Why to be Bullish on Commodities ?

Commodities are like stocks and other securities. There values could theoretically go up and down over the long term. Some experts have been suggesting that the future holds a particularly good time to be invested in commodities. They believe that there are several demographic factors which make commodities a more preferable investment as compared to the others. This article lists down why this is the case.

Some of the major reasons for an investor to be bullish on commodities are as follows:

Population Explosion

The world is on the brink of population explosion. Almost all countries in the world are experiencing simultaneous record increases in their population. Commodities are essential in nature. Therefore if the number of people present in the world increases, so does the demand for essential commodities. In fact there are several studies which predict a shortage of essential commodities and a resulting famine. From an investors perspective the demand is pretty high and there is almost zero chance of it dropping down in the future. Hence, investment in commodities is a good investment bet given that the current valuation is appropriate. The fundamentals are strong, only the valuation needs to be appropriate.

Urbanization

Developing countries like India and China are urbanizing at a pace which has not been heard of before. At the present moment, less than 15% of the world’s population resides in cities. However, this rate is expected to be higher than 50% by 2030!

Newer smart cities are being built to accommodate the burgeoning population of these nations and the real estate sector is in a boom. This is a very positive scenario for commodities. This is because many metals like iron and steel are extensively used in the construction of houses and buildings. Also, commodities like cement play a vital role in these construction projects.

Therefore as more houses and buildings are being built, the demand for these commodities is skyrocketing. This scenario is expected to sustain for several years if not decades! From an investor’s point of view, once again this represents a stable investment in a stream of growing cash flows which could sustain for several years. This is definitely going to exert an upward pressure on the price of commodities.

Industrialization

The world witnessed a huge wave of industrialization in the 19th Century. This is what created the western world or the developed world as we know today. A second such wave is already underway. This wave is transforming almost all countries. However, the frontrunners of the modern day industrial revolution are the BRIC countries i.e. Brazil, Russia, India and China.

The Chinese economy has been growing over 9% per annum for several years. Indian economy is close on its heels with growth rates hovering around 7%. With a large number of citizens in working age population, these countries are bound to witness a repeat of the industrial revolution. This is good news for commodities as most factories are built using commodities and also a large number of the raw materials used in the production process are commodities too.

Inelasticity

The economic concept of elasticity is the degree to which the demand for a good fluctuates with its price. Hence if a small change in price causes a big change in demand, the product is said to be elastic. However, commodities usually have an inelastic demand. This is because they are usually necessary to maintain a good living condition. For instance the demand for heating and electricity is not optional in the modern world. Neither is the demand for not having a home or not eating food. People will continue to buy these good unless they are ridiculously overpriced. From an investor’s point of view having control over such commodities seems like a good value proposition which is likely to pay out rich dividends in the future.

Safe Haven

Commodities such as gold and silver also provide a safe haven in times of turmoil. These metals have been used as money for centuries and still provide a safe haven if crisis breaks out. For example, any crisis from Weimar Germany to modern day Zimbabwe has seen the system of fiat money collapsing and has the price of gold and silver rising. The quantitative easing that is being undertaken by western governments is likely to bring about a hyperinflation in the developed nations. If such a scenario were to present itself, the demand for gold and silver would simply skyrocket. This is why investors such as central banks are queuing up to buy as much gold as possible.

No Market Manipulation

Stock markets are prone to market manipulation. However, the same cannot be said regarding commodity markets. There is no company specific information which can make or break the markets. Also, the commodities market is spread across the entire globe. Hence obtaining preferential information consistently or being able to corner the market repetitively is a farfetched idea to say the least. This is what makes commodities investing fair game regardless of the size or sophistication of the investor who is making the bets.

Also, commodities perform better in the downturn i.e. late boom and early recession. Many economists predict that such a period is coming in the near future. Hence, it is a good idea to hold on to some commodities as being the main defensive elements in your portfolio.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.