But a long-term investor with a five-year-plus horizon? Virtually none. (The commodities allocation in our Gone Fishin’ Portfolio, for instance, is zero.) Here’s why…
It’s not unusual to hear reports in the media from time to time about how human beings are “using up” the world’s resources or that we are “running out of oil.” Don’t believe it. And certainly don’t bet on it.
Innovation and technology undermine prices for most commodities. We’ve seen this in agriculture, where irrigation, mechanization, genetic modification, and new pesticides and fertilizers all boost productivity.
Sure, you’ve seen coffee shoot up over 90% this year and hog futures climb nearly 50%. But these are one-offs. The spike in coffee is due to a drought in top exporter Brazil. And a virus that has killed millions of pigs is behind the run-up in pork bellies.
The same is true of “peak” theories of oil and gas. It seems like only yesterday that the national media was reminding us about our “addiction” to foreign oil. But new technologies like fracking and horizontal drilling have boosted production sharply. Last year we surpassed Russia as the biggest producer of oil and gas in the world.
The prophets of doom never foresee the new advances and increasing efficiencies that undermine future scarcity. When whale oil began to run out, we started using petroleum. When farm yields stalled, new fertilizers were introduced. When glass fiber debuted, demand for copper fell.
Yes, raw material prices had a good run from 2000 to 2010. The Dow Jones-UBS Commodity Index more than doubled. Copper gained 417%. Cotton jumped 184%. But that was when China – which consumes 40% of the world’s commodities – was growing at more than 10% a year. That’s not the case today.
And commodity prices – which had a lousy three decades in the run-up to 2000 – are back