Correction Won’t Halt Commodities Boom
08/01/2007 12:00 am EST
Eric Roseman, editor of Commodity Trend Alert, thinks the recent selloff is just a correction, and foreign governments’ currency reserves will provide a boost to the bull market in stocks and commodities.
The ongoing subprime scare, compounded by private-equity financing troubles, recently dealt markets a severe blow in a long-overdue global correction.
But I doubt what is transpiring now will dramatically alter the secular bull market in commodities and global stocks; this is another correction in a long series of market hiccups over the last few years.
Private equity has been a big chunk of stock-market volume over the last 12 months. But they’re almost small potatoes compared to the massive liquidity rush coming our way, courtesy of global central banks—namely in Asia—with a few trillion dollars’ worth of reserves now heading into common stocks. That move ultimately will provide an incredible liquidity rush to all markets, including commodities.
So while the deal flow may dry up, the pool of US dollar reserves held by countries such as China, Japan, and the oil-producing nations of the Gulf will rescue global markets—provided central banks don’t tighten too aggressively. And they won’t. The Federal Reserve, the most influential central bank on the planet, stopped raising rates in June 2006; the next move by Ben Bernanke is a rate cut to rescue US housing.
The Baltic Dry index, one of the leading gauges measuring dry-bulk shipping conditions, climbed another 4.4% last week to a record, despite the big plunge in stock-market values worldwide. In a classic monetary squeeze in which global central banks are tightening interest rates, economically sensitive indices like the Baltic Dry Index would normally tank.
But that’s not happening this month as countries and companies continue to move record amounts of commodities like grains, iron ore, and coal. Global growth remains brisk, and China continues to devour almost every conceivable raw material to fund its booming economy. Even as stock markets plunged 5% last week, the Goldman Sachs Commodity Index posted a net gain as crude oil prices surged to $77 a barrel.
The Baltic Dry index is hitting new highs because global economic growth and cross-border trade is buoyant. Supplies for many bulk commodities, like iron ore and the grains, are declining—that’s not a recipe for falling commodity markets.
The grains remain mixed this summer following a correction last winter. Until a rally materializes for all components of our trades—wheat, soybeans, corn and sugar—we’ll continue to trade sideways. That’s been the case since late February. Right now, wheat is leading the charge higher while soybeans are not far behind. But corn and sugar remain weak, neutralizing returns thus far. Still, compared to just about every other commodity group since 2002—particularly the crazed base metals—the grains are dirt-cheap and at some point will rocket much higher. Buy the Power Shares DB Agriculture Index (AMEX: DBA) up to $27. (The ETF closed above $26 Tuesday.)