Commodities and Emerging Markets
Board: Macro Economic Trends and Risks

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By sonnypage
July 12, 2007

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I am not the only commodities bull on this board, only the most aggressive. I can safely say that because although I have no idea how the rest of you are invested I am well aware of how I am invested. Be careful out there, Sonny, some of you are saying. Don't you know that commodities are extremely cyclical? The end of any economic expansion always features a run up in commodity prices as demand outpaces supply. Commodity prices move up and the resulting inflation makes its way into the economy which by then is really booming. It's at that point, of course, that the Fed decides that we are having too much fun and takes away the punch bowl by hiking rates until a slowdown or cooling off is achieved. Commodity prices then plunge as surely as summer follows spring. But could it possibly be different this time? I believe that it may well be.

Consider carefully if you will what is happening in the emerging markets. We are in the midst of a singular event that the world has never experienced before and will most likely never experience again. China, India and the rest of the emerging markets are joining those of us in the West in achieving the standard of living we here have come to take for granted. This transformation still has many more years to run before it is finally accomplished, but make no mistake, it is on course and barring some worldwide catastrophic event, it is irreversible. This process is requiring and will continue to require the consumption of ever increasing quantities of the so called hard commodities; that is, the energies, the base metals and also the precious metals. Will supply keep up with demand, or better yet, will demand finally increase supply as might be expected? I don't think so. I think, in fact, that this time, it really is different. New supply will come, at ever increasing cost, and commodity prices will continue to slowly but surely climb. What we have then in commodities is not the normal cyclical bull market associated with the business cycle, but rather a much longer enduring secular bull market. No, the business cycle is not being repealed but contractions will be shorter and less intense. All this, in my opinion, the result of the emerging markets doing what they do, which is, of course, emerge.

Then there is that nagging problem with the U.S. dollar. Since World War II it has been the world's de facto currency. It was truly as good as gold until Nixon took us off the gold standard, but even after that, our status as the world's only economic superpower, and the defender of the free world, kept our dollar sound and still accepted as almost as good as gold. But now, I think, change is finally upon us. The world is awash in ever increasing quantities of dollars just as supplies of hard commodities are in decline. Countries as diverse as Venezuela, Iran and Russia are ready to cut themselves a better deal. Think about it if you will. As our own domestic supplies of hard commodities have dwindled we have still been able to import them from abroad. What we have to exchange are pretty pieces of paper with pictures on them in green ink of George Washington. It's been a great deal for us you must admit. Our current account situation must change; we must import less, export more, simply because the rest of the world now has more dollars than they can stuff under the mattress. Actually, they have not been stuffing them under the mattress, but rather, buying our treasuries. But if the dollar is on the verge of imploding, as I believe it is, then buying our debt is no longer that great an idea. Better to buy "stuff", hard commodities, which they increasingly are doing. Care to join them? I am, and the price of that "stuff" will continue to march higher. It's only just begun.

So what's the best way to play the commodities game? If you are an ant walking around on the Serengeti you are in danger of being stepped on by an elephant. There are very big players in this game with resources and capabilities very difficult if not impossible for us "ants" to replicate. It is best, at least in my opinion, to climb up on the back of a very big bull elephant, replete with ten foot tusks. My best efforts have finally brought me to two large hard commodities mutual funds, one of which is U.S.Global Investors Global Resources Fund (PSPFX). Almost two thirds of my portfolio rests in this one fund. Frank Holmes, the lead manager, has been at the helm since 1999. Holmes is also CEO and chief investment officer of U.S.Global Investors. Morningstar rates PSPFX five stars over the past five years. PSPFX is also winner of the 2007 Lipper Fund Award for the Best Natural Resources Fund for its consistent performance over the five year period ending 12/31/06. The fund ranked first among seventy two funds in its category during that period. But, as they say, "past performance does not guarantee future results". If you are interested, do your own due diligence with a Google search of PSPFX.


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