Many of us out there who have been involved in commodities trading and analysis have been warning, watching and waiting for the last two-three decades. So it comes as little shock to us that we are in this “crisis” now.

The Long Emergency

One of my favorite writers and lecturers is James Howard Kunstler. The Long Emergency is the title of one of Kunstler’s books, as well as one of his catchphrases, and, boy, is it dead on.

This commodities frenzy, and the related dash by nations to snatch up and secure all sorts of resources, has been a long time coming. It certainly didn’t happen overnight. I can safely say that for the vast majority of my career, commodities have been the poor redheaded stepchildren of the investment world. Two decades ago, when I walked onto the trading floor of the New York Cotton Exchange at the old World Trade Center, the climate was very different from today’s.

Back then, most “mainstream” investment houses looked at the commodity markets as a subculture. Commodities were, basically, another branch of Las Vegas, just without the free buffets, dancing girls and booze. Actually, maybe some of that stuff was available on a daily basis, but it was a lot different then.

I compare it to how Times Square was back in the 1970s and early ‘80s. If you ever visited the Big Apple back then, you know that Times Square was the worst of all things. It was a seedy, grimy, crime center filled with many colorful characters. Let’s just say Times Square was not a place tourists went, unless, of course, they were sex tourists.

Beneath it all, though, was an unpolished gem. The same is true with the resources market.

Respect Is Earned

Fast-forward to today.

Imagine you’re Rip Van Winkle and you go to sleep on 42nd Street back in, say, 1975 (let’s call you “Rip Van Wino”). You wake up in 2008 and see all the porno houses gone, bars shut down, strip clubs a distant memory…and then, suddenly, you are escorted to a homeless shelter because of New York policies on street people near 42nd Street… Welcome to the new world.

In some ways, this is true of the commodity markets, too. When I got involved with commodities in 1988, the exchanges were the low men on the totem pole. The members held all the exchanges privately, and none were traded on the stock exchange. It was a secretive world, and the only way to get a job on the floor was to know somebody. I got my job because my best friend’s brothers owned seats on the floor and gave me a job as a clerk.

Everyone on the trading floor was either related to or knew someone in the biz; it was a very incestuous market. The basic reason was that there was so much money to be made in the market nobody wanted outsiders coming in. It was a shortsighted approach, but it was the rule of law down there. The problem was that the markets stayed small and took only a small percentage of the global investment pie.

As the early 1990s set in, commodities, basically, fell and/or stayed stagnant for much of the decade, except for during the occasional war, such as we had in 1990 and 1991 (oil went wild when Saddam Hussein invaded Kuwait).

The general public focused on stocks and still pooh-poohed commodities. Nobody talked about corn or soybeans at any cocktail parties I went to in 1991. Now it’s different. I must get 15 calls a week inviting me to speak about corn and soybeans at events or on TV. It’s been a paradigm shift from 1989 to 2009.

Bubblicious

The most common question I have gotten on a weekly basis for the last 18 months is “When will the bubble pop?”

My answer is pretty standard: “There is no bubble!”

I am not usually invited back to those cocktail parties, as it scares the guests. The truth is we are not in a bubble. We are in an upward correction propelled by years of denial, stupidity, underinvestment and neglect. The blame falls squarely on several parties.

Wall Street is guilty for not embracing the commodity markets earlier. Wall Street should have allowed commodity prices to reflect the true nature of pent-up demand by making those markets available to its clients. Instead, Wall Street discounted commodities as some form of gambling.

The commodities exchanges and traders are also to blame for not making their markets more transparent, and for also projecting an image of secrecy and mystery.

And I could tell you stories about the underinvestment in basic production over the past couple of decades. Really, what were people thinking? That prices were low, and would stay low forever? Did it ever occur to anyone that all those babies born in the 1970s and 1980s might some day grow up and want food, energy and manufactured goods?

No, this is not a bubble. It’s a coming of age, a big, hard reality check that has been decades in the making. I have seen more activity by Wall Street in the resource markets in the last three years than in the previous 17. And I do not expect that it will ever go back to the way it was. I also don’t expect to see 42nd Street filled with porno and hookers again, either.

Change is often hard to accept. $140 oil, $1,000 gold, $8 corn…this is all the new reality. None of these new price trends are a figment of some rogue speculator’s imagination or the products of evil activity. This is a wake-up call that our growing world is hungry for the limited resources it still has.

The most important thing to remember is that markets, even parabolic bull markets, always correct. Those corrections can be painful if one is overextended or married to one side of the market — in this case, the bull market.

So ride the wave of change, of course. Be flexible, buy on the corrections, sell for profits on the overdone rallies and vice versa. Go short when clear tops have been made (although I grant it can be hard to determine the exact top).

There is no trail of breadcrumbs to follow on Wall Street, but that’s why you have me to help guide you. As long as grains don’t go up too much more, I should be able to supply you with a good trail to follow for many years to come, whether commodities are in rally mode or consolidation.

Yours for resource profits,
Kevin Kerr
July 16, 2008

P.S.: So if you agree that high prices are here to stay, that means there is definitely money to be made in commodities markets. But how exactly do you begin? It’s definitely a tough world out there, and the guys that have been in forever will try to keep the new guys out. That’s why I’m offering you a guest pass into this market that will help you earn more than enough money to help you keep pace with these rising prices.

Commodities Market was originally featured on Whiskey and Gunpowder

In fact, now you have all of these dollar bulls coming out and saying that inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I disagree. Do you remember as a child wishing for something, wishing so hard, yet it didn’t come true? Wishing for something to happen does not mean it will be so. (I never did get that red bike.)

As I shared with my Outstanding Investments readers, and as my Resource Trader Alert readers know, I sold our silver positions for some solid profits a few months ago, and then sold half of our gold, too. And just the day before the gold sold off, it looked brilliant. But I have to claim a little luck on that one. Any good trader knows to give credit to Lady Luck once in a while. Anyway, it was the right thing to do, and now that gold is correcting, my new target is around $850. And here we are: I think now it’s more like $820, but I am seriously looking at adding more longer-term options down here in both gold and silver.

I believe this move in the dollar will continue a bit, although short-lived, and the same problems that drove the dollar into the basement will persist, and even worsen. The Fed can’t just snap its fingers and wipe away twin deficits with some stimulus checks. Too many folks are subscribing to the idea that the consumer will somehow come to the rescue and spend our way out of recession. It’s pure fantasy.

Do I think commodities are in a bubble? No. Do I think that there is a lot of froth in the market? Absolutely. The fact of the matter is that we are in a new paradigm for commodities and the old-school thinking about how commodities used to be traded has to be changed. And this is true of most commodities — none more so than the agricultural ones.

Peak Food: You Heard It Here First

As I sit here in the transit lounge for business class, I am watching CNN out of the corner of my eye, and on the air is Jonathan Stevens, a baker from a Massachusetts company called Hungry Ghost Bread. He is starting to grow his own wheat and encouraging his customers to do the same. Not a bad idea. For a 50-pound bag of organic flour, he used to pay $25, but now pays around $60. So in back of the store, the bakers are now growing their own wheat. Funny, but they may have the last laugh.

Now, while farming in your backyard may not seem very practical, it’s great marketing, and also a new reality. Costco limiting the number of bags of rice — and now other things — that you can buy is clearly physical demand. I am a speculator and a Costco member, but have not been there to buy rice lately, especially 20-pound bags.

Sure, speculation is a part of this puzzle, but to lay the blame on the farmer’s doorstep or to say it’s all speculators and hedge funds causing the run-up is a sad mistake. Real physical demand and a weak dollar are two of the biggest reasons. I don’t see demand going anywhere but higher, and this year is getting off to a bad start for agriculture in the U.S., as the weather has been awful. This year’s corn crop could be extremely disappointing. We are betting on much higher prices in soybeans and corn over in Resource Trader Alert and are using option spreads to take advantage of this. I just got back from meeting with farmers in Minnesota and learned some very interesting things and ways to invest for the next big move.

You can also follow along with my latest TV appearances and my travels to Abu Dhabi and Dubai this week. I will be meeting up with “Aussie Joel” Bowman from The Rude Awakening, who now lives in Dubai, so we are sure to see many interesting things and, hopefully, learn more about some outstanding investment opportunities.

I have to say it is very satisfying to have been one of the only people at last year’s Agora Financial Investment Symposium to speak on the topic of Peak Food. Some of my colleagues snickered (“There goes Kevin again”) and some audience members looked puzzled. After all, nobody in the mainstream press talked about higher food prices or the coming rally for agriculture, and now we seem to hear about them every day.

Times are certainly getting tough out there. Hey, I’m just the messenger.

Yours for resource profits,
Kevin Kerr
May 8, 2008

Coming Peak Food was originally featured on Whiskey and Gunpowder

Everyone seems to have a relative who took a beating in the commodities market, and this fact (or fiction) is considered sufficient reason that no sane person would ever risk playing around with such dangerous things. That this particular victim was also a professional economist makes the warning seem even more ominous. I, however, couldn’t help laughing.

Billions of dollars are invested in the commodities market every day. Without the commodity futures markets, many of the things that you depend on in life, from that first cup of coffee in the morning to the aluminum in your storm door to the wool in your new suit, would be either scarce or nonexistent, and certainly more expensive.

There are several other bromides out there for why “ordinary people” should not invest in commodities, and I want to lay these myths to rest, once and for all, so that we can get on with the more interesting business of how you can begin to make some money investing in the next-generation asset class.

About That Relative of Yours Who Got Wiped Out — He was inexperienced. You can learn. Most likely, he was buying on thin margin — the minimum deposit a broker requires to take a position in a particular commodity — and when the market went against him he lost big-time.

Here’s how it happens: Like stocks, commodities can be bought on margin. Unlike stocks, however, where by law you have to put up at least 50 percent of the price of the shares, the margins on commodities can be even lower than 5 percent: You can buy $100 worth of soybeans for $5. If soybeans go up to $105, you’ve doubled your money. Beautiful. But if soybeans go down $5, you’re wiped out. Not so beautiful.

Experienced, smart speculators can make tons of money buying on margin. They also know that they can lose tons, too. But they can usually afford it. Your relative was in over his head. If he had bought $100 worth of soybeans in the same way that he can buy IBM — for $100 (or maybe even $50) — he would be happy when it goes up $5 and a lot less sad should it go down $5.

Whenever I mention commodities in public, someone always points out that we now live in a high-tech world where natural resources will never be as valuable as they were when we had a smokestack economy. But if you read your history you’ll discover that technological advances are as old as history itself: The introduction of the sleek and beautiful Yankee clipper ship dazzled the world in the mid-nineteenth century, loaded with cargo, sailing down the trade winds at 20 knots and more, averaging more than 400 miles in 24 hours and able to make it from U.S. ports around Cape Horn to Hong Kong in 80 days; within a decade, the clippers had been replaced by the steamship, no faster but not dependent on wind power; and before long the next big thing in transport had taken over, the railroad, which, of course, was the original Internet — and prices in the commodities market still went up.

In the twentieth century came electricity, the telephone, and radio (three more Internets) and then television (a fourth Internet). There was also the automobile, the airplane, the semiconductor — and in the midst of all of these truly revolutionary technological breakthroughs came periodic, multiyear commodity bull markets.

When the supply and demand in raw materials is seriously out of whack, the emergence of new technology will not necessarily restore the balance quickly. To be sure, changes in technology, for example, have made the economy less dependent on oil. But we still use plenty of it, and whenever there isn’t enough prices will rise. Computers or robots may do amazing things, but they cannot find oil or copper where there is none or make sugar, cotton, coffee, or livestock grow faster than nature allows. We can put in orders all day long on our computers for lead, but all that Internet technology will be in vain if there are no new lead mines. Technology can neither feed us nor keep us warm, and the demand for commodities will never disappear.

“But My Stock Broker Tells Me That Investing in Commodities Is Risky.”

Tell me again about all those Cisco shares you owned back in 2000. Or JDS Uniphase, or Global Crossing? So many risky stocks made the turning of the new millennium a not so happy time for many, who watched their portfolios evaporate.

If you do your homework and remain rational and responsible, you can invest in commodities with perhaps less risk than playing the stock market. You don’t need me to emphasize that investing in anything is a risky business. But let me point out something that you might not have realized: There has been more volatility in the NASDAQ in recent years than in any commodities index. Cisco, Yahoo! and even Microsoft have been much more volatile than soybeans, sugar, or metals. Compared with the risk record of most tech stocks, commodities look safe enough to be part of any organization’s “widows and orphans fund.”

And let me remind you of one more important difference between commodities and stocks: Commodities cannot go to zero, while shares in Enron can (and did).

Regards,
Jim Rogers
May 7, 2008

Commodities Investing was originally featured on Whiskey and Gunpowder