No less a sage than Warren Buffett has taught us to be greedy when others are fearful and vice-versa. That's true for almost any stock. But it's particularly good advice for commodities investors.
A retailer like Wal-Mart (NYSE: WMT) or a consumer products vendor such as Coca-Cola (NYSE: KO) might be able to deliver consistent growth year after year. But raw materials such as copper, coal and platinum are different -- they are susceptible to boom-and-bust cycles.
If you invest during the height of the boom, then you know what's coming next.
It's pretty simple, really. Whenever a commodity price starts to soar, more people are anxious to dig it up. New miners enter the game, while existing ones pour cash into expansion projects to ramp up their output. Before long, everybody and their cousin are bringing in new supplies and glutting the market.
When that happens, prices inevitably begin to fall. When they get low enough, financial incentive disappears and producers decide it's no longer worth it. Mines begin to close. New projects are delayed or cancelled. In time, the supply surplus thins and turns into a deficit -- causing prices to reverse course and move higher.
Prices for this key industrial building block have plunged amid the deteriorating economic picture. But today is irrelevant -- tomorrow is what counts.
Incidentally, this is exactly what we saw in the natural gas market. For example, I told readers of my Scarcity & Real Wealth newsletter that Chesapeake Energy (NYSE: CHK) had voluntarily suspended 1 billion cubic feet of gas production per day, and that others had followed with their own curtailments. Meanwhile, the lack of incentive has forced energy producers to abandon most dry-gas fields and funnel their leasing and drilling budgets into oilier plays. Natural gas prices have already responded by rebounding about 45% off their lows.