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So while temporary bubbles may form in individual commodities and then pop, the long-term trends support ever-higher profits from natural resources. Consider:
- The most needed commodity, petroleum, is found beneath some of the least stable governments in the world, from Iraq to Venezuela.
- The U.S. trade imbalance -- far more imports than exports -- puts relentless downward pressure on the dollar, and gold is what T. Rowe Price's Ober calls "the ultimate dollar-weakness play."
- Most industrial metals are at historically low levels of inventory and are increasingly difficult to produce, partly for environmental reasons.
- Though U.S. gross-domestic-product growth is widely expected to slow to 1.9% next year, the International Monetary Fund has forecast global growth of 4.8%, most of that in emerging markets. S&P expects China's GDP to zoom ahead 10.9% next year, barely down from this year's 11.5% pace.
- One entire industry, chemicals, is basically being exported to the Middle East because of the soaring cost of petroleum feedstocks. Saudi Basic Industries, now the seventh-largest chemicals producer in the world, is forecast to become No. 1 within a decade.
Wait for an entry point
Oil for $95 a barrel is almost certainly a bubble price, fueled both by rampant speculation from hedge funds and overblown fears that Turkey will bomb Iraqi Kurds or we will bomb Iran.So a correction in natural resources would not be surprising. It would almost certainly be transitory, however. So though today is an excellent time to be selling energy securities, the time to buy them is probably not far ahead.
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Good energy funds are not easy to find. Morningstar does not think any of them is worthy of its Analyst Pick recommendation. The best performers are the hardest to get; many have steep sales loads. Vanguard Energy (VGENX, news, msgs), for instance, has a $25,000 minimum, and the New Era fund could involve transactions fees if you're not a T. Rowe Price customer.
There are plenty of energy exchange-traded funds, however, including the Energy SPDR (XLE, news, msgs) ETF and the iShares ETF, which like New Era owns other commodities besides oil.
Since I added a 5% stake in the iShares ETF to my MSN model portfolio three years ago, it has grown to represent 6.8% of assets purely because it has performed so splendidly. The same thing, in about the same proportion, has occurred in my personal portfolio.
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How to handle a commodities dipIt looks like prices for commodities like oil, gold and copper are set to level off. But these are corrections within a long-term upward trend, not a major change in direction, says MSN Money's Jim Jubak. So investors can take some profit but probably want to stay the course.
Because of its volatility, I don't want this group to grow too large in either portfolio. I wouldn't feel comfortable with more than about 7.5% of total assets in a natural-resources fund. Since I'm not there yet, I'm standing pat. You should take a look at your portfolio, though, to gauge whether your exposure is getting uncomfortably large.
If it is, take some profits. If you're tempted to buy into the group or boost your stake, I would await a pullback. This summer's correction was hardly unique. Last year, the group pulled back more than 8% twice, in February and again in August and September.
Long term, however, I expect natural resources to remain one of the best-performing sectors. Nobody wants the global economic expansion to end, and it needs fuel.
At the time of publication, Tim Middleton owned the following securities mentioned in this article: T. Rowe Price New Era and iShares S&P GSSI Natural Resources.
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