The twelve-year picture

Viewing the above chart, one could easily conclude that only people who are exhibiting a lack of good sense or judgment would buy commodities at the present high prices as they are conceived. Anything that has risen 70% in a relatively short time may in fact be a good sale - unless of course we are in "one in an age"-mega trend.

But how do we know?

The following chart, going back to the year 1920, tells a different story, namely that commodity prices, adjusted for inflation, are as low as during the depression of the thirties. The prices of basic commodities world-wide have fallen so low that, despite modern efficiencies, many trade below their cost of production.

A secular rise in commodity prices during the next decade is a significant likelihood.

Commodities are bargains! If "buy low, sell high" makes any sense at all, this is the time to buy.

As the above chart suggests, the secular decline in commodity prices has come to an end and a reversal is in progress.

But for most, the rationale behind rising commodity prices is simple:

• Demand for basic commodities increases as the world's population (6.44b at present and growing by close to 100 million people each year) strives for improved lifestyles.



• The emergence of China as a super economic power. China will have a huge impact on the world's commodity markets and is likely to push up commodity prices very considerably.



• Add India with 1.08 billion people.



• Add many other Asian countries like Indonesia (242m), Japan (127m), Philippines (87m), Vietnam (84m), Thailand (65m) South Korea (65m), Malaysia (24m) etc.



• As a consequence, supply cannot meet demand.



• As a consequence, prices will have to go up.

The falling US-Dollar

One key factor worth noting is the falling US dollar. If the US dollar continues to weaken, prices will rise to compensate. A trend of rising prices tends to attract more investors and they could push prices higher still. Eventually this process could develop into a classic spiral of rising prices such as occurred during the 1970s.

The United States of America is THE super-power of the world at present.

Nevertheless,

• less than 5% of the world's population lives in the USA.
• The country has huge deficits and debts.
• The country is at war at every corner of the world and it prints as much money they need to pay for it.

As a consequence, the dollar will continue to fall over the long-term.

The medium-term picture

While we are presented with a flawless up-trend and a long-term investors may not be perturbed or unsettled by the fluctuations within the trend, the short-term minded investor was clearly presented with a situation of too much enthusiasm in March. As could be expected at that time, a consolidation followed and stopped right where it had to stop to confirm the up-trend.

The short-term picture

The RSI-Indicator is usually reliable in identifying excellent buying opportunities as well as periods when you are well-advised to be cautious.

This is why we wrote in March: "Buy on pull-backs and the buy-level we indicated was an Index of 290."

At present, the indicators are in "neutral territories" but we also know from the past that such indicators can signal a lot of enthusiasm for quite a while as the market keeps rising as a rising market attracts more buyers.

Selling at the right time seems more difficult for most as buying means creating hope and selling actually destroys hope "to make even more".

As the Reuters-CRB Index is composed of different products as shown at the beginning, namely energy, industrial metals, precious metals, grains, meats and softs, it could be propitious to analyse individually the products one wishes to buy or sell instead of the Index

Following is a table which shows how we view the individual components. NEUTRAL does of course not mean that these components will not move. You should however buy when things look really cheap or sell when too much enthusiasm is evident.

A lot of people believe that investing in futures is high risk. They probably confound the investment itself and the fact that you have to put up little margin to buy a contract. If you buy anything with a high degree of leverage, this risk IS high.

A diversified portfolio of commodities is most likely less risky that buying ten different stocks on the New York Stock Exchange. If the market goes down, most of your stocks will go down.

If you diversify over energy products, metals, grains etc., your risk is indeed much less.

Investing in the CRB Index or in the Goldman Sachs Commodity Index can be very profitable and an excellent hedge against the falling US-dollar at the same time.

Our recommendations were valid at the time of writing, viz. at

and not necessarily when you happen to read them.

Peter Zihlmann


www.pzim.com
investment@pzim.com
forex@pzim.com

June 13, 2005

Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company's share price. Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.