Thursday, December 21, 2006

Investing in 2007 - commodities

In the previous article, we looked at the foreign stocks from both the developed world as well as the emerging markets. In this section, we will touch upon commodities - a topic we briefly looked at in the first article of this series.

Let us start with gold. The year over year gold consumption has fallen by 3%. While the usage of gold for industrial use has increased, its use for retail and investment purposes has declined. The high prices typically reduce consumption and this has been the case with gold. The industrial use of gold will increase as the global growth increases but the retail/investment sectors are difficult to predict. Another 20% rise in gold prices most likely will dent the retail usage further.

Silver has had a comparatively weak year thus far this year after a runup. This indicates the supply is meeting or exceeding demand already. The creation of the silver ETF generated a lot of enthusiasm for the metal. The main silver production comes from mining, government selling and from scrap. The main consumers of the metal are industrial usage, photography, jewelry and coins.

The other key industrial metal, copper has also declined in value from its highs earlier in the year.

The other common commodity is coffee. Its price has also increased by about 20% from the previous year. Coffee has been very cyclical - increase in prices causes higher growth and decline in prices causes some of the smaller farmers to go bankrupt. Sustained increase in prices will result in higher production and consequently lower prices for this commodity.

Orange juice and pork bellies have also increased in price. Some of this has to do with higher inflation and the devastating hurricane seasons of the prior years. It remains to be seen if these higher price levels can be sustained in the next year.

Finally, the mother of all commodities, oil is expected to remain flat to lower in the next three years. This considers that the current situation in the middle east wont deteriorate further and increase in gas prices will curtail consumption. Oil has cyclical effect on the economy and other commodities as energy is the least common denominator in modern civilization.

Overall, the outlook for commodities doesnt look bullish for the new year. However, disruption to oil supply, further decline in the dollar or other unforeseen events can move the prices higher.

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