What began as a normal correction in an overheated commodities market has now turned into the early stages of a rout. Energy, metals, grain... they're all headed lower. The only thing that seems to be bucking this trend is gold. What's going on? Two things, in our view. First is the rise in the U.S. dollar. Since most commodities that are traded globally are priced in dollars, it stands to reason that a stronger dollar will translate into lower prices for commodities. But that's not the only thing that's going on here.
The other factor is slowing global growth. China has been tightening their lending activity, and Europe is in the middle of a debt crisis. Estimates of global economic growth have been coming down for weeks now. The combination of a stronger dollar and weaker growth is putting pressure on commodities. We would not fight this trend.
If we look at the history of commodities going back all the way to the mid 1700s, we find that the average secular bull market move has lasted about 20 years. The average increase in commodity prices during these bull markets has been about a triple. So, in that context, it would seem much more likely that the current bull market in commodities has further to go.
Supporting this premise is the fact that the emerging economies of China, India, and others are in the middle of multi-year rapid expansions, which will continue to put upward pressure on commodity prices from a supply-demand perspective. Until the commodity producing countries gear up their production, and bring significant additional supply to market, the upward move in prices will probably continue.
