Thus far, the high-return standouts have been volatile Russian steel magnate Mechel (NYSE: MTL) and our gold plays. (See VRI, June 26, 2008, Still Glittering.) As we’ve pointed out in previous issues, Mechel has a major advantage over its rivals: the ability to control costs with its control over supplies of metallurgical coal, iron ore and even electricity. That’s allowed it to benefit from surging demand for steel in Russia and Eastern Europe, particularly with its solid connections to authorities in those countries.

Gold, meanwhile, took a tumble earlier in the year, largely on the rebound in the US dollar. Over the past couple of weeks, however, our trio of plays has bounced back strongly on the chaos and inflation fears in the market, particularly major producer Goldcorp (NYSE: GG), which finished June up by more than 50 percent year to date.

The year has also seen strong performances from diversified miner Rio Tinto (NYSE: RTP), which remains a takeover target of Australian giant BHP Billiton (NYSE: BHP). Anglo American (NSDQ: AAUK) and Xstrata (OTC: XSRAF) benefited from takeover rumors as well as continued strength in the price of copper and other key commodities.

Freeport-McMoRan Copper & Gold (NYSE: FCX) also had a huge run back from early-year weakness on takeover talk, as did the giant that could make an attempt to acquire it in the second half of 2008, Companhia Vale do Rio Doce (NYSE: RIO, CVRD).

Our stake in agricultural resources was a mixed bag, reflecting the ups and downs in that sector. Overall, however, it was a major plus. The far-and-away winner was biotechnology leader Syngenta (NYSE: SYT). But we also captured respectable gains from China Green Holdings (Hong Kong: 904, OTC: CIGEF) and enjoyed a massive one-day comeback from The Andersons (NSDQ: ANDE), which in late June announced a dramatically improved outlook for full year 2008.

We also realized a healthy gain in PowerShares DB Agriculture Fund (AMEX: DBA), an exchange traded fund of four major commodities. That more than offset the small losses we saw in Sino-Forest (Canada: TRE, OTC: SNOFF) and water play Hyflux (Singapore: HYF, OTC: HYFXF).

Our largest losses were in Alumina (NYSE: AWC), China Molybdenum (Hong Kong: 3993, OTC: CMCLF), Du Pont (NYSE: DD) and Posco (NYSE: PKX). Alumina and Posco were affected by rising commodity input prices. China Molybdenum’s drop, meanwhile, appears to have more to do with the overall pullback in Asian markets, while as a major US blue chip Du Pont has been something of a casualty of overall US weakness.

Volatility is the nature of vital resource markets, and we’ve certainly seen that this year. On the one hand, prices of a full range of commodities have relentlessly pushed higher, as it’s become increasingly obvious global demand is relentless and cheap supplies ever more elusive. On the other, any hint of global economic weakness has been enough to send producer stocks crashing, and we saw that this week in abundance.

We don’t see any reason not to expect more of the same in the second half of 2008. In fact, this past week we saw clearly that investor sentiment can turn negative even if commodity prices rise, as worry increases that the economy will be unable to bear the strain.

We’re clearly on dangerous ground here. And any market that rises in parabolic fashion is prone to a nearly equally gut-wrenching reversal.

Regardless of what daily volatility brings, however, we do have two very big advantages. First, the foundation of this bull market in vital resources is wholly intractable: insatiable demand from developing nations–particularly in Asia–that’s been growing for decades and will for years to come, accompanied by the fact that easy-to-get-at sources of key commodities are increasingly scarce.

Second, as is the case for any market, the best stocks will always outperform. Our top-performing picks have definitely shown their stuff in a tough environment, and will do even better when recession fears subside. And even the weaker performers remain extremely solid and ready to surge.

Media hype notwithstanding, the first nine months for Vital Resource Investor haven’t been particularly noteworthy for commodities in general. That’s evidenced by the basically flat performance of the indexes we benchmark against.

Rather, what we’ve been able to realize in profits is the result of outperformance of individual companies we’ve analyzed from the ground up. We’ve done well, not because of an overall bullish trend, but rather because individual selections have far outperformed.

Looking ahead to the second half of 2008, we can see plenty of risk to global markets for vital resources, in general. Economic weakness in the US, for example, is likely to worsen, as businesses and consumers wrestle with rising costs and the US financial system’s excessive leverage continues to wash out. Meanwhile, China and other developing nations will increasingly work to get a grip on inflation, which will almost surely have a negative impact on demand for vital commodities.

A rebound in the US dollar–however short-lived–could also have a significant impact. And of course, any time investors get fearful of recession, they’re going to dump any perceived to be economically sensitive en masse. And as we saw this week, vital resource stocks–no matter how solid they are–are the first targets.

These are reasons why we’ve periodically advised taking profits in positions. But the long trend is as much in our favor as ever. As we said at the outset of this advisory, our goal is to take the maximum advantage of the call on resources that’s coming from emerging Asia, central and eastern Europe, the Middle East and Latin America, as well as the increasing scarcity of economic supplies due to logistical challenges and resurgent resource nationalism.

That remains our primary goal with Vital Resource Investor. And doing that means riding out the day-to-day turbulence that’s so much a part of this market.

We’ve advised taking profits on several positions during the past nine months and have made a handful of sells besides. This we’ll continue to do going forward. And we’ll occasionally sell a company that doesn’t appear to be measuring up to our standards.

The best way to profit from this bull market will be the same as it’s been the last nine months. That’s choosing good businesses with strong growth prospects in a wide range of areas and holding as vital resource prices rise and the market recognized their true value. That’s where our focus will continue to lie.

Our four areas are as follows. For the complete list of our recommendations, see the Portfolio table. Note that original recommendations can be accessed from the Web site archives by looking at the issue matching the date of the original recommendation.

• 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.