Goldman Sachs recently released a report on the impending inflation in raw materials and how to hedge/benefit it. While they are a bit more optimistic about economic growth than I am their thesis for commodity price increases is largely the same with one TPC caveat; the excess liquidity from global central banks will likely gravitate towards raw materials as China stockpiles and inflation concerns increase amidst reckless U.S. fiscal and monetary policy. Add in the development of a dollar carry trade and we have only one logical result: higher commodity prices. GS elaborates:
We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.
The world’s population is increasing at its fastest pace in history. As the developed world increasingly begins to consume like Westerners the demands placed on the finite resources of the planet increases. This trend of human populations growing faster than the earth’s ability to produce not only impacts food production but that of commodity usage.
The leverage a commodity has to China matters both in the context of their share of global consumption but more importantly their relative shortness of supply domestically. These criteria suggest agriculture and metals have the greatest leverage. Brazil has little in the way of natural resource protectionism and is long commodities in its resource base.
How does GS want to play this? With the following names: