Commodities Boom- You ain't seen Nothing Yet!
Commodities / Resources Investing May 30, 2008 - 03:19 AM GMT
Nearly every natural resource under the sun is about to enter the second, most powerful phase of their bull markets, eventually reaching dizzying heights that make today's record prices seem tame by comparison.
Almost everyone would scoff if I gave you my peak projections for copper, uranium, corn, wheat, and each of the other commodities I follow. They'd probably lock me up in Bellevue!
But then again, that's what the so-called experts said of me six years ago, when I proclaimed gold would surpass $1,000 an ounce and oil would easily climb to over $100 a barrel.
Maybe now they're listening!
Bottom line: As for the natural resource bull markets, "You ain't seen nothing yet!"
All told, I see five persistent, strengthening forces that explain why the boom in commodities is poised to explode ...
Force #1: Demand Continues To Soar!
I'm just back from three months spent touring Asia. Anyone who tells you Asia's economic growth is slowing has been smoking something.
Why do I mention Asia? Because it happens to be ground zero for the demand side of the bull market in natural resources. There is simply NO WAY anyone can even come close to forecasting the boom without understanding Asia.
Some recent facts, supported by my own eyes and ears when I was in Asia ...
- China's 2008 copper demand will increase by as much as 15%, while India's will jump nearly 10%.
- Asian demand for food is growing faster than Asian economies' GDP, and is expected to jump as much as 50% by 2020.
- Oil demand in China for the first quarter of this year shot up a whopping 8%!
And as strong as all that demand emanating from Asia is, it is not the only place with strong demand for natural resources.
Demand is increasing in almost every corner of the globe.
- Gold: According to the World Gold Council, dollar demand for gold reached US$20.9 billion in the first quarter of 2008, a 20% increase over the same period in 2007 and more than double the level of four years earlier. Investment surged 163% to 284 tonnes in the first quarter of 2008.
- Oil: IEA forecasts global oil demand for 2008 to reach 86.8 million barrels per day. This figure is expected to increase about one million barrels per year for the next five years. Global demand is expected to rise to about 115 million barrels a day by 2030.
- Steel: Global steel demand growth is forecast to reach over 1.45 million tonnes in 2011, a massive 88% leap in the ten years from 2001.
- Cement: Global demand for cement will grow 5.3% annually through 2012, driven by strong increases in construction activity in developing countries. India will grow the fastest.
- Platinum: In 2007, global demand for platinum increased by 8.6% to a record 7.03 million ounces.
- Agricultural commodities: Up to a 50% increase in demand in the next 20 years!
And all of this despite a slumping economy in the U.S., the world's largest consumer of natural resources, and a sluggish economy in the world's second largest economy, the European Union!
Now imagine, just for a few seconds, what would happen to global demand for oil, gas, coal, iron ore, cement — you name the natural resource — if the U.S. economy improves, even in the slightest?
All bets are off. Even my projections for how far this bull market in natural resources can go could end up looking conservative.
Force #2: Supplies Continue To Dwindle.
With all the money pouring into the commodity markets, you'd think supplies would be ramping up. But nope: Supplies of virtually every natural resource under the sun are dwindling.
Some recent evidence ...
- The global platinum market ended 2007 in a deficit of 480,000 ounces, with demand of 7.03 million ounces surpassing supply of 6.55 million ounces.
- According to the World Gold Council, in 2007 gold supply decreased 3% to 3,469 metric tonnes. Of that, mine supply decreased 3% to 2,047 metric tonnes.
- The International Energy Agency is now (finally) concerned that future crude supplies could be far tighter than previously thought. Previously the agency has predicted that crude supplies will arc to keep pace with rising demand, topping 116 million barrels a day by 2030. But now the group worries that aging oil fields and diminished investment may leave oil companies struggling to produce even 100 million barrels a day for the next two decades.
- Copper: New 2008 supply will only feed an additional 2.3% into the market. Furthermore, stockpiles of copper monitored by the LME have dipped by more than a third since the beginning of the year.
- Global grain reserves are "precarious" at only 1.7 months of consumption. Wheat inventories, for example, have reached a 30-year low. For rice, global ending stocks finished in December 2007 at 72 million tonnes, an all-time low.
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| With hundreds of millions of families around the globe consuming more meat, agricultural commodity reserves are at record lows. And according to U.N. projections, the world population will increase from 6.5 billion to 9.2 billion between now and 2050. |
The chief reasons for the sinking supplies: Besides record demand, in many commodities like oil and gold, there simply isn't enough left in the world. And of what is left, the quality is lower, and the cost to bring it out of the ground is higher.
In other natural resources such as foods, base metals, and more, there simply was not — and still is not enough — investment in farming, mining, mining technology, and infrastructure, in repeated problem areas like water, irrigation, mine safety — and more to increase production safely and quickly.
So we are all paying the price now, and will pay increasing prices for years to come. In fact, as I've reported to you previously, the world's consumption of natural resources is already 1.3 planet Earths. And by 2050, two planet Earths will be required to meet forecast demand.
Force #3: Weak U.S. Dollar Adds To Upward Price Pressure.
That's a no-brainer to most of you by now. But what's not as obvious is that the dollar's bear market has a long way to go.
The dollar has tried to rally recently, but the bounce failed miserably, and now the greenback is hovering just above its all-time record low.
Will it collapse to another new low? Or will it bounce again? Whatever it does in the short term, you can rest assured that no matter what, long term the value of the dollar can slump another 30% to 40%.
Do you have any idea what that would do to the world's economy from an inflation perspective? Three-quarters of the globe is already experiencing double-digit inflation. Soon, the entire world will be in the throes of double-digit inflation. And then, when the dollar takes its next big swoon, we will even see triple-digit inflation start to show its face.
There is no solution to the dollar crisis that's occurring. Reason: Our own Federal Reserve wants the buck pummeled lower and as much asset inflation as possible. It is the only way — I repeat, the ONLY WAY — they can deal with the massive mountains of debt that exists in the U.S. (and in other parts of the world) — by devaluing the dollar and inflating asset prices relative to fixed debts.
As a corollary of the weak dollar ...
Force #4: Central Banks All Over The World Will Remain Passive On Inflation.
Oh, they will jawbone it to death, talk about how they are going to control inflation, and not let it get out of hand.
But their actions will be entirely different. There is not a central bank on the planet that will aggressively hike interest rates to dampen domestic inflation rates.
Why? Because most economies — emerging and mature — are much too weak to handle higher interest rates. Because there's too many mouths to feed in the world today, literally and figuratively, and because there isn't a central banker on the planet today who is willing to choose deflation over inflation, recession or depression over growth, even if the growth is merely a mirage and covered up by inflation.
So don't count on any Paul Volcker-type, gun-slinging, inflation-killing central bankers riding into town to kill off inflation. It's not going to happen. Not for a long time.
Force#5: Natural Resource-based Wars.
Yep, they're already brewing. In Nigeria, over oil. In the East and South China Seas, over the Sprately Islands and the huge oil reserves that lie beneath.
They're also brewing in the form of trade tariffs, export constraints in food markets, and arms-smuggling in Darfur and the Sudan to support local genocidal groups in order to get access to everything from oil to cocoa.
In Latin America, with Chavez. With Columbian fighters skirmishing over border rights with Venezuela (where oil transportation and taxation are the underlying motives).
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| In the event a geopolitical flashpoint erupts or an act of natural-resource based terrorism occurs, oil futures prices would go parabolic at the NYMEX. |
Even Russia, with the threat of oil and gas shutdowns to try and control Eastern Europe, mostly for political gain, but also to control greater access and control over the flow of oil.
Natural-resource based terrorism and actual wars are going to be on the rise from here on out, unfortunately. Besides the terrible human cost, these conflicts will dramatically cause prices to rise even more.
I could go on and on. There are many more forces driving commodity prices higher, for years to come.
To review, some of the targets I expect to be able to check-off in the months and years ahead ...
- Gold more than $2,200 an ounce.
- Oil more than $200 a barrel.
- Food prices ... corn, wheat, soybeans ... QUADRUPLING.
- Sugar, quintupling. Coffee, quadrupling.
And dozens more natural resources leaping to record highs well beyond what most people and analysts believe possible.
My Suggestions:
Without question, a large chunk of your portfolio, by far the biggest, should be allocated to the natural resource sector.
And these are the four main areas and vehicles I believe you should consider investing in ...
1) Gold: As a core commodity, via the SPDR Gold ETF (GLD) . This fund, formerly known as the streetTracks Gold Trust, allows you to invest in an exchange-traded fund (ETF) that owns the physical gold for you, but without the storage hassles.
My favorite gold stock mutual funds are Tocqueville Gold Fund (TGLDX) ... U.S. Global Investors World Precious Minerals Fund (UNWPX) ... and the U.S. Global Investors Gold and Precious Metals Shares (USERX) .
2) Oil: Also as a core position, via Profunds UltraSector Oil & Gas (ENPIX) , and the U.S. Global Resources Fund (PSPFX) .
3) Food: Via an investment like the new PowerShares Agriculture Fund (DBA), an ETF devoted to tracking the prices of the major food groups, especially grains. This fund allows you to effectively invest in agricultural commodities, but without having to go into the futures or options markets.
4) Asia, via investments like:
The First Trust ISE Chindia Index Fund (FNI) , which seeks out the best returns from companies in China and India in the following industries: Oil and gas, software, telecommunications, banks, Internet and mining.
U.S. Global Investors China Regional Opportunity Fund (USCOX): This mutual fund invests at least 80% of its money in the China region, from Mainland China to Hong Kong, Taiwan and more.
iShares FTSE/Xinhua China 25 Index (FXI): One of the most liquid ETFs that tracks China's top 25 companies, the FXI is a great way to play China.
Do that, stick with the long-term view, and you may well end up making more money that you ever imagined.
Best wishes,
Larry
P.S. To be sure you don't miss any of my upcoming signals and recommendations to profit from the next phase of the rally in natural resources, subscribe to Real Wealth Report now . It's only $99 a year for 12 issues, urgent flash alerts whenever warranted, and more. Click here for more information.
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