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The Hidden Driver Behind This Commodity Rally

By Matt Badiali, editor, S&A Resource Report
Wednesday, November 10, 2010

Commodity prices are soaring.
 
Copper rose from $1.24 per pound on December 25, 2008 to $3.90 per pound this week. That's a 210% gain in less than two years.
 
Aluminum is up 92%, lead is up 194%, and nickel is up 169% over that same period. Silver and gold have surged to all-time highs... And nearly all the energy commodities are in uptrends.
 
Sure... the declining value of the U.S. dollar is responsible for these nominal price increases. If the dollar falls, commodities rise. But when sizing up the commodity markets, it's important to realize it isn't just the falling value of the dollar driving the price of "stuff" through the roof.
 
You see, even though China and India – "Chindia" – are growing their economies at 8%–10% per year annually, they are still WAY behind the United States when it comes to standard of living. And we can use a simple yardstick to understand what's going on. The yardstick is electricity consumption...
 
The mark of a modern, developed economy is the use of things that consume electricity... like refrigerators, televisions, air conditioners, lightbulbs, and computers. So it's useful to measure economies in terms of electrical consumption.
 
In the U.S., we use about 13,500 kilowatt-hours per person per year. That's about 1.5 kilowatts per hour... 24 hours a day, seven days a week. Now consider that China generates just 2,791 kilowatt-hours per person per year. India generates just 743 kilowatt-hours per person per year.
 
Working out the math here, China uses about 20% of the power per person that the U.S. does. India uses less than 6% per person. This is a huge difference in living conditions.
 
But as you can see, demand for electricity is rising steadily in both India and China.
 
 
In China, electrical production has grown an average 10% per year for the last 20 years. In India, it was 6% per year. The U.S. electrical power supply grew just 1%.
 
Here's the thing: It takes tons of concrete, aluminum, copper, and steel to build power plants and transmission lines. Then it takes enormous amounts of coal, oil, and natural gas to produce power.
 
As the people in China and India receive more reliable power, they want more of it... they want more stuff to plug in... like refrigerators, air conditioners, and iPods. In turn, that drives more growth.
 
It's an incredible demand cycle that is helping to power the bull market in commodities.
 
Yes, as the dollar goes down, the nominal price of commodities goes up. But also consider the "Chindia" factor here. It's a major driver of a bull market that will last for a long time.
 
Good investing,
 
Matt Badiali




Further Reading:

Last month, Amitabh Singhi, managing director for an India-based money-management firm, shared shocking statistics about India with attendees at the Value Investing Congress... Get the full story – and details on huge opportunities in Indian equities – here: "India Will Not Survive".
 
Brian Hunt shared a secret he believes "will allow you to make an investment fortune." And he's got a chart that you must see. Read more here: The Secret to Investing in Chindia.

In The Daily Crux
Market Notes
"Fear index" VIX touches lowest level since April.
 
Gold, silver, and copper hit new highs as investors continue flight to hard assets.
 
Big treasury fund TLT crumbles to fresh four-month low.
 
Earnings today... Cisco (telecom equipment), ING (European bank), Macy's.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1218.71 +0.4% +11.5%
Oil 38.04 +2.7% -5.9%
Gold 137.24 +1.2% +26.6%
Silver 26.72 +2.1% +56.9%
US-Dollar 77.72 +0.9% +3.6%
Euro 1.38 +0.1% -8.0%
Volatility 18.47 -3.2% -19.1%
Gold Stocks 565.05 +2.7% +22.7%
10-Year Yield 2.65 -0.4% -23.9%

World ETFs
Symbol Price
Change
52-Wk
USA 122.10 +0.4% +11.4%
Canada 30.06 +0.7% +16.1%
Russia 20.97 +0.4% +6.6%
India 40.41 +0.1% +31.5%
Israel 16.55 -0.9% +17.8%
Japan 10.39 +1.2% +7.6%
Singapore 14.37 -0.1% +29.1%
Taiwan 14.41 +0.5% +17.2%
S. Korea 57.63 +1.6% +27.1%
S. Africa 71.72 +1.2% +28.5%
China 47.24 +0.7% +4.1%
Lat.America 53.55 +0.4% +12.1%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 129.23 +1.9% +4.1%
Big Pharma 64.79 -0.5% +3.2%
Internet 72.67 +1.1% +27.1%
Semis 15.09 +0.0% +28.8%
Utilities 31.62 -0.4% +6.9%
Defense 18.25 -0.5% +11.9%
Nanotech 9.82 +0.0% -0.6%
Alt. Energy 10.41 +0.1% +3.4%
Water 18.12 +1.3% +10.4%
Insurance 16.18 +0.9% +17.9%
Biotech 20.30 +1.1% +23.2%
Retail 18.63 +0.8% +21.8%
Software 24.50 +0.6% +23.7%
Big Tech 53.72 +0.5% +23.2%
Construction 12.64 +0.4% +7.9%
Media 13.24 +0.4% +21.9%
Consumer Svcs 65.87 +0.4% +22.4%
Financials 55.53 +1.2% +6.2%
Health Care 64.61 +0.2% +6.2%
Industrials 61.39 +0.1% +18.0%
Basic Mat 71.75 +0.9% +24.2%
Real Estate 55.93 +1.2% +32.1%
Transportation 87.81 +0.4% +25.2%
Telecom 22.54 +0.6% +24.6%