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
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
Goldman on gold
Finally, it’s worth noting that Goldman is recommending that clients remain long gold. Shareholders of SPDR Gold Shares
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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.