North Dakota has the lowest unemployment rate in the U.S. Less than 4 in every 100 North Dakotans are out of work.
It’s not just locals who have jobs, either. Last year, state officials were forced to declare a housing crisis because of all the people that have moved there for work.
North Dakota’s unusually low unemployment levels may seem irrelevant to the international investing picture. But the state’s jobs bonanza is telegraphing a very clear message to global investors.
It says commodities are booming, even at today’s prices.
You see, North Dakota is home to the Williston Basin – America’s biggest oil find since the discovery of oil at Alaska’s Proudhoe Bay in 1968.
Oil was first discovered in North Dakota in 1951. But back then the world had a surplus of the stuff. And so no major drilling followed. (In fact, the state imposed strict limits on the amount of wells it allowed.)
But the world has changed since 1951. Now, oil supplies are tight. And a growing population and exploding wealth in the emerging markets is putting huge extra pressure on the demand side of the equation.
It’s easy to forget, but the global economy is inextricably linked with the use of hydrocarbons, such as oil, gas and coal.
We started to use hydrocarbons as a power and fuel source from about 1800 onward. Since then, the world’s population has grown from about 800 million to about 7 billion. Meanwhile, there’s been a roughly tenfold increase in wealth in developed countries.
Only a tiny fraction of this growth would have happened, without the widespread use of hydrocarbons.
But this creates a problem: A growing population and rising incomes is starting to put a huge strain on our natural resources…the very resources that allowed us to grow so fast.
The market is well aware of this. In fact, it is sending investors the mother of all price signals.
This is the point fund manager Jeremy Grantham made in his recent quarterly letter to investors. According to Grantham:
The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
Think about this: One hundred years of falling prices have been erased in just nine years.
Add to this the explosion in wealth and populations in the emerging markets, and what we are looking at is a paradigm shift – a permanent readjustment upward in commodity prices.
As I wrote yesterday, we’re experiencing a short-term commodities downdraft right now. Silver, oil, gold and other key commodities have undergone significant declines, as speculators have rushed for the exits.
Silver prices led the declines. After the exchange silver futures are traded on upped its margin requirements, the gray metal, which had risen about 60% for the year, plunged by 25%. And just this morning, crude oil has followed suit, with its biggest loss in more than two years.
The recent sell-off shows how much dumb money there is chasing up commodities prices. These are mostly momentum traders and technical traders who pile into any market that’s rising fast in the hope of making a quick buck. As soon as the momentum turns, they’re out just as quick as they got in.
The real profits in the commodities markets come to longer-term investors who understand that we live in an increasingly resource restrained world in which shortages will become the norm. And that, as a result, prices will remain high over the long run.
Commodities are a great way to play the global growth story. The trick to profiting in the commodities market is to buy low and sell high…and to use a disciplined system of stop losses (which I described yesterday).
Once the speculators have been shaken out of the market, prices of key commodities will come down. Then it will be time to buy back in again.