Secular Bull in Commodities Remains Intact

The Chinese Purchasing Managers Index (PMI) for May remained in the expansionary zone of higher than 50%, although it moderated to 53.1% from 53.5% in April, according to Li & Fung Research Centre. Although eight of the 11 sub-indices were slightly lower than their respective levels in the previous month, it is noteworthy that the new export orders index returned to the expansionary territory for the first time since June 2008. “Strong domestic demand, together with an improving export situation, has helped resume the expansion of the manufacturing sector in China,“ said the report.

China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

According to Rosenberg:

The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities.

He highlights that the world has just endured the steepest global economic setback in 70 years and yet commodity prices across a broad front - gold, oil, copper, soybeans - managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market - you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Comments

[TradingHelp...:]

Another great article. No doubt the insular bears that think the NYSE is the global economy will knock you, but you are spot on. Inflation is coming back strong.

Jun 03 05:41 AM

[rick12345:]

As the world economy expands. the USA's parochial economy will move sideways. I know it sounds drastic, but the US needs to open its borders' with South America like West Germany did with East Germany.

Jun 03 07:42 AM

[mrmillergd:]

Great article. Although I am skeptical of resumed growth in foreign exports, I do think domestic demand could be a driving force for China. As the 1B population starts to pursue a middle class lifestyle with all the accompanying goods and food products that come with it, the secular bull in commodities appears intact.

Jun 03 07:58 AM

[doubleguns:]

I am curious about the AG sector with all of the land grabs going on around Africa and SE Asia. Either they know what is coming or they are moving away from US food source.

I am not sure where this is heading yet.

Jun 03 08:19 AM

[Moon Kil Woong:]

100% agree commodities are rising with inflation. China or no China. If I had to be delta neutral I'd prolly go pig on all commodities besides the ones China is hoarding. After all, their own domestic consumption of steel would take decades to eat through all the copper and steel they are hoarding. But I guess, they don't know what else top buy with US cash. After all, their citizen's still have not much purchasing power since .5% of them are hoarding all the wealth of China and aren't in the mood for sharing (or buying).

Sooner or later all that copper and steel will pour into the market or just oxidize into green and red powder.

Jun 03 08:50 AM

[twinnkie:]

bunk

Jun 03 10:27 AM

[Mad Hedge F...:]

You can bet you bottom dollar on it. If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year (www.madhedgefundtrader...), then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (Remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world’s largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these. Hmmmm, I wonder if those bell bottoms still fit.

Jun 03 11:28 AM

[AndrewBaker:]

Commodities are on the up priced in dollars as the dollar itself sinks relative to other currencies. Beware though that demand will not use up all the commodities in store, so much of it is being used a s a value store rather than raw materials for manufacture. So, when the markets drop, so will prices of those commodities not actually bought for use. I'm backing agricultural commodities especially for that reason, plus gold, as that is always the default currency of choice when the dollar drops.

Jun 03 02:34 PM

[Tony Daltorio:]

Excellent article! Commodities, along with emerging markets, are the places to invest your money for growth.

Jun 03 04:28 PM

[ecoco:]

No one can deny the positive effect of Chinese economy on the price of commodities, but presently china is a minor factor in the overall present bull.
The present bull in commodities is generated by speculative demand by investors seeking safety. This demand is partly to hedge against inflation and falling UD$ value and partly due to low interest rates and investors being cautious with regard to equities. Physical demand of commodities for economic activity is at an all time low.
Gold physical demand is at an all time low and scrap gold supplies are at an all time high in major markets of India and the Middle East.
Oil physical demand is way bellow figures seen the previous periods and inventories are high and at comfortable levels.
Industrial metals physical demand is down by 30% compared to previous years due to declines in global manufacturing output and construction.
Most of the present demand is either speculative by investors or stock piling by countries, these will soon face the reality that commodities can only be consumed by economic activity (except for gold). This might take some time, there is limited space to store unused commodities and speculators are not a patient bunch.
For this bull to remain strong one has to also look at the US$ index, interest rates, economic activity and most importantly investor’s sentiment.

Jun 04 05:33 AM

[Asset Manag...:]

No doubt at present China is emerging stronger as an economic power, it is due to their large population, high requirements, and of course latest and better technologies. They seem to be developing in all respects whether it is economy, politics or technology, or Asset Management. If they will continue the trend they will be the largest economy in the world.

Jul 05 03:55 AM