Commodity bulls believe we are in early stages of a bullish ‘supercycle’ for commodities that may last several decades.
Before this cycle, commodities prices stagnated for many years.
Global economic growth and demand for commodities was limited due to the “ongoing economic challenges in the West, a slowdown in Japan, the collapse of the Soviet Union, debt and currency crises in Latin America, and the relatively small [economic] size of China and India,” stated Standard Chartered in a note.
Moreover, advances in technology made the extraction/processing of commodities cheaper and more efficient, which lowered prices on the supply side.
Since 2001, however, things have changed.
On the demand side, China is industrializing and urbanizing, which created demand for consumer goods and infrastructure. In the decades to follow, other large countries like India and Brazil will likely follow suit.
On the supply side, innovation is still occurring, particular on efforts to develop renewable energy. However, these efforts will likely not be enough to offset the rising demand. Moreover, non-energy commodities like metals and food are still not renewable.
The chart below shows that the commodities rally began in 2001. It was briefly interrupted by the global financial crisis. Now, on the back of the global recovery and loose US monetary policy, it’s in full-swing again.
It’s unclear which commodity will benefit the most. Some think it’s energy, whose consumption will increase with urbanization and industrialization of countries like India. Others think it’s agricultural commodities because the growing middle class in emerging market economies will result in more people being able to afford more food. Still, others thinks it’s metals due to the demands of infrastructure building, cars, and home appliances.
There are several ways to invest in commodities. One way is to buy and store the physical commodities. For easily storable and divisible commodities like gold, this method is a popular choice.
Another is to buy futures contracts of these commodities and roll them over at each expiration.
A third way is through equities of commodity producers or commodities exchange-traded funds (ETFs).
For US retail investors, the equities market is by far the most convenient and practical way to invest in commodities.
Below is a list of candidate equities for the commodities supercycle play.
United States Oil Fund LP (NYSE:USO) – an ETF that buys oil futures
SPDR S&P Oil & Gas Explore & Prod. (ETF) (NYSE:XOP) – an ETF that holds oil and gas exploration and production companies
Petroleo Brasileiro SA (ADR) (NYSE:PBR) – largest oil producer in Brazil
PetroChina Company Limited (ADR) (NYSE:PTR) – largest oil producer in China
ExxonMobil (NYSE:XOM) – large international oil company
United States Natural Gas Fund (NYSE:UNG) – an ETF that buys natural gas futures
Chesapeake Energy Corporation (NYSE:CHK) – large US natural gas producer
Devon Energy Corporation (NYSE:DVN) – large US natural gas producer
Peabody Energy Corporation (NYSE:BTU) – large US coal miner
Yanzhou Coal Mining Co. (ADR) (NYSE:YZC) – large Chinese coal miner
PowerShares DB Agriculture Fund (NYSE:DBA) – an ETF that buys corn, soybean, sugar, and wheat futures
Market Vectors Agribusiness (ETF) (Public, NYSE:MOO) – an ETF that holds agricultural stocks
Potash Corp (NYSE:POT) – large crop nutrient producer
The Mosaic Company (NYSE: MOS) – large crop nutrient producer
Deere & Company (NYSE:DE) – large agricultural equipment manufacturer
AGCO Corporation (NYSE:AGC) – large agricultural equipment manufacturer
Powershares DB Base Metals Fund (ETF) (NYSE:DBB) – an ETF that buys metals futures
SPDR S&P Metals and Mining (ETF) (NYSE:XME) – an ETF that holds metals and mining stocks
Southern Copper Corporation (NYSE:SCCO) – large copper, zinc, and molybdenum producer
Vale (ADR) (Public, NYSE:VALE) – largest iron ore producer in the world
Rio Tinto plc (ADR) (NYSE:RIO) – large aluminum, iron ore, and copper producer
Stillwater Mining Company (NYSE: SWC) – palladium and platinum producer
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