Commodity Prices Soaring

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Sean Brodrick takes a closer look at the commodities boom and the recent data that is raising pricing higher. In this issue of Money and Markets, Mr. Brodrick explains why oil, gold, and other commodities prices keep rising.

Sean Brodrick takes a closer look at the commodities boom and the recent data that is raising pricing higher. Mr. Brodrick explains why oil, gold, and other commodities prices keep rising.

There are strong signs that a commodity correction may be coming to a close. After all, the inflationary forces and fundamentals that are driving commodity prices higher are still in place.

  • Consumers' appetites for gold seem to drop as prices go above $900 an ounce. And yet, gold just rebounded from its recent sell-off and looks poised for another run at its highs.
  • Global gold production fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold Fields Mineral Service. For 2008, production will likely drop again. While China is producing more gold, South Africa's output is falling. Gold miners are exploring frantically, but the large lodes are getting harder to find. This should drive consolidation in the industry going forward.
  • The huge rush of gold buying by the ETFs is helping drive the market. Demand from exchange traded funds and other funds that hold physical metal was up 16% in 2007, after jumping 25% in 2006. Now, exchange traded funds that hold physical gold hold more gold than many central banks.
  • Petrodollars are pouring into gold. Gold demand in the Middle East rose 30% in 2007.

Oil inventories are building week after week, and yet crude prices are trending higher. As the name petrodollars implies, oil futures trade on the perception and anticipation of the future. If a real disruption in the supply of oil were to occur, the Fed could pump a trillion dollars into Wall Street, and still the NYSE would still collapse. Even if the unthinkable never happens, traders look at the following data and project it out into the future:

  • Mexico is one of the U.S.'s major foreign oil suppliers. But the situation in Mexico's aging, under-financed oil fields is going from bad to worse. Production began to fall in 2005, and Mexico may have to import light crude for its refineries by 2011, according to Energy Minister Georgina Kassel.
  • Russia is one of the world's biggest oil exporters. But Russian oil output may fall in 2008 for the first time in a decade. Output fell 0.7% in January and 0.9% in February, to 9.79 million barrels a day.
  • Global demand for oil continues to rise. The International Energy Agency expects demand to rise 2% in 2008 to 87.54 million barrels a day.

Also, a worsening global agriculture crisis is also in affect. Billions of people in China and India are changing their diets. The Chinese ate just 44 pounds of meat per capita in 1985. They now eat over 110 pounds a year. Each pound of beef takes about 7 pounds of grain to produce, which puts even more pressure on grain prices. As a result, global wheat stockpiles are at 26-year lows and U.S. wheat stocks are at 59-year lows. Soybean stockpiles are also at multi-decade lows. World rice stockpiles are at their lowest levels since the 1980s, and the United Nations forecasts that exports will drop 3.5% this year.

As of December 2007, 37 countries faced food crises and 20 had imposed some sort of food-price controls. The prices of the world's three main grains, rice, wheat and corn, have all more than doubled in the past year. Over the past eight years, the price of food worldwide has increased 75%; the price of wheat has gone up a dramatic 200%. In a recent report, the United Nations predicted that food prices are likely to remain high for a decade.

All this is putting a tremendous upward squeeze on agriculture commodities and fattening the bottom lines of agriculture companies. But that's not all; basic materials are soaring, too.

"Korean steel giant Posco just agreed to a tripling of the price of coking coal, the kind used to make steel. That sets the bar for the industry much higher. Meanwhile, iron ore prices jumped by between 65% and 71% for the 12 months starting in April as demand from Chinese steelmakers outpaced global supplies. And copper is going higher, too. Citigroup boosted its 2008 forecast for copper prices by 15%, citing rip-roaring demand from, you guessed it, China," Mr. Brodrick states.

To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1647
About SEAN BRODRICK & MONEY AND MARKETS     

Sean Brodrick joined Weiss Research in 2000 as an analyst, bringing more than 25 years experience as a journalist and financial analyst to the position. He is Weiss Research's small-caps specialist, especially in natural resources, and is the editor of the company's Red-Hot Canadian Small-Caps, as well as a regular contributor to its daily e-letter, Money and Markets.

Previously, Mr. Brodrick was the investment director of The Sovereign Society, the world's leading publisher of offshore asset protection strategies and global investment opportunities.

Recognized for his expertise on Canadian and Australian investment opportunities, Mr. Brodrick has been featured on many financial talk shows, including CNBC Squawk Box and Bloomberg Market Line. He is a weekly guest on Market Matters Radio, a contributing columnist to MarketWatch.com and a frequent commentator on one of Canada's premiere financial websites, HoweStreet.com. His report, "70 Days to Empty," has garnered acclaim for its analysis of the forces pushing America toward its next oil crisis and was described by

The Daily Reckoning as "the most important report you're likely to read this year," while his knowledge of uranium has helped investors earn solid gains on the commodity.

Mr. Brodrick holds a B.A. degree from the University of Maine.

Money and Markets (http://www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit http://www.moneyandmarkets.com.

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