Commodities into the Stratosphere!
Despite the use of the Chinese and Indian middle class we reckon the usual commodity cycle will prevail. At no time in the last 200 years has such a steep rise in prices not been followed by a slump.
Canada’s central Bank governor Mark Carney disagrees with us and thinks this boom is a super cycle and will last a while yet. BHP’s Marius Kloppers however, in a farewell interview on the ABC, said lower Iron Ore prices would be BHP’s next big challenge and Mr Carney’s own Deputy, John Murray warned just last year not to expect prices to keep rising..
The chart below, measures the 10-year trailing rates of return of commodity prices, priced in $US. According to Hackett Financial Advisors of Boynton Beach Florida, whenever the 10 year average rate of return rises above 10% you are nearing the peak. Just a few weeks ago, the rate of change hit 12%.
I know we have said, in relation to stocks, not to look at prices or P/Es or moving averages, but when it comes to predicting commodities…
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Andy
:
Purely based on historic experience, one would conclude that the commodity cycle is likely near its peak.
However, the expectation of similar behaviour after the peak for this cycle is debatable for a couple of reasons:
1. ultra low interest rate (massive money printing) will serve as a support for commodity prices
2. Despite Chinese official’s proclaimed intention to transition from a builiding fixed asset economy to domestic consumption, the government will have to continue to rely on investment in fixed asset to prop up the economy as majority of the population does not and will not have suffiicient ‘surplus’ money to support the transition to domestic consumption.
I don’t expect a super cycle. However, I don’t expect a sharo decline either.
Kelvin Ng
:
Hi Roger, you’re absolutely right, commodities are clearly cyclical, with bubbles occurring in individual commodities with regularity – witness oil from 2007 to 2009, uranium, nickel, and zinc from 2006 to 2009, rare earths from 2009 to 2012, potash from 2007 to 2010 etc. This is because of the substantial lags in supply responses and as well as investors’ tendency to extrapolate indefinitely. These lead to overshoots both on the upside and the downside. Commodity stocks display even more extreme cyclicality, as they are leveraged plays on the underlying commodity. But hence the opportunities for the rational and patient investor.
But not all commodities are created the same. Individual commodities have different cycles. Whilst average commodity prices may be high, there are always opportunities in a particular commodity at any point in time. For example, uranium is deeply out of favour at the moment, especially after Fukushima, and in my opinion is a great long term buy right now
Kind regards,
Kelvin.