COMMODITY PROSPECTS
when adjusted for inflation. In this envi-
Figure 2: Real GDP – Annual Projections Through 2018, %
ronment, the dollar hardly presents any
competition against gold as a safe
haven. Depending on how a more severe
economic downturn developed and pro-
ceeded, it is quite possible that gold
would still be viewed as the superior safe
haven that investors have seen it to be
since 2002. Regardless of how gold and
other commodities performed in such a
worse-casescenario,itcouldbeexpected
to be a temporary setback to the world
economy – and commodity markets.
Every recession that has ever hit the
worldeconomyhasended.Somearelong
andpainful.Someturnintodepressionsor
arerelatedwithothereconomicandpolit-
ical events that ultimately lead to war.
But, they do end. When the current eco-
Source: CPM Group
nomic slowdown ends, whether it is in the
last half of 2009 or sometime later (after
sharply than is anticipated in the most a more difficult recession), the longer-term economic trends and
likelyeconomicscenario. individual market fundamentals will probably point to strong
For example, whether or not gold demandandhigherprices.
prices would decline in such a scenario
is more a matter of uncertainty. If a Longer Longer Term
sharp reduction in economic activity Thisarticlehasconcentratedonthelong-termtrendsincommodi-
ledtoariseinUSinterestratessimulta- ties prices, suggesting that the recent price strength should be
neously with a shift in investor atti- expected to continue. It has granted that there could be weakness
tudes toward a more positive view of in commodities prices over the next two years due to slower real
the US economy’s relative expected growth in many parts of the world. In our most likely scenario, the
economic strength, then the dollar weakness in commodities prices would be represented by prices
could rise and investors would shift consolidating at historically high nominal price levels. In a darker
from using gold as a safe haven to alternative economic scenario, prices fall further over the next few
usingthedollar. years,butlaterreturntotheirupwardtrajectory,astheworldecon-
A similar pattern was seen in the omy dusts itself off and returns to the stronger growth patterns of
1980-1982 double-dip recession. thepasttwodecades.
However, that might not be the case,
thenexttimearound.Backthen,many
‘Supercycle theory’ ... has all of the statistical
ofthefinancialtoolsavailabletodayfor
underpinnings of the ‘New Economic Paradigm’
investors to hedge against economic
woesdidnotexist.Moreimportantly,in Twoprovisosoughttobeaddressedaboutevenlonger-termissues.
1980-1982 the dollar was seen as First, and most important, is the fact that long-term real economic
being in the early stages of a protract- growth has generally been associated with a long-term decline in
ed upward price trend and interest real,inflation-adjustedcommoditiesprices.Thatdoesnotmeanthat
rates available on US Treasury bonds nominal prices have fallen, but that the purchasing power equiva-
andbillswerewellover10%.Thedollar lence of most commodities has dropped. This has reflected techno-
was king of safe havens at that time. logical improvements in the discovery, beneficiation, and use of
Gold fell from its US$850 peak in most raw materials due to industrialisation. Such a long-term pat-
January 1980 to a low of US$298 in ternofdecliningrealpricesmaybeexpectedtocontinueinthevery
themiddleof1982. long run. In the shorter long run (if you will) – a period of five to 10
At present, the dollar is in the eighth years – real commodities prices may continue to show strength,
year of a major downward move. reflecting the ongoing problems in increasing supply to meet rising
While some investors think the dollar demand.Longer-term,thatriseinrealpricesmightend.
could recover on a short or medium- Thesecond(andfarlessimportant)relatestotheongoingsuperfi-
term basis, the market consensus is cial reliance of marketing gimmicks to explain market trends. Over
that the longer-term outlook for the the past several years many investors have been attracted to the
dollarisnegative.USinterestratesare commoditiesmarketwithmarketinghyperelatedtoa‘commodities
alsoatextremelylowlevels–negative supercycle’. This unscientific theory suggests that commodities
36 SEPTEMBER 2008 COMMODITIES NOW
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102