Gold prices are extremely high. While I am a believer one should hold a modest amount of gold in a portfolio (10% or less), it is a commodity whose rise plays, in large part, on structural weaknesses in currency and economies. As history shows, an economy with solid fundamentals (rule of law, productive citizens, abundant resources) eventually gets back on their feet and, with it, a general decline in gold prices as capital shifts elsewhere.

If you believe that gold is now too expensive to take too much profit going forward or the credit crisis has merely accelerated the shift of geo-political power and wealth to Asia, one possible play as a hard asset, which also couples as a play on China, is iron ore.

Iron ore, in a very simplistic sense, are a certain type of rock required to produce iron (I am not a geologist so this is very dumbed down). Iron constitutes 95% of all metal production.  Pig iron is key to steel production. Iron and steel, to paraphrase Otto Von Bismarck, is what is literally making China an economic power-house.

This year the big three iron ore producers  BHP Billiton (NYSE: BHP) (yes the same company that bid for Potash), Rio Tinto (NYSE: RTP) and Vale (NYSE: Vale) moved from annual pricing to quarterly contracts; making pricing more sensitive to supply and demand. China also raised the quality of iron ore they will import, effectively blocking out lower quality Indian iron ore. With China importing approximately 70% of all iron ore, the result has been a 90% increase in iron ore prices year over year.

While gold is arguably a proxy of economic fears, iron ore is rapidly becoming a proxy for Asia- without the downside of actually investing in a stock listed on an Asian based exchange (mainly, lack of transparency, shareholder rights and rule of law).

There are several ways to play iron ore. One is to invest in a global metals exchange traded fund. The other is to invest in the big three iron ore producers listed above individually (the three collectively control over 65% of the market) or the third, for those with the stomach to do it, is to invest in junior iron ore companies- big upside, big risk; junior cap investors will note the battle going on right now over a junior iron ore producer named Baffinland.

Having said all of that, iron ore is like gold. For most average investors without the appetite for volatile returns, no asset which swings so widely in price should form a large part of a portfolio.  An investor with a modest portfolio should adhere to the KISS principal and invest in broad based equity and fixed income instruments.

Please take a moment today to remember and thank those who served and serve our country.

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