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The Key to Investing in Commodities in 2011

By Matt Badiali, editor, S&A Resource Report
Wednesday, December 22, 2010

The gains in natural resources are getting ridiculous these days...
In just the past year or so, my readers have made 542% on exploration firm ATAC Resources... 397% on silver company Silver Wheaton... 280% in silver miner Silvercorp... 213% on gold firm Northern Dynasty. We're also sitting on a handful of "just" 100% winners.
After seeing huge gains in such a short time, it's tempting for us to walk around feeling like geniuses. But in the resource investment business – which produces enormous booms AND enormous busts – simply counting your money and feeling brilliant, while ignoring risk, is a recipe for disaster.
You see, commodity prices have surged in the past year. Crude oil is at a new 52-week high. Copper is up 33% this year... and sits at an all-time high. Gold and silver are near all-time highs. Most agricultural commodities are at 52-week highs. These gains are drawing in a tremendous amount of money... all chasing the gains.
According to the Financial Times, the money spent on mining in 2011 will be a record $115 billion to $120 billion. That's more than the old record of $110 billion we set in 2008, which marked a massive top for the benchmark CRB commodity index. Also, fast money hedge funds hold huge amounts of long bets in crude oil, copper, and corn.
In other words, investors are throwing money at resources willy-nilly. We need to hang on to our heads.
Don't get me wrong... I don't want you to dump your commodity positions right now. I'm not selling any. In fact, I'm going to keep adding them to my portfolio. I think this could be the start of a full-blown mania in commodities... and manias are where "never have to work again" fortunes can be made.
We could see gains in commodities like we saw in 2007 and 2008. For example, crude oil jumped 130% from 2007 to mid-2008. You can see this huge rise in the chart below.
Back then, I didn't believe oil would hit $100 per barrel, let alone $140. But that's what happens when huge amounts of money chase commodities.
Now it's the other side of that hill we need to watch for... After its meteoric rise, oil fell from $140 to $35 per barrel in about six months.
Fortunately, my readers were out on the sidelines for most of the rout. We had taken care of our risk with trailing stops. And we managed to book most of our gains.
I'm not saying we're going to see a similar fall in gold, copper, or silver anytime soon. But we'd be foolish to focus only on the potential gains. We need to acknowledge that things could get crazy... but we still need to manage our risk.
Our risk today is that the world will send resources into a bubble... and that bubble will burst. On new mining investments, make sure to use trailing stops. And if you're sitting on giant, 100%-plus gains, consider tightening trailing stops to 15% or 25%. This will preserve the money you've made.
In sum, this bull market could go hundreds of percent higher. But don't ignore the risk of resource investment. If you stick to the plan I've laid out, you'll make plenty of money and get out when the time is right.
Good investing,
Matt Badiali

Further Reading:

While Matt has been touting natural gas plays for a long time, he warns readers of a "danger lurking here that could smash some companies in your portfolio." If you're invested in natural gas, make sure you're fully prepared. Get the details here: This Secret of the Oil & Gas Industry Could Hammer Your Portfolio.
Toward the end of oil's monster run up, as 84% of his portfolio was showing double-digit profits, Matt wrote, "When you get the big trend right and swim with the current, it's relatively easy to make big returns... But I'm not going to confuse brains with a bull market." And he showed his readers two simple rules for keeping commodity gains. Learn his rules here.

In The Daily Crux
Market Notes
Diesel engine producers Cummins and China Yuchai reach new highs.
Coal giants Arch Coal and James River Coal soar to new 52-week highs.
Digital storage giant SanDisk reaches new high.
Oil services are booming... Bronco Drilling (land drilling), Key Energy (well and rig servicing), and Rowan (drilling) hit new highs.
Market Watch
Symbol Price
S&P 500 1254.60 +0.6% +12.6%
Oil (USO) 38.29 +0.6% +5.9%
Gold (GLD) 135.32 +0.2% +26.5%
Silver (SLV) 28.64 -0.2% +71.6%
U.S. Dollar 80.60 +0.3% +3.2%
Euro 1.31 -0.2% -8.3%
Volatility (^VIX) 16.49 +0.5% -19.5%
Gold Stocks (^HUI) 561.32 -0.2% +33.1%
10-Year Yield 3.33 -0.6% -9.5%

World ETFs
Symbol Price
USA (SPY) 125.39 +0.6% +12.6%
Canada (EWC) 30.22 0.0% +16.9%
Russia (TRF) 22.44 +0.5% +23.8%
India (IFN) 38.52 +1.9% +31.9%
Israel (ISL) 17.38 +0.7% +16.0%
Japan (EWJ) 10.72 -0.1% +8.9%
Singapore (EWS) 13.27 -1.3% +15.8%
Taiwan (EWT) 15.00 -1.2% +20.4%
S. Korea (EWY) 58.63 +0.2% +27.2%
S. Africa (EZA) 71.92 -0.6% +31.1%
China (FXI) 43.27 +2.1% +4.6%
Lat.America (ILF) 52.46 +1.2% +14.2%

Sector ETFs
Symbol Price
Oil Service (OIH) 138.31 +0.5% +15.9%
Big Pharma (PPH) 65.18 -0.2% -2.4%
Internet (HHH) 73.45 +0.1% +28.5%
Semis (PSI) 16.42 +0.7% +23.9%
Utilities (XLU) 31.20 +0.0% -0.8%
Defense (PPA) 18.69 +0.7% +9.7%
Nanotech (PXN) 10.03 +0.1% -1.8%
Alt. Energy (PBW) 10.37 +1.2% -6.2%
Water (PHO) 19.31 +0.3% +14.8%
Insurance (PIC) 16.36 +0.3% +21.2%
Biotech (PBE) 22.09 +0.2% +34.7%
Retail (PMR) 19.41 -0.1% +23.0%
Software (PSJ) 25.41 +0.4% +24.3%
Big Tech (QQQQ) 54.89 +0.6% +22.1%
Construction (PKB) 12.93 +0.4% +8.2%
Media (PBS) 13.96 +0.7% +20.6%
Consumer Svcs (IYC) 68.03 +0.3% +21.7%
Financials (IYF) 57.08 +1.5% +9.9%
Health Care (IYH) 65.96 -0.1% +2.7%
Industrials (IYJ) 65.54 +0.8% +22.8%
Basic Mat (IYM) 76.84 +1.2% +30.0%
Real Estate (IYR) 55.43 +1.1% +20.1%
Transportation (IYT) 92.22 +1.1% +22.8%
Telecom (IYZ) 23.44 +0.6% +16.8%

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