Commodities Boom

While everyone’s attention was focused on the stock market this past Friday, a landmark event took place that very few people noticed:

For the first time in 24 years, a key index of commodity prices — the Reuters CRB index — surged above the 300 mark, reflecting one of most dynamic demand-driven commodity booms of all time.

Just in the past eight months, world steel prices have surged by nearly 70%, driving producers into a frenzy and consuming companies into a panic.

Nearly half of the world’s steel suppliers have canceled orders in January. Nearly all are slapping on special surcharges or renegotiating their contracts.

And just this past week, oil prices gushed through the $50-per-barrel barrier and touched close to $52 before receding slightly.

Not long ago, $50 was viewed as a far-away oil-price ceiling. Now, more and more oil market experts are beginning to acknowledge that it may actually be a nearby oil-price floor.

The price of heating oil, jet fuel, diesel oil, natural gas, and even coal are following a similar pattern.

The commodities boom is sweeping through metals, grains, meats, and other foods.

Nearly all commodities are being catapulted higher by supply/demand imbalances the likes of which have not been seen since the 1970s.

What is causing this price explosion? How can you take advantage of it? Is it too late to jump on board? Here are my answers …

What’s Causing The Commodity Boom

For many months, I’ve been warning you about the falling dollar and how it would propel commodities — and inflation — higher. Now, it’s happening.

For many months, I’ve also warned how the rising cost of energy — an integral element in the production costs of nearly every agricultural or industrial product — would drive commodity prices still higher. Now, that’s happening, too.

Plus, we have told you about the volcanic eruption in world demand … and why the world’s two most populous countries — China and India — would be at its core. Now, that eruption is here.

So last week, Larry Edelson, a long-time contributor to my Safe Money Report and the editor of his new Real Wealth Report, flew to Asia to personally survey the economic landscape.

Early this morning, I called him to get his latest report.

”If anyone tells you things are slowing down here,” he said immediately, “they’re dreaming. China and India are in a mad dash for oil, gas, iron ore, scrap metal, and more. Japan is trashing its cars to ship to China. Countries like Brazil and Chile are shipping more to China in one day than they used to in one year. This boom has legs.”

“How do you know for sure?” I asked.

“Nobody knows for sure. But I can smell it, feel it, touch it.”

“Give me some concrete examples.”

“You want concrete? Then you should see the skyline directly in front of my Shanghai hotel room. I counted six new skyscrapers going up. But that’s merely a small slice of this city. Shanghai is 2,400 or so square miles, over 16 million inhabitants.”

“What’s happening right now?”

“It’s wild. China’s retail sales in December, the latest stats we’ve got, were 14% ahead of last year’s. Can you imagine that? FOURTEEN percent! In the States, retailers would be jumping for joy if they could lock in growth that’s one FOURTH that level.”

“Any sign of a slowdown?” I asked.

“None whatsoever, at least not yet. This week, I visited Nanjing Road in the center of Shanghai. Its sales rival New York’s Fifth Avenue and Palm Beach’s Worth Avenue combined. Gucci, Versace, Cartier, Rolls Royce, BMW, Rolex, Louis Vitton, and dozens more high-end retailers line the street. Each and every one of them is packed with customers.”

“What’s driving all this?”

“Domestic demand. It’s exploding. Plus foreign investment. It climbed 10.7% in January. Over 3,500 foreign companies built stores and or factories in China.”

“In 2004?”

“No. In January of 2005. Just ONE month!”

China Surpasses U.S. in Commodity Consumption

“Any hard data on commodities?”

“Are you kidding? Listen to this: Among the four most basic commodities — grains and meat, coal and steel — consumption in China has now eclipsed consumption in the United States.”

I asked for numbers, and Larry paused for a moment while he consulted his notes. Then he read them off to me in staccato fashion.

“GRAINS. China’s consumption hit 382 million tons in 2004. Surpassed U.S. grain consumption — 278 million tons — by a mile …

“MEATS. China bought 64 million tons of it in 2004. Almost DOUBLE the amount consumed in America …

“STEEL. China’s usage is now MORE than double ours …

“OIL. Their imports literally JUMPED off the charts in 2004 — up 34% …

“COAL. China’s consumption soared to 800 million tons. Easily exceeds the 574 million tons burned back home.”

“Why so much coal?” I interjected.

“Because China uses coal for nearly two-thirds of its energy needs. According to Fenz Zhang, an analyst at JP Morgan Chase, China’s power producers just agreed to pay as much as 25% more for coal this year. That exceeds China’s own official government price limits. Why? Because the government simply failed to contain prices. How could they? World prices are surging. It was beyond their control.”

India Exploding

“Where are you now?”

“Right now, I’m in Bangkok. Just got in from Shanghai Friday night — the 25th. Saturday I took a breather. Sunday, I met with a world renown Asia guru. I’ve got an Energy Windfall Trader coming to you in a few minutes. Also, I’m lining up a bunch of appointments here, plus in Bombay for next week. Then back to Shanghai on my way home. So don’t worry. I’m not slackin.’”

I laughed. “That’s not why I asked. I asked because, even as you speak, I’m typing all this into Martin on Monday, and I think some readers may be interested in where you are, what you’re up to.

“Oh. I get it. This is an interview for your Martin on Monday?”

“Exactly. When do you leave for Bombay?”

“Not sure of the exact schedule yet. But I do know this: India’s economy is bursting at the seams, perhaps even more so than China’s. And remember, that’s a country that was going nowhere for decades, a country that everyone thought was locked into a never-ending cycle of wretched poverty.”

“And isn’t that still the case?” I queried.

“For part of the population, maybe. But for a rapidly growing middle class, no. They’re taking off. They’re pushing annual economic growth up at an average annual rate of 5.9% between 1994 – 2003. Look at their retail sales — up by over 16%. Or look at their sales of passenger vehicles: In 2004, they were up by an astounding 25%. That’s even faster than China’s already-fast 15%. It’s the fastest growing automobile industry in the world.”

I told Larry about my own recent trip to Brazil. Then, for a few moments, we talked about how India and China are now scouring the world for food, iron ore, oil, and gas … how they’re forging strategic partnerships with Brazil, Kazakhstan, Russia, Iran, Indonesia, Australia … how they’re transforming the world’s commodity markets.

Overall, the evidence couldn’t be clearer: We are smack in the middle of one of the greatest and broadest commodity booms of all time.

Not Too Late To Jump On Board!

I also gave Larry an update on some of the stocks in our Safe Money Report model portfolio …

“First,” I explained, “our energy trusts are continuing to pump out double-digit yields, surging in value like rocket-propelled missiles. And I’m especially pleased to see other analysts finally discovering them.”

“Like who?” Larry asked.

“Like Forbes, for example. Their recent report says ‘the yields on these trusts are usually well into the double-digit percentages, and with persistently high energy prices, capital gains have been impressive, as well.’ Then they also cite a prime example:`[It] yields 10%, and the stock is up 67% since last May.’”

Larry reacted immediately. “Hey! That’s the one you’ve been recommending in Safe Money since God knows when!”

“Yes, it is, thanks to you. Richard Lehmann, editor of the Forbes/Lehmann Income Securities Investor, is also enamored with these energy trusts. He says he’s attracted by their high yields and ample opportunity for capital gains. He talks about how the dividends qualify for the 15% tax treatment. He’s telling people why he thinks these high yields should be snapped up because, within a year, they are likely to drop into the single digits.”

“What do you think?” Larry inquired.

“He’s right. That particular stock is undergoing a modest correction now. So I think it’s an ideal time to buy.

“Second,” I continued, “our Energy Select Sector SPDR Fund has also gone through the roof. If you look at the chart, you can see how sharp the run-up has been. You can also see how some kind of setback is perfectly natural and to be expected. I know many people are anxious to get in. But I’m telling them to wait for a correction, at least a small one.”

Energy Select Sector SPDR Fund (NYSE: XLE)

I paused to email the chart to Larry, along with one other.

“Third,” I said into the phone receiver as I maneuvered my mouse, “U.S. Global Resources Fund (PSPFX) is also skyrocketing, up about 20% in January alone.”

U.S. Global Resources Fund (PSPFX)

“Any others?”

“Sure. And of course, we’ve also had some losers, such as investments that are designed to profit from rising long-term interest rates. But be patient. If anything will drive up long-term interest rates, it’s going to be this energy boom.”

For the details on what to buy now, when to grab profits (or cut losses), and how to build a well-balanced portfolio overall, see my Safe Money Report. Plus, for a newsletter specialized in commodity-based investments, refer to Larry’s Real Wealth Report.

And if you want to really go for the kind of profits only more aggressive trading can deliver, try out his Energy Windfall Trader.

Don’t Jump. Look Before You Leap.

After Larry and I hung up, he emailed back his comments on the two charts: “Nice work! But still too conservative for my blood. You like to double your money in a few months or years. I like to do it in a few days or weeks.”

I shot an email with my response: “That’s OK for your play money. But not your serious money. Booms never last forever. You’ve always got to be ready for the bust. You must never ignore the risk.”

Just seconds later, I heard a “ding” from my computer signaling a new email had arrived, again from Larry in Bangkok.

At the very top of our string of correspondence was just one, single added word: “Agreed.”

Good luck and God bless!

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

Correction: In last week’s issue of Martin on Monday, we inadvertently cropped off the source of the “Nymex Crude Oil Futures” chart. The source is WTRG Economics, www.wtrg.com. We apologize for the error.

Martin Weiss and “Martin on Monday” are non-partisan. Third-party ads do not necessarily represent their opinion and should not be interpreted as an endorsement.