How Long Can This
Commodity Bull Market Last?
By John Myers
Myers' Secret Stocks
In the 1970s the United States played fast and loose with its monetary policies. The result was a decade of stagflation and the largest bull market in commodities in over a century.
As we have seen, Washington was again busy running the printing presses by pushing interest rates to record lows at the beginning of this decade. The result: a roaring bull market in commodities.
Some argue that the end is coming for this commodity run. Yet we believe that there are powerful factors that will drive this bull market even higher. One of them is the soaring demand for resources from two of the largest populated countries in the world - China and India.
Together, these countries have a population of nearly 2.5 billion, the majority of whom are literate, educated and ambitious. They are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will be millions of new consumers - the very people who are already straining the natural resources of the Earth.
In his book "How Much is Enough?", futurist Alan Durning argues that the world is broken down into three distinct groups arranged by economic wealth. He calls these classes, "consumers, the middle income, and the poor."
Consumers make up a little more than a billion of Earth's 6 billion citizens. These people live primarily in North America, Japan and Western Europe. The poor make up about the same number and are largely represented in Africa.
It is the middle-income class, the 3.5 billion people who live in China, India and Latin America, that will soon place the greatest strain on the world's natural resources.
Why? Because as they move up the economic ladder, they become consumers, and consumers do exactly as their name suggests - they consume, particularly copious amounts of real assets.
Just look at the massive increase in global per capita consumption and you'll see evidence of the emerging consumer class society. Since about 1950, energy use has doubled, car ownership has quadrupled, plastic use has quintupled, and air travel has grown by 33 times - all of which add to the demand for petroleum. Meanwhile, consumption of copper, steel and timber has all doubled.
China and India have definitely embraced economic growth as a way to obtain consumer societies, resulting in a serious drain on the world's natural resources.
Compare China today to the Japan of 1950: a largely literate country determined to work hard. The result has been an economic miracle in which Japan now has an abundance of consumer items that could not have been dreamt of a half-century ago.
But that growth required an increased consumption of resources. Between 1950 and the mid-1990s, Japan consumed more than four times more aluminum, five times more energy and 25 times more steel than it was consuming 45 years earlier. This has happened in a nation of less than 130 million people.
Let's apply that type of growth to China and India, with combined populations of nearly 2.5 billion people.
China for example has been on an economic tear. Its economy, once a lumbering giant, has been growing at near double digit rates for over a decade. With wealth comes the expectation for greater wealth. And today hundreds of millions of Chinese are yearning to live in an industrialized nation.
Just like China, India is a nation that is hungry to grow into an industrial power with millions upon millions of new consumers.
According to the CIA, "The [Indian] economy has posted an excellent average growth rate of 6% since 1990, reducing poverty by about 10 percentage points. India has large numbers of well-educated people skilled in the English language; India is a major exporter of software services and software workers; the information technology sector leads the strong growth pattern."
The truth is both China and India are willing and able to grow to an extent that will tax the world's finite resources.
The richest 1 billion - or one-sixth of the world - account for three-quarters or more of the of the globe's consumption of aluminum, chemicals, paper, iron, steel, timber and energy.
Imagine what would happen if instead of 1 billion people gobbling up these resources, 2 or even 3 billion people had the same avaricious demand for them?
"If everyone in the world used as much metal, lumber and paper as [the 1 billion] consumers do, mining and logging would jump three-fold," reports the Worldwide Watch Institute.
An even more interesting question is, what prices will these resources sell for? If supply is in decline, a doubling of demand will not equate to a twofold price increase. Rather, a much greater multiple of price appreciation will occur... one that depends on the severity of the decline.
Even now, with just over 1 billion people consuming three-quarters of the world's energy, oil is hovering around $70 a barrel. If 2 billion people commanded the wealth and exerted the same demand as the 1 billion, then without a substitute fuel oil might look cheap at $140 a barrel!
Of course, before such a price appreciation occurs, substitutes would come into play. But even with the billions of dollars being invested in alternatives, they will meet only a fraction of the world's future demand for energy.
Ultimately, we cannot ignore an overriding fundamental - a fact that most of Wall Street has yet to recognize: We live at a time when the demand for finite resources is increasing exponentially.
As more investors finally acknowledge this fact, the value of companies that mine, cut, pump and harvest the Earth's resources will soar. Those of us who see that this commodities bull market has a long way to go are in a position to reap the rewards of our foresight.
Editor's Note: John Myers has been writing about natural resources for the past 25 years. He started working for his father, C.V. Myers, a famous gold bug who nailed the bullion market on the head in the 1970s. Besides having grown up in the energy patch (John's dad founded Oil Week Magazine), John also has a geology degree from the University of Calgary. He and his wife Angela make there home in Calgary, where John writes his weekly John Myers' Secret Stocks report.
In his weekly newsletter, Myers' Secret Stocks, Myers help investors find natural resource companies with the biggest potential to return significant gains over the next few years. You can learn more at: www.myerssecretstocks.com.
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