With the recent attempt to corner the cocoa market there has been a sudden awareness that commodities are back. In the past few months they have come down from their money supply driven highs of 1996 and 1997 and they were suffering terribly from the recession.

With the recession still going on, and arguably intensifying for many, commodities should be going down and should also be deeply unfashionable. Instead they are going up, for both good reasons and bad reasons. There may still be some play in them yet.

The first and most obvious reason is that China has not done nearly as badly as people have been predicting. Well, not yet. China’s industry is highly export oriented and reasonably highly geared and the drop in demand was expected to hit China harder than most. While China has been undoubtedly hit it’s not been hit as badly as its customers. This does not just mean that it needs to import raw materials in order to export finished goods; it also means that the Chinese consumer still has the potential to consume a lot more.

The other point of light is the fact that governments after an initial Keynesian spurt are starting to realise that the private sector is the only real way to get them out of a recession. Sooner or later recession wracked governments do realise this, but it is good that they’ve realised this sooner. This bodes well for economic activity.

Another factor is the “commodities super cycle”. This is essentially the theory that the amount of money that was invested in commodities extraction during the lean period was so low that it will take a long time for the underinvestment to work itself out. As this investment also took a hit during the recession then this is still going to have some force.

Finally there is worry about the money supply. When there is more money printed, as there is under “Quantitive Easing” then there is going to be inflation at some time down the road, as the amount of available money increases in relation to the amount of available commodities. Commodities become a wealth protection strategy.

There are a number of ways of taking advantage of this through spread bets and contracts for difference. Firstly there is the ability to buy the commodities long, although it must be remembered that if this is done on leverage that the investor may have trouble with short term swings. Many commodities are now traded in this way, thanks to the commodity boom at the start of the decade. The other way is to invest in mining and agricultural supply companies. These tend to be leveraged towards any boom as the capital costs means that there profits explode in good times and disappear in bad.

About the author

Lunch is for Wimps used to trade currencies and equity indices – and even occasionally traded German government bonds when he was trying to cure insomnia. Watching Wall Street one night, he heard Gordon Gekko deliver the classic line: “if you want a friend, get a dog”. Unfortunately, a large build-up of ear wax led to him mishearing this piece of wisdom, and he ended up starting this damn blog when he should have been at the pet shop instead.

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