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"I tell you pal, we are going into a new age"... G Gekko circa 1987

There is no doubt in our minds that the world is in the midst of a resources boom that will last for decades to come.

This boom has taken the world economy and in particular the resources sector by surprise, with commodity producers battling to keep up with soaring demand for raw materials.

We believe there are some simple but fundamentally sound reasons for the sustainability of the current resources bull market. Quite simply, they relate to the laws of supply and demand.

When we cast our eyes across the broad resources market, we see a scarily familiar pattern emerging for nearly all commodities. This involves market conditions of strongly rising demand, combined simultaneously with relatively few new commodity supply sources on the horizon.

We emphasise that this applies across the board, but an examination of several key commodities provide excellent case studies. In our view, the best examples are gold and oil.

To begin with, let us turn our attention to gold.

We believe it is fair to say that resource company management has become a lot more conservative over the last few decades. There are far less risk-takers now, a mindset likely molded by many years of poorly performing commodity prices.

Certainly in the gold sector, the key theme became the acquisition of ounces and production, rather than exploration. It was cheaper to buy ounces in the ground than to go out and find them, particularly when gold was trading at just US$270 per ounce in 2001.

Consequently, the gold industry throughout the 1980s & 1990s became reliant on mergers & acquisitions for growth. This was a low-risk strategy in the short-term and popular with shareholders and management alike.

However, this strategy had unfortunate longer-term consequences and the chickens are now well and truly coming home to roost.

Firstly, the slashing of exploration budgets in favour of acquisitions led to a dramatic drop-off in the rate of new discoveries. Hence, the production line of new mines has been disrupted.

And when China came along and led the surge in commodity demand that we see today, the problems were exacerbated.

The result is that gold production from the traditional 'big three' producers - the USA, South Africa and Australia - is in decline. Essentially, the gold industry is a mature industry in crisis.

Quite simply, there are few major world-class mines on the drawing board for the next decade.

So the resource sector is paying the penalty for decades of underinvestment in exploration spending: what we like to refer to as resource sector 'R & D.'

An examination of the oil sector decade paints a similar picture. Essentially, it was easier and cheaper to acquire barrels than to explore for them.

Again, this seemed like a sensible strategy at the time, particularly when crude prices plunged to US$10 a barrel in 1997 in the wake of the Asian economic crisis.

But the consequences for the oil industry are significantly worse than those presented by the gold sector as oil is the lifeblood of the world economy.

Once again, the chickens are now coming home to roost. The world's major fields are maturing rapidly and there is an increasing reliance on smaller fields to plug the gap.

A decade of under-investment in the exploration for new fields has meant that oil prices have surged more than six-fold during that time.

And because it takes years to find, develop and successfully produce from a world-class oilfield, there are no easy fixes. Sensible investors are aware of this, which is why oil prices are heading towards US$100 a barrel within the next few years.

When one also throws in other factors such as the question marks over Middle East reserves, the fact that OPEC's share of world oil production is set to increase and that production from big fields is declining by 16 on last year.

Looking at the broad sector once again, the simple laws of supply and demand that usually apply in resource markets do not seem relevant at the moment.

The laws typically dictate that when prices rise due to strong demand, new sources of supply are attracted to the market, and hence prices will ease.

Scarily, the scenario that is playing out before us will ultimately see record commodity prices pretty much across the board, but with stagnant or declining production in many instances.

There is a scarcity of new projects in the wings, but even some of those projects ready for development are being shelved due to high development costs.

So even in an environment of record prices it is difficult to bring new projects onto the market. What hope is there if prices soften?

And is the Chinese juggernaut likely to stop any time soon? The answer is no.

The world is experiencing a once-in-a-century boom via China. The country is undergoing unparalleled industrialisation, with an enormous rural migration to cities. In turn, this is providing the low-cost labour that is driving China's industrial development.

China has experienced ten-fold growth since the 1970s and over the past decade has averaged 9 over the past four years, the fastest pace since it gained independence and second only to China. It is forecast to average growth of 8 to 13 to 22, energy stocks are up 118, and key commodities copper and oil are up five-fold and three-fold respectively.

So far this year there have been some key commodities that have outperformed and are very much in favour with investors and speculators alike. These include uranium, nickel, copper, platinum, iron ore and silver.

By comparison, commodities like gold, oil, coal and zinc have relatively underperformed. With our unrelenting focus on finding value, particularly amongst those commodities that are somewhat out of favour with mainstream investors, we believe there are some bargains to be found.

As a result, we believe commodities such as gold, oil, coal and zinc will play catch up and we favour investment in companies exposed to these commodities. We firmly believe in not following the herd!

IMPORTANT: This message, together with the Fat Prophets website (www.fatprophets.com.au) and all its contents have been prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the Fat Prophets website. Performance is hypothetical and based on recommendations made in the Fat Prophets report. The table is updated monthly. Transaction costs have not been taken into account. Past performance is not a reliable guide to future performance, and investors should be aware that returns can be negative. For a full explanation of the performance calculation methodology, please www.fatprophets.com.au