Tangible Wealth

The Daily Reckoning PRESENTS: Let’s face it; natural resources have long been the underdogs of the investment world…but not for long. Puru Saxena explains…

TANGIBLE WEALTH

Our lives depend on commodities yet most are too afraid to invest in them. Whereas growth stocks and real estate are considered “safe bets that can only go up,” even the mention of the word “commodities” creates tremendous fear amongst the public.

Human beings are totally dependent on commodities, period. Everybody needs food and clothing to survive as well as energy to go about the business of living. What amazes me though is how people know so little about commodities. Nobody seems to care, and “things” are just taken for granted.

Every so often, however, commodities get their revenge and the limelight they rightly deserve. When raw materials are in great demand and supplies are extremely tight, commodities make headlines all over the world as prices soar. Now, we are witnessing another such time. The new bull-market is here, but it is not in financial assets (stocks and bonds); it is in commodities.

History is dotted with massive bull-markets in commodities, which occurred regularly. In fact, over the past 200 years, we had five major booms in natural resources. The shortest boom I could find lasted 15 years, and the longest one continued for 40 years! The current bull-market started in 2001 when commodities (adjusted for inflation) were the cheapest they had ever been. So, this bull-market is still an infant as far as commodity bull-markets go with the potential of becoming the grand daddy of all bull-markets.

“Why do commodity bull-markets last for such a long time?” you may wonder. The answer can be summed up in two words – supply and demand.

When demand is on the rise, it takes years to increase the supply. Unlike financial assets, the supply of commodities cannot be increased at will. Consider crude oil as an example. Despite our desperate need for increasing oil production, not a single gigantic oil field has been discovered in the past 35 years. Now, let us assume that a huge oil field is discovered tomorrow. While that would be great news, it would still take years before the infrastructure is built to bring this new oil to the consumer. In the meantime, oil will continue to surge. Similar supply-constraints also apply in the case of gold, silver, sugar, corn, coffee or wheat – wonderful news for the commodity-investor.

Moreover, we are living in a highly inflationary world. Most central banks continue to print money like there is no tomorrow. The money supply is surging by roughly 10% per annum in most developed nations. So, this excessive liquidity has to find a home somewhere, and in highly inflationary times, it usually goes into commodities because their supplies cannot be increased at will. You can be rest assured that central banks around the world will continue to print money for as long as they can. If they don’t, the $46 trillion debt in the United States will become even more of a problem and lead the world to a depression. The truth is that money printing (inflation) makes debt less formidable. Due to inflation, the hundred dollars you owe today “feel” like a lot less in ten years time. So, monetary inflation is another very good reason why you want to protect your wealth by investing in commodities.

While many are concerned about the risk involved with investing in commodities, a recent study conducted by professors from the Yale University and Wharton School reveals that as an asset-class, commodities outperformed both stocks and bonds since 1959 – and with lower volatility when compared to stocks. This study is clearly a milestone, as it eliminates the myth associated with commodity investing. In fact, I would argue that investing in commodities is much simpler than investing in stocks or bonds because you do not have to worry about the management issues of a particular company or industry. All you need to know when investing in any commodity is how much of this stuff is around and how much is being used up.

I first started investing in commodities five years ago amongst widespread skepticism from investors. Today, I continue to accumulate commodities for the long-term as I feel that the current boom will last for another 10-15 years based on historical patterns.

The main drivers behind this boom are the rapid urbanization and industrialization of China and India. As these two economies continue to power ahead, they will require a lot of commodities over the coming years. Metals and energy will be needed to build cities and food will be in great demand as the 2.4 billion Chinese and Indians acquire more wealth. It is worth noting that per-capita consumption levels in these two most populated countries are amongst the lowest in the world and expected to rise rapidly. So, even a small increment in demand will cause shockwaves in commodity prices.

In the current economic environment, where monetary inflation is rampant, every investor must take a position in commodities as a wealth preservation strategy. Now, I am not saying that you should sell all your assets and put everything in tangibles. After all, this bull-market will be punctuated with periods of correction and nothing beats a good night’s sleep. How much you invest is a personal decision, but consider allocating 20-25% of your net-worth as a starting point and add when you make some profits.

Up until now, metals and energy have appreciated significantly. On the other hand, soft commodities such as cotton, wheat and corn have not gone up much and here lies a fantastic investment opportunity for the long-term investor. Adjusted for inflation, grains have never been cheaper in over 200 years. Now that’s what I call value!

Regards,

Puru Saxena
for The Daily Reckoning
April 6, 2006

P.S. A great commodity bull-market is unfolding right in front of our eyes…and the alert investor who is prepared to seize this opportunity will make a fortune over the coming decade. You can read all about booming precious metals sector of the natural resource market – and how to make it work for you.

Editor’s Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com

An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

The above article was published in The South China Morning Post, a leading newspaper in Hong Kong. Puru Saxena produces Money Matters, a monthly economic publication, which highlights extraordinary investment opportunities in all major markets.

Bill is traveling again today – by car, much to his chagrin, as the strikes and demonstrations in France have all but stopped rail traffic. So, it looks like you’ll have to put up with our comments from the DR office in Baltimore today.

As we flipped on the computer this morning, the first thing we saw was that gold had spiked up significantly – hitting the psychologically key $600-an-ounce level. The last time gold saw these levels was in January of 1981, when investors bought bullion to hedge against rising oil prices.

Today, the reason behind the rally is linked to rising oil prices, as crude oil gained for a second day in New York, nearing $68 a barrel. Gasoline prices also rose after the U.S. Energy Department released data showing declining stockpiles.

“Everything is bullish for gold,” quipped Christoph Eibl, head of commodities trading at Zug, Switzerland-based Tiberius Asset Management AG. “Look at oil prices, look at the euro and base metals. People are just crazy for commodities.”

Gold is typically bought as a hedge against inflation…and the dollar hit a seven-month low against the euro today on speculation that interest rate increases by the ECB will start to outpace moves by the Fed.

Investors are also turning to gold as a safe haven after Iran reported that it had successfully tested a “flying boat” and the land-to-sea Kowsar missile that military analysts say is designed to sink ships in the Gulf, reports Reuters.

“Key resistance was broken overnight, and, as we have been building support and healthy consolidation over the last week or so, now we have a firm base to move higher, our own Kevin Kerr told MarketWatch this morning.

“Gold is exploding, and silver isn’t far behind.”

That’s for sure – silver traded at a 22-year high of $12.01 an ounce. Many of the same factors that move gold have the same effect on silver – that’s why there is a gold/silver ratio built into the price.

But there are a lot of other forces that drive the price of silver, even beyond those driving megatrends the white metal shares with gold. For instance, many people don’t realize that silver is one of the best electrical conductors in the world, and it doesn’t corrode like other metals.

So this means you need silver to make digital cameras…iPods…laptops…microwaves… televisions…the list goes on and on. The electronics industry alone uses up 44% of all the silver produced each year – and you can bet that percentage will keep going up.

Especially since while the demand for silver has gone up, the supply has gone down. Unlike gold, when silver gets utilized for industrial purposes, it is used up and burned away. Here’s something to think about: total world silver supply has plummeted by over 86% just in the last few years…while silver demand has gone up.

If this isn’t an opportunity to make some serious profits, we don’t know what is.

And now, we turn to our team at The Rude Awakening…

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Eric Fry, reporting from Manhattan:

“If today’s stock market were a feature film, it would be a light-hearted romantic comedy…But today’s stock market is not a feature film; it is a vast repository of hard financial data and soft human emotions.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

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Short Fuse, back in Baltimore…

*** Right around the same time we sent copies of Empire of Debt to the Senate and members of the House, David Walker, the Comptroller General of the United States, gave a speech comparing America to an empire of its way to ruin.

More recently, he gave a speech at the London School of Economics, saying:

“In my view, the greatest threat to America’s future isn’t a new superpower or even persons hiding in a cave somewhere in Afghanistan or Pakistan. Instead, this threat is widespread, involving U.S. policymakers, the public, and even the press. What I’m talking about is a decline in societal values and political comity, combined with continuing ignorance and inaction on a range of known issues that are rapidly reshaping the United States and the world. I’m talking about known forces like changing demographics and global economic trends that are having an impact on a scale not seen since the Industrial Revolution. Unfortunately, these and other current and emerging challenges are getting too little attention, provoking too little concern, and prompting too little action.

“Today in America, both policymakers and the public need to face the facts, take a long-term perspective, and accept the need for dramatic reform and some shared sacrifice. After all, when our days on this earth are nearing an end, we should be able to look our children and our grandchildren in the eye and say we did everything we could to pass on a community, a country, and a world that’s better off and better positioned for their future.”

Perhaps we’ll hear some more from the Honorable David Walker in the Empire of Debt documentary…look for more on our endeavors into the world of film in the DR Weekend Edition. In the meantime, you can read the rest of his speech on our site:

America’s Fiscal Future

*** And finally, our efforts at spreading good cheer have not been in vain. A dear reader notices and had this to say:

“I read your article, ‘Good News’ that appeared in the Lew
Rockwell message. It begins, ‘Don’t you ever have anything positive or upbeat to say? asked Michel.’

“Well, Michel just doesn’t get it, as the current assessment of those who aren’t ‘hip’ goes. Anyway, be it known to you, and everyone else who cares to listen in, you are with out a doubt one of the finest humorists to grace the current writing scene.

“Personally, I would have to place you right up there with Will Rogers for the perspicacity and wit evidenced in your observations. Given that you might just be receiving more ‘Michel’ type criticisms, and since you hardly ever publish any of those that offer praise, I would just like to add my view to the later category.

“I particularly identify with your take on the dismal exercise we currently call education. I labored long and hard during my (mostly misspent) youth to struggle through night school to obtain an undergraduate degree, in of all things, physics, followed by several more years, also in night school, pursuing a post graduate degree in mathematics. Finally after fourteen years of this idiotic effort, totally burned out by burning the candle at both ends, I simply stopped ‘getting educated.’ By this time it became abundantly clear that my on the job success had little or nothing to do with what I was forgetting faster than I could learn in school. Of course, this was at a time that spanned the later half of the last century, during which, no one in the school system had any idea of what amazing things we were accomplishing in the real world. Who knows, perhaps they’re teaching that stuff now? Only fifty years behind those developments.

“Also your comment about ‘keeping your eyes open’ strikes a responsive chord. My very wise, dearly departed mother often said, ‘Your eyes steal.’ And usually followed that beauty up with, ‘In this world you pay for what you don’t know.’ Not too bad, coming from a mother of ten who never finished grade school, but managed to go through it ten times over as she reviewed after school lessons with each one of us. They just don’t make moms like that anymore…

“So, keep sending the wonderful, uplifting, and on the mark, observations along. They provide a much-needed humorous view of things that in their rawest sense are not funny at all. (truth & jest…) So, there’s a lot to be said for another old bromide, ‘Laugh and the world laughs with you.'”

Thanks, Larry. We’ll do our best.