The Dow finally crossed above 10,000 for the first time in a decade or so. Over the short term, opinion is divided whether it can hold this level or retreat. We give it a 50/50 chance.
 

Long-term, however, we expect it will fall. Just as the Dow oscillated between 500 and 1,000 for nearly a generation from the mid-1960s to 1982, we would not be surprised to see it remain locked in a comparable trading range for the foreseeable future.
 

What makes us cynical about the market's prospects is the growing resource squeeze...

 

THE SMART MONEY IS BUYING RESOURCES

 

To us the most important item in last week's news, though not the world's, was oil closing at a 12-month high. Oil has now shot above $75 a barrel, and appears to be taking aim at $80.
 

The move has most commentators stumped. Why should oil prices be climbing when inventories in the U.S. and some other parts of the world remain high? Many believe the buying in black gold is speculative and unwarranted – and indeed may represent a bubble.
 

But let’s keep in mind that oil is not the only commodity attracting attention – and in some cases undeniably intelligent attention. Oil prices are rising for the same reason that two recommendations, Potash and Mosaic, are rising. Supplies of many critical resources – including oil and potash – are characterized by ephemeral abundance and long-term scarcity. We have no idea whether the rumours of impending takeovers of POT and MOS are true, but would not be surprised if they are.
 

Specifically, the buzz is that BHP Billiton has its eye on Potash (POT), while Vale is circling round Mosaic (MOS) like a hungry predator. Potash and Mosaic both produce phosphate, which is a critical ingredient in fertilizers. However, at the moment, phosphate prices are fairly low and supply temporarily abundant.
 

Let's keep in mind, BHP and Vale generally know what they are doing. They are successful companies with diversified resource portfolios. They don't make many mistakes when it comes to acquisitions. So why are they keen on Potash and Mosaic now?
 

Truth is, phosphate prices won't stay low for long, not if worldwide economic growth turns upward at all. A world that's growing both in economic production and population requires higher agricultural production. More people eat more, and wealthier people eat more resource-intensive products such as meat. In turn, this means phosphate demand will rise substantially along with economic growth.
 

Problem is, according to the Oct. 7 issue of Nature, the world may run out of phosphate within the next few decades. Like oil, phosphate is one of those critical resources whose production may be near or past its peak.
 

We've said it before: with two billion people currently earning less than $2 a day – and itching for a raise – consumption of critical resources such as phosphate, oil and many others could explode over the next few years. Unfortunately, production won't, which means buying a share of the remaining resources could be immensely profitable. BHP and Vale have spotted a great opportunity to buy phosphate on the cheap.
 

It's the same with oil. Inventories may be high right now, but that could easily change next year. The smart money knows this and is already trying to buy up what they can. China is purchasing resources around the globe and frantically searching for oil along the African coast – competing vigorously with Exxon and other Western oil firms. Similarly, the Saudi Arabians are drilling the deep waters of the Red Sea, anxious to fill up their dwindling reserves.
 

Then, of course, there's the geopolitical situation to consider. Last week, extremists launched another attack along the Saudi/Yemen border. It was foiled, as was the previous one. But every now and then extremists get lucky. If they do, that could also send oil prices sharply higher.
 

In this crazy world, it makes all the sense in the world to accumulate positions in these rare and vital commodities, while they are still relatively inexpensive.
 

Consider too that commodity prices are all interrelated. It takes oil to produce phosphate, so when oil prices rise so does the cost of fertilizer. And so do the prices of metals, and other commodities. In turn, it takes commodities to produce oil. And so a vicious circle of rising prices could easily develop as supplies of a few commodities grow tight.
 

To be fair, the article in Nature was not alarmist. It suggested we might have enough phosphate to last another 30-50 years. Bear in mind, the faster worldwide growth rises, the faster phosphate supplies will run out – and the higher prices will go. The crisis could arise much sooner than expected.
 

What can we make of all this?...

 

IS IT DIFFERENT THIS TIME?

 

A popular book at the moment is called, This Time Is Different: 8 Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff. The title is meant to be ironic. Most of the time, humanity learns from its mistakes only so it can repeat them better next time. Before every crisis, we tell ourselves, “this time it's different.” Too late, we realize “it's the same.”
 

We agree with the book for the most part. However, there is one thing that really is different about today's crisis. Never in history has the entire world bought into a capitalist system which so strongly believes that the quest for “more” is the true purpose of life.
 

The problem is, as the 1977 Nobel Prize winner Philip Anderson wrote, “More is different.” By that, he meant that, in any science, an increase in scale brings about new and different problems. Getting “more” is not a simple case of extrapolating how much you need and placing an order. As the scale rises, the operation becomes more complex and difficult to control. New phenomena arise. Unexpected things happen.
 

That is the case in the world today. We don't share the world's faith that more is easily achievable. The quest for more growth could just as easily lead to less resources available per person.
 

With that in mind, we think you (like others in the know) should get your piece of the pie while you can. Buy leaders in the energy patch such as Schlumberger (SLB) and Transocean (RIG) and leaders in other areas like POT and MOS – which are destined for much higher prices takeover or not.
 

Also buy gold and its volatile companion silver. There's never been a bull market in gold in which silver has not outperformed the yellow metal. Yet, in the past decade silver has underperformed. Is this time different? Or has the real bull market in gold not even started yet? We suspect the latter is true.
 

Getting a position in silver is a little trickier, since silver tends to be a byproduct of mining other metals, so few pure silver stocks exist. Companies that produce a lot of silver as well as gold include current favourites such as Agnico-Eagle (AEM). Others worth looking at are Goldcorp (GG), which is extremely well-managed, and Compania de Minas Buenaventura (BVN).
 

Bottom line: the escalating demand for resources is different than anything the world has ever seen and will cause new problems. What you can be sure of is a bull market in commodities, especially precious metals. They should be among your core holdings.