Why the commodity markets, unlike housing,
are still beaming

By Chuck Butler, President EverBank^® World Markets

As investors, we know there is a beginning—and an end—to any bull market. Sometime in late 1998, the latest bull market in commodities began. Though we’re several years into this cycle, many analysts believe the backdrop could remain compelling for another five to 10 years. Here are some reasons why:

Research shows that commodity markets tend to rise over periods lasting as long as two decades, followed by subsequent periods of declining prices that roughly equal that duration. In his book Hot Commodities^<1, Jim Rogers tracks commodity bull markets over a period of 200 years. Each bull cycle was shown to have a relatively long run; the average range over the two centuries analyzed was 17 to 22 years.

Of course, volatility is inherent in any trend. In the last six months, many commodities have backed off their frenetic pace of the past few years. While they could portend a change, periodic corrections don’t necessarily signal the beginning of a prolonged downward trend.

When many of us think of commodities, we go right to energy. But there’s a plethora of raw materials, from precious metals to agricultural products, which fall under the umbrella of basic materials. And many are flirting with record highs. Gurgling oil prices have flowed into the corn market, for instance, where demand for ethanol has driven corn prices higher.

As you’ll read below, a new secular trend in infrastructure building among developing nations is also unfolding—and driving the prices of many commodities sharply higher.

Yes, this is the part where we mention China and India.

In those two countries, the middle class is only now emerging but is already increasing demand for items filled by commodities. For the first time, these countries are seeking oil—and plenty of it. Consider that our automobile revolution of the 1920s is just now happening in China. Some analysts say oil could eventually surpass $100 per barrel; while that figure might be extreme, oil prices could hold above $60 per barrel for some time to come.

As industry has picked up in developing countries, so has the demand for basic materials so vital to infrastructure building. Concrete and base metals, such as aluminum and nickel, continue to be bought. Copper is used in nearly every major industry: transportation, engineering, machinery and equipment, electrical, building, and computer. This metal has outpaced all of its precious-metal peers significantly over the last half-decade. Since their low in 2001, spot copper prices have risen more than 300%.

And what about those shinier metals?

Price increases in gold and silver have been eye-catching, with the former rising more than 90% over the past 24 months. Reflecting the volatility inherent in precious metals, this market did experience a technical correction in late spring. Gold remained well-bid during the correction, however, and has since moved above this recent low

Bull markets in gold and silver, by some estimates, last between seven and nine years. Such estimates would put the latest bull cycle in its third or fourth year.

Many analysts believe the investment climate could remain favorable, especially for gold. With inflationary concerns creeping higher worldwide, investors are seeking gold as a hedge against inflation. The growing popularity of gold and silver ETFs (Exchange Traded Funds) is also keeping the precious metals well-bid.

Research by Ibbotson Associates² and other sources has shown commodities to have a low correlation to traditional stocks and bonds, meaning they tend not to move in lock-step with more mainstream assets. Commodities therefore offer the benefits of diversification, while also typically producing higher returns and acting as a hedge against inflation.

Commodities have greater inherent risk than more traditional assets. For this reason, many asset allocation guidelines suggest limiting commodities to 20% of an investment portfolio. When part of a well-diversified portfolio, however, commodities have been shown to increase the relative performance of the total portfolio while actually reducing overall risk (see chart).

“Strategic Asset Allocation and Commodities,” Ibbotson: Thomas M. Idzorek, CFA

Investors should view any sharp increase in a particular market with caution. In terms of the commodity markets, however, perhaps not all the cattle have crossed the road just yet.

Visit us at www.everbank.com to learn more about your alternatives for commodity investing—as well as other investment programs.