MetalMiner welcomes guest columnist, Jennifer Gorton from Forex Traders
Investors in commodities have broad smiles these days, perhaps, because their fortunes have increased considerably of late due to a “perfect storm of sorts in both hard and soft commodities. Value appreciation is across the board, has been almost immediate in some cases, and has had a staggering run-up in the reaches of 65 to 100% or more for selected items in a matter of months. While gold has stolen many of the headlines, silver has actually performed more admirably in a shorter period of time. Cotton may have reached triple-digits in appreciation, but that increase required six months, whereas silver’s steep climb was accomplished in seventy days.
The chart below tells the success story for silver:
The increases in all commodities has been so steep that every analyst has proclaimed them to be unsustainable, but after the anticipated correction that is presently taking place, the question obviously becomes, “What is next?
In order to address this question, there are five factors worthy of review:
- Business Cycle Timing: Basic commodities have always been regarded as “bellwethers for resurgences in economic activity. When recoveries grab hold, the demand for basic building blocks generally causes a run up in prices. Copper has typically been the leading indicator of preference. A global recovery after one of the worst recessions on record is gathering steam;
- Supply: In a recent interview, Jeremy Grantham, an esteemed investor and economic forecaster of no less that 34 asset bubbles during his career, has stated that the issue with commodities is that there are not enough of them to go around, plain and simple;
- Demand: Globalization and the related off shoring of jobs has created dramatic growth dynamics in GDP in the emerging markets of the world. This growth has fueled the prosperity of a burgeoning middle class, especially in China and India, our two largest population centers, and these individuals, now with higher disposable incomes, want to enjoy the good life. Complete cultures are unfortunately shifting to Western styles of consumption. They not only want to drive nice cars and live in better homes, but they also want to dress and eat well. The increased demand for commodities is a direct outgrowth of these behavior shifts;
- Intrinsic Value: Hard commodities, as well as soft to a lesser degree, are valuable in their own right. Both consumers and industries prize both gold and silver for their intrinsic value, well beyond uses in jewelry. Electronics and photography, for example depend on these substances and other commodities for their very existence. Their value can also offer excellent hedges against inflation;
- Currency Fluctuations: Those involved in currency trading could quote chapter and verse in this area. The dollar is the world’s reserve currency. Most commodity contracts are transacted in dollars. If the dollar weakens, the “intrinsic value of the commodity will require that the price for the resource will rise in order to maintain its value in the marketplace. The Fed’s announced program for quantitative easing will add $600 billion to the money supply, deliberately weakening the dollar. This anticipated program has exacerbated the rise in commodity prices, even before it has taken affect.
As one ticks down the list above, it is remarkable that all five factors are displaying positive “green light signals for market pressure on commodity prices. The recent “correction was expected, and to some degree was initiated due to inflation concerns in China and the pronouncements by their central bank that interest rates would increase to curb concerns. Caution and patience are recommended now.