High Commodity Prices Are Here To Stay

Posted: May 09, 2011 15:19 PM by Sham Gad

Despite the sudden plunge in commodity prices over the last few days, the reality is that consumers are probably going to have to deal with them for the foreseeable future. Oil prices have dropped by more than 10% in the past week while silver has plunged more than 20% in roughly the same amount of time. Those were the headline declines. In fact, all commodities including grains and metals have retreated in the most recent commodity sell off. However, while the dip has proved that prices can't go up forever, most indicators are pointing to high prices in commodities for a long time to come. Here we look at why this is and what you should be investing in now.

A Natural Correction in CommoditiesIt's a natural fact of life that prices cannot go up forever; in the end, prices naturally revert back to the mean. Commodity prices have been experiencing a huge rally unlike any other asset class over the past year. It's only natural that the faster something goes up, the greater the chance of a sharp correction. How far commodity price will pull back is not a question I am qualified to answer as I can't predict human behavior in the short run, but today's reality seems to support higher commodity prices.

Earlier this week, Kraft (NYSE:KFT) reported that its sales grew by just over 4% quarter over quarter. The vast bulk of that increase was due to price increases that the company implemented to deal with rising commodity costs. In addition, Kraft continues to face significant costs pressures for the rest of 2011. As the second-largest food company in the world, Kraft is in a good positions to accurately assess the state of commodity prices.