After a lackluster 2011, 2012 is expected to be good for commodity investors. This was forecasted by Barclays Capital in its annual survey of institutional investors on February 27. The study found that commodities were valued as a way to diversify risk and generate positive returns in a time of economic uncertainty.
The study found that the attraction to certain commodities was not universal, so this article will address the best expected performers for 2012.
This reddish metal doesn't grab the headlines like the precious metals, but it's used in almost every industry around the world. It's a key component of motors, plumbing, heating, air conditioning, automobiles, computers, mobile phones, wiring, electrical transformers, lighting and roofing. In addition to being a good electrical conductor, it's flexible and corrosion-resistant.
As the economies of China and India have grown and become more industrialized, the demand for copper has steadily risen. Both countries are pouring huge resources into building construction, new airports, industrial equipment and advanced transportation systems. There hasn't been a discovery of a sizable new copper mine in almost a century, so replenishing the supply chain is getting more difficult and costly.
The price of copper was about $1.00 a pound in January 2004, and it made a steady climb to $4.00 in mid-2006. For the next two years, the price range was $2.50 to $4.00. As the financial collapse unfolded in 2008, the price plunged to about $1.50, then reversed course and topped out at $4.50 a year ago. After fluctuating in a range of around $3.50 to $4.00, the current price is roughly $3.90 per pound.
Rising prices for gasoline are largely a function of the cost of crude oil. The U.S. Department of Energy reports that the national average cost for one gallon of gas is broken down as follows: crude oil (71%), state and federal taxes (14%), distribution and marketing (10%) and refining (5%).
Crude is reacting to the laws of supply and demand and tensions in the Middle East. Demand is on the way up because of high growth in China and India that has offset economic weakness in the Western Nations.
The demand for oil extends well beyond gasoline. Products made from petroleum include plastics, medicines, linoleum, shingles, ink, cosmetics, synthetic fibers, solvents, fertilizer, asphalt and thousands of others. The increased demand has driven a barrel of oil over $106, still well below its record high of $147.27 reached in July 2008. That gives oil a potential upside of almost 40% before it runs into resistance at the peak.
The opinions on gold range from one extreme to the other, but Barclays found more bulls than bears in its investment survey. Once gold notched its all-time high of $1,917.90 on Aug. 23, 2011, (unadjusted for inflation), it pulled back below $1,600 by year's end. There was no shortage of pundits proclaiming that the bubble had burst and three-digit gold prices were just around the corner. Instead, gold reversed course and has since regained the $1,700 level.
Most of the current demand for gold is coming from central banks, governments, mutual funds, hedge funds and individual investors. It's viewed as a form of insurance against world unrest, war, inflation and natural disasters. It's still well below its inflation-adjusted high of about $2,400 reached in January 1980 during the Iran hostage crisis and the Soviet invasion of Afghanistan. At this time, however, the U.S. had double-digit inflation and all the restrictions on trading and owning gold had been lifted.
The Bottom Line
When deciding to invest in commodities, renowned investor Jim Rogers suggests that three key questions be answered: First, what is the current level of world production? Second, what new supply sources are currently coming online? Third, are there potential supplies that are undergoing exploration?
In addition to the commodities mentioned above, other commodities to consider are the other precious metals (platinum, palladium, silver), lithium, cotton and food products (coffee, corn, oats, wheat, soybeans, sugar). They have all performed relatively well during the past two years, reacting to increased global demand.
There are many ways to invest in commodities, including mutual funds, index funds, exchange-traded funds (ETFs), stocks and futures markets. As with all investment decisions, do your own research or consult with an experienced broker.