If I were forced to pick a single barometer that could predict the weather for all types of assets, it would be China's inflation rate.
It's no secret that China has become the world's growth engine. And the bullish outlook for natural resources in particular is predicated on the assumption that China's booming economic expansion is fueling huge demand for coal, copper and just about every other commodity you can think of.
Any serious signs of deceleration (like we saw in 2008) could trigger a swift selloff. And inflation is the one roadblock that could prompt Beijing to deliberately step on the brakes.
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Thanks in part to bold stimulus initiatives (and the stubborn refusal to let the yuan appreciate), prices have been on the rise, particularly in overheated real estate markets such as Shanghai.
But we're not just talking about property. Overall consumer inflation rates have remained above the government's safety zone for nine straight months, touching 5.2% in March and 5.4% for the first quarter.
In response, the central bank has cut off the loose credit spigot. Bank reserve requirements have been tightened six times during the past six months, and interest rates were just hiked for the fourth time.
Those moves won't automatically bring this locomotive to a screeching halt -- gross domestic product (GDP) still surged 9.7% this quarter. But any cool-down will be met with a hostile reception from investors. With that in mind, I'll be watching diligently for signs that China's inflation-fighting tactics are blunting growth, but the train still seems to be chugging down the tracks.
And as long as China remains growing and hungry for natural resources, there are profits to be made. Especially in copper, a key building block for any rapidly growing economy. Copper wiring, for example, is essential in plumbing, power transmission, electrical circuitry and endless other applications. There's no arguing that demand is on the rise. Prices on the London Metal Exchange recently touched $10,100 per ton -- a new all-time peak.
And I think copper prices will move higher.
A few weeks ago, about 500 delegates representing mining companies near and far gathered in Santiago, Chile, for the 10th annual World Copper Conference. The delegates came to a unanimous conclusion: They won't be able to meet the world's demand for copper this year.
Michael Jansen, a precious metals strategist with JPMorgan Securities Ltd, predicts demand for copper will exceed its supply by 500,000 - 600,000 tons for 2011.
I expect copper inventories to dwindle and prices to ascend further into record territory, possibly breaching $11,000 per ton. Profits are likely to explode as copper prices continue to climb.
I'm so convinced of this phenomenon that one of the top stocks I've picked in my newsletter, Scarcity & Real Wealth, is the mining company Freeport-McMoRan Copper & Gold (NYSE: FCX). Freeport-McMoRan mines an incredible 4 billion pounds of copper annually and rakes in $260 million in incremental operating cash flow for every $0.10 increase in copper prices.
The number of investors catching on to the commodities super cycle is growing, and there are more and more ways for individual investors to take part.
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