Kitco - Exclusive Commentaries

There has never been a better time to take advantage of the commodity markets. China’s economy continues to grow at a record pace, commodity prices are still cheap, and the nomination of Ben Bernanke as the next Federal Reserve Chairman solidifies the fact that we are heading towards an inflationary period.

“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (Full Speech)

Even if Mr. Bernanke did not have such strong views on inflation, the markets are dictating that in fact we are heading towards an inflationary period. In the past 2 weeks we have seen the CPI index jump the highest it has in 23 years, as well as seeing the PPI index jump the highest in 15 years. Inflation, my friend, is here.

I just came back from the Money Show in San Francisco, where I spoke about the bull market that we are experiencing in commodities. During the show, I came to a couple of conclusions. First, more people are paying attention to the commodity markets than they have in previous years. Of course, this isn’t shocking, since we have seen oil hit $70/barrel, gold hit an 18 year high, and a slew of other raw materials consistently moving higher. What is shocking, however, is that few of these people are doing anything about it. They seem to be either on the sidelines ( in cash) or still hoping for a rally in the stock market. To me, this is another contrarian indicator which reiterates the fact that we are still in the early stages of a 10+ years bull market in commodities.

If you are on the sidelines, there is no better time than to act now. I am offering an educational brochure on commodities to anyone who requests one from me, just send an email to ebalarie@wisdomfinancialinc.com or click here:

There are a number of fundamental reasons that point to why commodity prices will rise. None other is more powerful than supply/demand economics. One of the best things that I like about the commodity/futures markets is that long term price of a commodity is most purely based on supply and demand. If we have a dwindling amount of supply, and an increase of demand, then chances are, the price will rise accordingly. With stocks, you have a lot of white noise associated with it- What about management? Accounting irregularities? Earning Seasons? Even natural resource stocks are sometimes affected by this white noise.

And so, when we look at the current level of supply we know a couple of things. First, most raw materials are self-depleting by nature. I cannot go and produce copper at the local factory or manufacture gold in my back yard. The reality is that over a period of time, the supply of these materials will dwindle. In addition, since we are coming off a Bear Market that lasted for 18+ years, there has been an inactivity of exploration and mining of some of these raw materials. It was not in the best interest for oil companies to spend money on exploration, when oil was trading at $20/barrel. Of course, now oil companies are scrambling to find new oil deposits. However, this does not happen overnight. The immediate impact of this is that there is even less supply in the markets.

The demand side of this equation can be most evidently seen from Asia (especially China and India). As China continues to industrialize their economy, there will be a continued need for raw commodities. They sill have more factories to build, more roads to pave, and the 2008 Beijing Olympics. In the 3rd Quarter this year, China’s GDP rose 9.4%. And yet another eye-popping statistic occurred in 2004 when China was responsible for the following consumption percentages of worldwide raw materials: Cement( 40%); Iron Ore( 30%); Cotton( 30%); Raw Steel(30%); Stainless Steel(25%); Aluminum(23%); Zinc(21%); Refined Copper(20%); Soybeans(20%); Crude Oil(8%).

I expect the demand for commodities out of China to continue for years to come, as their standard of living increases. With an educated workforce and an increase in standard of living, the average Chinese citizen will now be able to afford buying the basic material goods that citizens of an industrialized nation are accustomed to. They will now be able to trade in their bicycles for a car, buy a new television, a washer and dryer, etc. Again, to meet this demand, China will continue to import raw materials.

A couple months ago, I wrote an article stating that I believe that Palladium was cheap at this level. I also stated that over the last couple of years, Palladium has dropped 80% in value, while other metals have hit multi-year highs. More importantly, however, was that the spread between Palladium and Platinum, which is similar in their industrial use, was substantial.

I believe we are now seeing a break out in Palladium. In the last couple months, we have seen Palladium prices rise over 15%. With the price of palladium at $220 currently, I see some initial resistance at this level. If it can break through this level, it has some slight resistance at the $240 mark. After that, expect a quick move up to $300. As I mentioned in my previous article, I believe that palladium will likely be the most high-flying ( and speculative) metal in this bull market.

If you would like my recommendations on how to participate from the expected bull market in palladium please send an email to ebalarie@wisdomfinancialinc.com.

Emanuel Balarie is the Senior Market Strategist at Wisdom Financial. As an expert on foreign markets, foreign currencies, and the precious metals industry, Mr. Balarie often speaks at public engagements and his research is regularly published in investment newsletters. You can find out more about Mr. Balarie and his services at Wisdom Financial, Inc.

The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.