Best of the Week
Most Popular
1.Trump Delirium Triggers Stock Market Brexit Upwards Crash Towards Dow 20,000! - Nadeem_Walayat
2.The Future Price Of Gold Will Drop Below $1000 In 2017 -InvestingHaven
3.May Never Get Another Opportunity to Buy Gold at this Level Again - Chris_Vermeulen
4.Delirium - The Real Reason Why Donald Trump Won the US Presidential Election - Nadeem_Walayat
5.Why Nate Silver / Fivethirtyeight is one of the Most Reliable Election Forecasting Indicator? - Nadeem_Walayat
6.Gold Price Forecast: Nasty Naughty November Gold Price Trend - I_M_Vronsky
7.Gold Mining Stocks Screaming Buy! Q3’16 Fundamentals - Zeal_LLC
8.Delirium of Trump Mania Win's Mr BrExit US Presidential Election 2016 - Nadeem_Walayat
9.The War On Cash Goes Nuclear In India, Australia and Across The World - Jeff_Berwick
10.Hidden Signs for Gold and Silver - P_Radomski_CFA
Last 7 days
Crude Oil Prices: "Random"? Hardly - 5th Dec 16
The Coming Stock Market Crash and WWIII - 5th Dec 16
This Past Week in Gold Market - 5th Dec 16
Stock Market Short-Term Correction Underway - 5th Dec 16
If Trump Doesn’t Do This, We Will Have the Great Depression 2.0 - 5th Dec 16
India’s Demonetization Could Be the First Cash Domino to Fall - 5th Dec 16
Our Future Economy, Jobs, Banking, And Governance - 5th Dec 16
Gold and Silver Bullion Buying Opportunity for 2017? - 4th Dec 16
First UK BrExit then Trump, Next BrExit Tsunami Wave to Hit Italy HARD Sunday! - 3rd Dec 16
The 10YR Yield and SPX Stocks Bull Markets - 3rd Dec 16
Gold And Silver – Do Not Expect Much Difference With Trump Compared To Obama - 3rd Dec 16
Gold, Currencies and Markets Critical 61.8% Retracements - 2nd Dec 16
Gold Junior Stocks Q3’16 Fundamentals - 2nd Dec 16
Adventures in Castro’s Cuba - 2nd Dec 16
We Are Putting Off the Inevitable - 2nd Dec 16
Macroeconomic Cycles & Demographics - A Fuse, An Explosive and The Igniting Catalyst - 2nd Dec 16
How Moving Averages Can Identify a Trade - 1st Dec 16
Silver Prices and Interest Rates - 1st Dec 16
America, is it Finally time for us to say Goodbye? - 1st Dec 16
Blockchain Technology – What Is It and How Will It Change Your Life? - 1st Dec 16
Burn the Flags, Can Trump Salvage The Sinking US Economic Ship? - 1st Dec 16
Will US Housing Real Estate Market Tank in 2017? - 1st Dec 16
Referendum Puts Italy's Government to the Test - 30th Nov 16
Why We Haven’t Seen Gold Price Rally after Trump Victory - 30th Nov 16
Breakdown and Slide in Crude Oil Price - 30th Nov 16
A 'Wicked Rally' in Gold Price Predicted - 30th Nov 16
Silver Market Sentiment Looks Golden - 30th Nov 16
Indian Demonetization Denotes Severe Stress in the Global Gold Market - 30th Nov 16
Owning Gold and Silver in Troubling Times - 29th Nov 16
Trump's Presidency - Stock Market Crash or Start of New Mega-Trends - 29th Nov 16
Prime Minister Modi's War Against Corruption, Black Money and Fake Currency Notes in India - 29th Nov 16
Can President Trump Really Drain the Swamp? - 29th Nov 16
President Trump’s Economic Plan Isn’t Going to Work - 29th Nov 16
The US Bond Bear Market Has Begun! - 29th Nov 16
Simple Yet Powerful Technical Trading Tools - 28th Nov 16
Public Infrastructure – Welcome to the World of Waste, Fraud, and Abuse - 28th Nov 16
Fifty Years Later, Moore's Computing Law Holds - 28th Nov 16
An Elusive Stock Market Top - 28th Nov 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

$10000 Gold

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.


© 2005-2016 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

Catching a Falling Financial Knife