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| I read a report from Strategas yesterday that showed the price moves of various
commodities over the past year against various currencies, and thought it was
worthy of discussion. As you know, members of the Vestopia
community have differing views on commodities from very bullish outlooks due to
supply/demand issues as well as thoughts that this could be a secular bull
market in commodities to those who are more negative on commodities due to the
large increases in prices and the historical cyclicality of the area. Below, are
highlights of the commodity price changes over the past
year. Wheat - US $ +104%, Euro +76%, British Pound +102%, Yen +72% Crude Oil- US $ +70%, Euro +47%, British Pound +69%, Yen +44% Gold- US $ +37%, Euro +18%, British Pound +36%, Yen +16% Silver- US $ +27%, Euro +9%, British Pound +26%, Yen +7% RBOB Gasoline- US $ +46%, Euro +26%, British Pound +45%, Yen +24% Soybeans- US $ +60%, Euro +38%, British Pound +58%, Yen +35% The one clear takeaway from this in my opinion is that clearly the fall in the dollar is not the only (or in many cases even the primary) reason for the increased prices. In Euro or Yen terms, the basket of commodities listed above is higher by double digit percentages with the exception of silver. Another item that is interesting is that both crude oil and gold sold off once they reached approximately 2 standard deviations from their 200 day moving average while the yen/dollar relationship has broken below this level. My own opinion of commodities is that their are pockets such as agriculture that may do well in the short term, at least until ethanol requirements are changed, while some areas such as the energy complex seem over-extended even at current levels. My investment philosophy is to invest in companies with a two year time horizon, and therefore I am not currently invested in the area. I am finding better opportunities in other areas such as in a software company in the plastics area which is trading for an enterprise value/earnings of less than 10 and generates 85% of sales internationally, in a defense company experiencing rapid increases in backlog and an asset manager that is trading at an enterprise value/ebitda well below 4 and a price/book of less than 0.6. |
Disclosure: No Positions
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This article has 24 comments:
Stockdude's point about exploration is true in as much as they are looking for resources but NOT finding them. The Petrobas find is deep beneath the ocean and will require expensive if not undevelopled technology. Much pricier than the stick-a-straw-in-the-g... Saudi oil. The Canadian oils sands are a mining operation with a bpd of maybe 2-3 million max...the global demand will eat through that in a year.
We've had barely a handful of major oil field discoveries since the 60's and a vast majority of producing countries are in decline. The 21st century will be defined by the quest for resources, you have already witnessed it with two wars in Iraq.
Ignore commodities at your own risk.
you have it right as the commodity bears may ignore the hard asset sector at their peril. I don't know why anyone could conclude that the commodity bull is "dead". Jim Rogers knows a lot more about these cycles than anyone and he has stated plainly they run on avg about 15 years. Since we started in the 2000-01 time frame, we are only in the middle "innings" of the ballgame. Another thing to consider is that in commodity bull cycles the most money is made at the beginning of the cycle (first 2-3 years) and near the end of the cycle (last 3-4 years). Instead of trying to "time" entry points it seems to make more sense just to buy n hold them.
I remember even 15 years ago in school it was quoted that "if everyone lived with the per capita resource consumption of the US, we would need 3.5 Earths." Barring huge breakthroughs in science (rapid development of fusion reactors), living standards in the US are going to decline as everyone else rightfully comes to the table for a bite.
A previous poster mentioned offshore oil and the tar sands of Canada. We wouldn't even be CONSIDERING these oil sources if we were not desperate for every last drop of the black petro we can find. Tar sands are what they sound like -- several steps below the worst crap crude that comes out of Venezuela. Turning it into gasoline is going to require many more refining steps and extra energy resulting in ... higher oil prices!
Commodities may flap around here and there but the sky is the limit for the next several decades.
vestopia.com/danw
While corn gets used (recklessly) on ethanol, as millions worldwide starve for want of food, as there are gas lines in China, as Iran is troubled about providing for their own energy needs (let alone supplying for the rest of the world), common sense dictates that for the next two or more years, commodities will continue to do fine, and they'll certainly do well enough to protect the last 5+ years of gains.
@christle and js: haha!
For those folks that don't think commodities will do well: Sit back and enjoy the show.
Two relatives of mine, in their 50s and 60s sent me savings bonds (series ee) when my daughter was born three years ago. This is well meaning but foolish. I am planning on taking the bonds, cashing them, and buying Apache oil.
Which would you rather fund your son or daughters education with--paper debt of a bloated and undisciplined nation---or the single most actively traded commodity on earth?
After the depression and into the 50s, people stayed invested with bonds because stocks were "too risky". This in spite of the recovery in the markets. There was no doubt in their minds that bonds were safe, and less risky.
They wrote articles like, "Why I dont invest in Stocks"--everyone knew that bonds were the way to go and protect your wealth in the deflationary times, and next depression.
Now, on the heels of the worst bear market in commodities possibly ever (1980 to 2002) the commodity market has been on fire.
But old beliefs die hard. Stocks must be the way to go, and every year people express amazement that the commodity bull still has legs. Surprise of what great heights gold, oil has achieved, and utter skepticism that commodities will go higher. There is always supreme confidence in those that fight the last war, that they know the way.
"There must be a bubble. It must be hot money chasing too few goods. It cant last because it doesn't fit my mental model. My confidence tells me so." Ranks right up there with "I'm the decider".
Just to be clear, the fed and other central banks are categorically *not* printing up lots of money. The commodities boom may have gotten a bit of a speculative kick from recent fed easing - maybe, but the rational for the commodities boom has very little to do with monetary debasement. It's just good old supply and demand.
vestopia.com/danw
Once again you pass judgment on commodities based on "price levels." Sure, there is some element of fad investing in commodities right now but this is not like the "tech and telecom names of the late 90s." Those were entirely artificial bubbles based on wild speculation and collective insanity. Put away the chart for a second and look outside. There's not enough oil in the world to meet demand (hence willingness to find oil in 6,000 feet of water)!
The U.S. Energy Information Administration showed in 2008 a production peak in May 2005. Please explain away how oil is going to become cheaper given this fact?
On the food side, the hungry masses of India and China want more meat -- and now they can start to afford it! The world's population continues to swell but arable land is on the decline! See: www.tranquileye.com/cl.../
For the last couple decades the market has been a playpen for ideas to go boom and bust in, hence the temptation to consider this current boom to be a bust waiting to happen. Commodities prices, however, are much more closely tied to "real world" events and the real world is starting to look mighty crowded.
Couple all of the above with the inflationary pressure of a declining dollar (thanks to the US being an enormously irresponsible debtor nation) and the commodity boom is looking just fine.
Agree 100% that supply/demand is pushing it up but I think it is also the double whammy with accelerating M3 growth worldwide. Matt Simmon's "Twilight in the Desert" was a great book on the subject. So was "The Long Emergency" by John Knustler if you want to get a little more on the darker side.
I won't argue the point I am about to make, as most people approach global warming as a religion, not as a scientific issue. I am hopeful, now that global temps by most measures have not increased for over 8 years, that cooler heads will prevail before some politician really screws things up (although they have already made quite a mess of things with ethanol-- which surprisingly nobody here realizes is the main driver of ag-based commodity prices). If not for the warming zealots we could take some steps that would help on so many levels.
Yes, we Americans have borrowed up to our ears. We can't pay our current bills, and nobody even mentions the REAL problems in store, for social security, medicare, and now medication for our expanding population of senior citizens (like me).
Sounds pretty hopeless.
But... if only...
Right now, we have huge amounts of oil off the East coast of our country, on the continental shelf under relatively shallow water. It is all off limits to exploration, so we don't even know how much is there. But scientists have estimated huge amounts, in line with the amounts off the coasts of all of the South American countries-- where they have the common sense to pull it out of the ground and sell it, to build their economies and draw investment away from the US. Yes, the US-- the story belongs in a Dr Suess book. The hubris of rich liberals who somehow feel good about huge hunks of 'unspoiled' land-- seeing value only as part of some environmental religion... while nature is really all about change of the earth in response to ALL of her inhabitants. People will read the story about the country that died of starvation while sitting on huge amounts of food-- died of starvation over fear of staining their clothes. After we are gone, the stockpiles will be taken by those who take our place, and the question will be 'why? why didn't they use what they had?'
The East coast, the gulf coast of Florida, and Anwar (where we find huge stores of oil in every tiny spot we are allowed to look)-- enough easy oil to pay off our National debt! Can you imagine how this country could be, if we had no interest to pay on debt? The greenies will paint a picture of a blackened earth-- which is just plain silly and untrue. Eventually all of the earth-bound carbon will be freed up and used-- either by us now, or by people in the future who have much less concern for using it 'cleanly'.
It is like a family going without healthcare, good food, vacations, and clothing, thinking they cannot afford any of those things, while they have a million dollars under a tarp in the basement-- they never lift the tarp because grandma is afraid it will make it dusty.
1) ETF's globally are taking larger and larger share of commodities out of the spot market--in some cases ETF demand is the largest open long category in the COT reports. This is institutional money, buy and hold, hedge funds that don't want exposure to futures, sovereign wealth funds, and managed institutional accounts. In contrast to the sub-prime fiasco, where leverage made the bubble, most of these ETF commodity investments are unleveraged, and not subject to interest rates, margin calls, or collapse in panic selling.
I hate to say it, but I'm going to: "this time it its different" because it really is different--we've never had a commodity market with the new demand made available by ETF's. see: www.investmentrarities...
Ted Butler archives "Still A Great Trade" March 11, 2008 Letter.
2) Rising demand from BRIC's, and consequent supply/demand imbalance. Saudi oil is not going to raise spare capacity going forward, neither is Canadian Oil sands. Supply technically isn't the problem but daily production growth. Petrpobras discovered a big feild that is a 7-8 years away from production, same with Venez. Oil sands, same with Devons big find with deep Water Gulf fields...
many years away, and not enough to keep pace with consumption.
It is different this time (thats twice) because we have lost meaningful spare capacity in oil especially, but other commodities as well.
Moreover, higher prices are not necessarily in feedback with lower demand. China subsidizes gasoline prices, keeping them artificially low, at loss of billions to PTR.
3) Inflation, inflation, inflation---by definition the growth in the money supply at a rate that surpasses the economic growth and trade growth. Thats why you see commodities rising in all currencies--because all countries (some worse than others) are engaged in competitive currency devaluation. In commodities and currencies as in Physics, there is no non-arbitrary frame of reference (with the exception of the speed of light) and so, there is no standard currency. The closest we get to a non-arbitrary currency is a basket of commodities. The markets are telling us a strong message that all currencies are being inflated and losing value--that is the message of commodities.
"The hubris of rich liberals who..." can only be outdone by the hubris of even richer neo-conservatives who wage wars for "freedom" and "democracy" based not on facts, or the wisdom of generals with a lifetime experience in the arts of war, but on faith, ideology, and gut instincts...and send 4000 Americans to their undeserved deaths.
(Please don't remind me they volunteered to serve--they didn't volunteer to serve under false pretenses, lies, manufactured evidence, and propaganda/misinformat... campaign).
But its just a thought, probably has nothing to do with commodities or inflation...or oil, or future wars that will effect these same trends....
are going to want everything you want: better food, bigger homes,
stainless steel toasters, air conditioning, cars, etc. That is such a
staggering figure that, while there may be moves down in commodities in the short term, in the long term, commodities are cheap.
For a complete debunking of Gene Epstein's commodity bubble myth, read this article:
seekingalpha.com/artic...
the population on this planet is growing, the population with spendable money is growing. most of those with the cash now, have never had the things we take for granted every day.but now that they can afford them, they want them. and this drives demand , demand for items that are in less and less supply .oil, you all seem to think it grows on trees and any time we need it , we can just go outside and pluck it from a tree and we are set. come on. open your eyes to reality.china has been on a quiet little buying spree for at least the past 10 years. and guess what they have been buying up?
oil. oil cause they were smart enough to understand back then, that supply took millions of years to develop and in less than 100 years, we have used up more than 3/4 of that supply. its dwindling , and they want it . as much as they can get their hands on. why do you think we are in Iraq right now? its not because sadam posed such a threat to Americans . its not because of some terrorists who supposedly invaded America(never happened ) its because bush and his clan know the value (and scarcity of oil) and they want to control and profit from it.commodities will fluctuate somewhat, but your never gonna lose all your money being invested in this area.
ok, you feel its over priced? then wait for your pull back and get in . but don't wait for a huge pull back , cause i don't believe that will happen for a long time to come.perhaps never. small drops i can see.