The boom has been postponed -- it's a contrarian's dream.
You don't want to find yourself investing at the wrong end of the commodity cycle. If you invest at the top, it's a long way before the crash back to earth.
You can still lose heavily even if you invest after the sector has slumped, because prices can go deep underground. I've learned that lesson the hard way.
Down and dirty
Commodity stocks have been hurtling downwards for some time. The best-known fund in this sector, JPM Natural Resources, tumbled 30% last year and another 12% this year, as Sheridan Admans at The Share Centre has just pointed out.
I knew that already. I bought units in this fund last summer, after it had fallen 20%. I thought that was a great time to get my hands dirty. I was wrong. I'm currently nursing a 28% loss.
The contrarians out there will see this as a signal to buy more.
Boom and dust
Commodities are a boom-time investment. Prices soared when the BRICs were busily cranking up exports and slapping down infrastructure.
The banking meltdown, eurozone woes and impending China crisis have put a stop to that. Demand and prices have fallen sharply. Traditionally, this is the point when the cycle starts moving upwards again, in a self-correcting mechanism, as falling commodity prices slash business costs and boost margins.
Not so this time. That mechanism appears to have broken down. Now we have the dismal combination of a high oil price and low growth. The boom has been postponed.
Not so supercycle
Plenty of analysts still assert that we are in a commodity supercycle. If we are, China started it. Its raging thirst for oil, copper, iron ore, bauxite and rare earth minerals sent prices heavenwards. Countries rich in natural resources, such as Australia and Brazil, reached for the sky.
The worry is that China is set to bury this supercycle, less than halfway through. And not just China. Even export wunderkind Germany, the last credible Western economy, is facing a slump in manufacturing PMI.
Drills and thrills
Yet I'm still bullish. China is putting together a massive stimulus package. The US Federal Reserve may join in the fun, possibly as early as Friday. The European Central Bank could follow suit.
Earlier bouts of stimulus quickly pumped up commodity prices, as all that loose liquidity flowed into metals, energy and agriculture. It could happen again.
When the global economy finally shakes off its troubles, demand for raw materials will quickly revive, especially from emerging markets.
Just don't bank on making shovel-ready profits. Prices could easily fall further from here, especially if we get hit by the commodity curse. If they do, that could be an even better time to buy.
If you plan to hang on for five or 10 years, as you should, you'll be glad you did the spade work now.
Mine's a miner
Thanks to recent falls, mining companies won't cost you the earth. BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are trading at 25% and 32% below their 52-week lows respectively. Mining stocks have never been renowned for their dividends, but both now yield around 3.5%, which isn't bad.
They are also investing heavily in a bid to expand capacity. They still believe in the China growth story. The question is, do you?
If the answer is yes, you might also consider Anglo American (LSE: AAL), 38% below its 52-week high, and Vedanta Resources (LSE: VED), which is down 40%.
They're all trading on juicy price-to-earnings ratios of around 7 times income. That looks like good value to me.
Chilean copper miner Antofagasta (LSE: ANTO) is the latest miner to report falling profits, thanks to a 25% drop in the copper price over the last 18 months.
To find out more, read our outlook for miners.
The crude facts
There are also endless commodity ETFs to choose from, investing in corn, silver, gold, cocoa, soybean, natural gas, platinum, cotton, oil, natural gas... take your pick and start digging around.
If you want active management, there is always JPM Natural Resources, which focuses on small- to mid-cap gold, energy and base metals companies -- for a 1.5% annual management fee.
Commodity price movements are impossible to predict. Few people foresaw the price of a barrel of Brent Crude sinking to $89 in June, then spurting back to today's price of $113.
I couldn't tell you exactly when commodities will recover. All I know is that they are up to 40% cheaper than a couple of years ago. Maybe that's all I need to know.
If you are keen to beat the market with higher-risk oil and gas shares, then this free Motley Fool report could help you on your way. "How To Unearth Great Oil & Gas Shares" explains the factors you need to consider -- and the risks you might encounter -- when evaluating smaller oil and gas explorers. Just click here to download the oil and gas report today. But hurry, all Fool reports are free for a limited time only.
Further Motley Fool investment opportunities:
> Harvey holds BHP Billiton and JPM Natural Resources. He doesn't own any other investment mentioned in this article.
