In 2010, Demand for Commodities is Creating Investment Opportunities

Emerging markets kicked into high gear a few years ago (see previous post on this blog titled “The World’s Center of Gravity is Continuing to Tip in Favor of Emerging Markets”) and this was fully evident in the middle of 2008 as many commodity prices reached all-time highs.

As global demand increased, the prices for commodities like oil, corn, sugar and cotton rose to dizzying heights.

The market cooled off in late 2008 and early 2009 as part of the deleveraging initiated in Phase 1 of the Global Financial Crisis but now commodities are beginning to move back up.

Many commodities have achieved a 50% retracement back up to 2008 highs and this upward movement signals to many a continuing uptrend.

After worldwide demand destruction in late 2008 it appears a solid uptrend is being formed.

This uptrend is a combination of fundamental factors with the most important driver coming from markets like China and India.

These emerging markets consume everything from oil to orange juice, and after the sudden fall of 2008, the craving for so-called luxury goods, from the people of these emerging markets, has just started.

Worldwide demand for these staple commodities (fuel for a car, coffee is a new delicacy, and corn-fed meats on the dinner plate) will continue to rise.

After you get past all the investment bank upgrade and market consensus reports, there are plenty of solid reasons that gold is set to rise in the next 12 months.

From a technical perspective, gold has not reached its inflation-adjusted all-time high. For that to happen, gold would need to be at $2,000 an ounce — a 75% increase from today’s price.

In 2010, this could easily happen. However, a more conservative, yet realistic goal would be $1,500 gold — which could very easily happen in the next 12 months.

Other than technical indicators and charts, there are plenty of fundamental reasons to assume the metal will go higher and two of the most significant reasons are listed below.

First and most importantly is that there is an implicit flaw with Western government funding models. Governments like ours here in the U.S., naturally choose short-term fixes for long-term problems (it probably has to do with the lack of term limits for politicians and frequent re-elections). Most likely these features of our government and political system will not magically change overnight, nor will it likely change by the end of 2010.

So the probabilities are high that fears of inflation will remain large and as a hedge, many will demand gold, hence increasing gold prices. And, as the short-term fixes expose more government-monetized debt, prices of the precious metal will also go higher.

The second reason that gold will shoot to $1,500 in the next 12 months is supply related. Many of the gold fields in South Africa are finding it more difficult and hence more expensive to mine the gold that is deep in the earth. With gold being harder to obtain, the price will be higher due to increased mining costs and inevitably, there will be less supply of gold brought to market due to these expensive mining methods and ongoing difficulty in the mining process.

As demand rises and supply is reduced, you can bet that prices for gold will have nowhere to go but higher than the current $1,100 an ounce.

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.

As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

I trust this article provides a little more insight into the world of the commodity markets and with the raging demand due to the rise in the living standards in many of the world’s emerging markets, there are numerous alternative wealth generating opportunities. This increased demand places commodities in a super-cycle that will likely last another decade. In the commodities world, there are no CEOs on the inside cooking the books nor do you have accounting firms puffing up the profits - you just have prices responding to pure supply and demand. This is why many refer to the commodities markets as the last bastion where there is pure capitalism. It is wise to have exposure to the commodities markets as the world’s economies respond to the emerging markets.

I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.