China the wild card when it comes to commodities bets

The price of oil is going up. But no analysis of commodities can be complete without a serious consideration of the impact of fast-growing economies such as China. That is among the findings from a panel of experts speaking in Chicago at the Morningstar Inc. annual conference. “This is a very unique time for oil, and I think oil prices go a lot higher from here,” said Geoff Jay, an equity research analyst at Janus Capital Group Inc. Among the main drivers of a longer-term trend toward higher oil prices is rising demand and access to the commodity, according to MacKenzie Davis, a portfolio manager at RS Investments. “When it comes to oil, the marginal cost of supply is rising because we've already worked through all the cheap supply,” he said. Responding to a specific question related to gold and silver investing, Bob Greer, executive vice president at Pacific Investment Management Co. LLC, said investors need to think of gold not as a commodity but as a currency. “It's a store of value,” he said. “Gold is the only currency not associated with a printing press, and it's also the only currency without an economy behind it.” With that in mind, Mr. Greer added, “Gold will have value as long as somebody thinks it has value.” Mr. Davis said he has a difficult time forecasting the price of any commodity, but “we think of gold prices in terms of the marginal costs, which is now about $1,200 an ounce.” The fact that gold is currently trading at around $1,500 an ounce is proof, he said, of the impact of investor emotions in driving prices. On the agriculture front, Mr. Davis focused on the supply chain and said the “best and safest way to play agriculture is through fertilizers.” Specifically, he advised gaining exposure to nitrogen, phosphates and potash. “It's a matter of understanding where along the supply chain you want to be,” Mr. Davis added. Overall, the panel concurred that most of the global growth is in the emerging markets, and growth is what roils the supply of commodities. For example, the average American currently consumes about 20 barrels of oil per year, according to Mr. Jay. By contrast, the average Chinese citizen consumes only about three. If Chinese per-capita oil consumption increases to just the level of Mexico, which is about seven barrels per person per year, “the impact will be significant,” Mr. Jay said.