Why a Commodities Super-Boom is Inevitable

By: Paul Mladjenovic | Tue, May 12, 2009
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As we watch the roller-coaster ride that the markets are on, we consider the next moves. Where do you put your money? In these unsettling and uncertain markets, where are the "bubbles" waiting to pop and...where are the markets waiting for a true bullish run?

First, in what investing venues should you be wary? What markets look bearish or (at the very least) don't look bullish? In short...what should you consider avoiding today?

Let's take a look at the major choices...

  1. Real Estate- this market is still reeling and there is no potential for a strong upturn any time soon. The inventory of unsold properties is still too high. Buyers are justifiably still wary and sellers are still struggling with unsold property. Lending standards are tightening and the market is still focused on unusually high foreclosure rates and troubled mortgages. It is a buyers' market to be sure but it may be one for years to come. For now, prudence tells us to be ultra-cautious here and wait for more data to come in during the coming months to give us a better picture before diving in.

  2. Stocks- this is a schizophrenic market since lately it has been so typical for bad stocks to go up and good stocks to go down. In addition, many sectors are bad long-term investment while a few are acceptable. As I have told my readers in the recently-released 3rd edition of "Stock Investing for Dummies", stay focused on "human need" stocks (food, water, energy, etc.) and be very wary of everything else. There is still plenty of downside risk in cyclicals, construction, consumer discretionary, technology, manufacturing and retail. The political policy and economic environment is not conducive to a strong rebound any time soon. In the long run, bad stocks will go down and good stocks do go up. However, the short-term irrationality of the markets give investors false signals. Caution is the primary concern.

  3. Bonds- Should you put money into debt instruments? There's plenty of variety here. Corporate bonds, municipal bonds and US treasury bonds are the usual choices. In spite of the recent shake-outs in this area, there are still pitfalls. Corporate bonds have a higher interest rate but they are riskier since the companies that issue them get money to repay this debt from customers (voluntarily getting money by selling goods and services) and these customers are spending less these days. Municipal bonds are a little safer since they get paid by forcing taxpayers to cough up the money (through income taxes, real estate taxes, etc.). However, government agencies that issue municipal bonds (state, county and local governments) have (as a group) been spending beyond their means. Most states (47 out of 50) have budget deficits and their ability to repay their liabilities is suspect. Treasury securities are much safer but their interest rates are very low. Even 10-year treasury bonds are running at about 3%. Treasuries may be an acceptable choice for the short-term but they are not a safe, long-term place for your wealth. Why? Inflation is certain to coming roaring back during the next few years.

  4. Mutual Funds & ETFs- Mutual funds and ETFs are basically "conduits" and are only as safe as what they invest in. Mutual funds and ETFs that are in "good investments" do well long-term while those in "bad investments" tend to do poorly long-term. As I have written earlier in this essay, consider mutual funds and ETFs that are tied to securities (such as stocks) that are in "human need". Those mutual funds and ETFs that are tied to the general stock market are risky and I mention some vulnerable sectors in the prior segments on stocks and bonds.

  5. Cash- This has been the safest place during the past 9-12 months. Everyone should certainly have a portion of their money in this vehicle (such as having a savings account that serves as an emergency fund). Unfortunately, the interest rate is generally under 1%. As with bonds, you risk losing purchasing power when inflation comes with a vengeance. In other words, "cash" and cash equivalents are not a good place to be long-term.

  6. Commodities- Available in a variety of vehicles for both investors and speculators, commodities had a mini-"boom and bust" period during the twelve months of 2008 but they have been on a long-term bull market since the beginning of the decade. This is a risky and volatile area but I am generally bullish on this sector (more on this later in this essay).

Yes...there are more areas to consider (collectibles, etc.) but these are the areas that are most acknowledged as conventional venues for investment and speculative purposes. Next, let's consider what economic conditions we are facing currently (or expected):

  1. The US economy is in a soft depression right now. Business failures, job losses, bankruptcies, foreclosures and other difficulties are at troublesome levels and this has resulted in severe economic contraction.

  2. Debt levels in most areas of our society are still at historically very high levels.

  3. The size, scope and cost of government at all levels have hit all-time highs (and growing).

  4. Taxes at the state/local level are currently increasing and federal taxes are set to increase either next year or in 2011 (depending on our politicians).

  5. Many countries are modernizing their economies (such as China and India)

  6. Demand for goods and services have fallen due to economic contraction and the de-leveraging of debt. This has caused temporary "deflationary" conditions.

  7. A current government report tells us that medicare and social security liabilities are soaring past $50 trillion and are heading into financially difficult times during 2010-2017.

Given all the above, what should people consider to keep growing their money? What sector will be the beneficiary of current (and expected) economic conditions? The short answer is a simple one: COMMODITIES. Why?

  1. Demand. According to the World Population clock (found at the U.S. Census Bureau website), the world population on 7/1/08 was 6,710,926,117. A year later, the projected population for 7/1/09 is expected to be 6,790,062,216. That's an increase of almost 80 million people in just twelve months. 80 million! At this rate, the world poulation will surpass 7 billion by 2012. Billions of people to feed, clothe and shelter. More people that want more stuff such as food, water, energy, materials and so on.

  2. Supply. The supply situation for many commodities are tightening. Due to a variety of factors- weather, government restrictions, the credit crisis, etc. the natural resource sector has limited or falling production that will not be easy to increase in the coming months and years. Many commodities are facing conditions where their production may be peaking in the next few years. Total world oil production, for example, peaked in 2005 and has been steadily decreasing ever since. The recent financial and economic turmoil has only exaserbated the situation. Grains, base and precious metals are also experiencing production decreases. Old copper mines are being depleted and there have not been any new major copper discoveries. The bottom line is that commodities are not in abundance right now and it is a huge and serious question about adequate future supplies to meet growing demand.

  3. Inflation. Yes...economic conditions have been "deflationary" but understand that prices have falled (or not risen) due to 'supply and demand" factors as consumers have drastically pullled back their spending which in turn as forced businesses to contract. As businesses contract, they ultimately have to lay off workers who in turn spend less due to income loss. It becomes a vicious cycle. Therefore, market forces in these conditions have driven prices lower but "lower prices" are not "deflation". The terms "inflation" and "deflation" are really references to the money supply (our currency). Our government (through our central bank, the Federal Reserve) has issued TRILLIONS of new dollars. This massive money creation and massive spending can not be done without consequences. All of this "over supply" of dollars will ultimately permeate our economy. The bottom line is that our economic necessities -- food, water, energy, etc. -- will rise in price.

  4. More government spending. Those massive so-called "stimulus plans" by our government and other governments (such as China) will artificially push up demand for natural resources as infrastructure projects and other spending programs kick in.

  5. Government restrictions. Many governments (including our own) are expanding regulations and taxes on business and production. This will have a net negative effect on production.

To summarize:

More people + more demand + less supply +
more inflation + government spending + government restrictions
An inevitable, historic commodities super boom

The prices of commodities will hit record highs in the coming years. This is why I tell my readers and students to focus their portfolio on those areas that are tied to "human need" (such as commodities). Millions will get hurt by what is coming but those that are prepared can not only avoid losses but could potentially make fantastic gains. To find out more, check out my newest mini-seminar, "How to Cash in on the Commodities Super Boom" (available as a mini-seminar audio report).

Be patient, displined and focused and you will survive and thrive through what will be most likely an inflationary depression that is heading our way. Stay tuned...



Paul Mladjenovic

Author: Paul Mladjenovic

Paul Mladjenovic, CFP

Paul Mladjenovic

Paul Mladjenovic, CFP is the author of the audio ebook "Financial Firewall: How to Protect your Money and investments in the age of Financial Chaos" and his website is www.RavingCapitalist.com. He is also the author of "Precious Metals Investing for Dummies" and the financial newsletter, the Prosperity Alert.

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