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The Case for Investing in Natural Resources

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The Case for Investing in Natural Resources

CHICAGO, IL - MARCH 15: Traders watch prices in the Ten-Year Treasury Note options pit at the CME Group following the announcement by the Federal Open Market Committee (FOMC) that they would maintain the key policy rate near zero on March 15, 2011 in Chicago, Illinois. U.S. stock and commodity prices tumbled today following a sharp drop in Japan???s stock market, as investors worldwide worry about the economic impact of that country's recent earthquake, tsunami and unfolding nuclear crisis. (Pho
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The natural resources sector has a lot of potential for investors as not only the consumers but also the producers are based in high-growth emerging markets, according to experts at Switzerland-based Gaia Resources Fund.

The fund's strategy is to invest in stocks such as emerging producers of energy products, base and precious metals, bulk materials, agricultural products and related companies from the infrastructure and logistics fields.

In a recent letter to investors, Gaia Resources Fund listed 10 drivers for investing in the natural resources sector. Click ahead to discover what they are.

Rising Incomes

TO GO WITH STORY China-unrest-Xinjiang-Uighurs BY ROBERT J. SAIGET A Chinese woman walks along a shopping street as stalls and shops reopen in Urumqi, in China's farwest Xinjiang region on July 11, 2009. With a boom that has failed to share the wealth, cultural misunderstandings and historical resentment, the anger of Xinjiang's Uighur Muslims is deep-set but there are glimmers of hope over how Han Chinese and Uighurs could live together and prosper in this vast region, even as tensions remain n
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In countries like China, India, Brazil and others, rising incomes drive demand for basic consumer goods.

China's economy, the second-biggest in the world, advanced by 10.3 percent, and income per capita in its rural areas increased by 10.9 percent in 2010.

Demand is also increasing for better services, and there is greater diet diversification.

Infrastructure Spending

A worker poses in front of the construction site of the Essakane gold mine, the biggest gold mine of the country under construction in the north, which will produce 12 tons of gold yearly, according to people in charge, on May 12, 2010 in Essakane. Burkina Faso more than doubled its gold production in 2009, reaching more than 11 tonnes, according to Prime Minister Tertius Zongo. Several mining companies from Canada, South Africa, Australia, and Russia have acquired mining rights. AFP PHOTO / ISS
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Spending on infrastructure in the developing world is estimated to be worth between $6 billion and $8 billion over the next three to five years.

Replacement of infrastructure should create tremendous demand for all commodities, as roads, high-speed railways, power grids, construction projects, and oil and gas distribution are slated for development or upgrade.

Lower Debt

People visit the first Russian official casino "Orakul' in a special gambling zone "Azov-City" near the town of Azov, Russia's southern Krasnodar region on September 4, 2010. Casinos and slot-machine halls shut down across Russia as a new law took effect that put sweeping new restrictions on the country's formerly boisterous gaming industry. Under the law, casinos are only allowed to operate in four remote regions, each at least 1,000 kilometres (600 miles) from Moscow and some as far away as Si
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Most emerging economies have lower debt than developed ones, and they have large reserves of hard currency.

Those two factors give emerging states purchasing power and a larger capacity to invest, thus making such investments likely to rise in the future.

Private sector debt is also very low, creating large consumer demand potential and spending power.

Fast Growth

Indian stock traders trade at a brokerage firm in Mumbai on April 5, 2010. Indian shares rose 1.37 percent on Monday, an over two-year-high, on optimism that economic growth in the country could accelerate in coming years. The benchmark 30-share Sensex closed up 243.06 points to 17,935.68. Last week, India's finance minister Pranab Mukherjee said the economy could grow by up to 8.75 percent in the year to March 2011, led by strong demand in the manufacturing and services sectors. AFP PHOTO/ Sajj
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The International Monetary Fund (IMF) predicts that emerging economies will grow by 6 percent between 2011 and 2014.

That growth rate is manageable and at the same time bullish for commodities, according to the Gaia Resources Fund letter.

Increasing Population

Somalis displaced people receive food rations at a distribution centre of World Food program (WFP) in the Dharkenley District of Mogadishu, on December 13, 2010, the camp feeds several hundred families a day amid an increasing number of people depending on food aid in Somalia. AFP PHOTO/ ABDURASHID ABIKAR (Photo credit should read ABDURASHID ABIKAR/AFP/Getty Images)
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An expanding global population drives demand for more of all commodities, such as electricity, oil, housing, food, the letter said.

The United Nations has projected a world population increase of about 47 percent from 2000 to 2050, to around 8.9 billion.

Urbanization

A woman rides her bicycle in front of apartment buildings in Beijing on March 28, 2011. China's efforts to cool its red-hot real estate market showed signs of working in February, as government data showed more cities seeing a fall in house prices from the previous month. AFP PHOTO / LIU Jin (Photo credit should read LIU JIN/AFP/Getty Images)
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As people migrate to cities, demand for natural resources increases, according to Gaia Resources Fund.

That's because they demand better services—improved transportation, for example—and more products such as refrigerators and air conditioning.

They also consume more foods high in protein and processed foods.

Natural Resources Deposits

SZIBIRA DISTRICT, SOUTH KIVU, DEMOCRATIC REPUBLIC OF CONGO - 2nd MAY 2009: Tumaini Munguakonkwa (25) works at the Szibira mine to support her husband and 4 children. In the Democratic Republic of Congo around 1,500 people die every day over fighting to control the lucrative trade in minerals. In the district of Szibira, South Kivu, around 50 people struggle to earn a living by mining cassiterite and coltan. The back breaking and dangerous work is mostly done by women and children who get around
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Many developing markets have natural resource deposits.

For example, Africa has up to 30 percent of the world's mining deposits, according to Gaia Resources Fund.

The countries of the former Soviet Union, Brazil and Latin America have "tremendous potential to develop additional farmland," the letter said.

Supply Issues

A child eats rice porridge as other children queue for food during a feeding program by the local government in Baseco slum area in Manila on October 2, 2010. The Philippines has among the highest population growth rates in the world, at 2.2 percent annually and efforts by President Benigno Aquino's government to introduce contraceptives in the Catholic country has angered the influential church. AFP PHOTO / JAY DIRECTO (Photo credit should read JAY DIRECTO/AFP/Getty Images)
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Existing supply constraints are unlikely to do anything other than push natural resource prices higher.

Years of under-investment, regulatory red tape and significant lead-up to first production all limit suppy, the letter said.

Many metals and mined products face those constraints throughout the world.

Security of Supply

Armed soldiers deployed as security escorts during rice distribution, watch a large crowd of residents waiting to buy cheap priced government rice outside the National Food Authority warehouse in Manila on April 11, 2008. A senior UN official visiting Manila said April 11 that food riots from soaring food prices have hit 33 countries and warned that the Philippines, one of the world's largest rice importers, could be next if the government mishandled the issue. Meanwhile the International Rice R
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Countries like China, Saudi Arabia, UAE, Korea and Japan, with significant currency reserves and importers either of food or of energy or both, are worried about security of supply.

They allocate significant financial resources to buy concessions for mineral resources, food production and energy development abroad, the letter said.

Store of Value

BANGKOK, THAILAND - MARCH 11:Gold Bars are displayed for photography at Gold Field Refinery Co., Ltd on March 11, 2011 in Bangkok, Thailand. Demand for gold has increased since oil prices started to rise, and individual investors and consumer have increased purchases of the precious commodity due to attractive returns. (Photo by Athit Perawongmetha/Getty Images)
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The traditional safe haven against inflation, gold, is still priced below historical highs in real terms, according to Gaia Resources Fund.

In emerging countries, the jewelry trade "is alive and growing" because people appreciate gold due to its reputation as a store of value, but also because of the status it brings, the letter said.

... but the risks are real.

A trader reacts on the floor of the New York Stock Exchange October 15, 2008 in New York City at the closing bell. The Dow Jones Industrial Average slid 733.08 points (7.87 percent) to 8,577.91 and the broad Standard & Poor's index plunged 90.18 points (9.04 percent) to 907.83 just after the closing bell. Wall Street stocks plunged on heightened recession fears Wednesday for the US and global economies, as panic returned to global markets. AFP PHOTO / TIMOTHY A. CLARY (Photo credit should read T
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Of course, as with any set of investments—especially a group that's seen major price leaps over recent months—natural resource-related stocks carry risk. Have the producers of energy products, metals, and other items critical to natural resources peaked? Or do they have more room to run? Investors in copper, for example, may argue for the former, given that the commodity has moved off highs since February of this year.