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Will commodities give you the opportunity to get a high yield from your investment portfolio? The main argument for a great performance by the commodities markets centers around the emerging economic and industrial demand placed upon this investment class by the burgeoning Chinese and Indian economies. One need only take a look at the price of copper over the last 24 months to get an inkling of the potential returns to be had from the commodities markets. 

It also shows why using movies as an investment guide may not be the best strategy. If you recently enjoyed the 1991 film “Other People’s Money” with Danny DeVito and Gregory Peck, you may have been convinced that dumping any connection to the metal in your investment portfolio would have been prudent. That would have been a mistake.

Fiber optics not withstanding, CU has had an excellent performance of late, due mostly to the increased demand from China and India. Partly because these nations are installing new cabling for power, telephone and data networks at a prodigious rate, there has at times been less than 1 days worth of refined copper in the hopper. That accounts for a good portion of the rise in copper from about $1.30 24 months ago to $3.30 today.

That’s all well and good, but is copper an anomaly? After all, wire and cable is produced mostly using copper, not pork bellies or wheat. Are other commodities poised to make similar gains? In part, yes they are. It’s all part of the law of supply and demand. Materials with finite production capacity will rise in price as their relative scarcity increases. In time the increase in price will cause a rise in production. Some commodities, however, are more difficult to increase production of. In addition, the demand for some are rising faster than others and this trend will actually increase.

Your goal as an investor is to determine which commodity will be most affected by such trends and capitalize upon them. The price of oil may well continue to increase, but the volatility instilled by geopolitical events frightens many investors. What then of other commodities? If you’re investing primarily on futures, grain and soybeans imports by China have been rising rather dramatically for the past 5 years.

This trend looks to continue as their standard of living rises. A paper produced in late 2004 by Tuan, Fang and Cao points to the increased importation of soybeans into China for some time to come. The Chinese production of soybeans will probably not be able to keep pace, partly because the amount of arable land in China that’s devoted to corn production, considered a more important crop. As other nations devote more of their arable land to corn production in an effort to supply the ethanol being used as a substitute for oil, this may well be the same there as well.

What about other metals? Surely copper isn’t the only metal required to ensure economic growth. No, it’s not. Uranium, used in the production of nuclear power, has almost doubled in price since December. In 2005 it increased in price 76%. As fears of a disruption in the oil markets caused by tensions in the Middle East fail to dissipate, this trend may continue as well. U.S. nuclear power plants are now operating at over 90% capacity, compared to just over 50% 20 years ago. If no new plants are built, there may be little room for increased uranium demand from the U.S. What about other countries? Even with the demand in the U.S. possibly reaching a peak, there just isn’t a large supply of Uranium around. Uranium mines just don’t produce enough. Over ¼ of the uranium on the world market actually comes from recycled Russian missile warheads! They had about 10,000 of the things, but what happens when they’ve all been dismantled?

Uranium futures haven’t been an easy investment, even with the recent price increases. The radioactive metal hasn’t been traded on a formal commodities exchange as are other metals. The price was set by a few private business organizations. This just changed, as of early this month, when Uranium futures began to be traded on the NY mercantile exchange (NYMEX). To buy futures of the stuff, you need to go to the merc.

As with other investments the key to commodities is having accurate, timely information, and alot of it. Do your research. Look at global trends. Find out about production capacity, existing, under construction and planned. Look at existing and pending legislation that can affect the delivery and/or supply of certain materials. Look at the stock market to see what industries may demand what materials. Where are populations growing, and what are they demanding. Look closely at China and India. What will they be using in the future, both near and far?

As with any investment, commodities entail substantial risk. Your job is to mitigate those risks, get yourself debt free (unless you’re investing on margin) and build a healthy financial future. Have a great (for those of you in the States, long) weekend.