What's the top-performing commodity this year? It's not gold, despite the attention the yellow metal is generating. The base answer is nickel, with a 39% gain through April 28 in the London Metal Exchange price for three-month delivery, according to Bloomberg. As investors debate the prospects for fiat currencies in advanced economies (generally poor, in my opinion) and the merits of hard assets, is nickel a viable investment choice?
It's all about China
As with virtually all commodities today, nickel demand is highly dependent on Chinese industrial activity. China is the world's largest consumer of nickel, which is used in the production of stainless steel). The rise in prices highlights surging demand -- particularly when one considers that the first quarter witnessed record production of a substitute product, nickel pig iron.
Despite this positive underlying trend, don't rush out to buy the iPath Dow Jones UBS Nickel Total Return Subindex ETN (NYSE: JJN) without understanding how the exchange-traded product works. Unlike the SPDR Gold Shares ETF (NYSE: GLD), which owns gold bullion outright, the nickel ETN purchases futures contracts, which creates a set of specific risks. Furthermore, it's illiquid -- an average day sees less than 25,000 shares trade.
Miners: an attractive alternative
All is not lost for share investors. In fact, I think it's better for individual investors to seek broad exposure to hard assets rather than focusing on any single commodity. At last weekend's Berkshire Hathaway annual meeting, Warren Buffett told shareholders that "the prospects for significant inflation have increased, not only here but around the world."
In that context, buying mining company shares at reasonable prices is an attractive way to get hard-asset exposure. The Motley Fool CAPS community likes the miners in the following table, all of which are rated four out of five stars. Of the five companies, BHP Billiton offers the broadest exposure to different commodities.
|
Company |
2009 Revenue Contribution, Major Segments |
Estimated Long-Term Earnings-per-Share Growth |
|---|---|---|
|
BHP Billiton (NYSE: BHP)* |
Coal, Metallurgical & Energy (29%); Iron Ore (20%); Petroleum (14%); Base Metals (14%) |
15.2% |
|
Vale (NYSE: VALE) |
Ferrous Minerals (61%), Non-Ferrous Minerals (29%) |
12.1% |
|
Rio Tinto (NYSE: RTP) |
Iron Ore (30%), Aluminum (29%), Energy (16%), Copper (15%) |
18% |
|
Freeport-McMoRan (NYSE: FCX) |
Copper (75%), Gold (17%), Molybdenum (5%) |
10% |
|
Southern Copper (NYSE: SCCO) |
Copper (71%), Molybdenum (12%), Silver (7%) |
18.5% |
Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, Freeport-McMoran and Southern Copper Forms 10-K.
*Segment information is for the 12 months ended June 30, 2009.
What China gives, China may take away
As contrarian Marc Faber pointed out in a televised interview last week, all industrial commodities, including nickel, are potentially vulnerable to the bursting of China's property bubble. In the current environment of historically loose money, investors would be well advised to have a genuine level of exposure to hard assets, either directly or via mining companies -- just not at any price. After all, that's how bubbles get started in the first place.
China isn't the only economy experiencing booming demand for commodities and infrastructure: Tim Hanson describes the biggest investment opportunity this year.
