Investors: What The Next Decade Holds For Commodities (GLD, SLV, UNG, USO, KOL, JJC, SPY, UUP, EEM)

Frank Holmes: What a  decade!… A rapidly urbanizing global population driven by tremendous growth  in emerging markets (NYSEARCA:EEM) has sent commodities on quite a run over the past 10 years. In fact,  you would find that all 14 commodities are in positive territory if you  annualized the returns since 2002.

The best  performer was silver (NYSEARCA:SLV) with an impressive 20% annualized return. Surprisingly,  that was higher 19% annual return on gold (NYSE:GLD).  Notably,  all commodities except natural gas outperformed the S&P 500 Index (NYSEARCA:SPY) 10-year  annualized return of just 2.92%.

However,  last year did not seem reflective of the decade-long clamor for commodities. In 2011,  only four commodities we track increased: gold (10%), oil (8%), coal (nearly  6%), and corn (nearly 3%).

The remaining commodities listed on our popular Periodic Table of Commodity Returns fell, with losses ranging from nearly 10% for silver to 32% for natural gas (NYSEARCA:UNG). I think  this chart is a “must-have” for investors and advisors because you can visually  see how commodities have fluctuated from year to year…

Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to  digest breakthrough technology that has opened the door to vast shale deposits  at a much lower cost.

On the  other hand, oil finished in the top half of the commodity basket six out of the  past 10 years. No stranger to volatile price swings, oil possesses much more  attractive fundamentals as we continually see restricted supply coupled with rising demand.

Then  there is gold…

After 11  consecutive years of gains, some are questioning whether gold can keep its winning streak alive in 2012. One of those skeptics is CNBC‘s  “Street Signs” co-host Brian Sullivan.

However,  during a recent appearance on the show, I explained how I believe the Fear  Trade and Love Trade will continue to fortify gold prices at historically high levels.

One  reason the Fear Trade will continue is the ever-rising government debt across numerous developed countries.

During our Outlook 2012 webcast, John Mauldin kidded me that the Mayans were not astrologers predicting the end of the world, but economists predicting the end of Europe. Whereas John believes the U.S. has wiggle room to decide on how to  deal with deficits and debt, Europe and Japan are running out of time.

The  situation is quite somber when you consider how much debt Europe, Japan and U.S. owes this year alone, says global macro research provider Greg Weldon.

In his  preview of 2012, Weldon says that the maturing principal and interest on U.S. Treasury debt due this year totals just under $3 trillion. Austria, Belgium,  France, Germany, Italy, Portugal and Spain together face nearly $2 trillion in  principal and interest payments. Japan, is the leader in the clubhouse, owing  just over $3 trillion in 2012.

With the  combined debt for these developed countries totaling nearly $8 trillion, the interest payments alone dwarf the total gross domestic product (GDP) of many  countries in the world.

Last  week, Germany sold a five-year government note for less than 1%, the lowest  interest rate on record. Bids for the low-yielding debt were three times more  than the amount sold, even as the consumer price index stands at more than 2%  year-over-year.

This  means that investors have so few acceptable safe havens they are willing to  accept negative real rates of returns.

This is good news for gold as a safe haven alternative against depreciating currencies such as the euro, the yen and the U.S. dollar (NYSEARCA:UUP).

The overwhelming debt burden in developed countries translates to an expected  slowdown in imports from the emerging world.

However,  the grandest of those, China, likely won’t be as affected as much as some people assume. This is “the biggest misconception” about the country’s economy,  says CLSA’s Andy Rothman. Exports only play a supporting role for the Chinese  economy. The world’s second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more  padding in their wallets.

Andy says 10 years of tremendous income growth and little household debt, make China  the “world’s best consumption story, for everything from instant noodles to luxury cars” in 2012.

According to December Chinese trade figures, month-over-month and year-over-year imports  of aluminum and copper increased significantly. This may be a result of China  restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy.

Also,  the urban labor market has been robust over the past two years, with an annual  change just below 5%-a record high over the past 15 years.

Along  with rising urban employment, income growth has been tremendous as well.

CLSA  says that last year was “the eleventh consecutive year of 7%-plus real urban  income growth,” with disposable incomes rising 152% over the past decade.

Investors  shouldn’t expect China’s growth to be as robust as it’s been, as the country’s  fixed asset investment growth drops below the 25% year-over-year pace of the  last nine years, says CLSA. China’s 12th Five-Year Plan has less infrastructure spending compared to the 11th Five-Year plan.  Transport and rail spending is also expected to drop, with only water and  environmental protection spending growth rising.

As shown  in the BCA chart above, GDP growth has declined below 10%, but the growth is  currently not the lowest we’ve seen in recent years. CLSA believes that China  will prevent GDP growth from slipping below 8.5% for the full year, as “Beijing  has the fiscal resources and political will to quickly implement a much larger stimulus.”

Judging  by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism,  according to BCA Research. Last fall, more than 1,000 articles discussed the risk  of a “China Crash.”

As I’ve mentioned before, contrarians view extremely bearish sentiment as a potential  attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear “deeply depressed.”

What  will happen over the next 10 years? I believe the supercycle of growth across  emerging markets will continue with rising urbanization and income rates.

This  bodes well for commodities, especially copper (NYSEARCA:JJC), coal (NYSEARCA:KOL), oil (NYSEARCA:USO) and gold (NYSEARCA:GLD), and we’ll continue to focus on companies that will benefit the most from these much-needed resources.

Written By Frank Holmes For Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially ; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.

Leave a Reply

Your email address will not be published. Required fields are marked *