http://www.energyinvestmentstrategies.com/2009/05/12/newsletter-24-where-will-new-money-go/#more-877

Commodities

China. That may be all an investor needs to know about commodities. China will be the growth engine of the global economy going forward. It has the cash to finance growth. It has the long range plan to achieve growth. And most important, it must have growth if it is to create the jobs needed to keep its population from demanding political change.

China was growing 11% a year, a phenomenal rate that seems unsustainable. That rate of growth is now down substantially - well below what the government wants to see. So the government has adopted a huge stimulus program and implemented it more effectively than the U.S. by issuing purchase credits to consumers to directly stimulate them to buy.

The Chinese government wants China to grow the same way the U.S. did after the Civil War - by creating a huge consumer economy and spreading out development across their broad geographic territory. They are stimulating particular industries - such as automobiles - to leapfrog old technologies and give Chinese consumers as good an option for personal transportation as exists anywhere. Then they offer consumers rewards for buying the more efficient cars. They are also building state-of-the-art electrical generating plants including coal fired plants with excellent carbon-reduction characteristics. In sum they are both thinking long term and being very practical in stimulating consumption.

China has been stockpiling commodities and it continues to do so. Gold, oil, copper, rare earth elements - and who knows what else. China is not doing this for its health of for lack of other things to do. As the new global engine of growth China is the paradigm commodity “insider.” That is, they’ve seen the numbers on China’s huge component of future global commodity demand - because they wrote the numbers.

So I think we know the answer to the question of commodity prices. As soon as the world starts growing again it’s a fairly safe bet that commodity prices will be rising again. Which ones? My guess is: all of them. I own equities and futures contracts relating to oil, copper, rare earth elements and, in a smaller way, gold. I think that fundamental and speculative demand - and a continually falling U.S. dollar - will combine to drive commodity prices to much higher levels.

Precious Metals

Gold and silver are a sub-set of commodities but are often thought of as an asset class in themselves. They are considered an inflation hedge. Many market commentators are now convinced that inflation will be our economic fate as a result of OECD countries pouring massive funds into their banking systems and deficit spending in the face of the recession. I’m not sufficiently convinced that inflation is our near term fate to want to own a lot of gold now. But since I do own a lot of oil, I don’t worry about not owning gold. It seems very unlikely to me that if gold appreciates oil would not do so as well. So I’m covered on inflation. On the other hand, it’s quite conceivable that oil could appreciate based on supply/demand dynamics absent any great inflation while gold might not appreciate so much in that case.

But - you might ask - didn’t I just write that the Chinese are stockpiling gold and that the Chinese are very canny guys? True. But my take on Chinese gold purchases is that China is starting to plan for the day when the yuan will be an international reserve currency. That must happen when China becomes the largest economy on the planet, which probably won’t be more than 25 years from now. I think the Chinese see themselves as the global superpower of the future. One thing that defines a global superpower - and a nation whose currency is held by others as reserves - is that it owns a lot of gold. So, since the Chinese are now floating in dollars which have a reasonable chance of losing value in future years, why not trade some of them now for some of the gold that will be needed down the road? That’s why they’re buying gold.

Bottom Line

Add this all up and it says that the current unsustainably high concentration of funds in cash will be resolved by a movement over time into stocks, bonds, and industrial commodities. And when you think of it, doesn’t that simply define a movement from economic stagnation to economic dynamism? After all, what do you need to support economic growth if not corporate finance (stocks and bonds) and industrial commodities?

So, will stocks go straight up from here? No, duh. Nearly every analyst is saying the market has come too far too fast and needs a pullback. Great, let’s have one. But over the next few years it’s a pretty good bet that the direction of stocks will be up. I think this is a decent time to be an equity investor. It may be a great time to be a commodities investor.