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.
"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 percent this year versus 1.5 percent 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 percent, soybeans have gained 51 percent and wheat is up over 80 percent. 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 percent) but that would simply be another opportunity to buy stocks, given that I think the stock market will provide rewards of 15-20 percent between now and August. Given that kind of risk/reward scenario, I am a buyer of equities on every dip.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
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Dear Mr. Schmick
I must confess that I have been reading your weekly column regularly for over a year now, and less regularly for 2 or 3 years prior to then. Having once practiced the dark science of professional investing for over 40 years, I admit to being struck by how uncommonly well you perceive the entirety of the investment spectrum. I am credited by many for inventing the “small cap (equity) investment style” and am encouraged when I come in contact with others who provide unique observations to our passing investment scene. As you well know, your observations have, by and large, been on the money, and, uniquely, for all of the right reasons. Typically, investors put together their investment plans with the best of intentions through their rearview mirrors which, as you know, is not the secret to financial prosperity.
Presently, I observe, you seem to believe that the equity market is a more or less safe haven for generating positive returns for the bulk of 2011. Generally, I would agree with that, but am, admittedly, getting more concerned about the restructuring and reorienting process that we all must go through if our country is to continue to prosper. As the spring evolves into summer this year, I will be eyeing the horizon for danger signals which may indicate that the final phase of this Bear Market rally is closing on us rapidly. Let’s keep our senses alert and vision focused, and keep in mind that this all is a Bear Market rally.......we think!!!
Thanks for helping me to keep a level head.
Thank you for your kind words. Yes, I do believe the equity market may provide a "safe haven" for some months but how long exactly is a question mark. I agree with you that the problems ahead are a matter of concern. I too worry that the period between May and August will be one of extreme uncertainty. At that time, I will be watching closely and will be ready to move to the "sidelines" at a moment's notice. If I have not yet made that clear in my columns, I will do so presently. All the best, Bill Schmick
This is my first New Year's resolution: have someone look over our financial situation. I have been reading your columns regularly and really like them, so I'm hoping that will be you.
I want to talk to someone about where we currently have retirement money and get recommendations about what might be improved. Plus, I expect a distribution from my uncle's estate (30-40K) this year and I don't know what we should do with it (pay part of mortgage, invest?), given we are a few years from retirement. The sum of all our assets is pretty small (about 150 k in retirement and savings accounts, plus state pensions). Do you have some limit that you work with? I'm sure we don't have enough money to need an on-going financial manager, just an evaluation and recommendations.