The One Chart Every Commodity Trader Must See

The past few years have seen the global economy fall on some hard times. At the head of it all has been the U.S., whose fiscal policies and rampant immoralities led to some of the biggest banks in the world bringing down the local economy. In order to keep our heads above water, the Federal Reserve has stepped in on numerous occasions, offering bailouts for hundreds of billions to try and salvage the economy. But the economy has done little to make a solid recovery and instead seems addicted to its regular injections of quantitative easing. As such, the financial situation surrounding the U.S. and our debt policies is beginning to grow concerning [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

Investors have long been wary of the Fed’s liberal spending policies, as many have feared that it is only a temporary solution to issues that will eventually find their way to the forefront. But the debt has been an issue in the press for some time now and the severity of its consequences seem to get lost in translation. The following chart, courtesy of ZeroHege, details the current outlook for debt to GDP for the coming decades, outlining a rather desperate situation [for more commodity news subscribe to our free newsletter].

As outlined above, the U.S. debt scenario has the potential to become astronomically worse in the near future. Though Bernanke has attempted to stand pat on his reluctance to pump more money into the economy, the damage may have already been done. With a debt-to-GDP ratio soaring to potentially disturbing heights, commodity investors need to take into account the future of the U.S. and the diversification of their current holdings. With debt piles adding up quickly, the U.S. dollar could slide into a tailspin and shake up the commodity industry in a hurry [for more commentary on the U.S. economy and the commodity industry, sign up for our free newsletter].

Cautionary Plays

If the dollar does go to hell in a handbasket, a number of your traditional commodity plays will be suspect at best. Assets like grains and industrial metals will likely take a major hit (along with the entire commodity industry). Your best bet to protect yourself against a massive dip in the value of your holdings is to invest in precious metals. Gold will have the least ties to the industrial world and will therefore be relatively independent of the slowdown in that market sector. Those seeking physical exposure in gold can either buy and store it themselves, or utilize the SPDR Gold Trust (GLD), which invests in physical bullion. Otherwise those looking for more of a speculative play can utilize futures contracts to make more specific bets [see also Why No Investor Should Own GLD].

The remaining three “white metals” (silver, platinum, and palladium) will be hit harder by a slowdown in the industrial world. That being said, gold prices are much more susceptible to being altered by heavy trading and speculators, so these three metals may even be a better alternative. While there is always physical and futures investments, those looking for ETF plays should check out the iShares Silver Trust (SLV), Physical Platinum Shares (PPLT), and the Physical Palladium Shares (PALL).

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Disclosure: No positions at time of writing.