Converse to the stock markets, since the end of 2001 commodity prices have seen rapid growth with just about all raw materials skyrocketing in value. Many commodities have tripled or even quadrupled in value since then, earning huge sums for those savvy investers in the know.
Asia, and in particular, the newly developing Chinese economy, has been fundamental
to this commodity boom – and indeed, such is the demand for metals and
oil, it is causing a global boom and with it a raging bull market.
Yet recently there have been some significant declines in commodity prices. First, in the base metals which started moving lower mid-2004. More recently, it was oil and steel with the prices of crude falling 5% hot on the heels of China’s first interest rate hike in nine years, and with a further decline since then.
Indeed the Chinese economy can be seen to be slowing down, but the market has seriously overreacted to it. This temporary slowdown, which was not only necessary but also entirely expected, will certainly have little impact on the region’s all-consuming appetite for commodities.
Let’s face it, with an annual growth rate exceeding 9%, a little cooling off now and then isn’t a bad thing. And it’s a stark contrast to growth rates in the rest of the industrialised world, which are anywhere between zero and 3%. It is inevitable that the rapid industrialization and increasingly consumer-driven economies of China will be making increasingly heavy demands upon global commodity and energy reserves over the coming decade.
Besides, world markets already adjusted to China's attempts to slow its economy last April when the Bank of China first issued a communiqué to reduce economic overheating. The news is already priced into the markets. Any further decline in global commodity prices can simply be seen as ill-considered over-reaction and going against the fundamentals.
What we should soon be seeing is the next upswing in the commodities markets. This I forecast to be a huge, long-term and very profitable bull phase. The previous growth phase in 2002 – after the Fed started aggressively pruning interest rates - was of course also profitable with significant gains in commodities and related instruments. But the next phase should be even bigger and more sustained as reality begins to sink into the markets and demands for energy, metals and other commodities outstrips supply.
Naturally, what will happen to the Dollar during this phase is a totally different, if not unrelated, issue. Up until recently, foreigners, particularly the Chinese, have been buying up dollars as quickly as the Fed could pump them out. This is not set to continue and indeed has been faltering for some time. However, one thing is certain - those dollars are now necessarily being used to buy up the world commodity supplies. Is there any wonder the US government is “hinting” that the Chinese might wish to re-value their currency somewhat higher?
Volatility? Yes, we should see lots of it in the short to medium term, both in the commodity and currency markets as sentiment continues to grapple with reality and the bulls come out to play.
Article by: Tony Wood, The Midas Trader Club
Date: Nov 22, 2004