1) Energy and commodities are in longer term bull markets. There will be corrections along the way, and some of these corrections can be swift, sharp, and sometimes violent on the downside.
a) Countries like China and India are not going to stop growing their economies. As these economies grow, they will need more natural resources to build their cities, and more energy to accommodate the number of people who will eventually own a car.
b) The supply and demand issue is an easy one. China is trying to slow its growth in part because the demand for raw materials is increasing production costs, and getting ahead of the governments capability to improve vehicle emissions, build refineries, build roads and parking structures, as well as create a system to manage traffic. When the Chinese auto market reaches levels similar to the United States, oil demand will soar putting a strain on the dwindling resources.
c) The manufacturing of vehicles and the construction of buildings and roads do not require precious metals like gold and silver; they require metals other than gold. But, in 2003 75% of the money spent exploring for metals was spent looking for gold.
So, as we look at the recent correction in commodities we have to ask ourselves was the correction due to supply catching up with demand, or was it simply profit taking due to a run up in prices?
If the correction in commodities was due to fears of a slowing US economy, then that is not a very good reason.
According to Macquarie Research, since 1989, 56% of the world痴 crude steel growth came from China, while 10% came from the US, Japan, and Western Europe combined. Everybody is talking about Gold, but no one is talking about steel. About 98% of iron ore is used to make steel.
When iron ore is alloyed with elements such as tungsten, manganese, nickel, vanadium, and chromium, it can be used in the construction of buildings, as well as automobiles, trucks, trains and train tracks.
I don稚 think it takes a genius to figure out that China is going to consume mega tons of these natural resources over the next 50 years.
Oddly, while most of the money spent was looking for gold, very few if any new mines were developed to find iron ore, zinc, nickel, or lead.
d) In the future, the best investment opportunities are in areas where China is deficient. China produces Iron Ore and Coal, but at its present and future growth rate, they have or are outgrowing their resource base.
We need to continue to focus on high quality natural resource companies that produce Copper, Nickel, Zinc, Iron Ore, Coal, Aluminum, as well as energy companies with proven reserves.
The bull market in commodities and energy has not ended, we are just in a nasty correction.
Comments (3)
Money leaving US markets?
Sept. 18 (Bloomberg) -- The U.S. dollar may fall to a 10- year low as American pension, mutual and hedge funds increase their purchases of overseas investments.
Three quarters of the money flowing into U.S. mutual funds in the first seven months of the year, or $113 billion, has gone into foreign securities, according to Boston-based Financial Research Corp. Pensions, hedge funds and endowments are also shifting from U.S. assets, lifting investments in international stocks by 72 percent to $1.05 trillion in the year through February, a Greenwich Associates survey showed.
The dollar, measured against the currencies of the U.S.'s largest trading partners, is close to the lowest since 1995 and Stephen Jen, head of global currency research at Morgan Stanley in London, says about half of the decline in the past three years can be attributed to U.S. investors moving money overseas.
``That does make us bearish on the dollar,'' said Michael Metcalfe, senior currency strategist in London at State Street Global Markets. State Street, the world's largest custodian of investor assets with $10.1 trillion, has seen outflows accelerating, he said. ``The home bias of U.S. investors is continuing to unravel.''
Posted by DollarBill | September 18, 2006 3:47 AM
Posted on September 18, 2006 03:47
Hi John,
What ETFs do you suggest for participating in the return of the commodity bull? The ones I normally employ are XLE, OIH, XLB, etc. Would you suggest any others?
Posted by jragusa | September 18, 2006 8:04 AM
Posted on September 18, 2006 08:04
You could take a look at GDX for metals.
Posted by DollarBill | September 18, 2006 9:40 AM
Posted on September 18, 2006 09:40