Certain Commodities are Best Investments Bet

As an Economic Analyst, every week I look for data which effects my view of the global economy. As an investor, I take this knowledge and try to make money.

My overall economic view for investing is not good.

Europe is reducing spending to bring their debt under control. Most likely the European economies will enter a small recession during the next year or two.

America is in a depression. Through the magic of monetary policy, they have masked most of the negative effects of the depression except for employment. The July 2010 employment data showed it was the second month in a row of declining jobs. Economic growth will be slow for at least the next decade.

Europe and Asia comprise the two largest export markets for the BRICCA exporting countries (Brazil, Russia, India, China, Canada and Australia). With relatively no growth in Europe and America, this puts BRICCA in a strange place. BRICCA will grow – but most likely at somewhat slower rates than pre-2008.

China has a huge populations, and can turn a significant portion of expansion inward. Exports never accounted for a significant portion of the Indian economy and is probably the most isolated economy from global economic fluctuations. Brazil, Russia, Canada and Australia being export commodity driven suffer lower commodity prices if the world's demand for commodities do not expand.

In addition, there is some doubt now that China is the world's best hope to drive the global economy in this decade. It is difficult to validate data in China – and observation of events cast uncertainty on bank liquidity / stability caused by a housing speculation bubble. Housing prices have now grown beyond the means of the workers and will need to correct. Internal consumption is driven by wealth – if your housing price declines your wealth declines and your consumption declines.

The bottom line is that the BRICCA countries will most likely expand, but the profitability of that expansion will be less than 2007 levels. My view of the BRICCA countries is a conservative view, and there is a chance economic activity could be higher – but I would not bet my money on it.

The world has too much production capacity because of the recession. In the short term there will be significant global competition – profit margins will be lower as there is too much supply, and not enough demand.

Whether you want to call it Global Warming or just a nasty heatwave, Russia has lost nine million hectares of wheat. Russia is the third largest producer of wheat and is now forbidding export of wheat until the end of the year. Wheat prices jumped on the news.

An investor loves certainty in investing. There are three components in business – supply, demand and profitability. The most profitable items are those where the supply cannot meet demand and cannot be readily increased. Investing in wheat when there is a shortage could turn very profitable.

The question is whether there is a REAL shortage of wheat. According my sources, global stockpiles of wheat are at a three year high – and the world's largest wheat producer (USA) has a large crop. Most likely, there is no shortage right now.

However, as China and India (the worlds most populous countries) economically emerge, they will build a middle class whose subsistence diet will grow towards higher proteins such as meat. It takes 4 kgs of grain to produce 1 kg of beef. This middle class most likely will also have an appetite for larger and larger purchases of gold.

The world is not able to quickly expand farm production. We have a fixed supply of farm production, and higher demand directly equals higher profits. The same is true about gold. There are only so much known reserves, and the rate of production is relatively fixed.

So we have a situation where we are certain of an expanding middle class in India and China. This middle class will consume more manufactured products – but because there is a global surplus of supply and competition - profits will most likely be reduced.

On the other hand, commodities where production is limited or fixed stand a good chance over the next 5 years of increasing dramatically in price betting on the growing middle class in China and India. The problem with investing is knowing exactly when to enter the market – or when to leave. And because of market fundamentals, commodities increase and decrease in value significantly more than other investments.

I currently have or will have in the near future investments in the following commodities:

* gold and gold mining stocks

* grain futures

The easiest way to invest in commodities is through exchange traded funds (ETF) where shares are bought and sold like normal stocks.

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