Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
2019’s Hottest Commodity Is About To Explode - 15th Oct 18
Keep A Proper Perspective About Stock Market Recent Move - 15th Oct 18
Is the Stocks Bull Dead? - 15th Oct 18
Stock Market Bottoms are a Process - 15th Oct 18
Fed is Doing More Than Just Raising Rates - 14th Oct 18
Stock Markets Last Cheap Sector - Gold - 14th Oct 18
Next Points for Crude Oil Bears - 13th Oct 18
Stock Market Crash: Time to Buy Stocks? - 12th Oct 18
Sheffield Best Secondary School Clusters for 2018-19 Place Applications - 12th Oct 18
Trump’s Tariffs Echo US Trade Policy That Led to the Great Depression - 12th Oct 18
US Dollar Engulfing Bearish Pattern Warns Of Dollar Weakness - 12th Oct 18
Stock Market Storm Crash, Dow Plunges to Trend Forecast! - 12th Oct 18
SP500 Stock Market Sell Off Well Forecast by President Trump - 11th Oct 18
USD and US Tr. Yields Retreat, GBP Gains on Brexit-deal Report - 11th Oct 18
Loss Of Yield Curve "Shock Absorber" Could Mean A Rough Ride Ahead For Markets & Housing - 11th Oct 18
Just How Bearish is the Stock Market’s Breadth? - 11th Oct 18
Here’s Why Gold Stocks, Gold, and Silver Are Great Buys Now - 10th Oct 18
Russian Ruble Technical Chart Analysis and Forecast - 10th Oct 18
Society Trends To Keep in Mind in the USA - 10th Oct 18
[eBook] How to Identify Turning Points in the Market - 10th Oct 18
Euro Vulnerable as Slowing Growth Reveals Underlying Issues - 9th Oct 18
Construction Companies to Watch For in 2019 - 9th Oct 18
ECB Meeting Minutes and US Inflation Data in Focus - 9th Oct 18
Interest Rate Shock-Time to Find Out Who has been Swimming Naked - 9th Oct 18
Unintended Consequences of Expanding Sheffield's Best Ranking State Secondary Schools - 9th Oct 18
Crude Oil Price Trend Forecast 2018 Update - 9th Oct 18
Inflation Is Starting To Heat Up - 8th Oct 18
Stock Market Seasonal Influence at Work - 8th Oct 18
Barrick Randgold Deal Breathes New Life into Gold - 8th Oct 18
Stock Market Sell Off, Dollar Rally Expected, Now What? - 8th Oct 18
The Chartology of Gold and Silver - 8th Oct 18
The Income for Life Playbook - 8th Oct 18

Market Oracle FREE Newsletter

Trading Any Market

What the Commodity Cycle Means for Precious Metals Prices

Commodities / Gold and Silver 2017 May 25, 2017 - 06:20 PM GMT

By: MoneyMetals

Commodities

The cycle for any commodity follows the same basic pattern…

When prices are low, production falls. As new supplies diminish, the market tightens and prices move higher. The higher prices incentivize producers to invest in production capacity and increase output. Eventually, the market becomes oversupplied, prices fall, and the cycle starts all over again.


Of course, this is a simplified model of what drives commodity cycles. Booms and busts can be amplified and extended by speculators, by unexpected shifts in demand, or even by interventions from central banks and governments.

Regardless of the causes, commodity markets will always be cyclical in nature. Commodities as a group can be pressured upward or downward by extrinsic forces such as monetary inflation or credit contraction.

However, any individual commodity – whether oil, corn, copper, gold, silver, platinum, or palladium – may be in its own particular stage within the commodity cycle at any given time.

As a resource investor, it’s important to have some idea of whether you’re investing in a commodity at a time in the cycle when it’s favorable to do so. Some technical analysts ascribe four-year cycles to some markets, longer duration cycles to others, and shorter-term cycles that operate within longer-term cycles. The reality is that cycles can’t be counted on to run their course within any prescribed time frame.

There are historical patterns and tendencies, to be sure. Gold, for example, tends to be less correlated to swings in the economy than oil and industrial commodities. Gold can remain in a major trend for years or even decades.

Gold prices crashed from $850/oz in 1980 to $300/oz in 1982. It wasn’t until 2002 that gold crossed above the $300 level for the final time. The new gold bull market rose out of a 20-year base and reached a cyclical high of $1,900 in 2011. A four-year downturn followed, and since 2016 a new cyclical upturn appears to be taking shape.

Commodities Are Moving into a Diminishing Supply Phase

Chart reading is always a tenuous undertaking, but when combined with supply and demand fundamentals, it can help investors identify favorable times to be a buyer or seller. Right now, it appears that gold, silver, oil, and other commodities are transitioning one by one into a period in the commodity cycle of diminishing supply.

In the case of crude oil, which is the most economically important and most widely followed commodity, the major storyline in recent months has been a supply glut.

North American shale production has swelled inventories in the U.S. But oil prices have been quietly advancing.

What does the market know that isn’t showing up in all the seemingly bearish headlines for oil? The longer-term supply outlook actually augers for shortfalls… and much higher prices. According to the International Energy Agency (IEA), new oil discoveries in 2016 sunk to their lowest number in decades.

The oil industry slashed spending on developing new supplies in response to low prices. ExxonMobil, for one, cut its capital expenditures by 26% ($10 billion) in 2016.

The IEA warns that in order to offset recent declines and meet rising global demand, the oil industry needs to develop 18 billion new barrels every year between 2017 and 2025. Oil’s recent price range in the mid $40s to mid $50s per barrel doesn’t seem to be incentivizing the necessary new production capacity. Higher prices appear to be in store over the next few years.

Mining Is an Energy-Intensive Business

Higher energy costs would mean higher production costs for the gold and silver mining industry. Mines are already having to process more and more tons of earth to extract ounces of valuable metals.

According to metals analyst Steve St. Angelo, “The global silver mining industry will continue to process more ore to produce the same or less silver in the future. While the cost of energy has declined over the past few years, falling ore grades will continue to put pressure on the silver mining industry going forward.”

Physical precious metals are, in a very real sense, a form of stored energy. Think of all the energy inputs required to move the earth, to separate relatively tiny quantities of precious metals from tons upon tons of rock and dirt, to refine the raw ore into pure gold, silver, platinum, or palladium, and finally to mint the precious metal into bullion products.

All those energy inputs are represented in the value that markets impute to precious metals. Trends in prices will reflect trends in production costs. And production costs will rise as it becomes harder and more energy intensive to mine metals.

A position in physical gold and silver should be viewed as a core long-term holding. However, there are some times in the commodity cycle that are more favorable than others for buying.

There are times when you may even want to sell a portion of your position. Right now, the cycle appears to be in the early stages of turning bullish for commodity prices – making it a favorable time to be taking out long positions in hard assets.

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2017 Stefan Gleason - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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