E.D.Hart

Are We About To Enter Another Commodity 'Super Cycle'?

Several studies run by various asset management firms have shown that commodities are the least owned asset class--Northern Trust published a study that showed that commodities represent something like 4% of the assets of those with more than 10 million dollars. Weve had a bear market in commodities for essentially 20 years, and since 2000-2001 weve seen a reversal. This isnt just a story, although a compelling one it may be--it is basic economics.

Two words: Yuan devaluation. It will happen, slowly, or rapidly, but when it does, those dollars are flowing out of teasuries, (raising treausry yields as prices fall). Chinese goods become more expensive in devalued dollars. Since oil is priced internationally in dollars (mostly) that oil becomes cheaper for the Chinees as their currency appreciates and ours declines. Consequently, no demand destruction--a key argument for the idea that oils price rise is temporary--goes out the window. The chinese and to a lesser extent the Russians, and the Indians will need ever increasing oil supplies, but their appreciating currencies will not register the price signal that we are told to expect. If the Yuan appreciates 30% in five years (as is conservative) , their price for oil is 30% cheaper--so why conserve and use less. Its the US that takes it on the chin and reverse the decades of falling prices due to glabalization. We are truly in a new era, on that will favor commodities over other asset classes for at least another decade.
Eric D. Hart Gustavus, Alaska