With many of macroeconomic and debt problems facing Europe and the United States still in place, investors continue to flock to precious metals. Funds like the ETFS Physical PM Basket Shares (ARCA:GLTR) have begun popular portfolio additions and have seen assets under management swell.
While prices for gold, silver and the platinum group have taken a breather over the last few months, a variety of analysts and pundits continue to set price targets for the next few years. One prominent Canadian fund manager and superstar in the commodities world recently gave his forecasts for an array of natural resources. For retail investors, seeing what the pros do, can yield be results. (For related reading, see A Beginner's Guide To Precious Metals.)
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A Bullish Forecast
With over $10 billion in natural resource-related investments, Eric Sprott is no slouch when it comes to commodities investing. Over the last 35 years, Sprott's excellent track record in managing a variety of resource funds has resulted in him becoming a sought-after commodities guru and speaker.
In 2007, Sprott was named Fund Manager of the Year by Investment Executive, a Canadian magazine, and he frequently appears on CNBC and other financial news outlets to share his views. Aside from price forecasts and analysis, Sprott has also been one of the most outspoken critics about the potential manipulation in the silver markets. In a recent interview with news organization Reuters, Sprott gave his price targets and opinion on the natural resource markets.
The Canadian fund manager continues to be bullish on gold and silver prices and expects gold to hit a record above $2,000 an ounce this year. Sprott cited continued strong physical gold demand by both investors and central banks in the emerging world. Massive imports of gold by China and Turkey at the end of 2011 and India's continued voracious appetite for precious metals are encouraging signs.
Sprott highlighted the miners of precious metals as great ways to play gold's continued surge upwards, saying "I think there is more upside to the gold-mining stocks as they were absolutely crushed when the price of gold went down. But when gold goes back up, the stocks will provide a better return." In addition, Sprott sang the praises of the energy market due to its relatively inelastic demand and depleting output.
On the other side on the coin, cyclical commodities like coal, steel and iron ore, were given a downgrade by the hedge fund manager. Overall, Sprott believes that any sort of economic contraction will severely undermine the demand/price for these commodities. Overall, the fund manager has been bearish on these cyclical commodities since the 2008 global economic crisis. (For additional reading, see An Overview Of Commodities Trading.)
Following Sprott's Lead
With a solid track record in the commodities space, investors may want to take Sprott's advice and position themselves accordingly. The manager has been critical of physically backed funds like the iShares Silver Trust (ARCA:SLV), since only registered participants can exchange shares for the physical metal. To that end, Sprott launched two closed-end funds, the Sprott Physical Gold Trust (ARCA:PHYS) and Sprott Physical Silver Trust (ARCA:PSLV), which allow retail investors to do that. It should be noted that both funds trade at premiums to their net asset values.
The Vanguard Energy ETF (ARCA:VDE) is one of the best options to play the sector, featuring energy heavyweights like Schlumberger (NYSE:SLB) and Occidental Petroleum (NYSE:OXY). The fund tracks 167 different energy firms and charges a dirt-cheap 0.19% expense ratio. Similarly, the iShares Dow Jones US Oil Equipment (NYSE:IEZ) plays into the notion that "It's getting tougher and more expensive all the time to produce energy."
Finally, to play the potential downside in cyclical commodities, the Direxion Daily Basic Materials Bear 3X Shares (ARCA:MATS) shorts an index related to chemicals, metals and mining, paper and forest products, and construction material stocks. Investors can also use the PowerShares DB Base Metals Short (ARCA:BOS) to play the short side of the industrial metals complex.
The Bottom Line
Eric Sprott's knowledge of the commodity sector has made him one of the top gurus in the commodities space. His latest forecasts show bullish news for both precious metals and energy. Retail investors who follow his advice and tilt their portfolios accordingly, could see some big gains in the upcoming year. (To learn more, read A Guide To Investing In Oil Markets.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.