Shift towards hard assets: Financialisation of commodities

Analysts believe this could be the right time to ditch the dollar.

Many investors strongly feel that if interest rates rise, gold will automatically fall. But is that going to be true?

There’s a great deal more involved in this story than just interest rates. I think that all commodities are set to rise further this year with prices peaking in 2012 or 2013 when the dollar crisis is likely to hit. The dollar has lost 50% of its value in the last 27 years against major currencies globally.

Precious Metals

Gold and silver is the best hedge against financial chaos in the market. If investors want to get insurance of their wealth, buying gold and silver is the best option since these are real assets. You can’t devalue or multiply gold/silver out of thin air. Gold and silver have got intrinsic value which can protect investors.

Investors should be bullish on silver since its industrial utilisation is very high. Silver has already touched $49 an ounce and it still has room to reach further highs.

Agricultural commodities

Agricultural commodities have been neglected over the past 25 to 30 years, but that is likely to change. In Japan, it is now hard to find farmers. The agriculture sector continues to witness rising prices amid growing demand from emerging economies with increased purchasing power and improved disposable income. Jim Rogers said “Fund managers would be acting like farm managers.” Farmers would be driving Lamborghinis and Mercedes with increased income at their disposal. Sugar is trading 37% below its spot price. With increasing utilisation of biofuel and ethanol, the prices of sugar, corn and soya bean are ready for another record high in the coming months and years. With changing weather patterns which is the main driver for rise in soft commodities, the outbreak of a real, live global famine looks increasingly possible with each passing year. So are investors prepared if a global famine does strike?

Already, there are huge warning signs on the horizon. Just check out what agricultural commodities have been doing. They have been absolutely soaring with the World Bank warning of food crisis this year.

Base metals commodities

All base metals would rise in two to three years as demand outsmarts supply, putting pressure on commodities like aluminum, steel, iron ore, tin, copper, lead, lithium, zinc to rise further as investors get jittery and global markets chaotic moving forward.

Energy Commodities

Oil, natural gas, shale gas, coal and ethanol would keep on rising due to growing demand and supply constraint in the future. Energy billionaire Boone Pickens is bullish on natural gas and advocates solution to the growing energy requirement of the US economy. The Cambridge energy group organised a conference in Houston, Texas in March-2010 and top executives from Exxon Mobile, BP, Chevron, Shell were all deliberating upon the possibility of an upsurge in natural gas, shale gas and its benefit for the global energy requirement since these commodities were more environment-friendly.

New commodities

Water is also commodity now and I don’t rule out the possibility of water becoming a luxury. In Pakistan clean bottled water already is. Water prices have gone up by 37% in China. Clean and drinkable water are a great source investment not only in the South East Asia but also in the North East Asia and Africa as well. Water is fast becoming a scarce commodity and prices would continue to rise going forward. Lithium is perhaps the most sought after commodity for batteries as it is environmental friendly and has improved efficiency. Rare earth for which China holds a market share of 97% will be another area whereby investors would strongly compete for. Happy investingI

The writer is an economist and graduate of the University of Chicago’s Booth School of Business

Strategic factors leading to rise in commodities globally include:

Accommodative monetary policy

Negative effective interest rate [adjusted for inflation from nominal interest rate]

Demand-Supply Gap

Under-investment in few commodities

Geo-political and geo-strategic landscape

Volatile financial markets for the next two years

Sovereign debt risk

Positive price growth

I am bullish on rice, sugar, wheat, corn and soya bean in 2011 and 2012 as well. Here’s what’s happened to some key farm commodities’ prices in 2010:

Corn               63%

Cotton           57%

Wheat             84%

Soya bean     27%

Sugar             55%

Sources: Forbes and Financial Times, Economist

Published in The Express Tribune, May 30^th, 2011.