNs mentioned in this article using My Watchlist, click here. Alternatively, if you’d like to track the group of integrated oil majors, click here. You'll get valuable updates as well as immediate access to a new special report, "Six Stocks to Watch from David and Tom Gardner." Click here to get started.

Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. Chevron is a Motley Fool Income Investor recommendation. The Fool owns shares of Exxon Mobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (25)

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  • Report this Comment On April 12, 2011, at 4:38 PM, rfaramir wrote:

    Sounds like Goldman is "ripping the face off" its customers again. With the dollar in decline, commodities and PMs are where you have to be.

    "I’m not calling a top here; these shares have some room to run yet before multiples bottom out, but they are not compelling right now."

    That's wise. And I'm not saying that they're compelling in themselves, but that the Fed's printing is compelling us to go somewhere solid, like oil, gold, and silver (and cotton, corn, etc.).

  • Report this Comment On April 12, 2011, at 6:20 PM, xetn wrote:

    What do you bet they had some serious shorts set up?

  • Report this Comment On April 12, 2011, at 7:35 PM, extremist wrote:

    Sell my commodities and put the money where? There aren't exactly a lot of compelling alternatives out there today -- especially not paper currencies!

  • Report this Comment On April 13, 2011, at 6:25 AM, mm5525 wrote:

    Agree with the comments above. I'm sure GS was putting on the shorts Monday afternoon. Let's see, commodities are limited resources, there's a rapidly growing global population, and we have devaluation of paper currencies, especially the USD. Commodities are where you need to be. I like many of the oil service MLPs in particular as they are not as volatile as the E&Ps.

  • Report this Comment On April 13, 2011, at 8:01 AM, TMFAleph1 wrote:

    Don't believe the hype!

    Alex Dumortier

  • Report this Comment On April 13, 2011, at 9:18 AM, Huayra wrote:

    When it comes to commodities I like to stick by the facts.

    Seeing the world population as of this morning is 6,886,695,698 (give or take a few) and is growing about 75 million this year, we will see a number of 9 billion by 2045. Even as the average population growth is trending down.

    Long term commodity plays should be included in a balanced portfolio, but then again differing opinions make the market.

  • Report this Comment On April 13, 2011, at 1:35 PM, edmond5 wrote:

    First off, good article in a 'report the news' kind of way. My biggest beef with these types of reports are short term vs. long term outlook. Basically, GS says sell for the short term, buy for the long term...which I don’t see as dramatic or actionable. I want to emphasize one particular statement in this story

    “As Goldman Sachs states they are positive long term prices,” said Michael Langford, Proprietary Trader at” “This means if they can push prices down in the short term they can reset their positions to take advantage of where they believe commodity prices are headed. Strategically a smart and profitable move by the bank.”

    In other words: Memo to Wall Street: ‘Here at Goldman Sachs we declare it’s officially time to start selling oil and we’d appreciate if you’d hurry up before it takes off again.*

    * We use phrases like ‘super spike’ and ‘substantial declines’ to speed up our manipulation.

    I like CPX and CLB...thoughts anyone?

  • Report this Comment On April 15, 2011, at 11:48 PM, rv3lynn wrote:

    Goldman says sell. Hmmm.

    Silver goes through the roof.

    Maybe us poor folks are starting to figure out what these geniuses are really doing.

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