The view from my contacts at the London Metal Exchange is that the sharp sell-off in commodities over the last three trading days was due primarily to short-term profit-taking. The run-up (and consequent correction) in the price of copper was particularly acute. With the price of the red metal up fivefold in the last two and a half years and 40% in the last two months alone, short-term speculators were anxious to lock in profits.
"Everybody has got a bit jumpy," said Mark Mathias, managing director of the Dawnay Day Quantum hedge fund and a former London Junto presenter. Added Mathias: "We’ve seen very sharp rises over the last couple of months on equities and commodities, so it’s no surprise it’s being marked down a bit."
Sharp corrections notwithstanding, the fundamental case which has fueled the commodities boom — demand from China and India to build its industrial infrastructure — is still in place. In the context of the secular bull market, the sell-off over the last three days is but a small hiccup. As long as you can stomach the occasional bouts of short-term volatility, commodities remain the "buy and hold" asset class of the next decade.
The bottom line? Corrections within secular bull trends like this one are great news because they offer investors yet another bite at the commodities apple.
The best way to play Mr. Market’s current swoon? Australia-based commodities giant BHP Billiton Limited (BHP). With 37,000 employees working in more than 100 operations in approximately 25 countries, BHP is the world’s largest diversified commodities company — and occupies top notch positions in a wide range of commodities businesses. As such, BHP is the:
- World’s second-largest copper producer
- World’s second-largest exporter of energy coal
- World’s third-largest producer of nickel
- World’s fourth-largest producer of uranium
- World’s sixth-largest producer of primary aluminum
BHP also has significant interests in the oil and gas business and engages in the mining, drilling, and processing of iron ore, manganese, diamonds, silver, and titanium. A genuine global player, BHP’s businesses stretch out over the U.S., Australia, Trinidad and Tobago, Pakistan, Algeria, Brunei, Darussalam, South Africa, Canada, and the Philippines.
So now is a great time to buy BHP Billiton Limited (BHP) and place your stop at $35.50. To play the inevitable bounce, buy the November $50 calls (BHPKJ.X). A word of warning: BHP — and commodity stocks in general — may be in for a volatile few weeks.
We were stopped out of Rio Tinto (RTP) where you booked a profit of almost 20% on the stock and an average of 76% on the options.
We also hit our stop on Singapore-based Chartered Semiconductor (CHRT). You exited the stock at a profit, and the options were up an average of more than 20%.
For those of you who want to play for additional upside on Brazilian discount airliner GOL, it has now corrected to a level where I’d recommend the October $40 calls (GOLJH.X).
I hope to see some of you at the Money Show in Las Vegas this week, where I will be presenting on a panel with Dr. Mark Skousen and Doug Fabian on Thursday, May 18th, to be followed immediately by a workshop I am leading on "The Top Five Global Bull Market Picks for 2006."