Investors in raw materials have enjoyed a sensational start to the year. Helped along by geopolitical tension and the weak dollar, which makes greenback-denominated commodities cheaper for non-US investors, oil last week eclipsed the $100 mark and gold burst through its 1980 peak of $850 an ounce; it has now reached $880. Platinum, soybeans, heating oil and palm oil also hit records.
Expect the commodities supercycle to continue
The upswing of the past few years is set to continue for years. As Jim Rogers puts it, we have three billion people in Asia "who were not in the game" during the last boom; they want Western living standards. Industrialising economies already consume 55% of the world's commodities, says Ian Henderson of JP Morgan Asset Management's Natural Resources fund, while Evy Hambro of Blackrock's World Mining fund said last year that Brazil, India, China and Russia would collectively need more oil, aluminium and copper than the entire planet used in 2006.
Supply has been lagging as new capacity was neglected during the bear market; it can take ten years to bring a new mine or oil field online. Underinvestment, a shortage of skilled people and industrialising emerging economies are trends that won't disappear any time soon, says Stan Sudol in Canada's Northern Life: we are in a commodities supercycle.
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Be wary of oil and base metals
But the commodities supercycle may well take a breather in 2008 as far as metals and oil are concerned. With a US recession a strong possibility, it's hard to gauge to what extent countries such as India and China are decoupled from the US growth cycle, as Mark Dampier of Hargreaves Lansdown points out.
Citigroup recently said that Asian consumption has declined as a proportion of GDP, leaving the region more dependent on exports. And it's interesting to note in this context that Singapore's fourth-quarter growth slid to 6% from 9% in the previous three months, while South Korean and Malaysian export growth is softening.
Barclays Capital points to the prospect of fresh lows in metals stockpiles, expecting slowing American metals demand to be offset by demand elsewhere although metals, which posted negative returns last year, remain "vulnerable to global growth concerns". The world economy looks set for a dramatic slowdown, according to Derek Burleton of Canada's Dominion Bank, implying a "meaningful impact on commodity demand".
It's a similar story for oil. Inventories have slumped and Opec shows no inclination to boost production, while there have been no major discoveries for years. Gerard Lyon of Standard Chartered thinks a recession in the US, still the world's biggest oil consumer, could lower prices to $70-$80 a barrel as demand falls. But that will be a setback en route to $150 oil in the next three to five years.
Be bullish on gold and silver
But while the short-term outlook for metals and oil may be inauspicious, precious metals should live up to their name this year. There is plenty of scope for further gains in gold, which in real terms is still far off its 1980 peak of over $2,000. Further dollar weakness, worries over the US and global economy, the ongoing credit crunch, the shaky geopolitical environment, "more than a whiff of inflation" as Graham Birch of Blackrock's Gold and General fund puts it all look set to give the ultimate safe haven and store of value a further fillip.
The fundamental outlook is also encouraging. Global output fell to a ten-year low last year as South African supply fell to a 65-year low and Canada has passed peak output. Meanwhile jewellery demand has risen as the Asian middle classes expand and investment demand is climbing sharply, although "we're still talking small numbers" compared to flows into other assets, as Philip Klapwijk of research group GFMS says. Central banks also look poised to step up buying, with Russia planning to raise its share of reserves.
Ross Norman of TheBullionDesk.com, the top forecaster over the past four years, says gold could reach almost $1,200 an ounce in 2008. An easy and cheap way to gain exposure is via a London-listed gold ETF that tracks the spot price (PHGP), while Dampier holds the Blackrock Gold and General fund.
Dollar and general political and economic jitters also traditionally bode well for silver, which is historically undervalued compared to gold. James Turk thinks it can double to $30 from here as the gold-silver ratio falls from its current 56 to below 40 and as gold reaches $1,200.
Platinum's fundamentals remain bullish with inventories low and supply disruptions resulting in a deficit this year; there is scope for further short-term gains, said Standard Bank late last year. All this makes the precious metals ETF containing gold, silver, platinum and palladium worth a look (PHPP).
Stock up on food
You can see why Jim Rogers has been stocking up on agricultural commodities. The sub-sector is still further from its historic highs than metals or energy and the demand-supply picture is compelling. Rising populations, mounting wealth in emerging economies fuelling protein demand and the trend towards biofuels are major drivers of demand, while urbanisation, limited room for acreage expansion and meagre stockpiles US corn inventories are at a 35-year low have meant supply is falling behind.
Barclays Capital thinks the outlook is especially positive for grains and cotton, which Byron Wien of Pequot Capital reckons could reach 85 cents per pound in 2008; it is now at 69 cents. There is a grains ETF in London (AGGP; it covers soybean, wheat and corn), as well as one for cotton. One of the few agricultural funds available is Hugh Hendry's CF Eclectica Agriculture Fund.
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