This extended Bull run initiated at the turn of the millennium is expected to last at least another decade. Though these elevated prices are here to stay, it's not too late to explore opportunities to put your money to work in the commodity arena.
The explosion in commodity prices (e.g. raw materials, natural resources, precious metals, etc.) closely resembles the buoyant stock markets from the late '90s. The only difference is that these lofty prices are sustainable over the long term. This is because of the tremendous imbalance in the supply/demand relationship in the next few decades, attributable to the rise of Southeast Asian economies (more demand) and fast-deteriorating supplies.
It's imperative to be well-informed about commodities as they — unlike stocks, bonds and real estate — are a part of our lives everyday. Your breakfast includes corn and milk; your Starbucks mocha contains sugar, cocoa and coffee; your lunch and dinner include wheat, rice, beans and pork; and the car you drive is made of steel, aluminum and rubber. Each day, you encounter commodities that are traded on a 24-hour basis around the world, and each day, the demand for these consumables is outpacing the supply.
Sugar, for example, has been experiencing a rise in prices for the last few years. Reasons include an increasing number of sugar beet processing plants shutting down since the mid '90s and higher demand for sugar from China (China has increased its sugar imports by 20 percent year-over-year for the past six years). Brazil (one of the largest sugar producers) has also contrib-uted to the price jump through smarter use of its home grown sugar for local consumption and ethanol use that have reduced its capacity to export.
Lead is a metal with wide-ranging applications in electric power systems, lead-acid batteries, ceramics, roofing, forklifts, television, computer monitors, etc., and its demand is expected to swell in the next two decades. If supply remains either constant or deteriorates, lead's price will inevitably increase.
The central bank of any country has the power to warm up the printing presses and create more money out of thin air if there is a need. But it's impossible to similarly create tangibles, such as foodstuffs, precious metals and raw materials. It will take 10 to 15 years for these highly demanded commodities to meet the supply.
It is cumbersome to invest directly in commodities such as sugar, lead or coffee, but more direct methods like investing in a commodity index (which tracks a bunch of commodities) or an ETF tracking commodity index solves the problem. Some internationally acclaimed indices such as the Rogers International Commodities Index and the Dow Jones AIG Commodity Index are up many-fold in the past few years.
Other alternatives include investing in companies that produce commodities. Behemoths like Arcelor-Mittal (which produces steel), Alcoa (which produces aluminum), Phelps Dodge (which produces copper), Rio Tinto (a mining giant), etc., are sure to rope in record profits in the next decade and a half with rising commodity prices. In fact, most of these stocks are up 300 to 500 percent in the last few years and still appear undervalued.
It is also very safe to invest in countries that produce commodities. Natural resource rich countries such as Australia, New Zealand, Canada, Bolivia and Chile will experience good economic times in the next few years.
One book, "Hot Commodities," written by legendary commodity investor Jim Rogers, explains why the next decade and a half will see an unprecedented boom in prices of all types of commodities, be it precious metals, energy, cereals or food. Being the first to foresee the commodity boom in 1998, he commands immense international respect.
During the late 1970s commodity bull market, oil hit a record high of $101.30(inflation adjusted). The late 1970s was also when gold and silver hit record levels. Something very similar has been unfolding in the last few months and will continue to do so for some time. History might not repeat itself, but it definitely rhymes with the past.
Online link to this article:http://www.collegiatetimes.com/stories/2007/11/28/corn_flakes__coffee_and_the_changing_world_of_commodities
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