Will a Euro Collapse Wreck Your Commodities Allocation?

It seems that the collapse of the euro, and possibly a global financial market correction, has become more likely than not in the next few year. It started with the fiscal disaster otherwise known as Greece, which has public debt equal to 166% of total GDP. But as time went on, Spain, Italy, Portugal, and Ireland all joined the race, with the latter four nations all faced with debts totaling to more than 100% of GDP (and let’s not even think about France’s 87% ratio of the same caliber) [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

Multiple bailouts and rescue packages have been installed in order to avoid and all out contagion, but there seems to be no easy fix. Famous economist Milton Friedman once predicted (prior to his death in 2006) that the euro would not survive its first crisis. He even went as far as to say that Italy would be one of the most worrisome nations — in 1998! With each day looking more and more like Friedman will turn out to be correct, we ask the question, is your commodities allocation prepared for the euro collapse [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand]?

Which Commodities to Avoid

To stay on the safe side of this collapse, investors will want to avoid a number of commodities–especially primary trading commodities like softs, ags, and energies. While it is certainly possible to take positions in these assets over the long term, these commodities will be among the most volatile when there is a global correction, and you will probably want them nowhere near your long term holdings. That being said, these assets will create some strong opportunities for active traders. Those with the risk appetite to take a calculated position in something like sugar futures have an overwhelming potential to turn a profit [for more gold news subscribe to our free newsletter].

Another big category that will destroy value will be industrial metals. A euro collapse will send the world back into another tailspin, similar to 2008. With that will come a supreme weakness in the construction industry and the inevitable crash of its underlying metals, like copper, aluminum, steel, and others. The following charts shows how the copper ETN fared during the 2008 crash, as copper prices bottomed out [see also Three Commodities Dividend Lovers Must Own].

Which Commodities to Own

Your best bet is to stick with precious metals. Precious metals, like gold, will offer a great store of value for your money. Also note that in recent years, these two metals have been deemed with safe haven status, so many investors flee to these assets when stocks are teetering, hence why gold topped $1,900/oz. when markets went haywire in 2011. Though investing in precious metals may not make you any money during the tough times ahead, they will likely lose far less than their equity and commodity counterparts, making them ideal allocations [see also Does GLD Really Hold Gold, Or is it a Scam?].

The above chart displays what happened to both gold and silver during the last crash in comparison to the DB Commodity Index Tracking Fund (DBC) which invests in the 14 most heavily traded futures contracts in the world. Though gold saw a dip, it was able to hold its ground much better and continue on to make strong gains. At this point, some investors may be arguing that sitting in cash is by and large the safest place to be. Bear in mind that while your money is sitting in cash, earning practically 0% interest, gold prices will be keeping up with inflation and holding the value of your money, while your cash will simply be devaluing every day that it sits [see also Why Warren Buffett Hates Gold].

Beyond precious metals (and don’t forget that platinum and palladium fall under that category), finding other attractive hard assets is an extremely difficult task, as few have the safe haven appeal and track history that precious metals carry. Your best bet is to keep your eyes on the market and time out your buys depending on what kind of timeline you feel that the euro zone has ahead of it.

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Disclosure: No positions at time of writing.

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

8 Responses to “Will a Euro Collapse Wreck Your Commodities Allocation?”

  1. [...] The Euro Crisis: Much like the general sentiment that gold would smash through the $2,000 barrier, many feel that the euro crisis leading to a major financial collapse is only a matter of time. With a number of the world’s biggest economies faced with mountainous debt piles (the U.S. included), equity markets could be poised for major losses. Recent weeks have already shown us what bad data and troubling news can do to markets around the world, as stocks have remained volatile. If the euro were to fail along with countries like Spain, Greece, Italy, Ireland, and Portugal, a rush into this precious metal could very well follow. Multiple bailouts and rescue packages have been installed in order to avoid an all out contagion, but there seems to be no easy fix. A euro fallout will mean big days for this precious metal as its price will probably skyrocket [see also Will a Euro Collapse Wreck Your Commodities Allocation?]. [...]

  2. Rayjbuccino says:

    Actually if you look at a chart of the ratio of GLD TO DBC, it will show that gold relative to dbc declined severely during 2008 before it rebounded in the years following.   In other words, during the actual crisis, gold did not outperform the basket of commodities.

  3. [...] Instead, Mario Draghi has taken in the reins in a Bernanke-like fashion. To be fair, Draghi’s open-ended asset purchasing program came a few days before the Fed’s, but Helicopter Ben has long been a proponent of debt purchasing. For the time being, Roubini feels that the asset purchasing will prop up markets and economies but that they will have to suffer a contraction at some point in the future. Given that Dr. Doom has been frighteningly accurate with some of his past predictions, investors may be a bit more wary of the failing European nations [see also Will a Euro Collapse Wreck Your Commodities Allocation?]. [...]

  4. [...] allocated to the mining industry. The South African economy has already been hit hard by the eurozone crisis, and now strife in the platinum mining sector is making things worse. The sector employs 180,000 [...]

  5. [...] all of the turmoil in markets this year, we have seen a number of investors change their positions on statements made in the [...]

  6. [...] all of the turmoil in markets this year, we have seen a number of investors change their positions on statements made in the [...]

  7. [...] all of the turmoil in markets this year, we have seen a number of investors change their positions on statements made in the [...]

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