BEST IS YET TO COME FOR COMMODITIES

Best is yet to come for commodities

Written by Celine Tan of theedgemalaysia.com

Tuesday, 14 June 2011 17:36

KUALA LUMPUR: Prices of commodities — from precious metals and industrial metals to foodstuff — experienced a dramatic decline in early May.

On May 6, silver fell 30% while crude oil, lead, nickel and copper fell 7% to 12%. Soft commodities fared little better, with coffee declining 3.3%, sugar 2.5% and cotton 4.6% the day before.

The Reuters-Jefferies CRB Index, which tracks 19 major commodities including crude oil, gold, silver, copper, aluminium, soybean and sugar, ended the week with a 9% drop, its biggest weekly decline since December 2008.

The dramatic sell-off was led by silver and oil. John Stephenson, author of The Little Book of Commodity Investing, says the catalyst for the metal was the London Metal Exchange’s three increases in margin for the silver contract in a single week.

“Generally, the catalysts for this decline include investors re-thinking their tolerance for risk, the faster-than-expected rate hikes in India as well as earlier (interest rate) moves in China and other emerging markets.

“(These factors) remind investors that there are limits to global growth. The European central bank failed to boost interest rates, a move that was widely expected. This helped to reverse the trade into the euro and sent the US dollar flying with the dollar index rising 1.5% in a single day. With the US dollar soaring and the realisation gradually dawning on investors that emerging market economies were taking steps to slow growth, the rout in commodities was on.”

Globally, commodity traders and analysts are of the view that commodities denominated in the US dollar are becoming increasingly expensive and the sharp sell-offs were prompted by fears of a slowdown in global economic growth. However, experts do not expect the fall in commodity prices to be prolonged. CLSA Asia Pacific Markets (Malaysia) in its weekly report says the current sell-off is “another healthy corrective phase”.

The report says, “according to technical guru Laurence Balanco, historic price patterns show that the fallouts after an accelerated advance tend to lead to a prolonged period of range trade before the long-term trend can reassert itself. We believe that the long-term gold price uptrend remains intact and once this correction runs its course, further gains are anticipated. Our US$1,800 upside target [for gold] remains intact. And, silver’s run is still far from over.”

Stephenson concurs that the recent fall of commodity prices does not signify the end of the commodity boom.

“Commodity booms last on average 20 years, so we are halfway through. The average mine cost about US$1 billion (RM2.48 billion) to build and takes a decade to begin production. Sluggish supply coupled with voracious demand from Asia is the primary reason why commodities will continue to be in the forefront of investing for at least a decade.”

The overall view is that commodities are still good investments for the next 20 years. “The ‘best’ is yet to come. Investors should understand that oil and copper are linked to global growth, agricultural commodities are linked to weather patterns as well as changing diets globally, and precious metals are linked to the US currency weakness and financial distress,” says Stephenson.