Dear Paul,

I keep reading that a political mishap or an escalation in wars in the Middle East could dramatically  drive  up  oil prices and the stock market would go down.  How does FOXHALL CAPITAL manage this type of risk?

We believe that every investor in the stock market should always have a portion of their investments in “HARD ASSETS. “  Hard assets are investments in real things like oil, real estate, currencies, raw materials, gold, silver and other precious metals.

HARD ASSETS REDUCE RISK IN YOUR PORTFOLIO 

Hard assets and commodity prices often move independently from stocks and bonds, helping diversify a portfolio. Over the past four years, the prices of stocks and commodities have climbed, with both benefiting from buoyant economic growth. But in many other periods, they moved in opposite directions.

That’s partly because hard asset and commodity prices typically rise with inflation, which hurts stocks and bonds. For example, many hard asset prices-like oil and Gold-soared during the double-digit percentage inflation of the 1970s, and then fell through the 1980s and 1990s as inflation declined.

But to the point of your question, hard asset prices often surge during war or other political or financial turmoil, when businesses are uncertain of supplies and many investors prefer tangible holdings to stocks or bonds. Hard asset prices rose after the 1987 stock market crash and after the Iraqi invasion of Kuwait in 1990.

And because most commodities are priced in U.S. dollars, they rise when the dollar falls-as has happened recently-because producers demand more of the currency to compensate for its shrinking value.

Investing in hard assets is really a hedge, a risk-management tool against inflation, geopolitical events and a falling dollar. 

THE FOXHALL CAPITAL HARD ASSET STRATEGY 

Foxhall Capital provides clients with a specialized portfolio option made up entirely of hard asset ETFs (Exchange Traded Funds). It is called our FOXHALL CAPITAL GLOBAL MARKET ROTATION HARD ASSET STRATEGY. In the other portfolio strategies that FOXHALL CAPITAL manages, we always try to have at least some percentage of the portfolio invested in hard assets.

Besides inflation, geopolitical risk and a falling dollar, as global investors, there are other reasons to have a portion of all your investments diversified in hard assets.

ASIA & EMERGING MARKETS ARE DRIVING HARD ASSET PRICES UP

A wide range of commodity prices are now soaring primarily because of fast global economic growth, particularly in China, India and other developing economies.

In China, for example, the government and businesses there are racing to build factories, office buildings, power plants and other infrastructure, while an increasingly affluent population wants to drive more cars and buy more electronics.

China’s economy is widely forecasted to grow 10 percent or more this year. That adds to strong demand elsewhere, pushing up hard asset prices for everyone.

Nickel, for example, is used to make the stainless steel needed to expand oil refineries in China, build tanks to store ethanol in Iowa and produce batteries for cell phones and laptop computers around the world. Nickel prices have more than tripled since 2003.

Similarly, uranium prices have more than quadrupled in the past two years, in part because of China’s push to expand its use of nuclear energy. Uranium is a key fuel for nuclear power plants. Also, the steep run-up in aluminum, zinc, copper and other base metals since early 2003 largely reflects the China effect.

The DOW JONES-AIG COMMODITY TOTAL RETURN INDEX, a popular benchmark index that tracks changes in the prices of 19 hard asset commodities, has more than doubled since early 2002.

HARD ASSETS SHOULD OUT-PERFORM IN THE NEXT RECESSION

Hard assets usually out-perform in bear markets and recessions. It may be several years before we see another recession and major bear market, but make no mistake about it, one is eventually coming. Recessions and bear markets are always a part of the natural cycles of stock markets.

But how do investors protect their portfolios during bear markets and recessions?

An investor has to be confident that his investment manager has a strategy to try to make money during the next down-turn in the stock markets. At FOXHALL CAPITAL, we will aggressively move all of our client’s investment portfolios to bonds, money market funds and hard asset funds during the next major bear market or recession. Our goal at Foxhall Capital is to first protect our client’s principal and second to try to make money during the next down-market cycle.

Until next week….

-Paul Dietrich

dietrich@foxhallcapital.com