Is the Commodities Bull Gaining a Second Wind?

After the carnage that has gripped the markets over the last 6 months, it's difficult at present to approach potential investments with confidence. Naturally, because very few people vocally predicted our current financial and economic crisis ahead of time, taking any investment authority as such these days is not exactly a conservative or rational call.

Most of the conventional wisdom of long term mutual fund investing and diversification has finally come into question, and a call to personal research and specialized investing is once again gaining precedence. Most investors have come to realize that the great stock market and real estate booms over the last 15 years have been anomalous, historically speaking. They were in fact unprecedented gains that should not have been taken for granted, or assumed to be the new order of things.

We are returning once again to a more precarious investment climate, and one that for those of us who have researched the markets throughout the 1970's, have seen before. Will history repeat itself? The last time the US fell into a long drawn out recessionary period, as many, including myself, speculate we are entering, was the decade of the 1970's.

Some of the events that marked this period were skyrocketing energy prices, oscillating and net negative stock index performance, financial and economic instability resulting in rapid government spending and bailouts, and consequently, very high inflation. Sound familiar? The first three should to you at this point. We've witnessed them all within the last year. The fourth and most insidious of these, inflation, has yet to surface, but its well on its way.

Our government has fallen deeply into debt, and has created more dollars in the last 8 years than were in existence throughout our entire history. The last year has itself contributed the largest portion of new money in an attempt to save corrupt financial institutions. And for those of you who know how money works, you know that when you add more of it to the current supply without a corresponding increase in value or product creation, then dollars become worth less, and real physical things become worth more. This is inflation.

Historically, times of high inflation have regularity in they way they impact asset classes. High inflation forces the hand of the Federal Reserve to raise interest rates. Raising interest rates reduces incentive to borrow and invest. Reducing this incentive hurts business growth and profit potential, as the cost of doing business increases. Therefore, stocks tend not to do so well, with individual exceptions. Even if they close at a higher dollar value in ten years, the chance of that value outpacing inflation is not so good.

So if stocks, in general, are not a great place to be, where should the small investor look to protect and grow his wealth? Let's get back to the title of the article, commodities. While the USA is and will be hurting for a while, world growth is set to resume before long, still led by China. The demand for physical materials, food, and energy is not going to remain muted. I'm not speculating here, I can see it with my own eyes. I've lived and traveled in China for several years, and while the economy is experiencing set backs in growth, it is still growing.

All commodities are cheap again, and this will stimulate spending on those things china needs the most, infrastructure, energy, and food. In addition to the coming resumption of demand, inflation will force dollars to flow into every asset that isn't dead, and create a new and greater base value of all commodities, if not an all out resumption of this incredible commodities bull market. Which commodities are safest?

The answer differs little today than at any other time, namely those commodities that have a supply and demand imbalance, or will in the foreseeable future have an imbalance. Some of these include coffee, cotton, sugar, and livestock. And in keeping with historical patterns, gold and silver benefit greatly from the flight to value that occurs when inflation sets in and nervous investors run around like chickens with their heads cut off.

The best way to have a footing in the gains to come is to consider commodity ETF's that allow you to hold long term positions in commodities themselves, without the risks incurred with futures. For 2009 and 2010 consider coffee and silver, both dirt cheap commodities suffering from a lack of supply relative to demand.

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