While penny stocks and commodities aren’t typically two investments you’d group together, they should be. After all, both can be purchased cheaply, both require diligent research, and both can deliver massive gains.

With that in mind, here’s a look at why commodities are heating up in 2010 – and how penny stock investors can best play them…

Emerging markets were kicked into high gear over the past two years — this was fully evident in the middle of 2008 as many commodity prices reached all-time highs. As global demand increased, the prices for commodities like oil, corn, sugar and cotton rose to dizzying heights.

The market cooled off in late 2008 and early 2009, but now we’re beginning to tick back up. Many commodities have achieved a 50% retracement to 2008 highs, which to me signals a continuing uptrend.

(Take a look at CRB commodities index below.)

After worldwide demand destruction in late 2008, a solid uptrend has formed.

This uptrend is a combination of fundamental factors, but the most important is coming from markets like China and India. These emerging markets consumed everything from oil to orange juice — and believe me, after 2008’s hiccup their craving for so-called luxury goods has just started.

Worldwide demand for these staple commodities (fuel for a car, coffee as a new delicacy, corn-fed meats on the dinner plate, etc.) will continue to rise.

Is Gold Headed Higher in 2010?

My gut feeling about gold is that it’s headed higher.

I know, I know, I really went out on a limb with that prediction. But past all of the investment bank upgrades and positive market consensus, there are plenty of solid reasons that gold is set to rise in the next 12 months.

Technically speaking (and I’m sure you’ve heard this before) gold hasn’t even reached its inflation-adjusted all-time high. For that to happen, we’d need to see gold over $2,000 an ounce — a 75% increase from today’s price.

Will that happen in 2010? It easily could.

But a more conservative, yet realistic goal would be $1,500 gold — which could easily happen in the next 12 months.

Other than technical indicators and charts (which are tough to decipher long term for a commodity like gold), there are plenty of fundamental reasons to assume the metal will go higher.

Here are the two main reasons I believe gold will shoot up to $1,500 an ounce…

First and foremost, there is an implicit flaw with Western government. Governments like ours here in the U.S. inherently choose short-term fixes for long-term problems (it probably has to do with re-elections and such). And I don’t see that trend magically stopping in 2010 — chances are it will continue.

As short-term fixes expose more government-monetized debt, the prices of precious metals will rise, that’s for sure.

The second reason that gold will shoot to $1,500 in the next 12 months is supply related.

With prices around $1,100 an ounce, it’s clear that demand is strong, but will supply be able to match it?

No way, José.

As gold demand rises, you can bet that miners are doing everything they can to pull gold out of the ground. So when scarcity rears its head, watch out! Prices will have nowhere to go but higher.

Yours for resource investing,
Matt Insley

February 4, 2010

Matt Insley

Matt Insley is our in-house specialist in commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he’s stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities.

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