In his latest column on international investments, Frank Holmes looks at the
last ten years and wonders what is in store for the future. What a decade! A
rapidly urbanizing global population driven by tremendous growth in emerging
markets has sent commodities on quite a run over the past 10 years. If you
annualized the returns since 2002, you find that all 14 commodities are in
positive territory. A precious metal was the best performer but it's probably
not the one you were thinking of. With an impressive 20 percent annualized
return, silver is king of the commodity space over the past decade with gold (19
percent annualized) and copper (18 percent annualized) following closely behind.
Notably, all commodities except natural gas outperformed the S&P 500 Index
10-year annualized return of 2.92 percent. Last year did not seem reflective of
the decade-long clamor for commodities. In 2011, only four commodities we track
increased: gold (10 percent), oil (8 percent), coal (nearly 6 percent), and corn
(nearly 3 percent). The remaining listed on our popular Periodic Table of
Commodity Returns fell, with losses ranging from nearly 10 percent for silver to
32 percent for natural gas. Periodic table of investments I think this chart is
a "must-have" for investors and advisors because you can visually see how
commodities have fluctuated from year to year. Take natural gas, for example,
which posted outstanding increases in 2002 and 2005, but has been a
cellar-dweller for the last four years as a result of overabundant supply and
softening demand. The industry is also still trying to digest breakthrough
technology that opened the door to vast shale deposits at a much lower cost. On
the other hand, oil finished in the top half of the commodity basket six out of
the past 10 years. No stranger to volatile price swings, oil possesses much more
attractive fundamentals as we continually see restricted supply coupled with
rising demand. After 11 consecutive years of gains, some are questioning whether
gold can keep its winning streak alive in 2012. One of those skeptics is
CNBC's "Street Signs" co-host Brian Sullivan. During my appearance on
Thursday, I explained how I believe the Fear Trade and Love Trade will continue
to fortify gold prices at historically high levels. One reason the Fear Trade
should persist in purchasing gold is the ever-rising government debt across
numerous developed countries. During our Outlook 2012 webcast , John Mauldin
kidded that the Mayans were not astrologers predicting the end of the world, but
economists predicting the end of Europe. Whereas John believes the U.S. has
wiggle room to decide on how to deal with deficits and debt, Europe and Japan
are running out of time. The situation is quite somber when you consider how
much debt Europe, Japan and U.S. owes this year alone, says global macro
research provider Greg Weldon. In his preview of 2012, Weldon says that the
maturing principal and interest on U.S. Treasury debt due this year totals just
under $3 trillion. Austria, Belgium, France, Germany, Italy, Portugal and Spain
together face nearly $2 trillion in principal and interest payments. Japan, is
the leader in the clubhouse, owing just over $3 trillion in 2012. With the
combined debt for these developed countries totaling nearly $8 trillion, the
interest payments alone dwarf the total GDP of many countries in the world. Last
week, Germany sold a 5-year government note for less than one percent, the
lowest interest rate on record. Bids for the low-yielding debt were three times
more than the amount sold, even as the consumer price index stands at more than
two percent year-over-year. This means that investors have so few acceptable
safe havens they are willing to accept negative real rates of returns. This is
good news for gold as a safe haven alternative against depreciating currencies
such as the euro, the yen and the U.S. dollar. The overwhelming debt burden in
developed countries translates to an expected slowdown in imports from the
emerging world. However, the grandest of those, China, likely won't be as
affected as much as some people assume. This is "the biggest misconception"
about the country's economy, says CLSA's Andy Rothman. Exports only play a
supporting role for the Chinese economy. The world's second-largest economy is
actually largely driven by domestic consumption from a population more than 1
billion strong with more padding in their wallets. Andy says 10 years of
tremendous income growth and little household debt, make China the "world's
best consumption story, for everything from instant noodles to luxury cars" in
2012. According to December Chinese trade figures, month-over-month and
year-over-year imports of aluminum and copper increased significantly. This may
be a result of China restocking ahead of Chinese New Year, but M2 money supply
growth rapidly rose in recent months, a sign the government is attempting to
reaccelerate the economy. Also, the urban labor market has been robust over the
past two years, with an annual change just below 5 percent—a record high over
the past 15 years. Along with rising urban employment, income growth has been
tremendous as well. CLSA says that last year was "the eleventh consecutive
year of 7 percent-plus real urban income growth," with disposable incomes
rising 152 percent over the past decade. Investors shouldn't expect China's
growth to be as robust as it's been, as the country's fixed asset investment
growth drops below the 25 percent year-over-year pace of the last nine years,
says CLSA. China's 12th Five-Year Plan has less infrastructure spending
compared to the 11th Five-Year plan. Transport and rail spending is also
expected to drop, with only water and environmental protection spending growth
rising. As shown in the BCA chart above, GDP growth has declined below 10
percent, but the growth is currently not the lowest we've seen in recent
years. CLSA believes that China will prevent GDP growth from slipping below 8.5
percent for the full year, as "Beijing has the fiscal resources and political
will to quickly implement a much larger stimulus." Judging by the record
number of articles mentioning a hard landing in China in late 2011, investor
sentiment has swung from euphoria to excessive pessimism, according to BCA
Research. Last fall, more than 1,000 articles discussed the risk of a "China
Crash." As I've mentioned before, contrarians view extremely bearish
sentiment as a potential attractive entry point. BCA believes the pessimism has
been priced in, as technical indicators as well as valuations for domestic and
investable markets appear "deeply depressed." What will happen over the next
10 years? I believe the supercycle of growth across emerging markets will
continue with rising urbanization and income rates. This bodes well for
commodities, especially copper, coal, oil and gold, and we'll continue to
focus on companies that will benefit the most from these much-needed resources.
U.S. Global Investors, Inc. is an investment management firm specializing in
gold, natural resources, emerging markets and global infrastructure
opportunities around the world. The company, headquartered in San Antonio,
Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family,
as well as funds for international clients. For more updates on global investing
from Frank and the rest of the U.S. Global Investors team, follow us on Twitter
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You can also watch exclusive videos on what our research overseas has turned up
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data provided are subject to change without notice. Some of these opinions may
not be appropriate to every investor.
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