Yoshikami: Commodities Rally Still Intact for 5 Years

Gold hits an all time high, food prices are soaring, and other tangible assets continue to rally. Many are left wondering if it is time to abandon commodities. The short answer is no.

We believe that the commodities sectoris in a secular bull market. Though the lingering concerns over the pace of global economic recovery and the expectation that global growth is likely to weaken could lead to a softening in commodity prices, our view is that any softening would occur over the short-term. The extent of the easing is likely to be modest given the current tight supplies in many commodity products and the continued economic expansion ofemerging economies.

The emerging economies continue to grow at a stable healthy rate with current growth rates for countries such as China, India, Brazil and Indonesia in the 6% - 10% range. This is likely to lead to a long-term uptrend for raw material prices. Structurally, the emerging economies will likely support continuous demand for commodities as people migrate from rural areas to cities, and disposable income increases with the rise of the middle class. Emerging markets will expand despite efforts to curb inflation in these location

Take the examples of China and India. Growth and development in China has gone beyond the cities of Shanghai and Beijing into the inland provinces. Expanding towards the western regions of China means longer roads and railway lines. Copper, tin, nickel and other commodities will be needed to expand a nation’s power grid, sewer systems, and transportation lines.

China’s recent Five-Year Plancalls for $50 billion to be spent on upgrading the country’s power grid and another $110 billion on building 13,000 kilometers of high-speed railways. India’s latest budget announced last month focuses on increasing spending on infrastructure by 23%. The country plans to increase allocation to this sector to US$47 billion. Add Russia, Indonesia and other emerging countries into the equation, and the result is a commodity-price-supportive global economic environment that looks to provide a continued stable growth in demand for industrial raw materials and fuels.

According to the Australian Bureau of Agricultural and Resource Economics and Sciences(ABARES) in its latest quarterly report, developing economies, particularly China, India and Brazil, are expected to fuel the strength in prices of coal and iron ore. These countries’ share of global steel consumption is expected to increase to 60% in 2016 from 53% this year. This reflects an average annual growth in consumption of 7% to 2016.

According to ABARES, China iscurrently the world’s largest consumer of steel, and consumption is likely to increase at an average rate of 8% a year. Not to be beaten, India’s steel consumption is forecast to increase by 14% this year, and is projected to increase at an annual average of 10% to 2016.

Yes, commodities have rallied. But the long term structural changes in the global economy are not going away. Look to commodities for balance in your portfolio in this rapidly changing portfolio. Current and future conditions appear to provide a fertile environment for commodities.

Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.