Commodities - The Best Asset Class For Long Term Investment

Long term investors globally are looking out for exciting investment opportunities in this current downturn which had lead to all asset classes falling substantially from their highs. While many asset classes will give superior returns if one is looking at a 5-10 year investment horizon, some will perfform better then the others over this period.

In my opinion commodities are one of the best asset classes to remain invested in for long term. This holds true for both industrial and agricultural commodities. In this article however, I will be mainly discussing industrial commodities and why it can prove to one of the best asset classes in the future.

To substantiate my point I would first like to take the help of the CRB commodity index. The chart below shows the five year movement of the CRB commodity index.

Chart Source: Bloomberg

• The CRB commodity index peaked out at around 470 in July 2008, when the commodity prices also peaked out.

• The CRB Index then slumped to a low of around 200 by February 2009 and is currently at 229.

Commodities had a 20 year bear market from 1980 - 2000. During the year 2000, the CRB commodity index was at around 180 after a 20 year bear market. Currently it is around the same levels and inflation adjusted the CRB commodity index would be at lower then the levels it was in the year 2000.

This clearly suggest that commodities have been oversold and are great picks at current levels.

Next, I would like to discuss about two commodities, which have huge demand going forward and can give multifold returns if one invests in them with a 5-10 year investment perspective.

1)Crude Oil

I consider crude oil to be one commodity which will be much higher then what it is at current levels. The major upside price drivers for crude oil are summarized in an excellent way in the chart below.

Chart Source: U.S Global Investors (usfunds.com)

Some additional facts and statistics for Crude Oil:

• In United States the oil consumption per capita (barrels/year) peaked out at around 27

• In Japan and South Korea the oil consumption per capita (barrels/year) peaked out at around 17

• In China the oil consumption per capita (barrels/year) currently stands at 1.8

• In India the oil consumption per capita (barrels/year) currently stands at 0.8

Asia is house to over 3.6 billion people which makes up around 56% of the world's population. One can imagine what the demand for crude oil would be even if these 3.6 billion Asians reach an per capita oil consumption of 5-10 barrels/year. The crude oil prices should just go ballastic.

Some more Crude Oil Price Drivers:

• In 1964, the world added 48 billion barrels of oil in proven reserves every year but consumption was only 12 billion barrels

• Currently, the world adds 5-6 billion barrels of oil in proven reserve every year but the consumption is around 30 billion barrels of oil annually

Again It would take no great analysis skills to tell where oil prices should be headed in the longer term.

2)Copper

Copper is another industrial commodity which should be much higher then what it is currently. According to the Energy and Commodity presentation from usfunds.com, to satisfy demand the world may need to mine as much copper over the next 25 years as throughout history. The same chart is shown below

Source: US Global Investors (usfunds.com)

Some Statistics and growth drivers for Copper prices:

• An average single family home uses about 440 pounds of copper

• Copper in used in all major industries like architecture, automotive, electrical, telecommunication and machine products ot mention a few

• Urbanization and Infrastructure improvement push in Asia will drive demand over long term for this commodity

It is interesting to note that China has been building up copper inventory during these times of crisis. They very well know that the commodity is coming very cheap and building inventory for future use is a smart move.

These are just two commodities discussed in the universe of commodities. I believe that holding stocks of these commodity providers can give investors big returns in long term. So if anyone is bulish on the long term growth of Asia and also the world economy then it would be a good thing to buy commodity stocks on every decline.

My Stock Picks for exposure to Crude Oil and Copper:

• Oil & Natural Gas Corporation Ltd (Crude Oil)

• Shiv-Vani Oil & Gas Exploration Services Ltd (Crude Oil)

• Sterlite Industries (India) Ltd (Copper)

• Hindustan Copper Ltd (Copper)

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