Why Commodities Aren't In A 'Bubble' Market
Some commentators have described recent action in the commodities market as a mania or 'bubble,' similar to the late 90s craziness in the dot.com stocks. Peter Schiff gives a good explanation of the short-term downturn in almost every asset class across the board.
While the price action has been extremely volatile, and metals prices have corrected violently to the downside in recent days, I believe that commodities are in a long-term secular bull market that will last at least another 10-12 years. Jim Rogers, billionaire investor and former partner of George Soros in the Quantum Fund said this back in early 2005.
"People have come to think [stocks] are okay again. They're not," said Jim Rogers, co-founder of the Quantum Fund and author of three investment books, Adventure Capitalist, Investment Biker and Hot Commodities...Historically, commodities and stock prices have moved in opposite directions. "In my view, we're in that kind of period again where essentially we're going to be having good commodity markets and sloppy stock markets," he said.
Here are my reasons why I agree with the Investment Biker.
First of all, central banks around the world are all inflating their currency, trying to weaken them so it's easier for other countries to buy more of their goods. This helps boost the current account (or trade) figures, hopefully resulting in a surplus instead of a massive deficit like the US currently has. Although the US has promoted a cheap dollar policy, it hasn't worked to generate a trade surplus, and probably never will. That's because we've outsourced our manufacturing base to Latin America and Asia, and it's a structural imbalance where China, Mexico and other countries make and sell more stuff to us than we do to them. If it weren't for agriculture and media exports, America would have an even higher Current Account deficit.
I know some of you reading this are totally in love with your stocks and mutual funds, probably still watch and listen to Jim Cramer's 'Mad Money' show with baited breath, and would almost never consider investing in commodities because they're 'too risky.' You may still believe what Wall Street and your broker tell you, and I can almost repeat it verbatim: "On average over the 'long haul,' the stock market goes up 7-8% a year. Keep dollar-cost averaging into the market, ride out the rough patches, and everything will be A-OK."
Speaking of averages, Mike "Mish" Shedlock at Whiskey and Gunpowder has a great column on averages, and how they relate to current economic conditions.
Back to Wall Street, stocks and averages. If you still believe that the stock market will keep going up 7-8% a year with the insane amount of debt at the government, corporate and household levels, I'll bring the Tooth Fairy and the Easter Bunny to your house for dinner. As Warren Buffett says, "Stock markets are a voting machine in the short term, and a weighing machine in the long term." As more investors bring out the scales on some of these heavily indebted stocks like General Motors, they won't like the numbers they see.
I'll concede that the major indices have recovered from the 2002 lows and gotten almost back to even. I'll take a guess that most American's 401(k) and IRA statements haven't been much to write home about over the past 5-6 years.
Compare this performance to gold over the past five years. It was trading around $260/ounce, as of this morning it's at $571/ounce, more than doubled. The factors that supported this have been a weakening US Dollar, plus increased gold demand from China, Russia and the Middle East. Dubai even has it's own gold and commodities exchange. As investors and central banks lose confidence in paper assets, such as stocks, bonds, mutual funds (and even some currencies), they will (and are already starting to) reallocated their assets from US Dollars and Treasury notes into tangible assets such as gold and silver.
Will commodities keep going up forever? Of course not. No market ever does. For the forseeable future, (I'd say the next 10, possibly 15 years) commodities will be in a solid bull market, while paper assets will disappoint most average American investors.
While the price action has been extremely volatile, and metals prices have corrected violently to the downside in recent days, I believe that commodities are in a long-term secular bull market that will last at least another 10-12 years. Jim Rogers, billionaire investor and former partner of George Soros in the Quantum Fund said this back in early 2005.
"People have come to think [stocks] are okay again. They're not," said Jim Rogers, co-founder of the Quantum Fund and author of three investment books, Adventure Capitalist, Investment Biker and Hot Commodities...Historically, commodities and stock prices have moved in opposite directions. "In my view, we're in that kind of period again where essentially we're going to be having good commodity markets and sloppy stock markets," he said.
Here are my reasons why I agree with the Investment Biker.
First of all, central banks around the world are all inflating their currency, trying to weaken them so it's easier for other countries to buy more of their goods. This helps boost the current account (or trade) figures, hopefully resulting in a surplus instead of a massive deficit like the US currently has. Although the US has promoted a cheap dollar policy, it hasn't worked to generate a trade surplus, and probably never will. That's because we've outsourced our manufacturing base to Latin America and Asia, and it's a structural imbalance where China, Mexico and other countries make and sell more stuff to us than we do to them. If it weren't for agriculture and media exports, America would have an even higher Current Account deficit.
I know some of you reading this are totally in love with your stocks and mutual funds, probably still watch and listen to Jim Cramer's 'Mad Money' show with baited breath, and would almost never consider investing in commodities because they're 'too risky.' You may still believe what Wall Street and your broker tell you, and I can almost repeat it verbatim: "On average over the 'long haul,' the stock market goes up 7-8% a year. Keep dollar-cost averaging into the market, ride out the rough patches, and everything will be A-OK."
Speaking of averages, Mike "Mish" Shedlock at Whiskey and Gunpowder has a great column on averages, and how they relate to current economic conditions.
Back to Wall Street, stocks and averages. If you still believe that the stock market will keep going up 7-8% a year with the insane amount of debt at the government, corporate and household levels, I'll bring the Tooth Fairy and the Easter Bunny to your house for dinner. As Warren Buffett says, "Stock markets are a voting machine in the short term, and a weighing machine in the long term." As more investors bring out the scales on some of these heavily indebted stocks like General Motors, they won't like the numbers they see.
I'll concede that the major indices have recovered from the 2002 lows and gotten almost back to even. I'll take a guess that most American's 401(k) and IRA statements haven't been much to write home about over the past 5-6 years.
Compare this performance to gold over the past five years. It was trading around $260/ounce, as of this morning it's at $571/ounce, more than doubled. The factors that supported this have been a weakening US Dollar, plus increased gold demand from China, Russia and the Middle East. Dubai even has it's own gold and commodities exchange. As investors and central banks lose confidence in paper assets, such as stocks, bonds, mutual funds (and even some currencies), they will (and are already starting to) reallocated their assets from US Dollars and Treasury notes into tangible assets such as gold and silver.
Will commodities keep going up forever? Of course not. No market ever does. For the forseeable future, (I'd say the next 10, possibly 15 years) commodities will be in a solid bull market, while paper assets will disappoint most average American investors.
posted by Brian Ochsner | 9:13 AM
2 Comments:
I'm curious about what you think about jewelry demand for commodities. Let's say 50% of the current demand is coming from jewelry makers. If there is a significant decrease in asset prices, such as houses and stocks, don't you think the demand for gold and silver will similarly decrease? Is your view that the decrease in jewelry demand will simply be replaced by demand from buy and hold investors like central banks? If so, what percent of a yearly demand could be purchased by these parties? If they are not "using" the metals, how long until the central bank demand is sated?
I don't know enough about jewelry demand to make an accurate assessment. I agree that there could be a significant downturn in the housing and stock markets, and it could temporarily bring down the prices of commodities like gold and silver. However, history shows that bull markets in tangible assets (commodities, such as gold and silver) and paper assets (such as stock, bonds, mutual funds, etc.) run opposite to each other. When paper assets are up - like they were in 1982-2000 - tangible assets are down, and vice versa, when you look at the period from 1966-1982. Now, the economic pendulum has swung back in favor of commodities from 2000 until probably 2015 or 2020.
I believe that central banks and wealthy investors will more than make up for any slack in jewelry demand. China's central bank is planning to quadruple its gold reserves from 600 to 2,500 metric tons, and the Chinese government is encouraging its citizens to purchase more gold. Russia's Central Bank has increased its gold reserves as well. Large investors in Asia and the Middle East are buying more gold, because IMO they don't trust paper assets (such as US Dollars or Treasury notes) to hold their value that well over the next several years. Dubai has a Gold and Commodities Exchange, Shanghai does too.
There's also a dimishing supply of
new gold reserves being discovered, so along with demand increasing, supplies are tightening as well. Central banks around the world (including our own Federal Reserve) are inflating and devaluing their currencies at a pretty good clip. Look at the back page of the Economist magazine and you'll see the rates in other countries, usually in the high single or double digit increases.
In summary, I'm still bullish on gold for the next decade or so because of inflated fiat currencies around the world, tightening supplies, and increased demand from central banks and investors in the Middle East, Russia and Asia - even if jewelry demand goes down with softening economies around the world. Gold and silver have been stores of economic value for thousands of years, and will continue to be (IMO) until the end of time.
Good question, keep those questions and comments coming - thanks.
Post a Comment
<< Home