Almost all commodities began 2007 on a downdraft, with the price of oil perhaps taking the hardest hit so far. Nickel and natural gas may be the most notable exceptions, while uranium has also remained strong. But the broader correction has been “so quick and violent,” says Sprott Asset Management, “that it has led many to believe that the commodity bull market that began in 2001 is now coming to an end.”
However, Eric Sprott considers this downtrend a short-term blip in what will continue to be a long-term bull market with several years to go.
“No, we don’t believe the commodity bull has been slain,” he said in a research note. “There are financial, and perhaps even geopolitical, games afoot that are suppressing prices for the time being.”
Given recent data on the Chinese economy, Mr. Sprott doesn’t expect global demand for commodities will weaken anytime soon.
He also stressed that demand for commodities continues to become less dependent on the health of the U.S. economy.
So why the sell-off?
For oil prices, Mr. Sprott thinks the financial world is equally quick to take profits during periods of weakness as it is during more bullish times, thanks in part, to the proliferation of hedge funds.
He also cites potential geopolitical factors for oil’s volatility and the potential for chaos, such as Saudi Arabia (perhaps with U.S. backing) trying to hurt Iran by suppressing the price of oil.
Jim Rogers, one of the strongest proponents for commodities, agrees, pointing to the importance of the supply situation.
“Excess inventories can drive down oil. But what’s going to keep it down?" he told the Financial Post. "Nobody has been discovering any oil over the past 35 years.”