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Are Commodities a Bargain?

By January 26, 2013

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Commodity prices are down  17 percent from their peak in 2011 and investors are wondering if commodities are set for another rally or the long term top is in.

We have to look at some individual commodities and then look at the big picture to see the outlook for commodities.  The energy commodities are doing well.  Even natural gas looks like it bottomed in 2012.  The upside might be limited in the near term for natural gas, but the long term outlook points to higher prices.

The grain markets are not far from record highs and world supplies are tight.  One bad year can wreak havoc on global supplies, while it will take a couple years of optimal crops to rebuild supplies to adequate levels.  Livestock supplies are tight, as breeding heards have been drastically reduced last year because of high grain feed prices.

The metals markets have been somewhat dormant, but a slight uptick in the global economy could send prices much higher.  This is the case for most commodities.  We have experienced major shortages in most commodities over the last few years.  There is little room for error if demand picks up or there is a shortfall in global production for any commodities.

The large driver of commodities for the last ten years has been increasing demand from the emerging economies and the easy money policies of central banks around the world.  Those trends will likely continue and higher commodity prices can be expected.  If the easy money policies subside, this means the global economy is growing.  Either of those scenarios are positive for commodities.

At this point, investors might want to consider adding commodities to their retirement account as a small portion of their allocation.  A growing world population will put extreme pressure on commodity producers well into the future.

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