Base metals and other mined material

Emerging markets are enormous factories for various often cheap products. Base metals are needed to build and run these factories.

Especially China and Brazil manufacture a lot of products everything from clothes to cars. These products are very commodity intensive. To build the factories also takes a lot of various metals. Emerging markets are producing these products for developed markets but also more and more for emerging markets. Emerging market workers are first time buyers of many commodity intensive products. China is already the largest car market for example. In emerging markets many rural people are moving to the cities to find work. A lot of new housing will have to be build. This also uses base metal ore.

Fertilizer also uses mined material. An example of mined fertilizer is potash. As food prices rise the demand for these materials will also rise. The higher demand and limited supply will cause the price to rise.

Indirect Investments: Commodity Companies

Buying and selling commodities is not the only way to profit from the coming commodity shortage. There are many companies that stand to profit from this phenomenon. Some companies produce commodities other companies are needed to provide services and extract the commodities.

Commodity producers can expect to make much higher profits. Often the profits of these companies rise much faster than the price of the underlying commodities. One of the reasons is that many of these companies own a lot of the commodities. The value they have in stock can be worth a lot more with higher prices. Many producers are enhancing their production attracted by the better prices. This means turnover is rising which is a good thing for a company.

During the gold rush the sure winners were the sellers of pots and pans. Producers are not sure about finding more oil reserves or ore but there will surely be demand for commodity service companies. There are many kinds of jobs to be done in the area of finding new resources and better ways to extract them.

Coal and Uranium

You might not be aware of this but most of the energy produced in American power plants comes from coal. Coal is a relatively cheap way to produce energy and there are new production methods that make the production more efficient and cleaner.

Emerging market are also becoming big coal users. Particularly China uses a lot of coal to create energy for its factories. China's economy is centered on production. It is no wander that there are many new power plants being build in emerging markets. Not only are the factories using the energy but also the people. As emerging markets become richer its people will want to use more energy to run their homes. They want to use modern home appliances which consume a lot of electricity.

The perception around nuclear energy is changing. More and more countries are seeing atomic energy as relatively clean. Modern nuclear plants are very safe. There is still the problem of nuclear waste but the amount of this waste is relatively small. Those atomic power plants will need a lot of uranium to run.

Besides the developed world there is also much interest for nuclear energy in emerging markets. Emerging markets have a very high need for energy and they see nuclear plants as a possible alternative to deliver it.

Protection and commodities

Commodities offer protection against inflation. In times where money loses its value commodities rise in price. The inflation is discounted in the price of the commodities. In this way they act as an inflation hedge.

A special case of protection are the precious metals. These metals can be seen as a form of currency when the trust in the dollar is low. Precious metals also tend to rise when there is a general sense of fear. Gold is so rare that it will always keep its value. Even if there are wars or disasters.

Oil and gas

Demand for oil and gas is very high in emerging markets. In fact china is already the world largest car market. Cars are very popular in India as well. The cars are becoming very affordable to. China and India have cheap car brands like Geely and Tata motors. The cars made by these companies are much cheaper than western cars. A good example is the worlds cheapest car the Tata Nano. Families are lining up to buy it. Tata will surely sell this car to other emerging markets as well.

Many workers are first time car buyers. They are switching their bikes and motors for cars. Especially families want to make this switch. It is not very comfortable to sit on a motorbike with more than two people. The cars are becoming more affordable because the wages in emerging markets are rising.

This extra demand for oil comes above the demand in the western world which is already high. It is very hard for particularly Americans to change their car use. Many still want to drive even if the prices are high.

While the demand is big the supply is limited. Scientist are sure that oil and gas will run out sometime, although they are not in agreement about the timing. The law of supply and demand dictates that oil will get more expensive the rarer it is.

Easy oil is the first oil that will run out. This means the oil will have to come from harder to reach places. With new technology it will be possible to extract oil in new way, examples are deep sea oil and tar sands. But this oil will be very expansive to produce. This means to customer will have to pay a high price for it to.

Direct Commodity Investments

There are a few ways to profit from rising commodities. One of them is to invest in the commodities them self. A big advantage is that your earnings are directly related to the commodity. Because commodities can be very volatile the earnings or losses can be big.

You can buy the actual commodity, like a bar of gold. But this is not very effective. It is hard and expansive to trade this way. You have to buy a lot of different commodities in order to diversify.

It is also possible to buy financial products which directly invest in commodities. Examples are funds, etf's, options and futures. This way of investing also makes it easy to diversify. It is possible to buy a basket of different commodities. An example is the rogers index. Diversification is smart because commodities can be volatile.

Diversification

Commodities are a good way to diversify. Commodity prices can behave in a different way than other markets like the stock market. Some times commodities can even perform in an opposite way compared to the stock market.

It is also important to diversify between different commodities. Because each commodity has its own price movements. Its hard to say in advance which one will do well. So its important not to put all your eggs in one basket. You can buy a basket of commodities to have broad diversification. It can also be a good strategy to buy a few promising commodities.

Expanding demand

At the moment the developed word is using much more commodities per person than developing nations. But this is changing fast. People in China and India are starting to buy cars and eat better food. They are eating more expansive food like beef. And it takes a lot of soft commodities to feed a cow. This rising demand is visible in all commodities, the demand is growing very hard in the energy sector. But it might surprise you to know that these countries also have a high demand for gold. Gold is very important in many developing nations like India.

The demand is growing in very populous area's. China and India are the most populous nations in the world. This makes the demand growth extra explosive. This demand growth will surely drive up prices.

This expanding demand is also a very important reason to invest in commodities.

Limited Supply

The supply of commodities divers a lot. Some commodities like tries are renewable. The price of wood still goes up with demand but the supply can be adjusted to fit supply. Wood and softs are not finite in nature, but the amount of land is limited. This will also cause the price to rice when demand rises.

Other commodities like metals and oil are finite in supply. If demand rises it is not possible to make supply much bigger in the long run. It is possible in the short run but then it runs out quicker, meaning a higher price in the future. This means the prices will go higher when they become rare. It is also harder to collect these commodities when the supply dries up. Oil will have to be found in the deep sea. Metals will have to be found in deep mines. This gives the price an extra boost.

Researchers are not sure when the supply of commodities will run out. But we are sure it will, the prices will reflect this fact. This is one important reason why they are a great investment opportunity.

Jim Rogers

Jim Rogers is a very good investor. He became famous by running the Quantum Fund with the also very rich and famous George Soros. This is a global macro fund, a fund that takes advantage of mis pricing in the market. A fund like this can invest in anything including commodities.

Now that he no longer runs the fund he still invests in commodities. Rogers has been outperforming the market for years and he probably will in the future. Rogers takes a broad approach to commodities. He likes to buy a basket of different ones to diversify his holdings. He has also made his own commodity index. This basket contains a lot of different commodities including: oil, gas,metals and softs.

Its is often smart to agree with a winner and Rogers sure is one. This is one of the reasons i like commodities a lot.