Math and Time Favor Investing in Commodities

Monday, 05 Mar 2012 10:08 AM

By Sean Hyman

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When it comes to investing, I don’t need an assurity — I need an edge.

Why? An assured return is typically a very low return. But investing with an edge, while not gaining a promised return, can still get you an outsized return that outpaces inflation.

Assured returns are “sure” to not outpace inflation. So a savings account or a CD may produce a sure return but you can almost always bet that return will be well below the rate of inflation. So you’re still losing purchasing power.

However, if you take a portion of your assets and selecting investments that have a decisive edge over time, then you’ll likely come out on top and end up outpacing inflation over time.

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One very strong edge that I like is one where the supply/demand is out of balance and in my favor. First, let’s look at supply/demand imbalances that are working against you and not working for you.

The main one that comes to mind concerns the U.S. dollar. You see, the U.S. Federal Reserve officials can increase the supply of money any time they want, simply by printing more of it. You and I can’t control that. However, when they do this, the supply is greatly increased in proportion to the demand for dollars. That causes the value of the dollar to go down when the supply of money in circulation increases.

Stocks can be this way too. A company can issue more stock and dilute your shares and there’s not much you can do about it unless you own enough shares to sway the vote in matters like this. That’s not the case for most Americans.

Now one thing that decreases the supply in proportion to demand is when a company does a “stock buyback” program. When this happens, they are buying back shares and taking them off of the market. That decreases the amount of shares in float that can be purchased and tends to push a stock higher over time because the supply of shares shrinks in proportion to the demand.

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However, there are many other dynamics concerning a stock that can still cause it to plummet. That’s why I like the edge in “hard assets” like commodities.

For instance, do you think that there was more oil in the ground in the 1960s or today? Obviously, with the millions of barrels of oil that get pulled out of the ground regularly, there was more oil in the ground then than now. Yet we’re using more and more of it each day now.

Also, back in the 1960s there was about 4 billion people on the planet. Today we have 7 billion people on the planet. So do you think the demand for oil has increased since the 1960s or decreased? We know it’s increased.

So the supply for oil has shrunk and the demand has increased. I bet you can see why I like the idea of owning oil.

For my readers that are old enough to be driving cars in the 1960s, think back to what you paid then and what you pay for gasoline now.

For those of us who weren’t able to drive in the 1960s, I’ll tell you what the price of gas was back in 1960. The average price of gasoline was 31 cents a gallon. Hard to believe that gasoline was ever 31 cents.

Today the average price for regular unleaded gasoline is $3.76 a gallon and it’s soon to head higher. Did you know there’s a gasoline ETF out there that appreciates in values as gasoline prices head higher? There is…just like there’s an oil ETF as well. These two assets have a “supply/demand edge” that I’m referring to.

So while it may not be guaranteed that oil and gasoline prices will go up…you know that it’s a reasonable bet because of the supply/demand imbalance that gives you an edge over time.

Another one I like these days is agriculture. There was a time when there was more farmable land. Also, technologies have been invented that speed up the harvesting time with better combines and tractors.

Additionally, food costs were able to be kept down as they learned how to get more of a yield out of the land due to the development of fertilizers, etc.

Now most of those “tricks” we used to get more food out of the same amount of land is starting to hit a peak. Also, the amount of farmable land relative to the number of mouths to feed globally is becoming imbalanced.

Remember, I said since the 1960s we’ve added three billion mouths to the planet. Now, do you think the population of the globe will continue to grow or shrink? Do you think it will be harder or easier to come up with enough food to feed these multitudes? Well, if you believe that the world’s population will continue to grow, then you believe that the demand for food will continue to pick up.

If you believe that it will be more of a challenge to feed these growing masses in the future then you believe that the supplies will be tight relative to the demand. Therefore, there’s a huge chance that food prices will continue to soar in the upcoming years ahead. These days, there are agricultural ETFs that can take advantage of that trend.

So you can see — all you need is an edge. The supply/demand imbalance edge is one of the best over time, I believe. It’s a bet that I’m willing to make over time. While it’s not an assurity, I believe that those investments will outpace inflation over time due to these supply/demand imbalances that work as an edge in our favor over time.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.


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