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.
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".
"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.