Last year precious metals garnered the headlines and the attention of most investors. Gains in gold, silver, palladium and platinum left stocks in the dust. This year may well be the year for base metals, food and energy to outshine precious metals and the stock market overall.
While gold and even silver’s rise last year was more about concerns over currencies and inflation, the rise in basic materials is largely a play on the coming global economic recovery. The investment theme is simple: while world economies are beginning to grow, nations and companies rev up production in order to meet demand and therefore the demand for commodities increase proportionately. At the same time, new wealthier, middle class consumers in developing countries, such as China and India, demand a better diet and now have the money to afford such delicacies as beef, pork, chicken as well as different grains and even bread and pastries.
This scenario is neither new nor original. The prices of aluminum, cooper, steel, lead, zinc and a host of other hard metals as well as wood and paper and other basic materials have been on the rise over the last few years simply because certain developing nations such as China have been demanding more of these commodities to both re-build the infrastructure of their countries and also export to developed nations such as the U.S. and Europe. Now that global economic growth is at hand, demand for these materials will continue to expand, and at an accelerated rate.
Some of these commodities, like rare earth metals for example, have recently skyrocketed in price causing a mini-bubble in that sector. We can expect more of the same.
Back in September of last year, readers may recall my column “Wheat, Weather and the grocery shelves” in which I warned that food prices were heading much higher.
“The real increases in food prices are still waiting in the wings until the world’s economies are on firmer footing. Once people can afford to spend again, prices are expected to move up quickly in commodities across the board.”
Well, folks, that time has come. Wall Street analysts forecast that food prices could rise anywhere from 2.5% to 4% this year versus 1.5% in 2010. A variety of factors including weather, population growth, the rise of the emerging market consumer as well as global economic growth have lit a fire under commodities as mundane as sugar, corn and cotton.
Since June, corn prices are up 94%, soybeans have gained 51% and wheat is up over 80%. Just this week the U.S. Agricultural Department reduced its estimates for global harvests of some important crops, as well as increased their demand forecasts for commodities overall. It seems a safe bet that when looking for new investments this year, commodity-producing companies and countries should be high on your list.
As for the markets overall, all three averages are grinding higher as the second week of January comes to a close. I still expect a pullback of sorts (risk of 3-4%) but that would simply be another opportunity to buy stocks, given that I think the stock market will provide rewards of 15-20% between now and August. Given that kind of risk/reward scenario, I am a buyer of equities on every dip.