The big question about resources: Is it too late to invest? Short answer: Nope. And it's easier than ever to get into the game.
(Fortune) -- Back in 2001, the executives running Australian mining giant BHP Billiton sensed that China's economic growth was gaining critical mass. So they commissioned a study on how the country's rapid industrialization might affect the global markets for copper, coal, iron ore, oil - all the stuff that the company pulls out of the earth and sells.
"The results were quite - well, 'outrageous' is probably the right word," CFO Alex Vanselow told me when I visited BHP's headquarters in Melbourne a few months back. "Because we didn't believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous."
But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China's billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India's potential for growth - and its own billion-plus population - the numbers got even more extraordinary. And when they factored in the industry's inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.
Today, of course, the commodities boom that the BHP (BHP) study anticipated is in full swing - and impossible to ignore. You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you're paying 20% more for that box of pasta than you were a year ago.
As painful as all those rising prices can be for consumers, the bull market in raw materials has proved to be an awesome investment opportunity. Over the past five years the S&P 500 has had a total return of 59%. But over the same period, the diversified Dow Jones-AIG Commodity index has risen some 110%, and the S&P GSCI Commodity index, another broad measure, has jumped 141%. The price of gold has more than doubled, and crude oil and copper have soared more than fourfold. If you were prescient enough to go long on rice on New Year's Day, you've already seen a return of 33% this year.
No wonder, then, that money is flooding into resource markets. According to Gresham Investment Management, institutional investors like pension funds and endowments had $175 billion in commodities at the end of 2007, up from $18 billion in 2003. Just as predictably, Wall Street has rushed out a flurry of new products geared toward individual investors.
But unless you happen to have a degree in mining and a cousin who works at the Chicago Mercantile Exchange, the idea of putting some of your precious retirement savings into commodities right now probably seems pretty risky. Isn't it too late? Aren't these markets way too volatile for investors planning for retirement anyway? And isn't investing in commodities too complicated for average investors? In short, the answers to those questions are: probably not, no, and no.
Let's start with the biggest, scariest question: Is the commodities boom now like Cisco stock in 2000 or Miami Beach condos in 2006 - i.e., a bubble?
Some of Wall Street's big brains seem to think so. In recent weeks strategists at Lehman Brothers, Citigroup, and Brown Brothers Harriman, among others, have volunteered the B-word and warned of a painful sell-off. The surging price of oil has prompted particular handwringing.
One enlightened observer who's not worried about a commodities collapse is Jim Rogers. The maverick investor, author, and one-time partner of George Soros famously predicted the bull market in hard assets back in the late 1990s and began putting his money in resources when most of us were still enthralled by the dot-coms. According to Rogers, the current highs may represent a market top, but hardly the peak.
"The bull market still has a long way to go," says Rogers. "Is it time for a short-term correction? I have no idea. And even if we are due for a pullback, that's not necessarily true for all commodities. Oil might be ready for a shock, but that doesn't mean that zinc is." (The price of zinc has, in fact, fallen by half over the past year because of a glut. Rogers says he's monitoring industrial metals for the right moment to buy more.)
History is on Rogers's side. As he likes to point out, research shows that over the past 140 years the typical commodities bull market has lasted about 18 years. Rogers calculates that the current boom kicked off in early 1999, which means that if it conforms to precedent, we have almost another decade left.