Why should i invest in commodities-Part 2

Since the fall of 2001,commodities have been running faster than the bulls of
Pamplona. The Reuters/Jefferies CRB Index (a benchmark for commodities)
nearly doubled between 2001 and 2006. During this period oil, gold, copper,
and silver all hit all-time highs (although not adjusted for inflation). Other
commodities also reached levels never seen before in trading session.
Many investors wondered, what is going on? How come commodities are
doing so well when other investments, such as stocks and bonds, aren’t performing? I believe that what you and I are witnessing is a long-term cyclical
bull market in commodities. Because of a number of fundamental factors
(which I go through in the following sections), commodities are poised for a
rally that will last well into the 21st century — and possibly beyond that. It’s
a bold statement, I know. But the facts are there to support me.
Although I’m bullish on commodities for the long term, I have to warn you that
there are going to be times when commodities don’t perform well at all. This
is simply the nature of the commodity cycle. Furthermore in the history no asset has ever gone up in a straight line. There are always minor
(and, occasionally, major) pullbacks before the asset makes new highs — if in
fact it does make new highs.
A case in point is that during the first few months of 2006, commodities outperformed every asset class, with some commodities breaking record levels.
Gold hit a 25-year high and so did copper. Then during the week of May 15,
commodities saw a big drop. The Reuters/Jefferies CRB Index fell over 5 percent that week, with gold and copper dropping 10 and 7 percent, respectively.
Many commentators went on the offensive and started bashing commodities.
“We are now seeing the beginning of the end of the rally in commodities,”
said one analyst. “Is this the end of commodities?” ran a newspaper headline.
An endless number of commentators hit the airwaves claiming that this is a
speculative bubble about to burst. A respected economist even compared
what was happening to commodities to the dot com bubble: “There is no fundamental reason why commodity prices are going up.” Nothing could be further from the facts. A couple of weeks after this minor pullback, some of
these commodities that were being compared to highly leveraged tech stocks
had regained most, if not all, of their lost ground.
There’s a story behind the rise in commodities — and it’s a pretty compelling
Capitalizing on the global population explosion
The 21st century is going to experience the largest population growth in the history of humankind. The United Nations estimates that the world will add a little
fewer than 1 billion people during each of the first five decades of the 21st century. This means that the global population will grow to about 9 billion people
by 2050 (as of 2006, there are approximately 6.5 billion people on the planet).
Also, consider the following statistic: According to the UN, the average
number of years it takes to add 1 billion people has shrunk from an average
of 130 years in the 19th century to approximately 13 years in the 21st century! This means the rate at which the human population is increasing has
reached exponential levels.
So how is this relevant to commodities? Put simply, significant population
growth translates into greater global demand for commodities. Humans are
the most voracious consumers of raw materials on the planet — and the only
ones who pay for them. As the number of humans in the world increases, so
will the demand for natural resources. After all, people need food to eat,
houses to live in, and heat to stay warm during the winter — all this requires
raw materials. This large population growth is a key driver for the increasing
demand for commodities, which will continue to put upward pressures on
commodity prices.


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