Background. In the high inflation '70s and early '80s commodity prices soared. Keynesian supply-side economics delivered high growth at the cost of high inflation. Irresponsible financial management led to negative real interest rates as inflation rose to double- digit levels in major economies. Investors and holders of commodities were rewarded by a virtuous cycle of price rises and negative carry costs. Commodity analysts were the toast of Wall Street. In the '80s and '90s, tighter financial discipline and positive real interest rates led to a collapse in commodity prices as investors and corporates de-stocked into a market of excess supply. Gold, which had traded at USD 850/oz in early 1980, fell to about USD 250/oz. As capacity was withdrawn or mothballed, investment in commodities and traded volumes fell to a trickle as selling prices in many sectors fell below production cost. Major investment houses closed their gold funds and sacked their resource analysts. Swiss banks that had advocated 3–8% in commodities in the early '80s as an orthodoxy, reduced this in the late ’90s to 0% as a defence.

The opportunity.Commodity related investments should be able to generate annual returns of 15%+ for many years. Since the collapse of the Berlin Wall and the emergence of Soviet- era acolytes like India and China, two thirds of the world's population – previously a nonentity in economic terms – has come on stream as potential private consumers of commodities as their societies urbanize. Mothballed capacity has been re-opened but it takes nearly a decade to start a gold mine from scratch and several years to cultivate a tea or cocoa plantation. The largest gold miner in the world grew production four times in the '90s but its reserve life was cut in half. Precious metal production is flat over the past three years despite price rises. A 20- year collapse in commodity prices has led to a chronic shortage of capacity and a shortage of analysts able to identify good investments. Never before in human history have so many new consumers come on stream as potential buyers of commodities.

Ways to play the theme. Commodity funds, gold and natural resource funds, commodity-producing country funds. Avoid index approaches if possible (Jim Rogers' soft commodities fund may be an exception) and Exchange Traded Funds, which lack gearing and value added. In metals, super-dominance of majors RTZ, BHP-Billiton etc. creates need for diversified approach through funds.

Particular factor skills required of selected managers. Geological / metallurgical / mining background and corporate finance / discounted cash flow analysis to be able to compare "like with like" across countries and sectors as common discipline. A good proprietary database as the bear market has created vacuum in many analysts' / stockbrokers' research.