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Time to Buy Commodities

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China's economy is about to slow -- and drag commodity prices down with it. That fear has begun to spread through investment circles, following January's revelation that China's economy grew 10.3% in 2010 and 9.8% in the fourth quarter alone -- both ahead of expectations.

Given the market's reaction to this news, I expect we're about to get an attractive buying opportunity in commodity-related companies. But before I get to that, it's worth explaining why such rapid growth in China isn't a good thing.

All things in moderation
Too much growth leads to problems such as inflation. In fact, China's inflation rate is reportedly set to exceed 6% in January -- an unacceptable number for the government, given how much of the country remains poor. After all, if hundreds of millions of Chinese peasants can't afford food, unrest among the citizens will likely increase. If history is any guide, the Chinese government will do everything it can to avoid such tumult.

This has investors worried that the Chinese government will take steps to cool its overheating economy, including raising interest rates. With less liquidity, China's growth will slow, diminishing the country's appetite for commodities. Given how important China has become to the global commodities market, that would cause prices for everything from oil to iron ore to corn to drop ... forever.

Don't be ridiculous
When it comes to stocks, very little lasts forever, despite investors' and analysts' propensity to forecast that whatever happens next will continue to happen for a very long time into the future. In fact, China stands to consume a lot of stuff over the next decade, whether or not its economy slows in 2011. The Economist, for example, predicts that China will eclipse the U.S. to become the world's largest economy by 2019, implying real GDP growth of almost 8% annually until then.

That long-term trend matters most, because even if China's appetite for commodities declines in the first or second quarter this year, it'll rebound soon enough.

What this means for you
With that as background, it should come as no surprise that I think investors should add commodities exposure to their portfolios. Indeed, I wrote to Motley Fool Global Gains members last year that they should buy Latin American trade bank Bladex (NYSE: BLX  ) in part because it would profit by helping to finance companies in Brazil, Chile, and Peru that are sending more and more of their stuff, including metals, minerals, food, oil, and gas, to China.

Since then, the price of stuff has gone up -- oil from $79 to $91 per barrel, copper from $3 to more than $4 per pound, gold from $900 to $1,300 per ounce, corn from $4 to more than $6 per bushel, and so on -- and Bladex has performed in kind. The stock is up 25% since we picked it in October 2009, and up 40% since we recommended it again in July 2010 (when investors momentarily panicked that global demand for stuff might go down).

Therein lies the most important lesson when buying stocks tied to commodity prices: If you're bullish on stuff for the long term, pounce when the market is worried about the short term.

Getting back to that attractive buying opportunity
Commodity prices and commodity stocks all dropped in late January following China's economic reports.  Chinese E&P CNOOC (NYSE: CEO  ) , Brazilian miner Vale (NYSE: VALE  ) , and Australian mining giants BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RIO  ) are all off more than 2% that day. We should expect that trend to continue if China moves more aggressively -- it's already raised the reserve requirement at banks to an all-time high -- to tighten up its money supply.

As an investor who wants more commodity exposure, I can only hope this happens, and that we get an opportunity to buy the likes of CNOOC, Vale, BHP, and Rio Tinto for prices far lower than today's. But I'm also doing more than hoping.

In order to prepare for this opportunity, my Global Gains research team and I are traveling to Australia in early February to meet with a variety of companies at the forefront of fueling and feeding China. We plan to vet them in advance, enabling us to pounce when any buying opportunity presents itself.

If you'd like to do the same, and read all of our dispatches from the field while we're Down Under, click here for more information.

Tim Hanson is the advisor of Motley Fool Global Gains. He owns shares of Bladex. CNOOC and Bladex are Global Gains recommendations. The Motley Fool owns shares of Bladex. Our disclosure policy is Australian for "disclosure policy."

Read/Post Comments (5) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 10:02 AM, swimmer2023 wrote:

    As for current commodity holdings, maintain those positions and add to? What are your thoughts on taking profits and then taking another position as stock prices dip?

  • Report this Comment On February 02, 2011, at 10:22 AM, smokyfied wrote:

    The Fools often refer to megatrends - commodities would sure seem to be one. My question is why now? Rapid growth in the developing world is not recent news. What was the Foolish reason for ignoring commodities for all this time? I have held BHP since 2006 and Vale since 2009. I need to rebalance but still believe in the megatrend.

  • Report this Comment On February 02, 2011, at 10:41 AM, TMFMmbop wrote:

    Why now?

    It's a fair question. At Global Gains, we've ended up underexposed to commodities -- and with no exposure to Australia -- because I think we've been too wary of commodity price volatility and have been a little punitive with our valuations of commodity stocks. If you were earlier to this story and bought heavily amid the 2009 downturn, then kudos -- you've made a lot of money.

    My point here is that another opportunity to get that commodity exposure may be coming if China decides to raise rates and mop up liquidity. If you agree with the long-term commodity megatrend, then that means, if you're underexposed like we are, it's time to pay attention again.

    Thanks for the comment!

    Tim Hanson

  • Report this Comment On February 02, 2011, at 12:32 PM, plange01 wrote:

    china's economy is always about to slow..

  • Report this Comment On February 03, 2011, at 12:44 PM, easyavenue wrote:

    Here's an Australian phosphate company setting up production and lining up sales to China and India. Has unknown hidden value too, in some diamond rights.... May be a good company for GG to check out. Best of luck with the trip!


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10/25/2016 4:02 PM
BHP $35.71 Up +0.74 +2.12%
BHP Billiton CAPS Rating: ***
BLX $27.64 Down -0.10 -0.36%
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CEO $136.05 Down -0.70 -0.51%
CNOOC CAPS Rating: ***
RIO $34.12 Up +1.00 +3.02%
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VALE $6.79 Up +0.30 +4.62%
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