(07/05/12) Is the Commodity Boom Over?

Is the Commodity Boom Over?

07/05/2012 10:30 am EST•2 min read

Portfolio Manager

VFO Asset Management

The grand commodity supercycle is 14 or 15 years old, and Global Guru Capital's Nick Vardy explains here whether he thinks the cycle has further to go.

The end of the commodity supercycle? Nicholas Vardy is here to explain that sentiment.

Well, you know, the commodity supercycle is a well-known sentiment among investors. Jim Rogers is a big proponent of that. He basically said the most recent commodity supercycle started right about the height of the dot.com boom in 1998 and 1999.

Right about that time, for example, Merrill Lynch shut down its entire commodities trading division. Everyone was buying Pets.com stock. Jim Rogers was on CNBC saying this is ridiculous, these aren't worth anything, what you really should be buying is real assets like copper and iron ore and really the hard stuff. That's basically when commodities bottomed.

Historically, supercycles have been about 15 to 17 years. The supercycle in the 2000s was basically driven by excessive demand for commodities by China. China was building an incredible number of roads, bridges, empty cities of malls. Over the course of ten years, they became the biggest consumer of commodities across the globe. That is now slowing down.

If you think about where the supercycle started, back in about 1998, and right now we're in 2012... And if you think a commodity supercycle basically lasts about 15 to 17 years, it's getting a little bit long in the tooth.

So if I said. "Why is it ending now?" your math points right to it, right?

Yes, basically so. People talk about the current pullback in oil prices and commodity prices and the slowdown of China really as just short-term pullback. The conventional wisdom says yes, it is just a short-term pullback, and China will come back.

But look at it from two perspectives. China is no longer building as many roads, bridges, highways, and railroads as it has been, so on the demand side for commodities, that is really collapsing. The big impetus behind the commodity supercycle is collapsing.

At the same time, if you look at it from a cyclical level, it is getting long in the tooth. It has been going on for about 14 or 15 years now, and so it's kind of scheduled to end anyway. I think it's important to look at it in that context as well. I think it had a good run over the past 14 or 15 years; but now I think it's time to call the end of it and really move on to the next big thing.