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Commodity Bull Market Will Roar for Years

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By MakinBacon


Quick Primer on Commodities

Before I get into the reason why commodities will be in a bull market for years, for the sake of those not familiar with commodities in general, I'm going to give a brief outline of what they are.

On the basic and most important level, commodities are raw materials we use to make everyday products we use, or food we grow to eat.

There are other classifications in connection to commodities, but foundationally that's what they are.

For example, along with agricultural goods like corn, wheat or soybeans, you have metals like gold, silver and copper, as well as raw materials like oil and steel, among numerous others.

Some of the uses of commodities, other than eating, are for an inflation hedge like gold, or in a large number of industrial uses like silver, which is playing an increasingly big role in many products.

Others like platinum are used in the making of automobiles, and copper of course has tons of uses.

Various products can come and go based on temporary fads or short term trends, but the raw materials that are used to make them never go out of fashion, and so over the long term will always have some type of demand.


Why the Commodity Bull Market Will Go On

Until the economic slowdown which made access to capital difficult for companies, and also forced companies to cut back on spending, we had been in a commodity bull market for some time.

While that has temporarily halted, it's only taking a deep breath until the economic circumstances change. Once that happens, demand will surge again, and investments in certain commodities will make a lot of money.

Long term though, the reason the bull market will continue on when things economically turn around, is because of the ongoing wealth creation of China and India.

The reason they're so important isn't only the size of their populations, which have been huge for many years, but rather it's the increasing size of a burgeoning middle class which was the driving force behind the booming market for the last 7 years or so.

China is the stronger of the two, as they have a much more stable economy and country, contrary to news reports that like to make it look the opposite.

Don't get me wrong. China has a lot of problems, but they remind me of the United States when they embraced a free market and capitalism and how they had wild days as they figured out how to manage wealth creation and the resultant challenges that came with it.

As far as the emerging middle classes in China and India, it comes with increasing demand for better products and services, as they now have the income to spend on these goods. That's where commodities come in, as most of the demand for products requires raw materials to be used in their creation. This will go on for years into the future.

Finally, there is also the building boom in China which has really only just started, as many areas of the country haven't even began to build up, as it's very regional in China, so raw materials for building will be in great demand for years as well.

Commodity Investment Vehicles

This article isn't for the purpose of going into depth on how to invest in commodities, but only to help you understand the tremendous opportunities they'll provide for those doing their homework and employing the correct strategies.

Having said that, here are a few investment vehicles people use to invest in commodities. There are futures, options, commodity ETFs, hedge funds, indices, mining companies, and companies that may specialize in commodities.

This is of course only a small sampling, but they're written to give you a glimpse as to what's availble out there.

One of the best way to invest in commodities is in futures, because futures represent the raw commodity itself, not a company, which can be affected by so many things like quality of management, government intervention, unions, etc.

The underlying fundamentals of demand over a long period of time is what the majority of large, successful commodity investors look for, and they invest primarily through futures.

Another investmest vehicle that mirrors commodity futures is commodity ETFs, which in most cases invests only in commodity futures according to a strategic plan set by the management, which they occasionally adjust according to market conditions.

Temporary Economic Slowdown Will Extend Commodity Bull Market

Some people have asserted the commodity bull market is over, only based on the current economic slowdown, which has nothing to do with demand, but on ability and/or willingness to spend money.

Most companies and consumers have went on the defensive, and are holding back until things are turning around and they feel save to spend money.

What this has done is not end the commodity bull market, but extend it. This will make it last longer than it would have originally, and will probably add as many years onto it as the economic slowdown lasts.

Chinese Middle Class Will Drive Future Food Prices and Demand

Guaranteed Commodity Investment Success?

While no reputable financial advisor of integrity could offer you guarantees for any type of investment, there is one commodity sector that I would say comes the closest to a guarantee over the long term, and that is in the area of agriculture.

As I mentioned in another article on the recently started China agriculture fund by Jim Rogers and Macquarie, food is the one thing we know will grow in demand, not only because people have to eat to live, but again, because growing middle classes in emerging markets will be able to afford a diversity of food which they couldn't in the past.

That, coupled with the fact there's no more land growing out there, guarantees price increases for food going forward.

This is the classic case of diminishing supply and increasing demand. That eventually means price increases.

Conclusion for Future of Commodities

Commodities are only in a temporary downturn. Demand for raw materials will never go away. The only way it could would be if demand for products were to go away. That's not going to happen.

No matter what direction demand for metals, currencies or oil takes, there's no doubt demand for food will continue to rise. That's probably a place to begin in doing commodity related research.

Again, I don't want to get into specifics in the article, only to show you why commodities will continue to be a hot sector for years to come.

Middle classes in emerging markets are only starting their hunger for food and products. It'll be years before the middle classes of emerging countries are satiated to the point of things beginning to slow down. That's good news for those ready to invest in the commodity sector.

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