Tags: Commodities | Have | the | Edge

Commodities Have the Edge

Friday, 21 April 2006 12:00 AM

Dear MoneyNews Reader:

On Thursday morning as I put the kids in the car for the journey to school, my eldest son Jack popped a question.

"Dad? When I grow up, will the calves on the back of my legs become cows? " he asked coyly.

I couldn't help but crease up into fits of laughter. Jack is only 9, but he has a keen sense of humor. He used to repeatedly ask Mrs. Edge and I whether chocolate milkshakes came from brown cows!

I only mention this anecdote because that same morning, I put the finishing touches to my premier trading recommendation, which involved the prospects for live cattle futures.

You'll have read my comments over the last several months about a variety of markets, from bonds and the dollar to orange juice and silver. Going forward, these views will form the backbone of my new service,

This week will go down as a milestone in history, as gold touched a new 25-year high and silver reached its highest price since 1983.

At $645.85 per ounce, gold has risen 25% since the start of the year. Compare that to a 5.2% rally in the S&P 500 index, which reached its highest point since February 2001.

Legendary commodities investor Jim Rogers, who began beating the commodities drum in 1999, believes we still have a decade to run on this. He points to the fact that historic bull cycles run an average 17 years.

This week Rogers upped his gold target to $1,000 per ounce, meaning that the yellow metal's price will need to soar yet another 54%.

Back in the mid-1990s, Rogers visited Paris and was summarily interviewed by a female French journalist. It soon became apparent to Rogers that the young woman did not fully grasp the huge story staring her right in the face – a commodities boom was about to take off. It seems the woman was therefore nonchalant in her reportage of both the investing legend and the story at hand.

As the two sat at a sidewalk café close to the River Seine, the indifferent reporter limply posed a barrage of dull questions. Unaware that she was standing directly over a goldmine of editorial material, she asked shockingly unoriginal and commonplace questions like: "Errr, wheech commoditees wud mussyer reekomund olding fur ze neckz dickade?"

Mr. Rogers was polite with his responses, though it was obvious to him that this reporter didn't really want to be there. He took some wrapped sugar cubes from a jar on the table and pushed them across the table right in front of the woman.

"Here. Put these in your pocket, because one day the price of sugar is going to go so high that cafes like this won't be giving it away. You'll have to ask for it!" Rogers warned.

Now a lot has changed since then.

As the global population has multiplied, the demand for sugar as a food sweetener has increased.

Back in the '90s, sugar traded between 4 and 14 cents per pound. But the commodity has really taken off this year. Since its 1999 low of 4.36 cents per pound, sugar has since soared to four-and-a-half times that amount, reaching 19.73 cents per pound in February.

There are two main reasons for the surge.

I already mentioned the rising demand for sugar in foodstuffs. One notable example is India, with its population of 1.1 billion.

After Brazil and the combined European Union nations, India is the world's third-largest sugar producer. But it is also the world's leading consumer of the sweet stuff. That means that India needs to import 7.6% more sugar than it produces each year.

In 2003, Indian sugar exports averaged 30.88 million tons per month. During the last two years, exports have slumped in the face of rising domestic demand, dwindling to 2.9 million tons monthly.

Since August 2004, India has begun importing sugar as if it is stockpiling for the end of the world. Imports averaged 21.9 million tons per month, and in August of last year, they peaked at a stunning 50 million tons!

The second very powerful argument is that sugar maintains a huge role as an alternative energy source.

The increasing popularity of ethanol as a fuel is securing the continued surge in the price of sugar, since sugar cane is used to produce ethanol.

Many years ago, Brazil decided that it was going to focus on alternative fuels rather than fossil fuels. As the world's largest sugar producers, Brazilian farmers expanded acreage devoted to growing sugar cane. Domestic carmakers also slowly began to increase production of cars that run on gasoline-and-ethanol mixes.

The result is that despite increasing its sugar production, Brazil is also consuming much more of the stuff as the price of oil increases.

The two-year chart above shows us a couple of things.

First, crude oil appears to be more volatile than sugar. Second, the prices move reasonably well inline. Some of that is due to the fact that both are just commodities, but sugar is increasingly likely to be converted for use as fuel.

In the last two years, the correlation factor between sugar and oil prices was 0.78. A value of 1.0 means that the two series move in lockstep. Here we have a 78% relationship between the two prices.

Of course,

But let's go back to the Jim Rogers story for just a moment.

I recently spoke to a friend in Paris. Many years ago, we worked together in London and whenever we would meet up for an evening out after work, we'd invariably end up eating Indian food.

She tells me that of all the Indian restaurants she frequents in Paris, not a single one keeps sugar on the tables these days.

A sign of things to come, I'd say.

Have a great week!   

Andrew Wilkinson

109-109

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Dear MoneyNews Reader: On Thursday morning as I put the kids in the car for the journey to school, my eldest son Jack popped a question. "Dad? When I grow up, will the calves on the back of my legs become cows? " he asked coyly. I couldn't help but crease up into fits of...
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Friday, 21 April 2006 12:00 AM
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