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A Creative Approach to Trading Commodities

Mar 10, 2008
To succeed as a futures trader, you need to think creatively about commodities. The story of Sam Brannan, California's first millionaire, serves as an excellent example:

At the beginning of the 1848 Gold Rush, Sam Brannan, who owned a general store in Sutter's Fort, discovered that John Sutter and James Marshall had discovered gold. Understandably, the discoverers wanted to keep the strike a secret. Brannan agreed, then quietly scoured northern California buying up every shovel, pick and pan he could find until he had cornered the market.

He then went around town yelling, "We found gold!" and the Gold Rush was on. Hundreds of people flocked to northern California, all needing shovels, picks and pans to search for gold. And there was Sam, the only source for hundreds of miles around! Sam Brannan never lifted a shovel, never swung a pick, never shifted a pan in the search for gold, but he became the first millionaire of the Gold Rush -- selling shovels.

There is often more than one way to profit from commodities. Money can be made not only by betting on the need for resources, but on the processing and transporting of those resources. Remember that futures trading is global. Creative thinking requires that you consider the need for resources in one part of the world and probable suppliers and processors who may be located in other parts of the world.

In thinking creatively about commodity futures markets, factor in the following and see where it leads you:
1. Population

We are at the start of what is expected to be the greatest explosion in population growth in human history. The United Nations estimates that world population will increase by 1 billion people per decade for the first five decades of the 21st century. That means that the number of people on our planet will increase from 6.5 billion today to 9 billion by 2050. Population growth has become exponential.

In the 19th century it took 130 years to add 1 billion lives to the planet. Barely 200 years later in the 21st century, it takes just 13 years. More people means greater demand for natural resources (i.e., commodities). Greater demand means rising commodity prices.

2. Urbanization

People need a place to live and are increasingly being lured to cities where the bulk of the world's jobs can be found. The exponential growth in population is being accompanied by the greatest increase in urban development the world has ever seen. In the early 20th century, less than 15 percent of the world's population lived in cities, according to United Nations statistics. In 2005, a full one-half of the world's population lived in cities. By 2030, the U.N. predicts that 60 percent of the world's people will be crowded into cities.

People in urban areas consume more natural resources than those in rural areas where life is more sustainable. As urban areas expand, more natural resources and industrial metals will be needed to provide the necessary infrastructure: houses, roads, buildings, cars, hospitals, schools, etc. Whereas cities may have been initially located near plentiful natural resources, the mega-cities of the future may require resources from across the globe.

3. Industrialization
In the 19th century, the first industrial revolution transformed Western Europe and North America. While industrialization has slowly been creeping across the globe during the past century, we are now poised for a second major industrial revolution in what are called the BRIC countries: Brazil, Russia, India and China. The need for natural resources in these countries is enormous and rising fast, pushing up commodity prices as demand rises.

Over the next few decades, China is expected to become the world's largest consumer of commodities. Of total world production in 2004, China used one-half the cement; one-third of the steel; one-quarter of the copper and one-fifth of the aluminum. China was also second only to America in oil consumption.
About the Author
Bill McCready is a futures trader. His trading course, Futures Trading Secrets, has helped students all over the world improve their trading. To get 11 FREE futures trading lessons, a video, and free ebook, The Truth About Day Trading, visit Futures Trading Secrets Trading System
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