Commodity Price Sustainability
Is the seven year bull market in commodities at an end and what are the long-term prospects for
the sector?
By Jeffrey M. Christian
UNTIL RECENTLY, COMMODITIES priceshadbeenrisingfornearly
seven years. These increases have been spread across almost the
entirecommoditiesuniverse.
TheCRBcommoditiesIndexrose149%inthe80monthsthrough
toJune2008.Thatfarexceedsthetwoearliermajorupwardmoves
incommoditiespricessinceWorldWarII.Thosetwoeventslasted
37and40monthsrespectivelyduringthehigh-inflationeraofthe
1970s. After they ended, commodities prices, as measured by the
CRB Index, entered a two-decade long period in which the CRB
Indexdeclined45.5%.
CommoditiespricesroseintoJuly,andthenwerehitbyawaveof
selling,whichpushedpricesdowntotechnicalsupportlevels.Mostof
thesellingcamefromshort-term,technicallybasedlong-onlyfund
managers,andwaspredicatedonpricemomentumindicationsthat
suggested that prices would drop in a seasonally inspired fashion,
exacerbatedbyshort-termprofittakingandlongliquidations.
Following this decline, during early August there was a wave of
commentarythatcommoditiespriceshadperhapspeaked,ending
thisnearlysevenyearrun.Thecommentarycameprimarilyfromthe
same short-term, technically based long-only fund managers and
wasbasedonthefactthatpricesHADfallen.Therewereveryfew
macroeconomic or fundamental arguments raised to support the
suppositionthatpricesindeedhadreachedalong-termpeak.
Infact,therearesomemacroeconomicandindustry-specificfun-
damentalsthatsuggestthatpricesmayreachaninterimpeakand
couldspendmuchofthenextyearortwoconsolidatingjustbelow
recent peaks. However, most of these developments suggest a
pause,notanend,topriceupwardmoves.
Commodities prices have risen as much as
they have since 2001 due to a complex
mixture of trends and events
Thereareother,longer-termmacroeconomicandfundamentalrea-
sonstoexpectsuchaconsolidationphasewillonlybeapause,tobe
followedbycontinuedstrengthincommoditiespricesinthelong-run.
Themacroeconomicfactorssuggestingapauseinpricesarethose
that indicate recessionary economic conditions in North America,
Europe,andindeedtheworld.Recessions,however,doend.Thefun-
damental factors largely relate to these recessionary indications. infrastructure spending represents spe-
They suggest interim consolidation. They do not suggest a perma- cialevents,suchastheBeijingOlympics,
nentendtothestrongdemand,andconsequentlyprices,ofthepast and that spending will plunge there-
sevenyears.Nordotheysuggestamassivedeclineinpricessuchas after. This is nonsense. Construction
the20-yearbearmarketthatprecededthecurrent7-yearbullmarket. spendingontheOlympicsrepresenteda
Furthermore,evenwithsignsofeconomicweakness,thereareoff- tinyportionofcapitalspendingoninfra-
setting signs of strength. While the housing market in the US and structurethroughoutChina.
other key developed economies has been gripped by weakened More importantly, the amount of
demandandlowerprices,non-residentialconstructionspendinghas money looking for good, safe (or at
surgedtorecordlevels.Infrastructurespending,meanwhile,alsocon- least less dangerous or risky invest-
tinuestogrowatstronglevels.Superficialanalysessuggestthatthe ments) continues to grow strongly.
COMMODITIES NOW SEPTEMBER 2008 33
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