Forget Gold, These Investments Are Poised For A Strong 2011

By Geoffrey Michael | December 13, 2010 AAA

While gold grabs the headlines as it reaches new highs, there are other commodity investments that aren't getting quite as much attention. As investors fret about bailouts, rising debt and currencies backed by nothing but faith, many are turning to hard assets that have intrinsic as well as investment value. Here are a few worth considering. (Find out which currencies are most affected by fluctuations in gold and oil prices and improve your trading. See Commodity Prices And Currency Movements.)

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Just As Precious Metals
Gold may steal the spotlight, but two metals that have had better returns than gold over the past year are palladium and silver. Palladium is used in catalytic converters and has excellent conductivity for electronic applications. It's also used in water purification, photo processing, fuel cells, raw material processing, and the purification of oil and natural gas.

Silver is widely used in jewelry, watches, dinnerware and other ornamental items. It has many industrial applications due to its physical strength, conductivity and ability to withstand temperature extremes. These include imaging, water purification and superconducting electronics.

A year ago, silver was selling at just over $17 an ounce. It is now trading well over $29 an ounce, an increase of more than two-thirds in value. During the same period, palladium has more than doubled, from $350 to over $750 per ounce. In comparison, gold has risen from about $1,100 to the $1,400 area, an increase of less than one-third.

Investments can be made by buying bullion, coins, exchange traded funds, futures contracts, mutual funds and items that contain the metals. Analyst expectations for precious metals vary widely. Some believe they are in a bubble that will soon burst, while Goldman Sachs predicts a rise of 28% over the next 12 months.

Lithium
Lithium is an important element that is not traded on major commodities exchanges. It is being used in an increasingly diverse array of industrial applications that have spurred higher demand and tripled the price during the period 2005-2009.

While it's probably best known as a key component in batteries, lithium is also used in medicines, propellants, lubricants, nuclear reactors, fireworks, aircraft and glass cookware. According to Nathan Slaughter, chief strategist for StreetAuthority's Market Advisor newsletter, "I'm always focused on catalysts - the unique factors behind an idea or investment that can spur it to tremendous heights. And lithium has plenty of catalysts."

Among those is the exploding demand for cell phones and other electronic devices, as well as emerging technologies such as electric cars that use lithium batteries. Slaughter considers lithium to be the "oil of the 21st century."

Coffee
Jack Barnes, a retired hedge fund manager who was chosen by Forbes as a top stock picker in 2006, believes that the recent rise in coffee prices isn't about to stop any time soon. He notes that coffee prices have skyrocketed 54% during the 12 months ending September 2010 and he's looking for a near-term rise of another 30%.

Current prices have reached 13-year highs and coffee futures confirm this trend. Since hitting lows in 2002, coffee has risen from about 50 cents to $2.00 per pound, a 20% compounded annual rate of return. That's a far better performance than all the major U.S. stock averages. It has forced the major food companies to raise their prices on coffee products.

Barnes is forecasting higher prices based on a short list of catalysts that drive supply and demand. The most compelling is the less than ideal weather conditions in the three countries that produce 65% of the world's supply: Brazil, Vietnam and Colombia. Another is that U.S. coffee reserves are reported to be at their lowest level in 10 years. There's also evidence suggesting Brazil and Vietnam may hoard coffee in order to drive up prices in the face of increasing demand.

Food Products
While historical price performance doesn't necessarily indicate future performance, there are other commodities worth a look based on increasing worldwide demand. This is particularly true of food products that have experienced significant price increases during the year ending October 2010: corn (+47%), oats (+36%), wheat (+31%), lean hogs (+30%), soybean oil (+29%), pork bellies (+26%), orange juice (+25%), soybeans (+22%), sugar (+22%) and live cattle (+19%). (They're hard to predict, but commodities cycles provide valuable information for traders. Check out Cashing In On A Commodities Boom.)

As populations grow around the globe and usable agricultural land continues to diminish, there will be continued upward pressure on prices.

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Commodities Roundup
Twenty-one commodities outperformed the S&P 500 index over the past year, and 17 rose over 20%. Two notable exceptions were natural gas and cocoa that were down during the same 12-month period. One other big winner was cotton, which was up 55.5% and is used in everything from clothing to medical supplies.

While the U.S. government is reporting composite inflation in the 1-2% range, many of the basic necessities are exceeding that rate by a wide margin. They are certainly candidates for consideration as part of your diversified investment portfolio.

There are a variety of ways to invest in commodities, including stocks, mutual funds, index funds, futures markets, exchange-traded funds, and exchange-traded notes. If you don't have any experience with commodities trading, consult with a broker who is experienced with these investments. (Learn more about commodities in our Commodities Tutorial.)

Find out what happened in financial news this week. Read Water Cooler Finance: Barack Obama Vs. The World.

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