Investing: From gold to corn, emerging nations drive commodities prices

Investors can look to natural resources funds. The price of raw materials - everything from oil to gold to corn - has been soaring, and, to find out why, you have to dig all the way to China. You don't have to go quite as far to take advantage of rising commodity prices.

If it comes from the ground, its price has probably been increasing the past 12 months: cotton, up 104 percent; silver, up 57 percent; oil, up 13.7 percent.

Typically, commodity prices rise at the end of a recovery, not the beginning. At the bottom of an idealized economic cycle, companies have lots of excess materials on hand, because demand has plunged. As the economy picks up steam, companies work off inventories, and mining companies have enough slack capacity to meet increased demand. At end of cycle, demand overwhelms mining companies' ability to produce raw materials, and prices rise. At that stage, too, the inflation rate rises, and the Federal Reserve starts raising interest rates to get the economy to simmer down.

At least theoretically, however, the U.S. is in the early stages of a recovery. The nation's factories were running at 75.2 percent of capacity, below their average 80.6 percent from 1972-2009. But mining companies are at above average shares of capacity.

The reason: China and other emerging markets. "China is the country moving the needle the most," says Alec Young, equity strategist at Standard & Poor's. China's GDP is growing at 9.6 percent; it's 2.6 percent for the U.S. As more people in China (and India and Vietnam and elsewhere in the world) become more prosperous, they consume more energy, eat better food and build nicer houses. "Everyone who has tried electricity has really, really liked it," says John Dowd, portfolio manager of Fidelity Natural Resources fund.

People like driving cars, too. The average person in the U.S. uses about 22 barrels of oil each year, according to Ned Davis Research. In China, it's 2.3 barrels, and in India, it's 1. "They are in the early stages of achieving maturity of consumption," says Alberto Jimenez Crespo, co-manager of the Nuveen Tradewinds Global Resources fund.

(Source: http://www.news-press.com/article/20110116/BUSINESS/101160345/1014/business/Investing--From-gold-to-corn--emerging-nations-drive-commodities-prices)