Still Believe In The Commodities Bull Markets
In this weekend's Barron's magazine article Commodities: Who's Behind the Boom? (subscription required), Gene Epstein provides a compelling argument that the commodities bubble is, indeed, a bubble and that it is about to burst. And the price action in today's markets certainly seems to support that thesis. All that said, I disagree.
Jim Rogers in his book Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market
If you look at the graphs of the commodities indexes on Bloomberg's website, you will note that, while commodities have become more volatile recently, they are still up on the year. Oil prices remain near record highs, natural gas is strong, along with agricultural products. If you visit Kitco's five year gold chart or Kitco's five year silver chart, you will again note that prices are still up substantially compared to recent history.
In the Barron's article, we are told that it is speculation that is driving commodities far beyond reasonable valuations. My response is that, if prices are so far beyond reasonable valuations, then why are the physical producers not taking advantage of this situation by dramatically increasing their production? The answer is, of course, because they cannot do so. They simply do not have the ability to find more readily available cheap oil. Finding gold and silver are similarly difficult. Natural gas is somewhat different because a lot of previously stranded natural gas is being converted to liquid natural gas (LNG) and imported to the U.S. I do not follow farm products, so I am more cautious about my comments. From my weak knowledge of the ethanol boondoggle, some artificial forces that are creating a distortion. The point is, many commodities remain in short supply and difficult to produce more quickly.
Until I see the commodity suppliers threaten and have the ability to carry out their threat of substantially more production, then I will remain steadfast in my outlook. At present, I do not significant additional sources of production coming on stream. Does that mean that prices can grow to the sky? The answer is clearly no. Prices are constrained by customers' ability to pay. While some argue that the U.S. recession is now removing the customers' ability to pay, I am in the camp that says world growth is still growing and thus commodities are still in demand.
In summary, while I acknowledge that the commodities markets are volatile, I continue to believe that the bull markets in commodities will continue. And while the U.S. recession might temporarily damp the price of commodities, I expect that external demand to be a moderating force. The demand for commodities continues to grow and the ability to produce more commodities cheaply is not keeping pace with the increased demand.
My photograph of the Bow River in Banff National Park is hosted at Flickr. This picture was taken from bridge on Banff Avenue looking west. If you click on the picture, you will be taken to my Flickr account where you can see other similar pictures.
