Commodities prices have been rising since 1999. To those who trade commodities regularly, this is no surprise. However, to the rest of the world, this has not been given a whole lot of attention – except for the discontent from high oil and gas prices.
Crude oil, currently at all-time highs, is not the only commodity that has risen substantially in the last few years. Since 2000, many of the energy, grain and metals commodities have risen well over 100 percent.
Commodities are the raw ingredients for most products that are manufactured or consumed. Higher costs for these raw materials will inevitably lead to higher prices for most foods and products we purchase and inflation will be an issue in the future.
Luckily, we have been able to curtail the rise in retail prices due to the cheap labor overseas – namely China. Much of that benefit may be coming to an end as China will likely mandate increased regulations due to problems in the U.S. over their tainted products, which will inevitably force their costs to increase. Also, the growing populations of China and India will demand a higher standard of living and will be competing for more of the world’s raw materials - commodities.
It is likely that the Fed will lower rates even further in the coming months.
Another major concern is the U.S dollar has been in a near freefall - hitting 15-year lows. A lower dollar only makes our commodities cheaper to purchase by other countries. This will likely lead to more demand and continue to tighten supplies.
Jim Rogers, author of Hot Commodities, believes we are in the middle of a long-term bull market in commodities. He points out that we are only 7 years into this move in commodities, while the shortest commodities boom he researched lasted 15 years - it began in 1966. He believes that companies in the oil and metals industries have invested little in expanding production for decades and now they can’t meet the increasing world demand. And you can’t just flip a switch to open an oil refinery or a copper mine, so it will take many years to significantly add to production.
With several commodities at or near all-time highs, it is hard to believe commodities could go much higher from here. Crude is above $80; gold above $750; wheat above $9 and soybeans near $10. It is possible that these prices could move even higher in the coming years and we may see many more commodities hit record prices.
An argument could be made that the Fed has created the Internet bubble and the housing bubble through its easy money policies. They went to extremes lowering interest rates to save the stock market after 9-11. That, in turn, opened the door for real estate values to explode. Now the real estate bubble has burst and the Fed may be bailing out the housing industry and Wall Street. If they continue with this policy, they will likely create another bubble – commodities.
There are many factors lining up for another leg higher in this bull market for commodities.
To see how strong world demand is for commodities, I had to look at the copper market. Much of the demand for copper comes from housing construction. It seems logical that the price of copper would have continued to drop significantly when the housing slowdown hit. However, copper futures are up nearly 33 percent in 2007. World demand continues to be extremely strong.
Until capacity expands and we see increases in supplies for many commodities, it is likely that the long-term commodities bull market will continue. China and India are the wildcards. I think we would need to see a significant slowdown in the world’s economies in the next year or two in order to prevent a continuation of the bull market in commodities.
Crude oil, currently at all-time highs, is not the only commodity that has risen substantially in the last few years. Since 2000, many of the energy, grain and metals commodities have risen well over 100 percent.
Commodities are the raw ingredients for most products that are manufactured or consumed. Higher costs for these raw materials will inevitably lead to higher prices for most foods and products we purchase and inflation will be an issue in the future.
Luckily, we have been able to curtail the rise in retail prices due to the cheap labor overseas – namely China. Much of that benefit may be coming to an end as China will likely mandate increased regulations due to problems in the U.S. over their tainted products, which will inevitably force their costs to increase. Also, the growing populations of China and India will demand a higher standard of living and will be competing for more of the world’s raw materials - commodities.
Accelerating the Trend in Commodities
Commodities got a big boost from the Fed cutting interest rates by 1/2 percent. Most commodities surged during the week on the news. Lowering interest rates will help put a band-aid on the housing market and stocks will benefit. The problem is that lower interest rates will likely lead to more demand for commodities – pushing prices even higher.It is likely that the Fed will lower rates even further in the coming months.
Another major concern is the U.S dollar has been in a near freefall - hitting 15-year lows. A lower dollar only makes our commodities cheaper to purchase by other countries. This will likely lead to more demand and continue to tighten supplies.
Jim Rogers, author of Hot Commodities, believes we are in the middle of a long-term bull market in commodities. He points out that we are only 7 years into this move in commodities, while the shortest commodities boom he researched lasted 15 years - it began in 1966. He believes that companies in the oil and metals industries have invested little in expanding production for decades and now they can’t meet the increasing world demand. And you can’t just flip a switch to open an oil refinery or a copper mine, so it will take many years to significantly add to production.
With several commodities at or near all-time highs, it is hard to believe commodities could go much higher from here. Crude is above $80; gold above $750; wheat above $9 and soybeans near $10. It is possible that these prices could move even higher in the coming years and we may see many more commodities hit record prices.
An argument could be made that the Fed has created the Internet bubble and the housing bubble through its easy money policies. They went to extremes lowering interest rates to save the stock market after 9-11. That, in turn, opened the door for real estate values to explode. Now the real estate bubble has burst and the Fed may be bailing out the housing industry and Wall Street. If they continue with this policy, they will likely create another bubble – commodities.
There are many factors lining up for another leg higher in this bull market for commodities.
- The Fed will likely lower interest rates further with less regard to inflation.
- Supplies of oil, metals and grains are low and there is little capacity to significantly increase production in the next few years.
- The U.S. dollar will likely decline further – leading to increased demand.
- World demographics are increasingly favorable to lead to higher demand for many commodities as their standard of living increases.
To see how strong world demand is for commodities, I had to look at the copper market. Much of the demand for copper comes from housing construction. It seems logical that the price of copper would have continued to drop significantly when the housing slowdown hit. However, copper futures are up nearly 33 percent in 2007. World demand continues to be extremely strong.
Looking Forward at Specific Commodities
The energy markets of crude oil, heating oil and unleaded gas should remain strong in the coming years as their supply/demand situation should remain tight. The grain markets of wheat, corn and soybeans could be very interesting next season. It is likely that farmers will try to plant as many acres as possible. Unfortunately, we will need record crops to help alleviate the tight supplies situation. If there are weather problems next season and significant crop damages occur, grains will likely be setting new record high prices. The metals markets, especially gold and silver, could garner a lot of “investment hedge” attention if inflation kicks into gear. The softs markets of cotton, cocoa, sugar and coffee have been lagging behind and may offer more upside potential.Until capacity expands and we see increases in supplies for many commodities, it is likely that the long-term commodities bull market will continue. China and India are the wildcards. I think we would need to see a significant slowdown in the world’s economies in the next year or two in order to prevent a continuation of the bull market in commodities.
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