With commodity prices up so much over the past several years, you can forgive long-term value investors for giving them a miss. Who wants to risk exposure to another asset bubble so soon after the dot-com implosion and the U.S. housing mess?
Step forward, Jeremy Grantham. The chairman of global asset manager GMO LLC is a much-admired value investor whose firm manages more than $100-billion (U.S.) in assets for corporations, endowments and foundations. As such, he's not the sort of guy to chase the latest trend.
But when it comes to commodities, he's certain that the world is experiencing a great paradigm shift, where rising demand for stuff in the ground is becoming more intense as the global population grows, and grows more affluent.
"I believe that we are in the midst of one of the giant inflection points in economic history," Mr. Grantham said in his quarterly report to clients. Investors must "recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common."
He has crunched some fascinating numbers. Before 2002, the world had been benefiting from a century of falling commodity prices, with the average commodity tumbling a total of 70 per cent, after inflation is taken into account.
But that 100-year trend has been undone in the past eight years alone - a remarkable turnaround that makes it statistically unlikely that the old trend is still in place, especially given the rise of China and India. Prior to 1995, developing economies grew at about the same pace as the developed world. Now, developing economies are growing three times as fast.
No doubt, crude oil is a big part of his argument here, but it isn't the only part. Mr. Grantham envisions an era of "peak everything," including for iron ore, copper, corn, silver, rubber, nickel, wheat and fertilizer.
Skeptics will fire back that commodities are in bubble territory, driven by speculative fervour and low interest rates. Curiously, Mr. Grantham has made a similar point about today's stock market levels.
However, stocks are "psychologically flakey," he said, whereas "commodities are made and bought by serious professionals for whom today's price is life and death. Realistic supply and demand really is the main influence."
So, does Mr. Grantham recommend jumping into commodity-based investments with both feet? Er, not exactly. There are short-term considerations to take into account, including the high probability that China's economy will stumble in a big way in the next year or so as it deals with a reduction in its competitive strength, unnecessary capital spending, growing debt levels and a housing bubble.
As well, the recent bout of bad weather throughout the world, which has contributed to soaring food prices, is unlikely to persist. If China's economy stumbles and the weather improves, commodity prices will take a hit.
Mr. Grantham's solution to these short-term risks and long-term opportunities: Take a small position now and aim for a bigger position down the road.
"Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus," he said.
"If on the other hand, more likely, they come down a lot, perhaps a lot lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever."