Commodities will fluctuate but rise, says Mobius

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Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, joined CNBC to discuss the euro zone debt crisis and commodities.

Source: CNBC, May 11, 2011.

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Commodity outlook rosy, cloudy, murky

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By Cees Bruggemans, Chief Economist of FNB.

After a sharp speculative shakeout last week in the commodity space, quo vadis (whereto next)?

Outlook for oil is rosy, base metals cloudy, precious metals murky and coal a special case (there may be others as well).

With China standing on its monetary brakes, it is not unreasonable to expect a more subdued price performance out of base metals for a while, though allow for specific demand/supply situations.

Longer term (beyond this year) the fundamental Chinese growth story is expected to stay strong, in addition to which India is approaching its resources constraint, in future increasingly becoming import dependent as well if its GDP growth were to remain in 7%-9% territory.

Oil was fired by many things in recent months, as much economic fundamentals as political premiums and speculative froth.

The froth was creamed last week, but the fundamentals stay very positive, with political premiums about supply security hardly yet ready to fade.

With world economic growth set to continue at 4%-5% for some years, given the attempt to narrow the large rich world output gaps and the continuing EM growth dynamics, oil demand is expected to keep growing at 2mbd annually.

In contrast, oil supply seems to be expanding at only 1mbd annually, indicative that the oil balance will keep tightening. There may still plentiful oil in the world today (as variously claimed by Saudi, Exxon and President Obama), but reserve buffers will be eroding, underpinning high oil prices.

The Arab world remains in flux, with as yet no clear indication how far the Arab Spring will progress and how Saudi may be affected. Until much greater clarity prevails, the relatively unstable nature of the region will likely keep demanding oil price premiums regarding supply security.

Coal is a special case. It is benefiting short-term from the high oil price and the Japanese quake disturbance of nuclear space. In addition, world growth of 4%-5% also fuels coal demand, giving an upward bias to prices.

A special factor is Chinese import demand, following major internal changes since 2009 in the Chinese coal industry, turning the country overnight into a major coal importer.

These changes, however, are aimed to get better Chinese production efficiencies, and the world is uncertain whether therefore China has only temporarily become a major coal importer, using global supply to facilitate its domestic restructuring, eventually returning to greater domestic reliance.

This obviously has implication for the likely trajectory of coal prices.

Then also there is India.

It makes longer term coal price prospects uncertain.

Precious metals outlook is murky, meaning a high water mark could be near (after which could follow a long cyclical slide) or there could still be substantial upside potential.

The case for threading cautiously is based on a strong global growth performance of 4%-5%, with rich countries with large output gaps steadily succeeding in witling these down and eventually normalizing their monetary stances without inflation mishaps.

Continue reading Commodity outlook rosy, cloudy, murky

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Don’t turn out the lights on commodities just yet

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The article below is a guest contribution by Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors.

The prices for many commodities suffered the worst week in recent memory this week. Oil prices dipped below $100 per barrel, gold fell below $1,500 an ounce and silver gave back much of the past month’s gains by falling to the $35 an ounce level. The prices for other commodities such as sugar, tin, nickel, aluminum, lead and copper also pulled back.

Immediately, headlines on websites such as MarketWatch, Bloomberg and SmartMoney read “Has the Commodity Bubble Popped?” and “Imploding Commodities Complex.”

Is this the end? Has the great bull run for commodities come to an end?

In our opinion, not likely.

First of all, we wrote two weeks ago that commodity prices were due for a pullback (read: Don’t fear a pullback in prices). Specifically, we pointed out that silver had wandered into “extreme” territory which exacerbated the reversal we saw this week. On May 3 (before we saw the largest declines), BCA Research wrote “one look at the hyperbolic rise in silver prices should be sufficient to convince even a hardcore commodity bull that things are getting frothy.”

In fact, the silver trade had gotten so far ahead of itself, the iShares Silver Trust ETF was “the most highly traded security on the planet,” according to our friend Tom Lydon over at ETF Trends. This week’s selloff was less of an end to the bull market and more a function of “stampeding speculators” (to borrow a line from Sarah Turner at Marketwatch) rushing for the exits.

But short-term speculators aren’t the only factor; this week’s strength in the U.S. dollar was just as much a facilitator of the price declines. The U.S. dollar found additional strength on Thursday after Jean-Claude Trichet, president of the European Central Bank (ECB), said the ECB would not raise rates until after June. By week’s end, the U.S. dollar was up 2.5 percent for the week, a pretty big move.

In addition, we entered the month of May which has historically proven to be a weak and volatile period for commodities. With the Federal Reserve set to wind down its quantitative easing (QE2) program by the end of next month, it’s possible we could continue to see volatility for a little while.

Despite the selloff, commodities were still the year’s top performing asset class as of Thursday. You can see from the chart that the year-to-date return for commodities has far outpaced the return for foreign exchange, bonds and emerging markets.

Looking out on the horizon, very little has changed for the long-term bull case for commodities. The U.S. is still struggling to come up with a feasible solution to its multi-trillion dollar debt problem. Emerging markets are still seeing incremental increases in demand for nearly all commodities. And, the reserves for many commodities are still struggling to keep pace with this demand.

Essentially, what happened this week was more of a “technical correction” than a fundamental shift in the long-term dynamics for commodities. The party’s not over for commodities, so don’t turn out the lights just yet. While it’s impossible to predict the future, we think in a month or two investors may look back and see this downdraft as a good buying opportunity.

Source: U.S. Global Investors – Investor Alert, May 6, 2011.

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Jeremy Grantham: Time to wake up – days of abundant resources and falling prices are over forever

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Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chairman of Boston-based GMO has just published the 1Q 2011 edition of his newsletter. As the title above implies, his report discusses the effects of our dwindling natural resources on the prices of commodities in the context of a rising world population.

Here is the summary of Grantham’s thoughtful newsletter:

  • Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
  • From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
  • Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
  • The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
  • Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
  • The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
  • The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
  • But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
  • Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
  • Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
  • Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
  • From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

Click here for the full report (free registration is required).

Source: Jeremy Grantham, GMO, April 2011.

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Commodities – climbing the wall of worry

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As commodity prices scale new peaks, some pundits are questioning whether the nascent bull is nearing a cyclical peak. Not yet, argues BCA Research in a recent research note.

The report discusses four possible risk factors that could rein in the commodity complex, as follows:

(1)       Somewhat ironically, one of the risk factors is high oil prices, especially as the recent oil run-up is supply driven. However … the oil shock does not yet appear severe enough to trigger deflation fears in risky assets or cost-push concerns in Treasuries. True, the price of many assets relative to oil has fallen sharply, but short-term correlations are not yet worrisome.

(2)       A second risk factor relates to the balancing act of U.S. growth. Overly weak growth would knock down real interest rates and the dollar, benefiting “liquidity-driven” precious metals, but putting growth-sensitive base metals and energy at risk. On the flip side overly strong growth would boost real rates and the dollar, undermining all commodities, especially precious metals. For now, the U.S. economy is on a positive, self-reinforcing path, with both the probabilities of a double-dip recession or above-par growth fairly low.

(3)       A third source of concern for the commodity uptrend is that the rest of the world cannot handle dollar weakness. Here, the EMU zone is critical because of the euro’s “dollar alternative” role. While an end to the euro/dollar rally would not be worrisome, a retest of 2010 lows near 1.20 would create volatility for commodity markets.

(4)       Finally, China is continuing to tighten policy, which leaves open the possibility of overkill. We continue to place low odds on an extended period of economic and property market distress, but base metals and bulks would be the most vulnerable to a further Chinese slowdown.

In short, although the cyclical bull remains intact, a cautious approach of only buying on corrections seems to be warranted.

Source: BCA Research – Daily Insights Service, April 22, 2011.

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Jim Rogers: “We’re running out of oil”

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In the video clip below, Jim Rogers, chairman of Rogers Holdings and author of Investment Biker: Around the World with Jim Rogers and A Gift to My Children: A Father’s Lessons for Life and Investing, shares his views on oil with CNN.

Rogers said: “… the current situation is certainly causing oil to go higher and oil will go over a $150 and it will go over $200 eventually. The problem is the world is running out of known supplies of oil –  period. The IEA is going around pleading with people to listen that the world’s known reserves of oil are declining at rates of 4–6% a year. Figure it out – that’s simple arithmetic; we’re running out of known reserves of oil.”

Source: YouTube, March 4, 2011 (Hat tip: Global Investor Blog).

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