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Don’t Buy Anything That Can Be Created With a Printing Press

We’re already eight years into what is probably a 20 year secular bull market for commodities. You can start with the traditional base commodities

I just want to take a moment to provide the long term view of 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 on population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth. Consumers want to buy stuff tomorrow, but many commodities take up to a decade to bring new production online.

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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. Copper at 85 cents a pound? Oil at $8 a barrel. You could have bought all you wanted 10-12 years ago at these prices, which are distant memories today. There is no doubt the hot money is here in size, so bring on the volatility. You are going to have to allow these things to breathe.

Ultimately this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. Some one billion people are expected to join the middle class over the next decade, and 2 billion by 2050. All of them are going to want to buy “things” made out of natural resources.

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You can start with the traditional base commodities of copper 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 Transocean (RIG), ExxonMobile (XOM), Occidebtal Petroleum (OXY), Joy Global (JOY), and Cameco (CCJ). Crude (USO) has in fact become the new global de facto currency (along with gold), and probably $30 of the current $75.50 price reflects monetary demand, on top of $45.50 worth of actual demand from consumers. That will help it spike over $100 sometime in the next year.

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 that absolutely killed prices. But growing emerging market appetites for more and better food will send demand soaring, just as the benefits of the “green revolution” peter out. These can be played through the futures or the ETF’s (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU).

Through an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. Who will need new fresh water supplies the most? China. 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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