Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18
Trump Sounds End Times Armageddon Trumpet for Jerusalem, Israel Evangelical Prophecies - 16th May 18
Our Next Stock Market Dow Fibonacci Price Targets – Get Ready! - 16th May 18
The Coming Copper Crunch - 16th May 18
Stock Futures Are on a Sell Signal - 16th May 18
What to do When the IRS Comes for Your Property - 16th May 18
IS BITCOIN ANONYMOUS? - 16th May 18
Bitcoin Tide Might Have Turned - 15th May 18
UK Online Gambling Market Grows According to UKGC - 15th May 18
Stock Market Study: What Happens Next when Dow Goes Up 8 Days in a Row - 15th May 18
Fibonacci Price Ladder Points to Higher Stock Prices - 15th May 18
U.S. Dollar Rally Is Doomed - 14th May 18
Gloomy Scenarios for the Fed That Should Boost Precious Metals - 14th May 18
US Dollar One Reversal Too Many - 14th May 18
SPX futures are higher, but so is VIX - 14th May 18
Precious Metals and Miners NUGT – The Sleeping Giant Trade - 14th May 18
Is This The Netflix Of Cannabis? - 14th May 18
US Quest for Iran Regime Change: Will EU Sustain the Nuclear Deal - 14th May 18
Stocks Bears Last Stand - 14th May 18

Market Oracle FREE Newsletter

Trading Lessons

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.


© 2005-2018 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

6 Critical Money Making Rules