David Roche, who heads Independent Strategy, a London-based investment consultancy, argues today in the Financial Times tha the bull run in commodities is soon to come to an end.
A big factor in the outlook for commodities is whether you believe our credit crisis will lead to inflation or deflation. Bernanke's aggressive rate cuts and the dollar's swift fall made commodities look like a great haven. But with the failure of the Fed's moves to revive lending, the high odds of a deep recession that pulls down emerging economies, and worries about the financial system leading to liquidity hoarding, the prospects for commodities are far from compelling.
From the Financial Times:
Commodity prices are hitting new highs almost every day. There seems to be no limit to where prices can go. Well, get ready: the big fall is coming soon.
In the current turmoil, there has been a rush into commodities. The volume of funds escaping risky assets and their derivatives has been enough to cause bubble-like euphoria in commodity prices. With global equity market capitalisation almost 10 times the notional value of commodity derivatives, the rush to commodities by investors has been like squeezing a quart into a pint pot.
The speculative element in commodity markets has grown sharply; non-commercial trades now constitute more than half of all trading, with hedge funds the biggest movers into the market. And in 2007, global equity funds switched away from financials and real estate into commodities in a big way.
But that’s about to change. Global growth is declining fast. Recession will ensue and no region or asset class will be immune from its ravages. Contrary to received wisdom, economic decoupling is unlikely....
...Where does this leave commodities? Along with slowing global growth, we estimate that a 3 per cent point drop in China’s growth rate, from 11 per cent to 8 per cent, would remove the ex-ante global supply/demand deficit from energy markets and push most industrial metals, including steel and copper, into significant surplus.
On that basis, we can expect the price for refined oil to fall 30 per cent and industrial metals by 20-30 per cent. The big fall is coming.