Commodity Roundtable: Analysts Pick Their Number One Commodity for 2011

Includes: DBC, GSG, JJC, KOL, REMX
by: Hard Assets Investor

Welcome to the inaugural "Commodity Roundtable" by Hard Assets Investor, a new monthly series in which we ask several leading commodity experts their opinion on a single question or hot-button issue in the markets today.

This month, we asked five well-known commodities traders, analysts and fund managers a deceptively simple question: "What's your No. 1 commodity pick for 2011, and why?"

We were surprised with the diversity of their responses — some we expected, others not so much. To find out their 2011 picks, read on:

Kevin Kerr, President and CEO of Kerr Trading International and editor of the Commodities Watch:

While energy and grains may do very well in 2011, I think they will not even come close to the percentage gains we will see in another group of commodities that are absolutely red hot. I am speaking, of course, about rare earth metals, or "dragon metals."

Certainly in the second half of 2010 we saw a bit of a froth and frenzy, as prices for certain rare earth elements skyrocketed on news that China would begin to clamp down on REE exports. And China is a big part of this puzzle, as they are in almost anything related to commodities. But they are not the only reason.

Demand for these rare earth elements is not going to diminish. After all, many of the things we depend on each day require some form of REEs: windshield glass, light bulb coatings, plasma TVs, computer processors, hybrid batteries, magnetsthe list goes on and on.

Investors who have at least some exposure to the key companies that produce REEs will do very well indeed. The big names in the space have seen a rapid jump in share price and likely have much further to go.

And even better unpolished gems are out there that are still very cheap. There are also other ways to play the REE market, by using ETFs, such as the Market Vectors Rare Earth Strategic Metals ETF REMX. There are no futures or options available on REEs yet, but who knows, 2011 may just change that.

Martin Kremenstein, Chief Investment Officer and Chief Operating Officer of DB Commodity Funds:

I would pick copper as the likeliest outperformer in the commodities sector for 2011. It's already in tight supply, coupled with expected increased demand from China, [which] should push prices even higher in 2011.

There is downside risk to this trade in the event that global growth (particularly China) slows, or that the People's Bank of China continues to raise its rates significantly.

Evan Smith & Brian Hicks, Co-managers of U.S. Global Investors' Global Resources Fund (PSPFX):

We're bullish on many industrial commodities in the metals and energy areas, including coal. [Metallurgical] coal looks attractive this year for a spike, and longer term it will likely remain at elevated prices. With a rebound in global economic growth, global steel production remains on an upswing and should grow 6 to 7 percent this year, while supplies of metallurgical coal have been disrupted by the massive flooding in Australia. Some of the same themes will also drive thermal coal prices higher in 2011, as exports from Australia will be down just as global demand grows 5 to 6 percent this year.

Adrian Day, President of Adrian Day Asset Management and author of "Investing in Resources":

Copper. Despite the strong price increase last year to new highs, the fundamentals support this price. China's economic development is at the stage where copper demand is strongest for homes, cars, phones, computers. And there's no new supply this year, but potential for supply disruptions from aging mines.

Although there has been buying ahead of the [launch of physical] copper ETFs, they could present ongoing demand as retail investors enter the fray, providing another one-time boost to the price.

So in terms of supply and demand, 2011 offers more of the same with the potential for increased demand and reduced supply.

Roger Nusbaum, Portfolio Manager and Chief Investment Officer for Your Source Financial, and Editor of Random Roger's Big Picture:

This is always a difficult and interesting type of question. The actual best performer will no doubt be something a little off the beaten path that does not get much attention and is not reasonably predictable, like zinc or tin.

We have several types of commodity/resource exposures in client portfolios, but the one I think will be the best performer in 2011 is the Market Vectors Coal ETF KOL.

The disruption still unfolding in Australia has the potential to distort global supply for quite a few months before stabilizing. In terms of pure commodities, this scenario could mean good things for the energy complex (oil and heating oil).

Looking out further, for what it's worth, I think water will be the most important resource-related investment over the next 10 years.