COMMODITY INVESTING
Figure 3: Investment SCurve
Ineffective investment
Effective investment
Ineffective investment
for all of the world’s most precious 14 commodities have increased on an annualized basis over the past ten years through 2011. Silver has led the way with a 20% annualized return, closely followed by gold (19%), copper (18%) and crude oil (17%). Notably, all commodities except natural gas outperformed the S&P 500 Index 10- year annualized return of 2.92%. In the 1970s, the world’s population
Input (spend etc) Source: U.S. Global Research
a reversion to the initial situation of supply-side sufficiency combined with low prices.” Put more succinctly, Barclays
analysts paraphrased an old Winston Churchill quote: “Now this is not the end. It is not even the beginning of the end, but it is, perhaps, the end of the beginning.” Commodity price increases have
was only half of the size it is today. China and India had no economic footprint and Russia was hidden behind the Iron Curtain. Today, China is the world’s largest engine of growth. On a purchasing power parity basis, China’s share of world GDP has risen significantly
Even after spectacular price gains over the past decade, the commodity supercycle remains
been so strong over the past eight years that they have reversed a 100-year downward trend in prices, according to research from the McKinsey Global Institute. Prices
from around 3% in 1985 to a current world share of nearly 16%. In 1970, only 17% of China’s population lived in cities; today it’s nearly 50% according to Morgan Stanley. Morgan Stanley says this urban migration is an important step in the country’s economic development because per-capita income in urban areas is more than twice that of rural regions. Even more amazing is the incredible pace at which this economic transformation is taking place. McKinsey says that it took the United Kingdom 154 years to double the country’s GDP per capita from $1,300 to $2,600. The United States was able to do it in 53 years and Japan was able to do it in 33. Today, China and India are doubling real per capita incomes every 12 and 16 years respectively. In addition, they’re accomplishing this
phenomenal growth on a much greater scale. The combined population of China and India sits around 2.5 billion, exponentially greater than the populations of the UK, US and Japan. It can be said, “as China goes, so go commodity prices” as the
Figure 4: The China Effect on Commodities (All data series are shown as 12-month moving totals) Crude Oil (Million Tons)
Natural Gas (Billion Cubic Feet) 400 200 200 100 1994 0 1990 1995 2000 Source: BCA Research 12 March 2012 2005 2010 1990 1995 2000 0 2006 2005 -100 2010 1990 1995 2000 2005 2010 0 2008 100 Coal (Million Tons)
Output (sales etc)
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