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Markets: Buy Commodities
New York: February 07, 2006
By John R. Stephenson

It happens every twenty to thirty years and is happening again - a bull market in commodities. While your broker may be telling you about a stock market about to roar, don't believe all the hype from Wall Street and the press that stocks always go up! There are long periods when stocks do nothing and other investments are better. One such investment is commodities, which, after decades of under-investment, are ready to roar.

We have just been through a huge bull market in stocks, which began in the early 1980s, but no one believed it back then. Back in the early 1980s, there was no CNBC or magazine covers featuring a series of hot shot money mangers that were there to tell you how to go about it. There was no rampant speculation in the market back then and people weren't rushing to take out second mortgages on their homes or loading up on their credit cards just to get into the market. No, back then, pretty much no one cared about the market. But, back then, is when you should have started investing. By 1998, the height of the bull market when magazine covers were proclaiming the "new economy" and everyone and their brother was rushing to join the market to take advantage of this new investing paradigm, some 60 percent of stocks fell with even greater numbers falling in 1999 and 2000.

Whenever you hear that the world is different and the old rules don't apply, it is time to take your money and run. All manias and bubbles end with pronouncements from the vested interests of how it is different this time and how you need to get on the train before it leaves the station. It is never different, it is always the same. When your doctor, plumber and electrician are giving you financial advice, it is time to get out. By the time the bubble gets extended, the smart money is already on the run. No, the time to buy is when blood is in the streets and people couldn't be more despondent. That is the time when great fortunes are made - before every fool and his brother thinks there are easy pickings out there. The law that has always governed investing and investments and always will is the law of supply and demand.

The technology sector has seen an enormous bull market over the last ten years based on the exaggerated claims of productivity gains from information technology. The Financial Times of London has reported that the money invested in technology stocks on the basis of these exaggerated claims of productivity from information technology has actually produced a negative return. While stocks of all stripes are starting to descend from the heights of the bubble, one area of the market that is poised for a turn around is commodities. Commodities are real assets, raw materials such as zinc, lead, corn, cocoa, sugar, orange juice, hogs, natural gas and oil from all over the world. Commodities tend to zig when the stock market zags. That's because when money was being diverted into stocks during the 1980s and 1990s, nothing was being spent on developing productive capacity for natural resources leaving us without enough supply to meet the needs of a commodity hungry world. The move toward commodities is not because of anything mystical but simply because of shifts in supply and demand. During the 1970s, high commodity prices led to the overproduction and eventual stock piling of commodities. During that time, inventories swelled, demand dried up and prices tumbled. During 1974, Sugar peaked at $65.65 only to tumble to $2.56 in 1985. The result? A more than twenty year bear market in commodities.

Today, the fundamentals of supply and demand favor the development and increased prices of all kinds of commodities. Commodities have historically moved up when equities have moved down such as the period between 1906 and the early 1920's when stocks did nothing but commodities boomed. Today, the stage is set for a resurgent boom in commodities as the under investments in gold mines, copper mines, rubber plantations is set to run smack into the explosion in demand from countries such as China and India that are rapidly industrializing. Not only is demand set to surge, but also it is difficult for a commodity producer to flick the switch and have the productive capacity at the ready to meet the surge in demand. Gold, copper and base metal mining operations take anywhere from five to ten years from the discovery of deposits at a site to commercial operations. With supply remaining flat for decades, excess inventories built up during the cold war being liquidated and new buyers throughout Asia, the stage is set for a ten-year bull market in commodities.

Best yet, few realize that stocks are ready to roll over and that the new opportunities lie in commodity investing. While stocks have had no growth between the end of 1998 and the beginning of 2003, commodities, on the other hand, are up some 80 percent over the same period. The commodity boom is well under way and yet most people remain unaware. The government's desperate attempts to reflate the economy by printing money and its massive operations overseas to bring democracy to an unwilling world, will ensure that the boom in commodities will last longer than it otherwise might.

For investors who are looking to profit from the coming boom in commodities, there are several ways to play the game. For starters, you could buy contracts on the commodities through futures brokers such as REFCO, the world's largest commodity broker. Investors wishing to go this route should spend a little time educating themselves to the various nuances of commodity trading. As well, you can buy stocks of the producers of these natural resources themselves and lastly you can invest in mutual funds or index funds such as the Rogers International Commodity Index that holds a basket of the 35 biggest and most important commodities. Investors looking to add a little more oomph to their returns should consider allocating a portion of their investments toward commodities.


StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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