The Call of Commodities Prices of gold, copper and other basics have been skyrocketing for a year. Is it too late to join the party?
By Lou Dobbs; Jeffrey M. Christian

(MONEY Magazine) – Prices for many commodities, ranging from oil to precious metals, have been climbing for more than a year. Investors are now wondering if prices are nearing a peak or if the upward trend will continue.

I talked with Jeffrey M. Christian, managing director at CPM Group, a leading precious-metals and commodities research and consulting firm, about which commodities may be good investments now, which ones to avoid, and how the economic and political environment may affect the commodities markets going forward.

DOBBS: What is your outlook on gold?

CHRISTIAN: Investment demand has been very high for two years now, in 2002 and 2003, and continues to be very high [so far] this year. Our view is that investment demand will probably continue to be high at least during the first half of this year and could continue to support prices, but that there could be some cooling of investment demand in the second half of this year.

Q. What about other major metals?

A. We think that platinum may be reaching a peak in the first half of this year. We think that silver and palladium may have further to rise because they have stronger fundamentals. Copper, in our mind, reached its peak in the first half of this year and could fall over the next few months. A lot of commodities have already risen to levels that we would have expected.

Q. How will the overall economy affect the outlook for commodities?

A. Two major ways. Commodities are industrial goods, and as economic activity rises, people will use commodities in fabricated products; rising demand leads to higher prices.

The other factor [is that if] the economy is sending mixed signals, you're going to have a number of investors who are going to like the idea of having more exposure to commodities as an alternative investment.

Q. How has the decline in the strength of the dollar affected commodities?

A. Most commodities are traded in U.S. dollars, so as the dollar has come down and commodity prices have risen, what you find is that commodity exporting companies and countries have a lot of dollars that they don't want. So they've been turning around and selling those dollars for whatever they can find. One of the things that they've been buying is gold.

Q. Do you think the commodities market could be affected by the outcome of the upcoming presidential election?

A. Yes. It is hard to say how it is going to shake out, but a Democratic victory could actually be bullish for the dollar and negative for commodities. We're focusing on the budget deficits primarily and the world's attitudes toward the U.S. government's ability to get those deficits under control. This country is addicted to debt, and if Bush wins again, I think that investors around the world are going to [anticipate] bigger deficits and less international cooperation on an economic and political basis. And all of those things are negative for the dollar. So that could be supportive of higher commodity prices. If Kerry comes in and starts running it like the previous Democratic administration... starts tightening the budget reins, and the deficit does come down, that could be supportive of the dollar and consequently negative for commodities.

Q. Is there a good way for a novice to enter the commodities market today?

A. Very carefully. We're picking up a lot of new clients because they've heard about how commodity prices are rising, and the first thing they ask is what they should be buying. By the end of the conversation, they're interested in finding fund managers who will short the markets. Investors need to focus on fund managers who don't believe in commodities but who believe in making money and take an agnostic approach to the markets. There's a tremendous amount of hype out there now, which is probably misplaced.