One of my Wall Street mentors wrote the …

One of my Wall Street mentors wrote the following today:

Not the equity bulls. They had their head chopped off in 2008-2009. Even after a historic rally, they are subdued.

I mean the commodity/precious metal bulls, currently the most arrogant group of investors on the planet. According to these guys, there is no price at which gold or silver can be sold. No overvaluation level for oil or copper or corn. Commodities can only rise ever higher.

These things are ideal vehicles for speculative bubbles. No valuations, no earnings expectations, no accounting issues. And this has led to a speculative market for commodities. My gardener is trading commodities as she does my spring planting.

Look, I get the QE box, I coined the term QEi, for infinite QE. But trees don’t grow to the sky. And commodities price spikes sow the seeds of their own destruction.

It costs about $6 or $7 dollars to produce an ounce of silver and about $1.25 for a pound of copper. But, silver is money say the bulls, and avoids the laws of economics. Copper is in permanent shortage so upside is unlimited. No price is too high. Until it is. We will see how arrogant the commodities bulls remain when the inevitable correction happens.

My suspicion is that their hubris will be tested in the absence of QE later this year, but who knows. Maybe gold will be $10,000 an ounce and oil $200 per barrel in 18 months. The commodity bulls blare that this is a one decision trade. It may be. Then again, by the time something achieves “one decision” status, it’s usually closer to a high than not.

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He’s right about these precious metal bulls (and probably the oil bulls too)…I was on a panel last week in San Francisco with two other money managers and all they could talk about was how gold was up from $300 to $1300 and there was no way it could ever go down.  One panelist said gold could “pullback” 10-15% at some point and the other one scoffed at the notion of even such a minor volatility-induced pullback.  Everyone in the crowd who asked in the Q&A section anything about gold was premised on the idea that it was a no-brainer that gold is a must-own here.

I think there’s a difference between gold and the other precious metals and “storer of value” plays versus the base commodities like cotton, corn and pork bellies.  The big differentiator between the two is that one class is  something we own and the other is something we need and use.  That is, we own gold, but we consume beef and wheat.  And as the government continues to let banks print billions of dollars of risk-free profits via 0% interest loans from the same taxpayer that the banks lend that same cash back to at 3% while continuing the “extend and pretend” approach to accounting for second lien mortgages and no-holds barred accounting rules for Fannie Mae and Freddie Mac, not to mention  QE2 from the Fed and the other $14 trillion in newly minted cash that the Fed has infused into the banking system in the last three years…well, as all that continues, it’s likely that the prices of most everything will continue to go up.  You should be considering any asset class to be its own form of currency versus the valueless dollars being created around us for the elites, giant corporations and especially the banks.  That is, Google, Apple, Nuance, real estate, gold, soybeans, and anything else you traded your dollars for is in some sense an alternative currency and thus a hedge against the inflation/dollar-depreciation threat.

The $64,000 question as it pertains to gold, in my mind, is this: Does trillion dollar press pumping trump the fact that there’s nobody left to buy gold?   As Marcin rightly points out, gardeners and the same people who were flipping real estate back in 2005-2007 are now gold bugs and commodity geniuses.

I think a great pair trade is to stay with our DBA long position, which is an exchange-traded-fund (ETF) that enables us to profit on inflation in the things we use like the things that go into our food and clothes, paired with a short position in the GLD, which is an ETF that reflects the price of gold.  Don’t get fancy with the double gold short ETFs or by trying to get in the virtual trading pits against the commodity trading professionals with leverage or anything like that.

I’m long the DBA already and at some point in coming weeks if and when gold were to start to break down, I might be adding some gold short positions to the sheets too.  Regardless, my point is that long base commodities, short gold is the safest way to set ourselves up for the inflation/dollar-depreciation dynamic while protecting ourselves from the warnings of newfound commodity bears like my friend Marcin.