If we have seen a bottom in 10-year benchmark yields, and are in the midst of a new secular bull-tre...
Commodities Bull Is Raging
03/02/2011 10:15 am EST
Precious metals, oil and other commodities will continue to move firmly upward because there simply isn't enough supply out there to meet growing demand, as Adrian Day of Adrian Day Asset Management discusses in this exclusive interview with MoneyShow.com.
Adrian, we've seen a lot of movement in commodities—particularly oil and the precious and base metals. What to you think about commodities as an investment?
I’m extremely bullish on commodities right now. This is not a speculation—we hear about gold being a bubble, but this is not a speculation, and it’s not a bubble. There are fundamental reasons why commodities have been going up and why they’re going to continue to go up.
Those fundamental reasons, as we know, are really two-fold. One is the increase in demand from China as China’s economy industrializes and you get an emerging middle class, and secondly we are simply not finding enough new reserves of most commodities to meet the growing demand.
That’s true whether you look at copper, or silver, or oil, or whatever. They all have their own fundamentals, of course, but those are the two basic things that are driving commodities—and nothing is changing.
China just recently hiked their interest rate in an attempt to slow growth and dampen inflation. Will that be seen in the prices of commodities?
Well it’s a negative, obviously. But I think the positives so overwhelm that—and you’ve seen that in the response of the commodities since China increased interest rates. Most of the commodities have actually gone up.
If you look at what China’s been doing over the last six months, that certainly hasn’t destroyed the commodity bull market. China is trying to avoid speculation in certain areas and I think that’s a sort of sensible move because some of the areas are very speculative.
But the fundamental thing is whether China has 10% growth or 5% growth—or even if they have a year or two of 1% or 2% growth—that doesn’t negate the long-term fundamental story. Which is: they are industrializing; they are urbanizing; the economy is growing; and that means more resources.
Looking at China, for example, demand patterns change. People go from bicycles to cars—well, if I have a car, I’m using a lot more copper and aluminum, and silicone, and platinum for the catalytic converter and rubber for the tires, than I am if I have a bicycle.
As China’s population moves from bicycles to cars, from wooden shacks to steel or skyscrapers, as they move towards electricity and as they get away from the chickens and move towards beef, it affects everything.
When standards of living goes up, they want better things, they want more of them, and that means more resources.
Any way to use equities to play on commodities?
I think you have to look at each one individually. If you’re looking at gold and you’re a conservative investor, I think gold bullion or the gold ETF is a fine way to play.
Now, for some of the agricultural commodities, the ETFs are not so good because they use futures and with futures you always have the contango, the additional costs and that can add up—over time, that adds up a lot.
So I think a lot depends on the particular commodity you’re looking at.
I like buying the most direct way that I can. If there’s a big cap, if it’s a good quality company with a good balance sheet, I’ll stick with that.
In copper for example, Freeport-McMoRan (NYSE: FCX) is a great company. It has a great balance sheet, and a growing dividend that gives you all the exposure to copper you’d want.
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