Our main reasons are:
1) The industrialisation of China and India will lead to above-trend growth in raw materials’demand.
2) There is a below-trend growth in supply because of the lack of investment and increased environmental and political risk in non-renewables and lack of arable land for renewal. Don't forget that natural disasters wiping out crop supplies like the one seen in Australia in Jan 2011 would further reduce the supply of certain commodities.
3) The weaker US dollar bodes well for commodity prices. A weak US dollar leads to increased commodity demand (as most commodities are pegged to the US Dollar) from countries whose currencies have appreciated (e.g. Singapore Dollar), because it is cheaper in domestic currency terms to buy the commodity. We see this happening currently as the Singapore Government lets the Singapore Dollar appreciate to tame inflation.
A weak US dollar also leads to an inward shift of the supply curve as farmers in countries whose currencies have appreciated now receive fewer units of domestic currency (at any given US dollar price) per unit produced. The shift in both demand and supply leads to higher commodity prices(as measured in US dollars). This theory is borne out by historical experience.
A weak US dollar also leads to an inward shift of the supply curve as farmers in countries whose currencies have appreciated now receive fewer units of domestic currency (at any given US dollar price) per unit produced. The shift in both demand and supply leads to higher commodity prices(as measured in US dollars). This theory is borne out by historical experience.
4) Long lead time to having additional capacity for commodities on stream. For certain commodities, time is needed to grow additional crops and certain crops are also only available for harvests at certain times of the year.
5) Diversification of assets. As what J did when he tried to diversify his portfolio, he added commodities inside his portfolio to reduce his portfolio risk. Commodities will never go out of trend. Even in a recession, people would still need to eat and consume rice, sugar and other related soft commodities.
6) You control your own investment destiny. If you invest in equities and bonds of companies, no matter how good the company's products are, you are always subjected to the human risk factor. The most famous case would of course be Enron, where the corrupt management brought the company to its knees. If assuming you trade in commodities direct (which we will show you how in our next post), you can minimise this human factor risk.
No comments:
Post a Comment