For several weeks, a rotation has been underway in the U.S. market, with money moving away from some...
Commodities Will Continue to Rise
05/20/2008 12:00 am EST
Eric Roseman, editor of Commodity Trend Alert, says tight supplies will drive prices of all major commodities higher, and there’s little anyone can do to stop it.
Probably the biggest conundrum for central banks worldwide is the ongoing acceleration of commodities prices despite a recession in the United States and a serious slowdown emerging in the industrialized economies. Textbook economics dictate a big crash for raw materials when the world’s largest economy is in a funk.
[But] following a correction in March, commodity indices hit new all-time highs on Thursday, May 8th and continue to power ahead. This advance remains driven by crude oil and the rest of the energy complex, which represent at least 30% of all commodity benchmarks. Until oil prices suffer a dramatic decline, commodities indices will continue to rally to new highs.
Oil, the grains, most soft agricultural commodities, the majority of base metals, and gold and platinum remain in very tight supply. The seeds of inflation have already been sown by the Federal Reserve, and other central banks will eventually abandon the inflation fight and start printing more money to avoid a recession or an economic slowdown. In fact, Europe and Japan have reported some pretty bleak economic numbers over the last 30 days—a bad sign.
Gold, of course, is historically the most sensitive inflation indicator. Forget the euro, Brazilian real or the Japanese yen; for true value, take a hard look at the price of gold measured in euro, real, and yen. In all three cases, gold has posted big double-digit advances since 2005. The dollar, naturally, has gone to the trash bin over the same period.
Gold prices, which stalled in March, remain in a long-term secular bull market and continue to warn of impending inflation down the road. The United States, and to a lesser extent the Europeans, will pay enormously for bailing out battered banks since last fall. Inflation will beat deflation—count on it.
Commodities continue to power ahead this year because of low net supplies. The press blames hedge funds and other index funds for driving prices higher; that’s not the entire story. Supplies are razor thin for many raw materials—period. The ongoing major supply imbalances cannot be immediately supplemented or neutralized by new production. When a commodity—any commodity—is suffering from a deficit in production and stable to rising demand at the same time, there’s only one direction for prices to go—higher.
Crude oil is setting itself up for a major decline—eventually. I’ve been dead wrong predicting a decline in oil prices this year. Supplies, however, remain in a net deficit of about two million barrels per day and several producers continue to be plagued by production problems, namely Nigeria. Despite a decline in US imports over the last 12 months as the economy softens, the Chinese and other emerging markets are easily absorbing this difference.
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