Has The Commodity Bubble Popped?

by on

Several weeks ago I received an invitation to attend an economic forecast conducted by the Executives’ Club of Chicago. Admittedly I dropped my membership a couple of years ago (not sure why), but did enjoy hearing the forecasts provided by folks such as Diane Swonk (Mesirow Financial) and in particular, Jim Rogers. To summarize what sectors each thought looked hot, Diane mentioned “Detroit, referring to the recovering automotive sector, and Jim (very big on commodities) said “the RMB. Jim specifically mentioned agricultural commodities and precious metals as interesting sectors from an investment standpoint, though I am struck by his suggestion that we all trade in our dollars for RMBs. However, we’ll save that commentary for another time.

Nevertheless, Jim appears bullish on commodities when one considers his recent public comments:

“Saudi Arabia has been lying about their (oil) reserves for decades. The reason oil is going up is the world is running out of known reserves of oil.

“Gold will go to $2000 in this decade. It’s pretty simple as far as I’m concerned. Silver will certainly go over $50. The old high on silver was $50. Silver will go to new highs again. All these prices are going to go to absurd levels by the end of the decade, by the end of the bull market.

“Huge bull market in agriculture. Agriculture prices are still extremely depressed on a historic basis. You know, the price of sugar has gone up 600% in the last 6 years, 5 years. It is still 50% below its all time high. 50% below its all time high. The scope for price increases in agriculture is staggering.

So what to make of the news that Glencore (a producer, marketer and trader of major commodities) intends to launch an IPO? Does an impending IPO signal that commodities have largely hit an all-time high and Glencore wishes to “cash-out so to speak near or at the peak, mirroring what Goldman Sachs did in 1999 pre-Dot Com meltdown as the article suggests? Is Glencore following in the footsteps of GE, the first company to sell its call center operations business in India ahead of the curve?

Moreover, does the Middle East turmoil suggest that oil prices will skyrocket once again, opening the doors for another follow-on commodity bust (including metals)?

Finally, should one interpret Glencore’s prospectus as a statement that the commodity super-cycle is dead?

We think probably not, as the original Reuters article also explains in a counter argument. Nearly a year ago, Stuart wrote about a proposed Glencore-Xstrata merger explaining the logic as providing Glencore with much needed cash to pursue mergers and acquisitions.

Despite a potential near-term oil crisis (which may or may not escalate into one), the long-term fundamentals on both the supply side (for many commodities) appear constrained and the long-term demand picture in emerging markets still remains healthy.

In short, we wouldn’t read too much into this one particular deal. Then again, some didn’t think Lehman Brothers crashing signaled much of anything either.

–Lisa Reisman

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.