To calibrate returns, we’ve used a model that weighs all positions equally, and there’s no cash component.

We started Oct. 4, 2007 by buying diversified mining companies Companhia Vale do Rio Doce (NYSE: RIO) and Rio Tinto (NYSE: RTP), both of which are major players on ever-tightening iron ore markets. We also picked up gold miner Goldcorp (NYSE: GG) and streetTRACKS Gold Trust (NYSE: GLD), a proxy for gold bullion.

The following week, we added copper bets Freeport-McMoRan Copper & Gold (NYSE: FCX) and Xstrata (OTC: XSRAF). Then we rounded out our October activity by recommending two steel companies–Mechel (NYSE: MTL) and Posco (NYSE: PKX)–and a simultaneous long and short position in aluminum: a buy on Australia’s Alumina (NYSE: AWC) and a simultaneous short sale of Aluminum Corp of China, which we subsequently closed out in the Feb. 4 Flash Alert at a profit of roughly 20 percent in two-and-a-half months.

In November, we focused on agriculture. Our picks were Asian growth play China Green Holdings (Hong Kong: 904, OTC: CIGEF), exchange traded fund (ETF) DB Agriculture Fund (AMEX: DBA) as a broad-based play on commodity prices, and technology and chemicals giant Syngenta (NYSE: SYT). And we recommended Hyflux (Singapore: HYF, OTC: HYFXF), a high-potential bet on Asia’s insatiable demand for water.

In December, we picked up shares of diversified miner Anglo American (London): AAL, NSDQ: AAUK), high Beta gold producer Lihir Gold (Australia: LGL, NSDQ: LIHR) and Russia’s emerging giant Norilsk Nickel (OTC: NILSY).

We stood pat in volatile January. Then in February, we completed our current alignment by beefing up our position in rare metals by adding China Molybdenum (Hong Kong: 3993, OTC: CMCLF). We also added Sino-Forest (Canada: TRE, OTC: SNOFF), a play on Asia’s growing timber shortage.

The result is the current VRI Portfolio, a diversified mix of producers and pure commodity ETFs drawn from the four basic critical resource areas outlined in our inaugural issue. See VRI, Oct. 4, 2007, The Definite Bull.

• Base Metals–The building blocks of all development and economic growth.
• Precious Metals–Particularly gold, which has emerged as the world’s fourth currency of note, after the US dollar, the euro and the Swiss franc.
• Agriculture and Water–This business is winning from growing global demand for food as well as rising energy demand.
• Steel and Other Raw Materials–Infrastructure investment is crucial for supporting global growth.

Our strategy is long term. We’re not trying to out time the market on a weekly basis. Rather, we’re building positions that we can ride to big returns as long as this bull market in vital resources lasts, which should be at least several more years. All of these are high-quality companies tied into established and explosive long-term fundamentals on both the supply and demand side. And we’re willing to ride out near-term volatility to see them reach their full potential.

As we said back in October, we’re not making a religion out of this. We’re not averse to recommending taking some money off the table when volatility runs amuck, even in positions we really like long term. In fact, that’s precisely what we did last year when takeover speculation reached a fever pitch for Rio Tinto, as well as earlier this year when Mechel’s price spiked.

We’ve carefully researched every stock in this portfolio. But we’re also firmly committed to exiting any companies that don’t measure up in the future and replacing them with others that are stronger. And if some of our resource themes run their course or don’t pan out, we’ll move on.

That said, our performance so far is definitely encouraging.

Starting with 2007, for the three months we ran the VRI Portfolio, our recommendations were up 3 percent. That handily topped the returns for both of our benchmarks: The S&P Materials Index was up 0.03 percent and the Morgan Stanley Capital International World Materials Index (MSCI) was down 0.77 percent.

The fourth quarter, of course, was a period of jagged volatility in financial markets overall–mostly on the downside–as the world grappled with fear of recession. Specifically, the conventional wisdom was that the slowing US economy would crater global demand for commodities and, therefore, prices. The downside was expected to accelerate as slowing growth in the US stalled growth in emerging Asia.

Those fears have mushroomed in the first few months of 2008 began with a series of severe shocks to the US financial system. And although demand hasn’t dropped off a cliff, there has been a real impact on commodity prices. By late January, both the S&P Materials Index and the MSCI were down by more than 10 percent on the year. Although they’ve since recovered some of their lost ground, they’re still both down roughly 4 percent.

In contrast, the VRI Portfolio finished the quarter up more than 11 percent for the year and 14.5 percent since inception. Volatility has been fierce, and not every position is in the black yet. But our focus on strong companies locked into the most promising trends is clearly paying off.

More important, our positions are all in excellent position to turn it on when the US economy cycles out of its current troubles. Our expectations are for vastly improved visibility on the US financial system and at least a bottom for growth here in the second half of the year.

We’ve also been impressed by the ability of Asian demand for vital resources to withstand what have become global economic pressures thus far. That suggests that, although commodity markets will almost certainly remain volatile over the next few months, downside for prices of even the most economically sensitive vital resources may not be as great as our stocks are already pricing in.

Again, we’re not going to be dogmatic on either trends or individual stocks. And if something happens to change our perceptions about the potential of any of our recommendations, we’ll get out.

As for new buys, investors should establish positions incrementally in VRI Portfolio stocks, rather than all at once. Diversifying among the aforementioned four basic vital resource groups is preferable to loading up on one or two positions. And keep in mind that vital resources as a sector should be only one part of a diversified portfolio.

That’s how to ensure you’ll take advantage of this once-a-generation bull market in vital resources. And you won’t get whipsawed by the volatility that will invariably accompany it.

Note you can access the original recommendation for all VRI Portfolio holdings from the Archives section on the left-hand side of the VRI Web site. To find the correct issue, simply scan down to the issue week indicated in the Entry Date column of the portfolios.

Mention molybdenum to most people, and you’re likely to get a blank look. But the market for the metal is rapidly becoming white hot.

We first covered this lesser-known metal in February. (See VRI, Feb. 14, 2008, Another Undiscovered Metal.)

Molybdenum is a silvery white, flexible metal with an exceptionally high melting point (2,625 degrees Celsius) used principally as an alloying agent in steel, cast iron and super alloys to enhance hardness, strength, toughness and resistance to wear and corrosion. It’s most significant end-use is as an alloying agent for the production of steel.

Molybdenum is used in the oil and gas industry for removing sulfur. And according to industry sources, it’s also used in oilfield drilling, especially drilling wells to 20,000 feet. Going to such depths requires special molybdenum casings to be able to drill and transport fuel to the surface.

China Molybdenum (Hong Kong: 3993, OTC: CMCLF) is our leveraged play on the metal. Leverage does entail greater risk than a diversified company, but potential rewards are also much greater.

The price of molybdenum has been rising steadily over the last two years and is trading now around USD35 per pound. The main reasons have been strong demand and shortfalls in supply. We expect this to continue for at least the next couple years.

The molybdenum market is still relatively small. (It’s only 15 percent the size of nickel’s market). But it’s rapidly expanding. At the same time, the infrastructure for the metal’s production hasn’t been updated to quickly respond to higher demand, as the majority of the supply comes as a by-product of copper production.

The US, Chile, and China are the big producers. One of portfolio favorites, Freeport-McMoRan Copper & Gold, plans to resume molybdenum production at the Climax open-pit mine in Colorado from 2010 (30 million pounds per year), with USD500 million earmarked to restart the mine. We’re still bullish on copper and expect it to perform even better in the second half of the year. Buy Freeport McMoRan Copper & Gold, which offers a strong and more diversified way to play the molybdenum story.