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Year End Risk Analysis: Commodities

This is my favorite asset class for the next decade, as investors increasingly catch on to the secular move out of paper assets into hard ones. Don’t buy anything that can be manufactured with a printing press. Focus instead on assets that are in short supply, are enjoying an exponential growth in demand, and take five years to bring new supply online.

The Malthusian argument for population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth. Of course, we’re already eight years into what is probably a 20 year secular bull market for commodities and these things are no longer as cheap as they once were. So you are going to have to allow them to breathe.

Ultimately, this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. You can start with the traditional base commodities of copper (CU) and iron ore. The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE). Add the energies of oil, coal, uranium, and the equities Chevron (CVX), ExxonMobile (XOM), Transocean (RIG), Joy Global (JOY), Peabody Energy (BTU) and Cameco (CCJ).

Crude has in fact become the new global de facto currency (along with gold), and probably $30 of the current $88 price reflects monetary demand, on top of $58 worth of actual demand from consumers. That will help it spike over $100 sometime in 2011. Don’t forget alternative energy, which will see stocks dragged up by the impending spike in energy prices. My favorite here is First Solar (FSLR).

Skip natural gas (UNG), because the discovery of a new 100 year supply from fracting and horizontal drilling in shale formations is going to overhang this subsector for a long time.

The food commodities are probably among the cheapest resources around, with corn, wheat, and soybeans coming off the back of bumper crops in 2009, and can be played through the futures or the ETF’s (MOO) and (DBA), or the stocks Mosaic (MOS), Monsanto (MON), and Agrium (AGU). Through an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. You can participate in this most liquid of assets with the ETF’s (PHO) and (FIW).

By. Mad Hedge Fund Trader

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  • Anonymous on November 15 2010 said:
    A 100 year supply of natural gas thank to 'fracting' and horizontal drilling. I'd hate to have to explain that to a room filled with intelligen people.But aside from that this is a very useful article.

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