Commodity Analysts Believe the Party's Over

Below we highlight the one-year price change (%) of 18 commodities. As shown, the gains have been enormous for many of them, with wheat leading the way at 99%. Lead, platinum and soybeans rank 2nd, 3rd and 4th, all with gains of more than 70%. Oil is up 65% and gold is up 39% (doesn't it seem like gold is up much more than that?). Only two commodities are down over the past year -- Zinc and Nickel.

click to enlarge

So what are analysts expecting for these same commodities going forward? Bloomberg tracks the consensus price forecasts of commodity analysts, and below we highlight the difference between current prices and year-end 2008 price expectations. While only two commodities are down over the past year, only two are expected to be higher than they are now by the end of 2008. The two commodities that are up the most over the past year are expected to go down the most going forward. Oil is expected to decline 19% to $80/barrel, and Gold is expected to decline 15% to $807/ounce.

Comments

[Greg Pinelli:]

It's a funny thing....when billions of people want to eat or heat their homes because they're freezing they don't really care that nat gas was up 11% last year or wheat triple that...they eat and warm their homes...and give up something less essential.
If you look at a long term inflation adjusted graph of nearly all the commodities/resources listed above or for sale the gains are anything but parabolic. Oh..and another funny thing..people in Asian countries and India don't much care what "analysts" say or consider a better life a "party."

2008 Feb 22 09:42 AM

[erniem:]

Bingo. Inflation is wayyyy past the 3-4% the fed says is happening. Try 6-11%.

2008 Feb 22 10:58 AM

[Rhodomontade:]

"Cornucopian puffery from navel-gazing, coddled, institutional chartists who swallow this government-manufacture... economic statistical propaganda wholesale because they are either stupid or afraid.

Back in the real world inflation rages, growth in Asia is exploding, the money supply swells, and commodity scarcity is the new reality.

2008 Feb 22 11:48 AM

[megiddo666:]

Bespoke, usually I might generally agree with the analysts....However on wheat, and especially rice, plus other grains, there is too much damage, drought, floods, snow, and shortfalls of fertilizer use in India, Pakistan, Africa, etc, to make the case for prices to fall that much. China -- who really knows how much the Chinese are hedging on what they say to not have prices go sky high on crop shortfalls......Rice, for example, is not expected by most analysts I've read in Asia to drop in price, even after spring harvest, and the US is announcing that less rice will be planted this year...for 08-09.

2008 Feb 22 01:38 PM

[BrucePile:]

These same analysts published an article right here at seekingalpha.com back on September 20 titled "Currency Analysts Expect Dollar to Strengthen" complete with the photos above. They projected a chart of Euro vs Dollar that had it going down to around 1.32 in March '08. Well here we are and they were like way wrong on that. They don't seem to have a grasp of what's taking hold of commodity vs circulating currency markets. Their predictions sound similar to what Steve Forbes and the majority of analysts said about oil in mid '05 - it has got to go down from this ridiculous spike up to $50/barrel because it has gone up too far too fast. They made no attempt to understand what was behind it.

2008 Feb 22 02:55 PM

[iman:]

Is this article a joke? This is the dumbest thing I've read in a long time. What is the basis for this? Dollar regaining strength? how?

2008 Feb 22 04:51 PM

[Eftychis Gr...:]

Wow, just wow. This is the dumbest analysis I have ever seen. I just had lunch with a friend who viewed a presentation by the Carlyle Group on Tuesday where they are predicting all commodities to dramatically increase in price. Additionally, according to the Chinese interior ministry the nation may need to import twice as many soybean imports in March compared to this time last year.
These morons at Bloomberg should realize a few very simple truths-populations are increasing, war and speculation are driving up prices, droughts and climate change are hurting production.
These kids over at this firm think they know what they are talking about, but when you have the friends of the Vice President of the United States buying physical gold and trying to make water into a traded commodity then you know that the price of all of these commodity's will continue to rise.

2008 Feb 22 07:27 PM

[01GTvert:]

This author is obviously a paid shill trying to sell us the BS of a healthy/recovering economy. Lucky for us we're not phools and won't believe his BS hype. Commodities will reign supreme for 2 more years at least...especially wheat, beans and rice.

2008 Feb 22 10:44 PM

[sbenard:]

If inflation is rising this fast during a slowing economy, when demand is supposedly lower, what should we expect when the economy recovers and demand increases? Hyperinflation?

2008 Feb 22 11:14 PM

[E.D. Hart:]

"Expectations arbitrage" is the way to make money here.

Furthermore: the fact that markets act to substitute commodities keeps some rising when others drop. (that is some commodities are undervalued with respect to others)

If oil does drop to $ 80, I would still expect natural gast to rise north of $12 mmbtu based on equivalent heat value. (not drop)

or look at the substitution of palladium for platinum...if platinum falls 10% (possible) from $2200 to $1980 (roughly), I would expect palladium to increase from its current $510 per ounce or so (havent checked today) to between $700 and $900 per ounce.

The expectations are just that...expectations..a... a wonderful way to arbitrage what the market expects and is signaling in todays prices, with what is a likely future outcome, based on substitutions and historical patterns, that results in higher prices, given a sufficiently long time horizon.

2008 Feb 23 04:30 AM

[GSL:]

How substantive! Not! Turn the graph over. What went up should go down. Kind of begs the question why?

2008 Feb 23 08:24 AM

[dipps:]

Why on earth would 16 commodities out of 18 go down - just because they went up too much - this is absurd assinine reasoning and a lot of egg will be left on these analysts' faces. CHINDIA alone is still running around 6 to 8 % GDP -

Just taking gold for example adjusted for inflation to repeat the 1980 status would have to rise over $2000 per ounze. Inflation is not going away. We are coming out of a "stagflationary economy" later this year which will demand higher prices.

( n'est pas )

2008 Feb 23 08:32 AM

[drbagel:]

Nothing goes up forever.

2008 Feb 23 08:37 AM

[drbagel:]

Nothing goes up forever.

2008 Feb 23 08:38 AM

[yank:]

Bloomberg's commodity forecast is pretty much worthless. Nothing is stated to support WHY key commodities will decline this year. Just because they have gone up they will go down? Sorry, it doesn't work that way. Obviously Bloomberg missed the memo from Jim Rogers. We are still in the early stages of a "multi-year" bull cycle in commodities. Most of these hard assets have YEARS to run before they pull back. Bloomberg just doesn't get it.

2008 Feb 23 11:16 AM

[User 151033:]

But aren't these analysts basing their estimates on the usual commodities cyclical structure, a structure that has been profoundly disrupted by a set of historically unusual global economic circumstances based an a supply-demand ratio, a ratio reflected in a steady trend upwards for commodities? Gold estimates for these analysts, for example, are based I believe on a $850./ounce estimate, whereas all indicators, technical and fundamental, suggest a movement in 2008 to at the very least $1000.

2008 Feb 23 11:38 AM

[User 155024:]

because of population pressures, the perceived need for growth to alleviate the aforementioned problem. commodities will be strong for a long time. whether in the soft ags, energy, precious metals, or industrial metals. what am i supposed to do based on articles like this? give up these positions for investments in fiat currencies that could come under extreme pressure because of over $1 quadrillion of derivatives exposure. in addition it makes sense to invest in commodities because as inflation grows, prices will soar, and commodities can be used as a hedge. pouring more money into over-valued companies in the nyse, with a volatile currency is questionable at best.

2008 Feb 23 11:44 AM

[NutritionFacts:]

Wow. Some strongly held opinions here, nearly all of them in the 'this is just the beginning' camp. The crux of the 'this is just the beginning, there is no way back' camp's argument, is that there is just too much demand and not enough supply, and the situation is only going to get worse.
Hmm. So, all of you, how much exactly of the rise in the prices of these commodities is due to 'too much demand and not enough supply'? You all implicitly believe that that, and that alone, is responsible for the rises in the prices of these commodities. I am astounded. I mean, you all have *such insight* into the individual trades pushing up these prices. You are all very lucky.
Personally, I am inclined to see the consensus of views here as the nascent beginnings at least of a contrarian indicator.

2008 Feb 23 12:00 PM

[jt:]

Well, looks like the topic was fairly well covered. I would only disagree that the unbelievably "asinine" comments being published are done out of stupidity. I have absolutely NO doubt that they are published b/c they conform to the propagandist message of TPTB--"all's well...be happy...this is just a temporary glitch...a little bump in the road on our ongoing journey to Eden on Earth where all are wealthy and enjoying all our paper money."

To Mr/MsNutritionFacts...... only contrarian indicator is that the mainstream media (read USPravda) continues to spout this drivel. The huge majority of Americans sense something is wrong but are so brainwashed that all they need is a little reassuring and they go back to sitting in front of their TV to be entertained and forget what they're seeing. AS far as your "I mean, you all have *such insight*" little piece of arrogance, by all means, go with your "nascent beginnings at least of a contrarian indicator" gut feeling and please feel free to short the entire commodity's sector. I'm sure it will be very "profitable" for you...at least in the sense that we all tend to learn more from our mistakes. jt

2008 Feb 23 12:57 PM

[Urbane Gori...:]

I read just about everything I can... And I particularly like the comments section as often they expose weaknesses in the thinking of the author... I appreciate cynicism and a contrarian view.... However, the senseless flaming and overarching comments detract from an appreciation of the counter-opinions. How about stating facts or reasoning for your opinion (either direction) without the "k3wL kiDdi3" flames...

Thx jegan ;-)

2008 Feb 23 02:35 PM

[jimmorningstar:]

i own DJP -- is that the best way to play commodities? (i like the fact any sector is capped at 33%)

as to gold, I own USAGX but it seems as volatile as gold; i would like gold exposure without massive volatility, so I also bought PRPFX, and it seems to work, but I wonder how logical the mix is? I also own HSTRX for pmetals exposure..again, a kind of chicken less volatile way of getting the exposure

the above (well, and some reits) are my only diversifying assets in my otherwise normal portfolio of dom and foreign funds

what is best way to get commodities expsore?
gold exposure?

what other non-traditonal so to speak or less correlated assets should I consider? some naturla resources etf?..utilities?

thanks if anyone has any thoughts

2008 Feb 23 03:33 PM

[Chancer:]

Experts are often wrong- especially on timing. When experts predict something this year, it may well happen- 2 years from now.

2008 Feb 23 03:58 PM

[David Jackson:]

I'm surprised that the comments are attacking the authors of the article for reporting what analysts are saying. The authors themselves aren't expressing a view either way -- they're just reporting the analyst consensus.

Note that consensus views tend to be a contrarian indicator.

What's interesting is that the consensus among commenters on Seeking Alpha seems to be that commodities will continue their climb, wheras the analyst consensus seems to be that that they're in for a fall.

I wonder what to make of that.

2008 Feb 23 04:20 PM

[Primero:]

I think that the analysts are overlooking the importance of inflation which is real and unstoppable. In such an environment, exposure to commodities is the only way to protect the value of your falling dollar.
If the commodities do in fact go down, this will be more than corrected by the rising prices, thus protecting your investment.

2008 Feb 23 04:50 PM

[TERN:]

Why leave out iron ore and steel?
Because we have just seen a 65% price increase negotiated for 2008 deliveries?

2008 Feb 23 10:59 PM

[E.D. Hart:]

When Apple, Google, RIM and others soar year after year, traders, and even investors believe that they must be good investments.

When asked why, people usually say something about expectations for future earnings growth and a confidence based on the fact that they have gone up in the past. (look at that chart!)

People often ignore that technology earnings growth rates are priced for higher and higher expectations, until they are priced for perfection, and then a disapointing earnings report sends the stock back to earth. That, and the fact that technology earnings are very cyclical.

But, when investing in stocks, its a good thing to see a rising upward line.

However,when commodities soar, people see a correction looming and look for them to fall. (oh my gawd, gold topping at $800, time to sell!)

I bought gold in every year from 1997 to present, and early on, people everywhere pointed to golds low price as an indicator that gold was a rotten investment, BECAUSE OF ITS LOW PRICE.

And because it hadnt kept pace with inflation (never that it was undervalued).

Fast forward to a decade later and the same magazines newsletters and commentators are saying that gold in a bad investment, BECAUSE OF ITS HIGH PRICE. (never that the trend is intact, and its still undervalued)

Finally, its true there is no published calculation (that Ive seen) exists that can tell you how to compute a given commodities value (unlike stocks where you can compute intrinsic value)--there is nevertheless a pent up demand and a supply that isnt keeping pace, ergo higher prices.

Look at palladuim and natural gas as two great examples--I dont need to be able to calculate their present intrinsic value, because I cant.

Everything I know and read points in the same direction---that the current and forseeable future supply isnt sufficient for current and future demand.

But, its all very imprecise.
I would rather be roughly right than precisely wrong.

2008 Feb 24 02:55 AM

[Jeffrey McL...:]

Interesting work, as usual. Keep it up.

2008 Feb 24 03:26 AM

[bigdog:]

Take a look at the 5yr price of rhodium ( kitco.com). I am still waitng for this bubble to burst.

2008 Feb 24 04:33 AM

[malomalo:]

Any commodity reccomendations for a novice 401k investor with the following:

45.73% BROKERAGELINK $76,277.67 = 55k BRK.B & 21k cash

29.98% FIDELITY RETIRE MMKT $50,008.54

16.51% DODGE & COX INCOME $27,533.32

3.39% PEPSICO COMMON STCK $5,661.96

1.78% SECURITY PLUS FUND $2,973.59

0.65% VANG INST TOT STK MK $1,090.64

0.65% VANG MIDCAP IDX INST $1,090.48

0.65% FID FREEDOM INCOME $1,085.86

0.65% VANG LG CAP EQ INDEX $1,080.36

100% $166,802.42

I jumped out of a lot of funds and positions just after the first of the year and feel lucky as portfolio is only down appox 1.5% ytd. I know I need to diversify and would like to start by getting into commodities. What % of portfolio? Which commodities? Any other commodities advice would be great. I know this is off topic, but I looked for a forum on this site ..couldn't find one so decided to post here. If anyone can direct me to forums, newsletters, sites etc.; then please advise. Thank you.

..malomalo

2008 Feb 24 10:34 AM

[CrossProfit:]

malomalo,

1) Any authentic investment adviser can not give real advice based on above information.
2) In order to do so, you would have to disclose personal information; not recommended for the web.
3) Perhaps it would be best to consult a licensed financial adviser with plenty of 401k experience.
4) Perhaps after working with a professional and paying fees for a few years, you will then be confident/competent enough to take over on your own.

In a nut shell - novice 401k investor, if you have to ask the above questions, you might end up following advice that is not suitable to your needs.

This is likely to be the reason that you did not get any 'concrete' responses from the SA community as most/all are professional. Any attempt by 'scamsters' to post on SA would be crucified by the community immediately.

CrossProfit

2008 Feb 24 01:33 PM

[hugho:]

Wow people. What do you really think?!!!I think the key to understanding the commodities is understanding the underlayment to commodities and that is the energy used to extract them and the financing behind the extraction.If the cost of the energy goes up, the commodity goes up and/or becomes scarce. The outlier factors influencing price are many and varied and of course include obvious things like analysts recommendations fatuous and otherwise, futures markets, sociopolitical events, investors expectations, etc blah blah. Most commoditites are oil driven, some coal or gas(electricity). If commodities are abundant and energy is cheap it stands to reason that there is price elasticity influenced by supply/demand factors. If lots of land can be planted to expand the crop base, elasticity. That is not the case, people. Something is different now and until it becomes common knowledge that the cost of energy is what drives these things, Oil(energy) will fluctuate in price but oil will never go down for any sustained period ever again.The truly essential commodities probably wont either and I wouldn't begin to guess on the specific ones like rare metals. If we enter a period of deep or sustained industrial downturn some will drop. We wont need as much platinum or palladium when basket case corporations like GM stop building 6000 lb suburbans and pickemup trucks that need big catalytic converters. But it's hard to bet against grains; we'll never see $2/bushel wheat again. People who watch the bubbleheaded bobbleheads on CNBC and Fox etc are wasting their time.

2008 Feb 24 02:16 PM

[GKM:]

Commodity bull runs tend to blow off in a huge final run. I can't speak for much beyond oil, nat gas, and gold but if these are any indication of coming price action we haven't seen the top yet (although we may yet see more pullbacks to buy into).

I think the analyst consensus that a significant drop is expected is hugely bullish. Those guys have/influence the capital to throw at their guesses whereas we schmoes here don't really add up to much. As Dennis Gartman says "do the tough trade" and since everyone feels oil will fall due to recessionary expectations then oil will likely rise.

2008 Feb 24 02:28 PM

[Brian in Mo...:]

Wow, How can you all right off a drop in commodities like gold, when demand could drop significantly in not just the USA, but now europe and even Asia. India is widely reported to be turning in gold as are Americans (Maybe to pay for those other things like food and mortages). Since GKM mentioned Gartman (Bigger Gold Bug than myself), maybe some of you are aware of his declaration that he lighten-up (50%) of his Gold positions. There are even a few market bears who covered their shorts. You know why ? There are no profits until they're taken. Many Gold sites I visit (kitco.com, #1 for me) are warning about a POSSIBLE pullback, ya it's possible. The banter reminds me of the Stock blogs where everyone is convinced when the $2 gold stock goes to $20 that it just has to go to $200, then it hit $.20 This is not investment advice: there has been alot of money made everyday after the gold and gold stocks open High and Fallback (I've done it even as an amateur, it's not rocket science when something goes up to far to fast). I admit nobody has seen the blow-off top occur either. I can't help but think Gold and Commodities are now being targeted by the same hedge funds in NYC and Baystreet who love to pump and dump any Bubble they can profit from (just look at the last half hour of friday's stock markets) and they do take profits eventually by selling and selling and selling some more (we may see this in Platinum first, if we're lucky enough to get a warning). That's my 2 cents from Canada, a resource loving country to boot, so be more careful and more open minded.

2008 Feb 24 08:26 PM

[John Scott:]

Lots of good comments here. Special kudos to CrossProfit

2008 Feb 24 09:58 PM

[spf5:]

If this article isn't the classic fade then I don't know what is.

2008 Feb 25 12:02 AM

[Peter Dag:]

Cheap money (low interest rates relative to inflation) creates commodity bubbles (as in the 1970s). When interest rates were higher than inflation (most of the times) from 1982 to 2000, commodities were stable with mild cyclical movements. In the 1970s were the Arabs. Now is China and India. There is always an excuse. Cheap money is the real force debasing a currency and creating inflation. Demand has a minor cyclical role.

2008 Feb 25 03:10 AM

[honyak47:]

It would be interesting and informative to know what a similiar survey taken at the beginning of 2007 would reveal as to the accuracy of the analysts projections of their expections for 2007 now that we know the actual results. Were they right on or did they miss the boat as usual?

2008 Feb 25 01:22 PM

[davemcc3300:]

And I heard what seemed to be a voice in the midst of the four living creatures, saying, "A quart of wheat for a denarius, and three quarts of barley for a denarius, and do not harm the oil and wine!" (Revelation 6:6)

2008 Feb 25 04:32 PM

[Spencerh:]

Please continue to public articles from these guys. They are great contrary indicators! :-)

2008 Mar 10 01:09 AM

[Spencerh:]

er, publish.

2008 Mar 10 01:09 AM

[silver-bullet:]

Obviously this article is a technical analysis on commodities. Good for speculators with short-term focus.

However, long term investors will be ill advised by this article, as it did not consider:

1) Global Population growth.
2) Dwindling global oil reserves (which will affect price of everything)
3) Parabolic increase of M3 money supply in virtually all currencies which is the cause of inflation.

At us$17.5 / oz, silver is one of the few affordable hedge to capital preservation. The recent drop in silver price serve as one of the few remaining opportunities that we may purchase it below $20.

2008 Mar 23 06:00 PM