Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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