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.
Of course, we’re already nine years into what is probably a 30 year secular bull market for commodities and these things are no longer as cheap as they once were. You’ll never buy copper again at 85 cents a pound, versus today’s $3.40. 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. 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 (DIG), coal (KOL), uranium (NLR), and the equities Transocean (RIG), Joy Global (JOY), and Cameco (CCJ).
As much as I love the long term case for hard commodities, I am not expecting any action in the immediate future. Commodities will remain a no go area until it is clear whether China’s economy will suffer a soft or a hard landing, or continues to remain airborne. Use this year’s big “RISK OFF” trade to acquire serious positions. If markets rally into year end, you might catch a quick 50% gain in the more volatile securities.
Oil has in fact become the new global de facto currency, and probably $30 of the current $100 price reflects monetary demand, and another $30 representing a Middle Eastern risk premium. Strip out these factors, and oil should be trading at $40. That will help it grind to $100 sometime in early 2012, and we could spike as high as $120. After that, the ‘RISK OFF” trade could take it back down to the $75 we saw in September.
Skip natural gas (UNG), because the discovery of a new 100 year supply from “fracking” and horizontal drilling in shale formations is going to overhang this subsector for a very long time. Major reforms are required in Washington before use of this molecule goes mainstream.
The food commodities are also a great long term Malthusian play, with corn (CORN), wheat (WEAT), and soybeans (SOYB) coming off the back of great returns in 2010. 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). The grain ETF (JJG) is another handy play. Though 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 asset with the ETF’s (PHO) and (FIW).
By. Mad Hedge Fund Trader