My case for the Commodities Bull:

The Wave Effect. Many bull markets start by a rare group of investors seeking appreciation in a fairly undervalued market or equity. It then catches the attention of institutional investors throwing in their share of the “next hot thing”. This creates a wave of speculation by which mere mortals and momentum investors ride the wave dry. All the while projecting and correcting.

In this effect we see how commodities have begun their run-up. We have seen the value investors such as Warren Buffett make their purchases. Now we are seeing institutional investors getting in on a piece of the action. But its still a drop in the ocean. How many people do you know with over $10,000 in stocks? Now how many in corn stocks, oil futures or gold Krugerrands in their jewelry stash? This party has just begun, and the fearfulness should just be making us more greedy.

The Vacuum Effect. What goes up, must come down. Once the Wave has taken its full strength, by laws governing science and physics it will begin to stabilize, deflate or break through its limited barriers – in other words “pop”. Just like the wave needs all aspects of its force to continue, so to in any market the run must be fueled by speculation.

Warren Buffett always jokes how when the first cars hit the market there must have been around 300 “promising” automobile producers on the map. Ford and General Motors were mere names on the list. Who would have known? Shorting horses however would have probably been your fairest bet.

With all the geopolitical speculation regrading Iran, the War in Iraq, the new government and so on, we can’t know what will happen to the world economy, housing bubble/bust , the stock markets or the in the enormous derivatives market. What we do know is that it can’t last forever. So instead of betting on the next “sure thing” you may have a greater chance of heading to the source. Commodities.

What China will transfer their currency reserves into, the Yen or Euro, only time will tell. What cars will be riding on a hundred years from now I don’t know. What houses will be worth then, I wouldn’t even try to guess. But whatever it is, if history is our guide, you will most probably be able to pay for it in gold.

If gold is your hedge for risk, then Wave or Vacuum I’m betting that risk is seriously undervalued.


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