Is the Commodities Bull Market Over?

by: Arie Goren August 12, 2008 | about stocks: DBC / DGL / GDX / GLD / GSG / IAU / OIL / RJA / USO / XLE    

Arie Goren

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The dramatic price decline of most commodities over the last five weeks brought some analysts to call for the end of the bull market in commodities; their conclusion is that commodities have reached a turning point and a bigger price decline awaits us. Are they right? Let's see how commodities have done this year.

In the table below, the main commodities are arranged by group and last price; the price at the end of 2007 and the maximum price of each commodity in the year 2008 are also given. In addition, the price change from 2008 maximum value and the price change from the beginning of the year are calculated.

click to enlarge images


From the table above, we can see that after a very sharp rise this year, which caused strong protest all over the world, most commodities have, on average, almost returned to their price at the beginning of the year.

Price change of main commodities from the beginning of the year

Price decline of main commodities from their maximum value in the year 2008

Many analysts explain the recent sharp decline in the price of commodities by the strengthening of the dollar, because the price of commodities is denominated in dollars. Naturally, the dollar and commodities move in opposite directions, but that cannot explain such a big decline in the price of commodities, since the dollar has risen only by 6.44% from its lowest value of all time against the euro - 1.60 on July 15th 2008 - and commodities have shown a much bigger move - a decline of 26% on average.

In our opinion, the recent fall of commodity prices is not due to a change in the basic fundamentals of supply and demand, but rather to a shift in the sentiment of investors. The fact that the US economy is slowing was known also in the first half of the year; nevertheless, commodity prices rose sharply during this period. It seems that after enjoying huge gains in the commodity markets, fund managers and other investors have closed their positions, and even went short after reaching the conclusion that "the party is over".

According to Jim Rogers, the famous commodities guru, commodity prices move in cycles of about 18 years, and since the current bull market  started at 2002, he expects it to last until about 2020. Rogers explains the cyclic nature of the commodities market by the fact that when the demand for commodities and  prices are low, no one is willing to invest in new mines, start oil explorations or increase cultivation areas. However, when shortage is felt and prices are moving up, that is when companies start looking to increase production; but it takes years to begin a new exploration or develop new mines, so that the supply shortage which is accompanied by high prices can last for a long time. If we accept his theory, the recent decline in commodity prices should now give us an opportunity to enter this market at the right time.

In view of the basic fundamentals of supply and demand, the market is still very tight, inventories of agriculture products are historically low, the oil supply has stayed almost the same, and the mine supply of precious metals from South Africa is dropping because of a shortage in the electricity supply. All this brings us to the conclusion that the recent decline in commodity prices is a healthy correction to the commodity bull market that is still going on.

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This article has 35 comments:

  •  
    Aug 11 11:14 AM
    FWIW I think you're right, but as we've seen this year, there are limits to how far prices can rise before they choke off the very economic expansion that fuels the boom in the first place. The market needs to find a balance between continued world-wide GDP growth and rising commodity prices. Ultimately, it will have to find substitutes for the most constrained resources or the growth simply can't continue.
    Reply | Link to Comment
  •  
    Aug 11 11:18 AM
    Some of the drops in commodity prices are justifed by fundamentals. Nickel and Palladium are sensitive to auto production which is down. Also, stockpiles of some of the metals have been rising which puts pressure on the price. Seasonal factor are also at play for some commodities (i.e., crude oil and corn).

    Reply | Link to Comment
  •  
    Aug 11 11:32 AM
    Commodities bubble burst. Commodities which are still up YTD will go down below Jan 1, 2008 prices. You can talk about commodities bull market when it's supply/demand situation. When it's in bubble and after bubble, supply/demand doesn't matter. If you don't believe me, look at the chart of gold (or oil, for that matter) since 1979.
    Reply | Link to Comment
  •  
    Aug 11 12:31 PM
    Commidities cannot go up in the face of a strong dollar.
    Reply | Link to Comment
  •  
    Aug 11 12:56 PM
    strong dollar ? where ?
    Reply | Link to Comment
  •  
    Aug 11 01:32 PM
    I noticed you did not include coal in your listing. I have been looking at the spot prices of coal and it seems to be either constant or rising. Yet, coal stocks have tanked. I think coal is a good investment because the fundamentals don't support a decrease in their stock prices.
    Reply | Link to Comment
  •  
    Aug 11 05:56 PM
    Sure it is. Its a classic bull market correction. You can watch all Jim Rogers videos at jimrogers-investments....
    Reply | Link to Comment
  •  
    Aug 11 05:58 PM
    strong dollar <rib splitting laughter> then why the intervention?


    See 8/10/2008 at blog.nowandfutures.com...

    With M3 at an amazing high - government spending out of control, I would expect some inflation to push commodities up further. It may be true there is no such thing as "peak oil" but there is something I call "peak cheap oil" ad I think we are there. China has a huge number of factories shut down and cars off the road - I would expect things to get interesting again after the Olympics are over and their demand back up.

    There is also the fact that all stops are pulled out to paper over everything for the election.

    What is less clear is the lead-weight of the mortgage situation - I see resets causing trouble out to 20012 - see:

    www.therealestateblogg.../

    and

    online.wsj.com/article...

    The question is - will this drag on the economy push down so hard for so long that it will destroy demand?


    Reply | Link to Comment
  •  
    Aug 11 08:32 PM
    Right on - and don't forget about peak oil - it is here and is going to get worse. It takes oil to get everything into production and into markets like a network. Start buying soon and the dollar is doomed and will go to nothing.
    Reply | Link to Comment
  •  
    Aug 11 11:04 PM
    All you dollar bulls, can you give me a logical reason as to why the dollar has gone up? Please?
    Reply | Link to Comment
  •  
    Aug 11 11:30 PM
    Dollar goes up because other countries' economies are worse, and there are way too many idiots doing the short dollar long commodities trade.

    Those idiots must be slaughtered first.
    Reply | Link to Comment
  •  
    Aug 12 12:56 AM
    mkreisel....are these other economies worse because they hold too many us bonds? where is the dollar headed?
    Reply | Link to Comment
  •  
    Aug 12 03:09 AM
    go to Kitco.com for an interesting analysis of gold and silver prices. the author notes that prices have fallen to August lows which was a breakout of a multi-year cup and handle formation. We're back to the "cup" or breakout point... a good place to enter.
    Reply | Link to Comment
  •  
    Aug 12 07:30 AM
    I didn't read it but it must be you are bullish commodities,I am too only with one difference,I differentiate between them.If for example Lumber,Sugar,Ol,Gas,Co... is cheap,it doesn't mean that Platinum (who needs it anyway) can not go down another 50% or gold another 30%.What's the problem?
    Before one invest in hard assets,make your research what each commodity means and where it stands in the crowd as all can not go only up.
    Reply | Link to Comment
  •  
    Aug 12 08:13 AM
    You are quite right ....it was a classic case of an asset bubble. Though supply demand scenario was suuortive, it never called for a 50% or 100% jump in the prices of commodities. Now when correction has finally set in commodity space, I hope prices will begin to reflect the correct pricture. I am still not betting on a deep correction but a $147 level in Crude Oil was certainly not justified on the basis of supply demand fundamental.
    Reply | Link to Comment
  •  
    Aug 12 08:15 AM
    commodity futures decline because sovereign wealth funds & other speculators pull their money out & move it elsewhere. see washington post this morning. thnx to messrs greenspan & bernanke we have excess $ sloshing around & it goes to where it can cause the most mischief,
    > jack
    Reply | Link to Comment
  •  
    Aug 12 09:53 AM
    Opinions on this, as on everything else with an outcome based on the thoughts and actions of poeple, are equal and opposite and cancel out.
    A regular person without influence, inside knowledge or an excess of wealth over his needs, should obviously steer clear of gambling on any securities at all. Without exceptional luck you will lose wealth and the industry will gain it.
    Reply | Link to Comment
  •  
    Aug 12 10:42 AM
    Chesapeake Appalachia just leased 200 of my acres to drill for gas in the Marcellus Shale in N.E. PA. This is supposed to be one of the most important finds for natural gas in the USA. Gas is a clean energy and it is a perfect link to give the good ole' USA time to get out of our oil dependence on the middle east and switched into outher clean energies (wind, water, sun). Also, we have enough natural gas under land that we do not need to do off-shore drilling and chance ruining the very basis and beginning of our food chain in the ocean. I think CHK would not spend billions to control acres covering Marcellus Shale if they thought it would not be profitable. No matter what President is elected, it will be good for the natural gas commodity. I think the lull in oil and gas and corn (ethanol) right now is to "paper cover the election" as one investor above stated. If you can be 'long' in a market like this, I would put my money on the natural gas commodity.
    Reply | Link to Comment
  •  
    Aug 12 11:06 AM
    I sent in a comment regarding my bullish feelings on natural gas commodity. Why isn't it printed here?
    Reply | Link to Comment
  •  
    Aug 12 12:04 PM
    epeon - - thanks for the voice for coal. In spite of my user name I am long coal ... cold weather is coming and how much lower can it go? I may have to wait for Sept but that's OK .....
    Reply | Link to Comment
  •  
    Aug 12 12:23 PM
    Good piece. It all depends on the dollar and the perception of the dollar going forward.
    Reply | Link to Comment
  •  
    Aug 12 12:28 PM
    For commodities other than food, I prefer to forget Jim Rodger's 18 year cycle theory. The conditioins are quite different now with regard to supply and demand. Prior to 2000, the major consumers were primarily the US, Japan and Europe. These regions, more or less, had predictable demand, economic cycles, and growth rates. Despite their growth rates, supply was always ample, or new capacity could be created expeditiously in a predictable manner.. Potential mines/fields were relatively plentiful to meet the demand, except if at all during brief periods. And the potential resources base were rich also, and needed less investment and shorter lead times to develop for new production..

    Conditions have changed dramatically. There are many more consuming nations growing at very high rates, and demanding supply to respond to growing consumption rates and even still much higher investment rates for development of national infrastructure for which some of these commodities are essential.. At the same time.available new resource sources are of lower quality and smaller squantity with regard to total extraction potential. Nationalism is also rampant now, and access to these new sources is not that easy or even attrative as it used to be quite often. Long lead in relation to the urgency of demand for developing known projects are almost legend now.

    Intuitively I surmise the changed circumstances and conditions should have a profound effect on the applicability of Jim Rodger's commodity cycle theory in the context of the prevalent reality.. I agree with the author that the fundamentals are still there, and at this moment sentiment is a better explanation for the major part of the recent slide in commodities.
    Reply | Link to Comment
  •  
    Aug 12 12:58 PM
    Great post.

    Fundamentally I agree that commodities are still very much bullish. I read another couple articles today on similar topic to yours.

    On TradersCorner, this post agrees that fundamentally, Oil and Gas are bullish:
    www.traderscorner.ca/c...

    Secondly, a post on the Stock Research Portal Blog by Ian Campbell questions whether Oil statistics are meaningful, and if meaningless oil
    statistics are the reason we see so many price swings in the Oil market.
    www.stockresearchporta......
    Reply | Link to Comment
  •  
    Aug 12 01:00 PM
    Great post.

    Fundamentally I agree that commodities are still very much bullish. I read another couple articles today on similar topic to yours.

    On TradersCorner, this post agrees that fundamentally, Oil and Gas are bullish:
    www.traderscorner.ca/c...

    Secondly, a post on the Stock Research Portal Blog by Ian Campbell questions whether Oil statistics are meaningful, and if meaningless oil
    statistics are the reason we see so many price swings in the Oil market.
    www.stockresearchporta.../
    Reply | Link to Comment
  •  
    Aug 12 01:59 PM
    Its a BUY the DIPS situation. Jim Rogers said that the prospects for Commodities are excepcional.

    jimrogers-investments....
    Reply | Link to Comment
  •  
    Aug 12 04:29 PM
    Excellent article. Commodities are only now having their summer window correction. A bit late, but here it is at last. I think that after the correction, we'll see renewed upswing towards the end of the year as the increased price of energy seeps through the economy.
    Reply | Link to Comment
  •  
    Aug 12 05:34 PM
    They say there are lies, dam lies and statistics. I am not sure just how to classify your out put

    Take your data on corn prices you report a price per bushel of $455.5 for end 2007.

    BUT the USA National Agricultural Staistic Service put it at only $4

    Now that is one hell of a difference.

    The price does show some seasonality - you must compare July 2007 with July 2008 or else it is meaningless.

    You should also note that the long term trend from $12/Bu in 1950 to $3/BU in 2000 in terms of $2001. The recent increases merely restore the profitability of the farming industry after years of decline.

    We need that profitability improvement to encourage more food production.

    We need the current prices of fwertilizer to encourage expansion offertilizer production. New mines will not be developed without the cash flow from sales at current prices.

    Please do not waste our time with phoney and inaccurate data and selective time series that are grossely misleading.




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  •  
    Aug 12 08:32 PM
    All those who think the commodity boom is over ,doesn't understand the world economy nor supply and demand . If the world is in a slow down or recession its only natural that the demand for "things" go down . Now if you believe we are in a permenent state of decline then yes the commodity and everything else is going to go down further . Now if you believe the world economy will recover then china , russia ,india and other emerging countries will once again demand oil and every other commodity or "things " as during the commodity boom of last year . IF you add on that the US needs to rebuild its own infrastructure which will require lots of energy (oil) and "things " (commodities ) then demand for all these things will be great ..What I see is a global demand for limited supplies of all commodities including oil , which should produce huge increases of the price of all commodities and probably wars like the one in Georgia/Russia and the middle east including Iran . If you doubt this you are in for a rude awakening which would be perfectly american .
    Reply | Link to Comment
  •  
    Aug 12 09:30 PM
    The prices in commodoties began to retreat significantly in early June - this was a result of the spotlight beginning to be focused on several key price provokers - namely 4 notable WS Frims, who had, over the last 4 years engineered the CIFs and had talked a lot of Pension Money,etc. into moving into the area. When Congress started pushing the CFTC to take a look, the heat was getting too close...and the Managers of the Pension Funds, etc. who had been enticed into playing the 'passive long commodity investor' game suddenly began to realize the damage their 'asset allocations' were causing to the global economy and the other 98% of their portfolios. So yes,"Investor Sentiment" did change as these fund managers begin to wise up and start to exit theri long positions....add to this the laying off of radical "ginned up" 'analysts reports' and saber-rattling by Bush/Iran/Putin, and things 'shifted' by mid-June. The outflow on monies begin to move back into the stock portfolios and the dollar finally had a chance...so the 'perfect storm' of factors that were driving high prices was reversed and they are working in favor of the other direction...yes, the 'manipulated bubble' was burst.
    However, get ready, the bad boyes of WS jsut bought inot the new Dubai Oil Futres Exchange - now they can begin to 'manipulate' beyond the reach of the CFTC shortly....
    Round II begins early next year.
    G
    Reply | Link to Comment
  •  
    Aug 13 03:59 AM
    Won't take til next year.
    Reply | Link to Comment
  •  
    Aug 13 09:26 AM
    Just a quick edit: corn, sb, wheat are in cents/bu, not $
    Reply | Link to Comment
  •  
    Aug 13 10:46 AM
    "According to Jim Rogers, the famous commodities guru, commodity prices move in cycles of about 18 years, and since the current bull market started at 2002, he expects it to last until about 2020."

    Jim Rogers has said the current secular bull market in commodities started in 1999, not 2002, and I don't recall him definitively saying he expects it to last until 2020. He's usually more careful in his statements. He has said that, historically, the shortest such secular bull market in commodities last 15 years, and the longest lasted 23. If that history is a guide, the current secular bull market could last until 2014 or longer.
    Reply | Link to Comment
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