BHP Billiton Limited (ADR) (BHP), Vale SA (ADR) (VALE): The Window To Buy Low On These Commodities Is Closing Fast

http://cdn2.insidermonkey.com/blog/wp-content/uploads/2013/07/sa-logo-color-tagline.pngWhen the Federal Reserve launched its plans to stimulate the economy through quantitative easing in 2009, virtually all asset classes were expected to benefit as the massive increase in liquidity would trickle through the markets. Indeed, commodity prices initially surged in tandem with stock and bond prices.

Yet commodities simply couldn’t keep up, and eventually faltered. Over the past two years, the S&P 500 index has risen 40%, while the iPath Dow Jones UBS Commodity Index Total Return ETN (NYSE:DJP) has fallen 20%. (The fact that crude oil accounts for roughly 20% of this exchange-traded fund (ETF) means that results would have been even worse if crude oil were excluded.)

Yet a case can be made that the storm clouds over commodities are starting to part. And as always, it comes down to supply and demand.

On the demand side of the equation, the discussion has focused on China, which had been showing signs of a rapid economic slowdown in the first half of 2013. Yet in recent weeks, various data suggest China’s slowdown may not be as bad as feared. In a Bloomberg article this week, a fund manager at Shanghai-based Dragon Life noted that “Signs are emerging that China’s economy will rebound.” In fact, several economists have recently boosted their growth forecasts for the Chinese economy after a series of earlier downgrades.

But perhaps it’s time to think about commodities in a global light. The Chinese market is surely important, but both the U.S. and Europe each account for one-fourth of global economic activity, and signs are pointing to growth (albeit off of a low base) in those areas well, which should lift demand for commodities.

BHP Billiton Limited (ADR) (NYSE:BHP)

Investors also need to track the supply side of the equation. A wide range of mining companies, from BHP Billiton Limited (ADR) (NYSE:BHP) to Vale SA (ADR) (NYSE:VALE) to Rio Tinto plc (ADR) (NYSE:RIO) have all removed billions of dollars of new mining projects from their development slate. There is always a lag time between changes in capital spending and the impact on industry output, but the stage is set for a more constrained supply picture in 2014 and especially 2015.

Meanwhile, various commodity prices are showing signs of a rebound, or are at least forming a bottom. Take copper, for example, which had been in freefall, until recent economic clues out of China boosted sentiment.

If copper has indeed found a floor, then Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is well positioned for upside, as I discussed recently.

In a similar fashion, agricultural commodity prices are showing recent signs of stabilization after sharp drops. Corn prices, for example, appear to have fallen to a level that has led poultry and cattle farmers to step up their purchases.

And the spot price for soybeans appears to have also made a bottom.

Perhaps the best way to capitalize on the apparent bottom in agriculture prices is the PowerShares DB Agriculture Fund (NYSEARCA:DBA), which made a 52-week low in early August before a recent modest rebound.

Investors should also explore the opportunities emerging in coffee after prices plunged to multi-year lows in the face of a robust global harvest. These sharp swings in coffee always tend to set the stage for their own reversal as low prices lead some major coffee traders to withhold supply from the market. The iPath DJ-UBS Coffee Subindex Total Return SM Index ETN (NYSE:JO), has plunged from nearly $43 to $23 in the past year, and is well below the $80 level seen back in early 2011.

Selectivity Is Key
Not all commodities are poised for a rebound anytime soon. Finished commodities such as steel and aluminum are still dogged by too much industry capacity.

According to the World Gold Council, roughly half of all gold bars and coins are being bought in China and India.

And trying to get a handle on the direction of gold prices is quite hard, simply because demand from places like India and China is proving to be fickle. According to the World Gold Council, roughly half of all gold bars and coins are being bought in those two countries. Yet the Indian government has raised taxes on gold imports on three occasions since the start of 2012 to blunt a staggering trade deficit, which could eventually crimp Indian demand.

What about natural gas? The spot price has plunged from $4.30 per thousand cubic feet (Mcf) in May to a recent $3.55 per Mcf. Benign weather patterns, which crimped summertime electricity demand, are the key culprit. And gas isn’t especially timely as we enter the shoulder season between summer and winter. Yet it pays to continue to track this commodity, which is far closer to a supply/demand equilibrium than it was a few years ago when gas prices plunged below $2 per MCF.

Risks to Consider: The biggest risk for commodity prices is on the demand side. If the Chinese economy falters badly, then commodities will likely see new lows. For that matter, the U.S. and Europe need to show at least modest signs of growth to help boost the demand side of the equation.

Action to Take –> Few are talking about commodities right now, after the sector has inflicted such deep pain. Yet it is such times that opportunities emerge. The forces of supply and demand may prove to be slow-changing, which means that patience will be required, but the stage is increasingly set for an upcycle as we head into the middle of the decade.

P.S. — Several strategic metals are poised to be caught in a severe supply crunch in 2014. Used in everything from computers to satellites, these 17 exotic metals are essential to our modern way of life. But China has a stranglehold on these metals — and is limiting supply to jack up the price. Click here to find out how you can position yourself now on the profit side of this development.

- David Sterman

The article The Window To Buy Low On These Commodities Is Closing Fast originally appeared on StreetAuthority and is written by David Sterman.

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of FCX, RIO in one or more of its “real money” portfolios.
Warren Buffett’s Top 5 Stocks
Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE.
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!