Inside Commodities: Is the Bull Run Over, or Just Taking a Break?

| About: SPDR Gold (GLD)

On Monday (3 Nov 2008) I attended the Inside Commodities conference at the New York Stock Exchange (NYSE). The conference was organized by IndexUniverse and hosted at the NYSE. Since the NYSE has acquired AMEX and is boosting its offering of exchange-traded funds (ETFs), a lot of the focus was on the ETFs and ETNs (exchange traded notes) available to take advantage of commodities. The event was organized as a series of panels covering different types of commodities from metals to agriculture and included panelists such as renowned investor Jim Rogers. The organizers had us sign a paper saying we wouldn’t quote the speakers, so I’ll give an overview of the different thoughts rather than what individual panelists said.

Almost all the panelists were in agreement that the short-term outlook for commodities was bearish. The average time frame given for the continued bearishness was at least another 9-18 months. Jim Rogers, though, thinks that commodities are in a secular bull market and that the current retracement is simply caused by forced liquidation and deleveraging, and can’t be considered a real bear market.

This forced liquidation is also what has pushed the US dollar up so much, and several panelists thought the dollar could suffer from future inflationary pressure as the US government continues to print money to cover a ballooning deficit and the bailouts. The currencies that could benefit from this are generally thought to be the Chinese Yuan as well as currencies from other Asian countries with large monetary reserves which could be used to prop up their own economies and bolster internal spending. One interesting thing to note is that Jim Rogers said he believes that long-term treasury bonds are currently in a bubble and that he is shorting them while longing short-term bonds.

And if all the inflationary pressures make gold seem a good buy, many of the panelists weren’t so sure; some think that it is over-priced by as much as $200-$300 and Jim Rogers thinks that if the IMF decides to sell some gold to raise money for all the bailouts it is giving out, it could put further downside pressure on gold. Furthermore, gold is the only commodity with 30 years' worth of supply sitting in storage above ground.

Another risk factor to gold would be redemptions from the GLD ETF (GLD), which currently constitutes about 50% of daily gold trading volume and holds reserves that are bigger than those of most countries. Any large scale redemptions from the fund could cause liquidation of some of those reserves and push prices lower. Some panelists thought that large scale redemptions were unlikely, though, as GLD is a non-leveraged fund and as such, there shouldn’t be margin calls on investors in it.


Most panelists agreed with the peak-oil theory and that it was far easier to get more output of natural gas than of oil. However, most think that price pressures on oil could remain low for some time as demand has slowed and Saudi Arabia has been working to keep prices down for geopolitical reasons - primarily to prevent rivals Iran, Russia and Venezuela from getting too strong.

Hedge fund managers have said that they are short for the short-term but that they plan to go long as soon as demand pressures pick up or the low prices push the supplies down sufficiently to cause a potential future shortage.

Another important point they noted is that the US has far larger oil consumption than China and India, and that most of that consumption is in transport - cars, trucks, etc. So even if a new administration puts up more sources of alternative energy and nuclear, there will still be a large consumption from vehicles. What about more fuel efficient vehicles? Even if there was widespread availability of cars running on electricity or that were far more fuel efficient, the time taken to replace many fleets would be at least 12 years and during that time the demand for oil would remain strong.

Industrial Metals

This was probably the commodity that panelists were most bearish on. Supplies have grown tremendously in the past few years as prices surged, and China is a large producer of many of these metals. As demand in China is slowing and the supplies are building up the supply/demand imbalance is growing and prices could still fall further until some of these mines close down or companies go out of business and supply diminishes.


In contrast to Industrial Metals, agriculture is the commodity that panelists were most bullish on, in particular Jim Rogers. The bullishness is due mainly to the world’s expanding population and the fact that even in a downturn, people will need to eat.

China is another major reason for long-term bullishness; the Chinese population is seeing an increase in income and this is affecting their choice in diet. They are consuming more and better food and China is a net importer of many of these foods.

In the recent spike in food prices, many farmers were unable to benefit as their production costs in fuel and fertilizer rose faster than food prices. At the same time, the food prices as reflected in the futures market were quite a bit higher than the spot prices the farmers were actually able to sell their food at. This would generally imply that the futures prices were influenced to a large degree by speculation.

Now that the credit markets have seized up, farmers face a new problem of financing which could affect the amount of crops they can grow, and if some other factor such as weather or a poor harvest comes into play food prices could once again rise as supply shrinks.

A few months back I was in Argentina, one of the largest producers of grains, and witnessed protests in the capital, Buenos Aires, after the government decided it wanted to raise taxes on exported grain to up to 90% in some cases. Naturally the farmers, who were already struggling with higher fuel and fertilizer costs and a drought in some parts of the country, were furious and took to the streets. The government called them ‘greedy’ farmers and said the money would be better off in the government coffers. In the end, the legislation failed to pass, but during the three months that the farmers partially boycotted exports, grain prices around the world rose further.


A Picture I Took Of The Protests In Buenos Aires

After traveling around the world and seeing how different countries handle food production and export, I am convinced that the world can produce more than enough food for a growing population. The biggest problem is legislation in many of the producing countries that has hampered - or, in cases like Zimbabwe, destroyed - the food producing capabilities of these countries. If these countries change their policies to give farmers a fairer deal, then food prices could decline and we could see supplies increase. However, the recent history shows otherwise.


Will the commodity bull run continue after this period of forced liquidation, or could a global economic slowdown signal an end to the nearly 10 year bull run in commodities? Most panelists thought that at least for the short term, commodities would probably continue their descent. In the long-term, there are some commodities that seem to have a far more bullish outlook due to their supply / demand fundamentals, and others that are currently seeing a supply glut and may take a longer time to have their stockpiles depleted.