Bullish on Long-Term Commodities - Matthew Grossman

Dec.15.10 | About: Jefferies TR/J (CRB)

Mike Norman: Hi everybody. Welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, what is the outlook for the commodity markets now? We’ve seen a recent setback. Here to talk about it is Matthew Grossman, chief equity market strategist for Adam Mesh Trading. Matthew, thank you very much for coming on the show; I appreciate it.

Now, I know you’re an equity strategist, but you’re also very, very active in the commodity markets. Tell us what you think here. We’ve seen another big rise in commodity prices recently. Now a pullback. Stock market’s looking a little bit shaky again. Problems in Europe, debt problems, the debt crisis. Some worries perhaps that this commodity market rally is over. What do you think?

Matthew Grossman, chief equity market strategist, Adam Mesh Trading Group (Grossman): Well, I think that you are correct, and that the commodity markets have been jittery, especially after the past few weeks. But I actually see a lot of resilience, to tell you the truth, in the commodity market. If you think about how the stock market reacted six months ago when everyone was scared about what was going on in Europe, we saw a much bigger pullback in the stock market, a much bigger pullback in commodities.

Norman: So they’ve been inoculated to a certain degree, you think, against the Europe debt contagion? That’s not a concern or at least as great a concern as it was the last time?

Grossman: I would agree with that. It’s not as great a concern. But we do need to monitor that situation, because Ireland is one thing, but Spain is another. If Spain goes the way of Ireland, that could be much worse than what we’ve seen so far.

But if you look this week at gold, gold has actually rallied when the dollar has strengthened. And for September and October, what fueled the commodity rally and the gold rally really was a weakened dollar.

Norman: Well, wait: Gold came way down from almost $1,500 an ounce to $1,350; almost a 10 percent drop.

Grossman: Correct. It went from $1,427 down under $1,350. We haven’t seen the dollar weaken as much, but we’ve seen gold rally. Gold is almost $1,390 again. So we’ve seen a lot of bullishness in the commodity sector even with the strong dollar.

Norman: Well, let’s set gold aside for a second. I’ve had people on this show that come from the commercial side of a lot of these commodity markets − people in the physical market, in the trade. And they’re preaching a different story here. They’re saying, “Look, in a lot of these commodities, we have abundant supplies. The physical demand from end-users is just not there. You’re seeing a lot of investment demand, but basically what that is are speculators just stockpiling commodities. If they ever want to sell it, you don’t have the real consumer there to take the other side of that trade.” You buy that?

Grossman: Well, I think that what you need to do there − which I tell everyone who asks me − is that you really need to classify your trades. Are we talking about short term, medium term or long term? And why I bring that up here is that in the short term, you could be right. In the next two, three, four weeks, it’s very hard to play these commodities. And you know what, we could see a pullback. But I think in the long run, in the long term, I’m a very big bull when it comes to these commodities.

Norman: What’s the long term: 18 years, five years, a year?

Grossman: Long term for me is years. I would say two years-plus. I always take the number five years. Do you think that within the next five years, gold will hit a new all-time high? Yes, I do. I think once things kind of play out, we will see massive inflation. And we already saw what happens when people are just fearful of inflation.

Norman: What do you mean, “Once things play out”? What things are going to play out?

Grossman: Once we get over the issues in Europe − one way or the other − once we get over what’s going on in the Korean Peninsula. I’ve been doing this my whole professional career. And the one thing that’s certain is that we do keep plugging along, we do keep on going. So while we might have times where we take dips, and we might see retracements in commodities, over the long run, I do believe that the fundamentals are there for commodities to continue higher.

How about this, simply: We have a growing population around the world. Take, for instance, the BRIC countries. We have emerging middle classes. In five, 10, 15, 20 years, they’re going to be even bigger than they are now.

Norman: But that’s always been true. The world population has always been increasing, and we’ve run out of things before or gotten close to that. But look, technology, science − different means of different processes by which we do things, industry, whatever − that’s always kind of made the commodity markets look like a cyclical thing, and then it goes back down to some very low price for a sustained period of time.

Grossman: I would agree with you. And some commodities have been stronger than others. But if you take a look over the course of history, if you bought oil in the 1970s, isn’t it worth more today?

Norman: Yeah, but everything is. But on an inflation-adjusted basis, it’s a lot cheaper.

Grossman: Correct. But there are certain commodities that did much better than others. So my point is that I do think there are certain commodities also that can actually do much better in the long run and have more …

Norman: What’s your favorite top three right now? What would you be getting into, short term, medium term, long term?

Grossman: I think short term … are we talking about the next four weeks?

Norman: OK.

Grossman: To be honest with you, I think that we’re in a difficult period and we could easily wind up at the end of 2010 at the same levels that we are now. Gold, copper …

Norman: We’re almost there anyway.

Grossman: Roughly at the same. Might go up a little bit, might go down a little bit. I don’t love anything for the next month. I think longer term, I’m a big fan of uranium. I actually just did a piece on that for the daily email that I put out to 180,000 people. Uranium. There is …

Norman: I’ll tell you what. We’re going to do another interview. Let’s hold that one for the next interview. So we’ll be getting back to talk a lot about uranium. But we got the perspective: Things are looking good longer term for commodities. The trends are still intact.

That’s it for now, folks. This is Mike Norman. See you here next time. Bye-bye.

Disclosure: No position