My plan for making serious wealth this decade
Commodity prices have been rising for years. And they're set to stay high, says Bengt Saelensminde. If you don’t have exposure, you are going to miss out on one of the opportunities of the decade.
It's rotten news for retailers
The Indian government has just announced that it is suspending cotton exports with immediate effect. There's not enough cotton about, and India wants to make sure its own manufacturers are well sorted before it offers any material to foreigners.
That is sending a cold shudder through the retail industry here in the UK. Cotton prices surged and clothing retailers plummeted.
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But then this is just one case that highlights how resources are tightening right across the globe. For decades we've taken resources for granted. Now things are starting to change. Rapidly.
In fact, I think we're only a decade into a major commodities super-cycle. And by my reckoning there must be at least another 20 years left as the world adjusts to new demographics. That is if we ever adjust! You only need to look to rocketing oil prices to see what this can do to your personal finances, let alone the economy as a whole.
Yet the situation offers fantastic opportunities for us as investors.
Exporting nations are rationing their resources
India's tactics this week are far from unique. China has long-since held back its precious rare earth elements. These metallic elements are essential for manufacturing all those electronic gadgets that we don't seem to be able to live without any more. And China produces more than 90% of the global supply of rare earths.
No wonder all these things are 'Made in China'!
And though the consortium of oil producers, OPEC, likes to promote itself as a stabilising force in the industry, what you've got to remember is that it's really just an oil cartel. OPEC's main aim is to ensure global oil prices stay at a level that's best for them; it's another way of managing exports.
As the global population grows, you can expect to read more and more about how exporting nations are rationing supplies. And that means prices could be going only one way for quite a while.
The days when Britannia ruled the waves and extracted resources from her great empire are long gone. And we are going to pay handsomely for that.
Resource competition is hotting-up
The emerging markets will continue to pile on pricing pressure. It's not just that their economies are growing at a healthy lick. It's where their economies are growing that's the problem.
As nations develop, nearly all their GDP goes into things'. They upgrade from a bike to a motorbike. They replace a fan with an air-con unit, and maybe they'll treat themselves to a fridge. And that's not to mention the massive infrastructure spending by governments.
Figures out last night show that Brazil's economy has just overtaken the UK's. Pretty soon it's going to be right up there with the US and China.
The developing world is still growing, and demands more and more commodities. If anything, the situation may get worse as wealth trickles further out to society at large.
So demand is set to grow. Now, what about supply?
Don't count on it
Some commodities are finite take fossil fuels. Many people believe we've passed the point of peak oil', and production is set to wane.
In the light of growing global demand, this is a massive danger. And it's part of the reason why oil prices are spiralling it's not just to do with tensions in the Middle East. So you really must have some exposure to the oil sector in your portfolio.
Meanwhile, other resources are still in plentiful supply, or can be recycled out of existing stock. But the cost of extracting and refining these commodities is escalating. And that's partly down to oil prices.
It takes a lot of energy (read oil) to make a tonne of copper, or aluminium it's not just getting the stuff out of the ground, it's refining it too. And exactly the same is true of soft commodities. Agriculture is massively dependent on oil fertilisers in particular and then all the farm machinery and distribution costs.
Higher commodity prices push up input costs and cause higher commodity prices.
As if that wasn't bad enough...
I think commodities are set to stay high. And if you don't have exposure, then you might find yourself at the losing end of the deal.
What we've looked at so far are what you might call the fundamentals' that is, the logic behind upwardly mobile prices. What we haven't mentioned is the ever-changing relationship between financial' wealth and tangible' wealth.
It's an idea that I like to emphasise. I'm convinced that most investors are completely married to financial savings. Fair enough, it's what we're all used to paper wealth. But this could leave investors dangerously vulnerable to the financial system.
I'm convinced the financial system as we know it is changing. You've got to be highly suspicious of a system where money is simply created out of thin air. And these suspicions will continue to show up in the ever-increasing price of commodities.
Newly minted money adds fuel to the price rises where the fundamentals lead the way.
How to take advantage
I've written in the past about my favourite way to get exposure to oil pricesand my favourite commodity play.
I also quite fancy Russia as a play on the commodities theme. Though Russia will be a great beneficiary of the oil boom, it's also got plenty of other resources to shout about. Here I showed you an investment trust that should do the trick.
My advice is to hold 25% of your portfolio in commodities. And make sure a good part of that is in precious metals. I'm expecting the global grab for resources to continue well into my retirement.
How are you planning for this decade long story? Let us know by leaving a comment below.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.