In the May 18, 2009 edition of Barron’s, there is an article from the authors of the book Globality: Competing with Everyone from Everywhere for Everything, that presents a concise explanation of why every long-term investor should have exposure to commodities in their portfolio.
While we are mired in an economic slump unlike anything since the great depression, it is important to know that in other parts of the world economies are still growing. China, for example, still grew its GDP over 6% in the fourth quarter of 2008 and is expected to still have an expansion of its GDP this year.
There are a few important differences between the US and other economies that are still expanding. The most significant is that those countries aren’t in hock up to their eyeballs and can invest in their economies without borrowing. The second is the continuation of a dramatic growth in their middle class. Millions of people are moving out of poverty each year in those countries. When they do, they want to live like other middle class people around the world. In short, they want more stuff, including more protein in their diet and new cars outside their new houses.
The growth in these populations, along with the growth in their economies generally, will put dramatic strains on the world’s natural resources. Growth in a desire for protein rich diets will strain the food supply and agricultural inputs of all types. The need to build infrastructure to handle enormous growth in autos and trucks will drive up demand for iron ore, and there will be the obvious strain on global oil supplies (do you think wind or solar power will be powering cars around the world anytime soon?).
For a US investor, the supply and demand economics of commodities make for a compelling investment theme. These economics will be further augmented by the likelihood of a decline in the purchasing power of the dollar. The massive growth of the money supply and the related massive deficits are likely to trigger a drop in the dollar that will add icing on the cake to the returns of long-term investors with exposure to commodities.
Unfortunately, the majority of individual investors don’t have investments in these ‘hard assets’. Right now is a good opportunity to allocate part of your portfolio to commodities. An opportunity that will quickly vanish once inflation raises its ugly head over the next few years and the growth in economies around the world begins to accelerate.
