Today was a great day for equities, but a horrible day for commodities and gold.

Gold futures dropped more than 3% Tuesday in a broad-based commodities sell-off, as strength in the U.S. dollar exerted heavy selling pressure on the precious metal.

 

I previously blogged why I do not like commodities, but on the weekend I finally saw a reason why the thinking is wrong. Look at the following image that I found in FUW (http://www.fuw.ch)

LastScan

This image is what traders were thinking about two weeks ago. They were thinking that somehow the demand for commodities would keep outstripping the production.

Folks this is not right! This is crazy talk. For kicks I decided to do a calculation of a similar period around 1980. At that time demand was out growing demand and the gap was about 12%. Now that gap is 16%. Look what happened after that, demand slowed and production increased. I could imagine the exact same thing happening again.

So where do I see the investing opportunity in commodities? Organics, beef from Oregon Beef, and niche products like micro-brews, wild Ethiopian coffee. People will eat less, but they will eat better quality. Living proof of that is StarBucks.

Why do I like these commodities? Because they contain pricing power and earnings power. People who buy these commodities are willingly paying more money! Want to know something folks? I pay 30 USD per pound of beef and 60 cents per egg. Why? Because I want Swiss home grown organic foods where I know the quality and the heritage. Do I eat the same portions? Heck no, but you know in an age where we consume too much that is not such a bad idea.