The Case for Commodities and Natural Resources

Robert Hsu, March 12, 2008

During the past four months, we have weighted our Asia Edge portfolio in favor of natural resource stocks that would hold up well in the current market volatility. We've been rewarded for this strategy as all eight of our natural resource and food production plays are up and making money for us.

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The natural question to ask when most of your portfolio is in one area of the market is, "Will this trend continue?"

The short answer to this question is yes, but there are factors weighing in that you may not realize are pushing the price of commodities higher. The major force at work now is the Fed.

As the Fed pumps more money into the banking system, the U.S. dollar continues to make record lows against other currencies. This is especially true now that other central banks around the world are becoming more vigilant about fighting mounting global inflationary pressures.

Central banks in China, Australia, England and the European Union are putting inflation concerns ahead of potential economic slowdowns. This is understandable because inflation is running at a multi-decade high for all of these countries. On Tuesday, the Bank of Australia raised rates by 0.25% to a 12-year high of 7.25%. On Thursday, both the Bank of England and the ECB decided to hold rates steady at 5.25% and 4%. The increasing interest rate differential between the U.S. and other major global economies puts tremendous downward pressure on the U.S. dollar.

Some economists make the argument that with an economic slowdown in the U.S., slowing domestic demand will counter inflationary pressure. The reason why this argument is wrong is because much of the demand for global commodities comes from rapidly growing Asian economies like China and India. Even with a drop in U.S. consumption, the collapsing U.S. dollar and strong Asian demand will likely drive commodity prices much higher.

You see, commodities can't help but move up in this environment. That's why it is crucial that smart investors put a portion of their money in this industry. American investors choosing to hide from market volatility by putting 100% of their portfolios in cash will almost certainly see their purchasing power shrink from the effects of inflation. The only way to counter the impact of inflation is to own assets that are growing more valuable. We learned this lesson just a few decades ago.

In the 1970s, the last time inflation was high, commodity prices went up significantly more than people thought possible. The price of gold surged from $35 an ounce to $830 an ounce. In 1973-1974, sugar jumped from 4 cents a pound to 66 cents a pound. So don't think that just because commodity prices are at record highs now that there's no way they can move up much more. I see commodity prices increasing for years to come and for many of our profit opportunities in Asia Edge to come from this industry.You don't want to miss out on the profits to be made in the commodity boom in Asia. Become an Asia Edge subscriber now, and realize the amazing opportunities to make money in Asia.