To hear the mainstream media tell it, the commodities bubble has burst.
Don’t you believe it.
Commodities prices will be back. In fact, 12 months to 24 months from now, gold, silver and other commodities will be trading at higher prices than they were just a few weeks ago – when they were trading at record levels.
Though you may be surprised by my predictions, this isn’t rocket science. Several clues point the way:
- Global demand is still rising. And in the “BEE” markets (Big Emerging Economies) demand is advancing well ahead of the global averages.
- We’re using four barrels of oil for every one we’re discovering. And unless you’ve got a few million years to wait, Mother Nature isn’t going to bail us out any time soon.
- Alternatives for energy-related commodities – and particularly oil – are few and far between. For instance, there are more than 60,000 industrial processes that depend on petroleum-based products. This is why even the most aggressive scientists think it could be decades before substitutes are robust enough to actually reduce oil demand. And that’s assuming a perfect substitute is found today.
The way I see it, the situation we face in the world today is like a thousand people trying to buy the last egg in the grocery store: Prices have to go up.
Ingredients for a Commodities-Price Rebound
Not only is the U.S. dollar hobbled, but also the fiscal mess Washington has created virtually guarantees that governments around the world are going to actively diversify away from the greenback and into “quasi-currencies” such as oil. These are highly liquid (in the financial sense), easily valued and easily traded worldwide.
All of this is a function of the Fed’s “QE2” initiative: the cheap-money flow that the Ben Bernanke has got the U.S. economy (and the U.S. stock market) hooked on.
Looking ahead, there is no doubt that commodities prices will end up being far higher in the future than they were at their apex during the height of the recent commodities bubble. The catalysts and scenarios that I’ve already outlined here would do the job on their own.
But there’s still one more factor that points to higher prices down the road. And it may be the most powerful and persuasive reason of all.
Margin calls, profit taking and panic selling all serve one important purpose: They effectively eliminate the “nervous money” – the smaller, less-committed and more-uncertain market participants. This clears the decks for hedge funds and trading firms with the deep pockets, strategic commitment and market resolve to ultimately drive prices far higher.
Moves to Make Now
If you missed the previous run up in commodities prices, you can’t ask for a more textbook-perfect second chance to get aboard before prices rebound – even if the selling isn’t finished yet.
So don’t kick yourself for having missed out on this commodities bubble – the next one isn’t far away. As Chris pointed out in Saturday’s issue, global demographic trends alone make this future reality abundantly clear.
Here are three choices to get you started – one a direct oil play, and the two others strong metals-market plays:
- United States Oil Fund LP (NYSE:USO): With net assets of $2.17 billion, this ETF invests in crude oil, heating oil, gasoline, natural gas and other exchange-traded and petroleum-related instruments – such as cash-settled options and forward contracts.
- SPDR Gold Trust ETF (NYSE:GLD): This ETF tracks the price of gold bullion using a combination of deposit exchanges and physical bullion. Whether you buy gold through GLD or the slightly cheaper ETFS Gold Trust (NYSE:SGOL), which holds purely physical gold in Swiss vaults, is up to you. Both are easy ways to add exposure to gold to your portfolio.
- iShares Silver Trust ETF (NYSE:SLV): This ETF tracks the price of silver as closely as possible through silver securities that represent fractional interests in the physical silver held by the trust. It offers investors the ability to participate in silver investments – but without the risk of physical ownership. It has $13.6 billion in assets and has had an average daily volume of 57.5 million shares over the past three months, which gives it good liquidity.
P.S. If you want to get real “bang for your buck” in the gold market, I encourage you to check out this report. It reveals how a new secret investment created by one of Asia’s most powerful emerging markets could pay you 100% more over the next two years than U.S. gold.