Wednesday, October 13, 2010

DBA versus GLD

The top chart shows the historical trend of the agricultural index exchange traded fund (ETF) Deutsche Bank Agricultural Index, DBA and the bottom chart shows GLD since late 2005.  The DBA chart had a double top two years ago just prior to the crash of '08. Double tops are a classic technical signal of an impending decline, and it worked in the case of DBA.  I googled the DBA and found a few technicians commenting on it to the effect that it has been/is a weak stock because of the double top two years ago.  Note the contrast with GLD, which has had a relatively steady upward trend, having taken a small double top and dip during the '08 roller coaster but recovering quickly and profoundly.

I have a problem with that combination of facts, though.  If gold is going up it is because of monetary demand, that is, people want to use gold to save instead of dollars, then people anticipate inflation and therefore DBA should go up.  If gold demand has a logical foundation, then inflation is impending.  If inflation is impending, then agricultural prices should be going up. This is especially true because the inflation has been caused by over-investment in real estate due to Federal Reserve and commercial banking's counterfeiting money and then investing the proceeds in politically favored industries, namely construction and real estate.  To expand investment real estate, the supply of agricultural land had to be reduced. Hence, there would seem to be upward pressure on food prices.  Last week DBA went up six percent in one day.  Since June, when DBA hit its low, it has gone up 28%, from $22.85 to $28.52.

The technicians may underestimate the effect of the underlying process of monetary inflation on long term food prices.  I bought DBA about two years ago and I'm up about 12%. The DBA has underperformed both gold and the stock market during that period. It may be subject to further downward fluctuations (the technicians have asserted this until recently) but given the recent trend it may be that the lean years are coming to an end for DBA.

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