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home | Greenback Mentor | Commodity Investing - Still A Viable . . .

Commodity Investing - Still A Viable Wealth Building Strategy?

Commodities have been in the news once again. Copper, Gold, Silver, Oil are all hitting multi-year (in some cases multi-decade) highs, with geopolitics, supply-demand ratios and several fundamental factors pointing to yet higher prices. Sure, this will pinch in the wallet on the consumption side, but on the investment side, are these areas worth your consideration as a serious wealth building strategy over the next decade?

Commodity investing is a wide area covering everything from grains and agricultural products to metals, oil, natural gas and further extending into the precious metals complex of gold, silver, platinum and the little consumed but crucial ingredient of automobile smog filters, palladium.

Overall, this entire complex has had a long bear market of about 20+ years between 1981 and 2001, give or take a year or two. There have been phases where individual commodities have had a cyclical bull market within the larger bear market, but they have been just that - bounces within the bear market.

Something seemed to have changed around 2001, as the entire complex - individually at first, and then as a group began rising up. The change did not go unnoticed by astute market observers. Some considered it as another dead-cat bounce, while others saw it as signaling a long-term change in the market - and flagged it as the start of a multi-decade secular bull market in commodities.

Some of the fundamental reasons offered are:

  1. The rise of China & India is increasing demand for raw materials.
  2. Demand from US & Europe is not lessening any - so the market pressures remain high.
  3. The long bear market led to the closure and consolidation of many marginal mining companies. New mining will take time to come online and relieve the pressure.
  4. The low interest rate environment of recent years flooded the market with excess liquidity (excess dollars) resulting in rise of these commodities in dollar terms far more than in other currencies.

Of these, at least reason #4 is disappearing rapidly as interest rates have risen and excess liquidity is being removed from the system. The dollar has strengthened significantly though again, many commentators consider this as only a break from dollar's own bear market.

One thing that one can be assured of is that this entire complex has risen so significantly that they are in for a lengthy break. In a recent visit to a Barnes & Noble store, I was asking the attendant for new books on commodity investing, and he asks me "Is it too late to invest in Gold?" That to me is as strong a sign as any that at least the precious metals complex is in for a long rest - much like the 2003-04 rest, if not longer.

The positive development out of all this interest in commodities is the development of several indices, such as the Goldman Sachs Commodity Index, the Dow Jones - AIG index and others. Follow this link for some more ideas:

This special report is of some interest as well:

And of course, Jim Roger's book on commodity investing is a must read on this subject.

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