Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
Syriza Convinces Greece to Commit Suicide, GrExit Beckons, Market Reaction - 6th July 15
Financial and Commodity Markets Become Scary: Crash Point Or Turning Point - 5th July 15
A Revolutionary Pope Calls for Rethinking the Outdated Criteria That Rule the World - 5th July 15
Forget 'Haircut', Instead Syriza Plans Beheading of Greek Bank Depositors, Theft of Deposits - 5th July 15
The Pentagon’s 2015 Strategy For Ruling the World Through Endless War - 5th July 15
United States Celebrates the Disastrous Secession From Great Britain - 5th July 15
Greece Referendum Vote Result Forecast Yes Win, But Depression Will Continue - 5th July 15
The Great Greek Economic Depression - 4th July 15
Happy 4th of July Stock Market Analysis - 4th July 15
The Most Pressing Reason Yet You Want to Avoid Investing in Retail Stocks - 4th July 15
Fed’s Full Normalization and the Stock Market - 3rd July 15
The U.S. Dollar's 2014-2015 Rally: Wave 3 in Action - 3rd July 15
Stock Market Where are we? And where are we Going? - 3rd July 15
Xi’s Anti-Corruption Campaign Is Key to China’s Prospects - 3rd July 15
How the New Iranian Nuclear Deal Will Impact Crude Oil - 3rd July 15
China's Stock Market Rollercoaster Ride Continues - 3rd July 15
Gold Stocks Cheap to Buy but Not for Long - 3rd July 15
Capital Controls and a Bank Holiday in Greece… Here’s How You Can Profit - 3rd July 15
Greece's Varoufakis: I will Resign if there's a 'Yes' Vote - 2nd July 15
The Student Loan Bubble: Gambling with America’s Future - 2nd July 15
Inflation Is Lurking, but This Asset Can Protect You - 2nd July 15
Three Total Wealth Stock Investor Tactics You’ll Need Because Greece Isn’t Over - 2nd July 15
Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off - 2nd July 15
Greek Debt Crisis: "Too late to prepare now" - Video - 2nd July 15
Guaranteed US Dollar Death Dynamics - 2nd July 15
The Greek Stress Test & The Reality Of Incremental Changes - 2nd July 15
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

Is the Commodities Boom Over?

Commodities / Commodities Trading Jul 27, 2012 - 07:35 AM GMT

By: Puru_Saxena

Commodities

Best Financial Markets Analysis ArticleThe world’s economy is passing through a low growth environment and this is in stark contrast to the first half of the last decade, when we had a global boom.  Today, Europe is on the brink of recession, the US economy is growing at only 2% per year and it appears as though China is facing a major slowdown.  Given these circumstances, we are of the view that the prices of natural resources will struggle to retain last decade’s momentum.  


Figure 1 shows that over the past decade, commodity prices grew at an annualised rate of approximately 9%, but 200 years of history suggests that this frantic growth rate is likely to moderate.  According to Barry Bannister at Stifel Nicolaus, commodity prices are likely to increase by only 2-3% per year over the next decade (Figure 1).  

Figure 1: Rolling 10-year commodity price growth 

Source: Barry Bannister, Stifel Nicolaus

If Barry’s estimate is on the mark, the Reuters-CRB (CCI) Index will only appreciate by approximately 35% over the next decade; a far cry from its recent gains.  However, if historical patterns play out, in about 10 years from now, commodities will embark on another multi-year secular bull market, which will cause prices to triple (Figure 4).

Look.  Long term forecasting is fraught with risk and at this stage, nobody knows whether Barry’s forecast will come to fruition.  Nonetheless, we tend to agree with the view that commodity prices will remain range bound for several years.
Within the commodities complex, the only bright spot we see is gold and even here, additional quantitative easing may be required to trigger another rally.  Amongst the laggards, we believe that the industrial commodities will continue to underpeform and in this low growth environment, they should be avoided.

Figure 2 provides a snapshot of the relative peformance of various commodities.  As you can see, with the exception of gold and a couple of grains, all the commodities have performed poorly over the past 52-weeks.  Furthermore, you will note that the industrial metals (including palladium, platinum and silver) have been amongst the worst performers!

Figure 2: Commodities – not a pretty sight!

Source: www.thechartstore.com

Despite the fact that the prices of many industrials metals and softs have declined by almost 30% over the past 52-weeks and silver has lost approximately half of its value since last spring, it is interesting to note that investor sentiment towards commodities remains staunchly bullish. 

Today, most hard asset bugs remain convinced that this decline is nothing more than a routine correction and after 10-years of gains, they are now conditioned to buy every dip.  After all, nothing skews an investor’s objectivity more than a decade long bull market and it appears as though the hard asset bulls are now making the same mistake. 

For our part, the price action in the commodities complex is telling us that for several months, sellers have been more eager than buyers.  Our personal view notwithstanding, nobody can dispute the fact that most commodities are currently in a downtrend and the recent weakness is much more pronounced than the previous ‘corrections’.

If you review Figure 3, you will note that commodities are currently in a downtrend and the CCI Index is trading below its 40-week moving average.  Furthermore, you can see that the previous rally attempt failed around the 40-week moving average.  Thus, for us to turn bullish on commodities, the CCI Index will need to close above that critical level.    

Figure 3: Commodities in a downtrend

Source: www.stockcharts.com

Now, we are aware that our sobering analysis on commodities may not sit well with some of our readers.  However, when it comes to the investment business, we have learnt that it pays to stay objective and unbiased.  Thus, given the fact that commodities are currently in a downtrend and their near term fundamentals have taken a turn for the worse, we feel it is our duty to call it as we see it.

Although we remain bullish about the long term (20-25 years) prospects of commodities, given the slowdown in global demand, we are of the view that hard assets will not provide stellar returns over the next decade.  Therefore, we believe that this is not the time to overweight this sector.

We take the view that during this low growth environment, the natural tendency for commodity prices will be to drift lower, but this trend will be periodically interrupted by policy intervention.  Accordingly, whenever any central bank unleashes ‘stimulus’, commodity prices may spurt temporarily but the economic reality will ultimately act as a headwind.  Under this scenario, a ‘buy & hold’ strategy will be ineffective and only nimble traders will be able to retain their profits. 

In summary, commodities are currently in a downtrend and we have no exposure to this sector.  If and when prices break above the 200-day moving average, we may initiate a modest position; but our enthusiasm will remain muted by the sluggish economic situation. 

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena
Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2012 Puru Saxena Limited.  All rights reserved.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History