The Coming Commodities Bubble

Many investors argue that the commodities market, specifically precious metals had its bubble popped last summer when the economic situation began to look dire. But there are several factors that make investing in precious metals and commodities in general an attractive option, if only to diversify an already seasoned investor’s portfolio.

The recent report that China’s GDP grew by 6.1% in the first quarter is a real sign that as a commodities consumer, and producer of products containing precious metals and other commodities, China continues to consume at a voracious rate. This consumption will likely continue well into 2009 and I would be very surprised if it really slowed at all through 2010 as well. China’s labor resources and export markets are looking great right now. China will consume more and more each year as long as the world continues to outsource its labor to them as well as purchase large quantities of exports from them. China’s exports already make up over 30% of its GDP, a huge number when compared with the falling ratios of exports to GDP percentages in the US, England, and many other industrialized nations that used to be big players on the export scene only a few short years ago.

With the Obama Administration pushing stimulus after economic stimulus through the House and Senate, and with the Federal Reserve and Treasury Department working together closely to begin to monetize the US’s debt, there is little doubt that inflation, in some form, will likely take hold as early as the end of 2009. If this happens, and the money supply is increased, precious metals, which hold their intrinsic value no matter how or in what respects currencies fluctuate, will see a huge increase in demand and thusly in value. A precious metals bubble could very likely be sitting on the horizon for anyone willing to go out on a limb and believe that inflation is coming before the end of this economic crisis is reached.

Another great reason to jump head first into commodities, especially precious metals as a mid to long term play is that if there is another level to the current global economic crisis, and the markets react negatively and begin to really slide similar to the way they did eight months ago, precious metals would again be the favored hedge, or insurance plan against a real global economic meltdown. If a depression ensues, or even if recovery from the current recession is slowed by bad news, whatever the reason, commodities will shoot through the roof. Last March gold closed at over $1000 an ounce and silver was about $20 an ounce for the first time since the early 1980’s. I would expect that if another economic catastrophe rears its ugly head, gold could very easily reach $2000 an ounce and silver could see $50 or more per ounce in this very volatile and extremely fragile market.

There is no telling if inflation will hit hard, or if there will be another downturn in the markets due to a currently unseen economic hurdle. But China will likely go on to grow for the rest of the year, if not well into next, so right now commodities, specifically precious metals are looking like a very attractive portfolio diversification and insurance policy option for anyone wanting a hedge against an even worse global economic atmosphere.