The first comes from Karl N. and he says…

Charles, First you have to buy into the assumption that fuel prices are realistic and will continue to increase! In reality, there is no reason for them to be where they are.

Second, Ethanol requires no more energy to produce than gasoline. Producers must pump, refine, and transport gasoline. Global hunger increased before ethanol because the American farmers cannot cost effectively operate. Fertilizer, fuel, seed, transport costs, living expenses, land and machinery have all increased substantially since the 1960’s without a significant increase in grain prices. The market will have more grain with the increased production of Ethanol than without it.

Please do not buy into propaganda that Ethanol is not efficient to produce, will contribute to world hunger or will drive food prices up (a loaf of bread uses 4-5 cents of wheat in it).
The truth is that unless grain prices increase more farmers will be forced to quit and food supplies will decrease.

I have to say Karl, that fuel prices are realistic even at today’s price. Granted, a lot of speculation has helped take prices higher. But the truth is that according to the Energy Information Administration, the world’s oil production peaked in 2005.

Sure, more oil is being found. But it’s not being found in easy-to-reach places. It’s all offshore, sands, and shale. Production from these areas should come online in time to replace lost production from older wells. The net result? Flat to slightly higher production in the next five to ten years.

Even with US consumption falling, consumption in China, Brazil and India is skyrocketing. The truth is, if these countries keep buying more and more, then oil isn’t too expensive.

Second, you have to admit that corn-based ethanol isn’t the most efficient way to make energy, right? The US Department of Energy says that corn-based ethanol produces a whopping (note the sarcasm) 26 percent more energy than required for production.

That’s god-awful.

Cellulosic ethanol, on the other hand, could produce up to 80 percent more energy than is required to produce it. That’s much better. But mass-scale production is also far off. (There are a few companies setting up pilot plants. But that’s all)

Now, I agree that global hunger isn’t all ethanol’s fault. I’d place the blame on the emerging economies like Brazil, Russia, India and China. But you have to admit, using farmland for fuel means there’s less farmland available for food. And if there’s less food being made, prices move higher.

In addition, corn-based ethanol was a big reason why corn jumped well over 100% after President Bush first announced the ethanol initiative. The effect is obvious – the ethanol hype is helping prices move higher. And this has been a boon to farmers.

Better yet, farmers are poised to make even more money in the years to come, mainly because of growing global demand for food.

I also received an e-mail from Sam L. that said…

As a seasoned investor I wouldn’t put one penny in green stocks, not now or for the near future. It is all hype and no action.

All hype and no action, Sam? How about geothermal producers that are taking off? Or solar producers which are making profits? Wind producers are doing well, and many high-tech battery manufacturers are on the cusp of inking huge, multi-million dollar revenue generating deals.

If you think investing in clean energy is a bad idea, just take a look at the Market Vectors Global Alternative Energy Fund (GEX) and you’ll see that the sector’s been clearly moving higher. And the PowerShares Global Clean Energy Portfolio (PBD) has been doing the same.

It seems to me that investing in green stocks is a great thing to do. What you want to do is avoid the companies that have no profits… the ones that are using very experimental technologies that haven’t been proven yet. These companies may do well in the future, but you take a huge risk by putting your money on them now.

It’s the perfect storm for investors – especially when just about everything else in the investment world has continued to post big declines since last July.

Best of all, you don’t have to purchase futures and options contracts to invest in these commodity gems. I should know. I’ve been researching and recommending commodities since 2002 in my Commodity Trend Alert (CTA). So I know it’s never been easier to trade raw materials with zero leverage and no margin!

Hot Commodities for Everybody

Commodity service-providers have launched a blizzard of exchange traded funds (ETFs) over the last 12 months. These new ETFs allow both individual and institutional investors access to hot commodities like coffee, wheat, sugar and corn, to name only a few.

It’s no wonder investors have poured an extra US$30 billion into commodities within the first 60 days of the year alone compared to just US$10 billion in 1998. The boom has arrived and everyone wants a piece of the action as the dollar slides, rates plunge and emerging markets feed their bustling infrastructure and populations.

Negative Correlation to Stocks is What Makes Commodities So Tempting

Commodities, and soft agricultural commodities in particular, are not tied to stocks, bonds or currencies. They’re not correlated to any of these markets directly. Therefore commodities provide a critical asset-allocation diversification strategy to traditional portfolios.

Indeed, as global stocks plunged the first 75 days of 2008, commodities continued to hit new record highs. The soft edibles have led the charge with big gains.

Recently, commodities have started a long-awaited correction after almost seven months of blistering gains – even as global stock markets entered bear market territory. Some bears point to a “bubble” in raw materials while others exclaim the Federal Reserve will eventually start raising interest rates again to cool rising inflation, supporting the flagging U.S. dollar. I seriously doubt that.

Facts are the United States can’t afford high interest rates for the foreseeable future because the financial system is coming undone. The Fed will continue to pump massive amounts of credit in the system. Bernanke and his boys will continue to bailout institutions that they believe pose a systemic threat and they’ll do whatever they can to act as lender of last resort in the worst financial crisis since the 1930s.

This Isn’t the NASDAQ – or the Volcker Fed

“Commodities in the 2000s are what the NASDAQ was to speculators in the 1990s.”

That’s a common misperception placed about commodities today because people assume that because the gains have been so spectacular that the cliff can’t be far away. They also point to how technology stocks went wild in the late 1990s with billions of dollars chasing the NASDAQ. We all know how that frenzy ended. Eight years later, the NASDAQ still trades more than 60% below its all-time high in March 2000.

To be sure, raw materials have enjoyed spectacular gains since bottoming in late 2001. Some sectors, mainly the base metals, are overbought. You should avoid these few overbought sectors, and possibly short them using reverse-index ETFs. But the rest of the complex, despite posting big gains lately, remains well below its inflation-adjusted highs back in 1980.

Wheat is still 150% below its inflation-adjusted high, corn is 62% off and soybeans still 60% below its best level.

The main difference between technology stocks and commodities is consumption. A few billion people every day consume raw materials while tech stocks mostly suffered from a mirage of negative earnings, negative cash-flow and absurd valuations.

Thirty-five years ago, the world didn’t have China and many other emerging markets rapidly industrializing. More than two billion consumers have entered the global trade picture. Whether we like it or not, the future of capitalism lies in the east, not in the west.

If the Fed was aggressively fighting inflation, then commodities would be dangerously vulnerable. But that’s simply not the case. In fact, it’s far from reality. This isn’t circa 1980 when the Volcker Fed was busy fighting 13.6% inflation and raising rates to a crippling 21%.

Commodities feed on easy money or low rates, a declining dollar and most of all, falling production coupled by rising demand. That’s exactly what we’ve got in 2008.