What’s your take on unfashionable investments? Investments and markets that are so hated that they are rarely talked about – that have little or no mention in the financial media and near the bottom of their trend graphs…?

I like them…sometimes. They are the ones with ten bagger potential – gains of 1000% and more within a reasonable space of time. I say “sometimes” because all too often, investments are hated due to good reason – there’s a lot of wisdom in the price of any given market.

But the market does get it wrong sometimes. At any given time there are investments that should be far higher than their market price – a correction will happen at some time and that’s why I love looking at hated investments. Listing them. Waiting for the tide to turn. And getting in well before the crowd when the indicators are right.

That’s exactly why the commodities market has been on my radar for some time now – here’s a terrible performer that has performed sickly over the past two decades — adjusted for inflation the value of commodities investments during this period has declined significantly. And let me ask you something – aside from small pockets (such as gold & oil) how much attention do you see general commodities getting?

Do you see books about them when you peruse the investment section at your local bookshop? Do you hear your friends boasting about their most recent commodities investment? No – because at the moment, despite the fact that prices are now moving north with some conviction, commodities are still unloved…and if as I believe they will continue to rise, this could be the start of a longer term commodities bull run and a very good time to invest.

Did you know that commodities prices have been heading upwards, almost un-noticed for some time now? Coffee, copper, wood and sugar are just a handful of the commodities that have enjoyed between 40% to 80% price growth per year in recent times. The exciting thing is that this could be just the start of a long commodities bull run – and when you think that the majority of the investment world still avoids commodities like the plague, there could be exciting times when the world finally wakes up to smell the coffee…quite literally.

The Case For Commodities Investment – A simple Question Of Growing Demand & Falling Supply.

The sophisticated investor understands one thing – whatever the current price of a product, it’s price will ultimately correct to reflect the basic demand versus supply equation. Yes, we get bubbles – anyone that invested money in “Useless Dot Com PLC” around 2000 at a PE of about 967 will vouch for that. But ultimately, the market corrects itself – overvalued markets and companies come crashing down with an almighty thud. And undervalued markets and companies get re-rated.

Why do they get re-rated? Because the market understands that there is an imbalance. In the case of Useless Dot Com PLC the market realized that the company (which by the way is fictitious) was just sitting on some cash with some far fetched business model with no underlying demand for it’s core business activity or product. The result is that the market valuation for Useless Dot Com PLC was trashed.

In the case of commodities, the market has no choice but to re-rate the market upwards because (as we’ll see) there is a significant imbalance in the demand versus supply equation. Global demand is far higher than global supply – and ultimately this will push prices up and up.

Why There Is Increasing Global Demand For Many Commodities, And Dwindling Supply.

The two rising super-powers – China and India are developing rapidly at the moment and consequently are consuming more and more commodities to fuel this stunning growth. China (and it’s relatively youthful population) is already among the biggest global consumer for commodities including platinum, steel, copper, iron and several other metals. The country is experiencing a construction boom and this has resulted in an incredible thirst for raw and processed metals. India imports more gold and silver than any other nation, is investing heavily into it’s infrastructure and is the fourth largest global consumer of crude oil in the world.

Both India and China are developing into global super-powers – and in order to do this, their level of consumption of commodities will be fierce and almost unsustainable over the next two decades.

We’re also at the very start of the trend for these two nations – both India and China have only recently welcomed widespread international investment & trade.

The Price Of Commodities – At A Historic Low (Adjusted For Inflation) But Heading Upwards.

Do you know that, adjusted for inflation, the collective price for commodities is at a historic low? This is because:

(1) The poor performance of commodities has led to a lack of investment in producing/mining – because the framework for production is not present it means that when there is a supply/demand imbalance (as we are seeing now), there isn’t an immediate solution. You can’t just go out and buy a gold mine.

You can’t just whip up a coffee plantation. As it becomes clear that demand is outstripping supply, but the latter cannot be immediately increased there can be only one outcome – higher prices.

(2) Until recently, demand for various resources has been met fairly comfortably. Not so any longer – the worlds oil is being consumed rapidly (with demand ever increasing), metals required for developing nations to grow rapidly are being used without any significant rises in global output – all signs point to rising prices.

Tracking The Price Of Commodities & Gaining Exposure To A Wide Range Of Commodities

A good way of following the general performance of commodities, and investing in them in the broadest way is through three of the main commodities indices. These include:

DJ-AIGCI – Dow Jones-AIG Commodity Index

This index comprises a mix of several commodities (typically 20 including coffee, crude oil, gold, silver and more). Some commodities are more heavily weighted than others in this index.

GSCI – Goldman Sachs Commodity Index

There are 24 commodities included in the GSCI – the weighting is constructed differently to the DJ-AIGCI. With the GCSI commodities are weighted according to their production levels over the past five years. Currently this means that GSCI have a heavy energy commodity weighting, so any changes in the performance of energy will seriously impact the performance of this index.

CRB – Reuters/Jefferies CRB Futures Index

A commodities basket that comprises 19 different commodities.

Investing in this type of index can be a good way of gaining exposure to commodities in general, particularly for those who do not wish to get into detailed analysis and education of specific commodities products.

The Top Commodities To Invest In?

We’ll now discuss some potentially exciting commodities to consider investing in. As always, bare in mind that circumstances may have changed at the time you read this document. Also remember, there are a wide range of commodities to choose from and the ones discussed below are just a small sample of all available commodities.

Gold – There is a separate section in this document about the potential benefits of owning gold. The demand is always strong and several global economic/political conditions that are in place could make it a very good investment over the long term.

Crops – Sounds unexciting doesn’t it? Ordinarily, unless you’re a hog farmer, crops would probably not interest you very much. However, the Supply/Demand Imbalance makes for a strong argument for owning corn, wheat and oats in particular. The productivity for corn has decreased due to poor yields across the U.S. – less crop production coupled with increased demand is likely to push the price up significantly.

It does not end there – inflationary pressures associated with crop production is likely to be a factor in the rise of crop prices.

Zinc – The metal that is used as a protective layer in the composition of iron and steel. Zinc is also used in the production of the batteries that are often used in cameras and other small electrical appliances. The greatest world producer of Zinc is China.

There is currently a demand/supply imbalance for zinc at the moment – countries like India and China are growing at a rapid pace and consuming many of the commodity metals to fuel this growth. Take into account that the current global stock levels of zinc have never been so low since 1991 and there’s a prime argument for a sustained price increase for the metal.

Renewable Energy – The world is on the verge of a global energy crisis. There is a dual problem — traditional energy sources are rapidly being depleted and are also damaging the environment in a big way.

The hunt is on to create cleaner sources of energy and a great deal of investment will flow into this market over the coming years. The problem is that some renewable energy sources (wind/solar) are too inefficient to produce mass amounts of energy for continual commercial consumption. Other sources – like geo-thermal and hydro could be far stronger alternatives and an investment in these technologies now could make for a highly rewarding pay off in the longer term.

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