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Related topics: Freeport McMoRan, BHP Billiton, Vale, Southern Copper, Jim Jubak

The sky's the limit. The sky is falling. In the short term, that pretty much describes the behavior of commodity stocks.

And it's all too easy to get caught up on the drama of those short-term moves, because the possible profits, if you can outguess the market, are all too tempting. (I know because I get caught up in it myself.)

But for most of us who aren't blessed with market-beating 20/20 foresight, playing the short-term volatility of commodity stocks isn't the best way to make money in this sector.

For most of us most of the time, the long-term swings between scarce supply (sending prices up, up, up) and scarce demand (sending prices down, down, down), which can last for years and years, are the best sources of profits.

And right now the long-term pattern says we're in an upswing that has at least two more years to run before we see a significant downside challenge.

Why do I think that? Supply and demand tell me so. I'm going to end this post with my take on the supply/demand picture for several important industrial commodities. But first, let me try to put the current short-term volatility in some context.

Why a short-term view is so appealing

The potential rewards in the short term are what get our attention. Iron miner Vale (VALE, news) was up 42% from the August 2010 low to the January high. One-stock commodity portfolio BHP Billiton (BHP, news) was up 44% from the August low to the February high. Molybdenum and copper miner Thompson Creek Metals (TC, news) was up 88% from the August low to its January high.

Image: Jim Jubak

Jim Jubak

But the volatility? Who can stand the drops? Look at just one stock, Freeport-McMoRan Copper & Gold (FCX, news).

On Jan. 11, shares had rallied to $60.90. Two weeks later, on Jan. 25, the stock had dropped 12.6% to $53.22.

On Nov. 11, 2010, it traded at $54.01. On Nov. 17, it was $48.42. That's a 10.3% drop in just six days.

But by Nov. 11, the stock had soared 62% from its Aug. 25, 2010, low of $33.33.

Just in case this volatility wasn't enough to make you insane, hovering over all of these moves is the memory of the great commodity rally of 2007, when Freeport McMoRan climbed 86%, and the great commodity collapse of 2008, when the stock dropped 74%. And the volatility in 2008 was even more severe than that if you look at just the last six months of the year. Freeport McMoRan fell from $61.65 on June 13, 2008, to $9.03 on Dec. 3.

If this kind of short-term volatility is what you focus on, you're paying attention to the wrong time frame. You need to be investing on a scale of years, not weeks or months.

Look at oil, for example. In 1980, the average U.S. price of oil was $37.42 a barrel. In 1998, oil sold for an average $11.91 a barrel. That's 18 years of solid losses in oil stocks and other shares that depended on the commodity.

But 1998 marked the bottom. By 2004, the average price per barrel hit $37.66, the same as it had been in 1980, on its way to a peak near $150 in 2008.

With oil demand sagging because of the world economic crisis, oil fell back to the $30s, where it had been in 1980 and 2004. It then began a climb back to a price near $100 a barrel, as demand recovered along with the global economy and the crisis in Egypt drove up fears of a disruption to global supply.

The long-term pattern for many other commodities looks similar. Copper on the London Metal Exchange, for example, sold for $2,710 a metric ton in 1990, $3,050 a metric ton in 1995 and $1,730 a ton in 1998. It then began a slow, steady climb to $1,880 a ton in 2003 and to $2,950 in 2004 before rocketing up to its current price. Last week, copper hit an all-time record price of $9,955 a ton.