The key to commodities investing now is idle capacity. And how quickly it gets back into production

In its regular report on June iron ore production, delivered on July 22, BHP Billiton (BHP) gave investors the key to investing in commodities over the next year. Ignore this at your portfolio’s peril. BHP just told us all what to buy, what to avoid, and when.

Ready for those words of wisdom: “Commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”

Let me translate into language useful to investors: Yes, commodity prices are climbing as consumers of raw materials rebuild their stock piles.  And yes, we are seeing what is a real increase in demand and not just a result of inventory rebuilding. But don’t get carried away by short-term spikes in commodity prices. So many commodity producers have idled mines or wells or whatever that any big increase in price will be temporary as it will bring that idled capacity back into the market. And that will depress prices–for a while. Expect, then, a start-stop price chart where the trend is gradually higher, but where the trend is punctuated by spikes and plunges as demand and supply lurch toward equilibrium.

And from that I think investors should be able to figure out what commodity stocks to buy. I’ll lay out three general prices of commodity investing–in the current scenario–in this post. And I’ll give you a stock to buy later today. Read more