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Commodities boom will collapse itself
Chet Currier
MUTUAL FUNDS
The world's commodity markets are making financial history.
They have staged a powerful rally heralding the emergence of a great global economic boom. Take a gander at the price of copper, which has roughly tripled in two years.
Oil last week soared above $75 a barrel for the first time. Gold, at more than $650 a troy ounce, looks to be mounting a challenge to the highs set 25 years ago. Silver rocketed 8 percent Friday.
All this has produced whoops of vindication from the commodity faithful, who spent the 1980s and 1990s sitting on the sidelines while stocks and bonds prospered.
It has also brought cries of alarm. However long it lasts, many voices of experience say, the commodity rally is headed toward a collapse like the one that ended the last great upsurge, which occurred in the 1970s.
Old hands remember the dawn of the 1980s, when the silver market plunged about 75 percent in less than four months. This time, says a poll of brokers and research companies released by Australia's Access Economics, commodity prices may be ripe for a decline of as much as 50 percent in the next two years.
''Prices at these levels can't be justified based on fundamentals only,'' says Christoph Eibl, head of commodities trading at Tiberius Asset Management AG in Zug, Switzerland. ''While we haven't seen the top of the market yet, the risk of prices collapsing is very high.''
To any contrarian investor, such entrenched skepticism might look like a sign that the resurgent commodities markets still have room to roam.
Whatever happens in this market cycle, however, the advance still bears all the hallmarks of a rally in a bear market - a bear market that dates back a century or more, dictated by inexorable forces in economic history.
Over the 20 years from the end of 1979 through the end of 1999, according to my Bloomberg, a Goldman Sachs Group Inc. index of spot commodity prices declined 1 percent a year while
the Standard & Poor's 500 Index in the stock market climbed at an 18 percent annual rate.
This was no new turn of events. ''Many commodity prices now stand near 100-year lows in real terms,'' says Di Tomasso Group, a commodities adviser in Victoria, British Columbia.
This speaks to powerful negative fundamentals for commodities: Namely, a world economy that has grown away from agriculture and manufacturing as a base, toward services and information.
A countervailing force in recent years has been the emergence of vibrant new economies in China, India and other fast-developing parts of the world. Behold, new demand for oil, copper and all sorts of other raw materials.
The catch is, these economies are emerging in a 21st century setting, not the 19th century environment in which the Industrial Revolution took place. Copper makes terrific wiring, pipes and all sorts of other good things. The question is, how bullish can you get on wires at a time when a Google search for the word ''wireless'' turns up 1.1 billion citations in less than a tenth of a second?
The higher prices go, the more they encourage the mining, drilling and production of new supply. In any case where new reserves can't be developed, each tick up on the price charts enhances the incentive to find alternatives.
There is no predicting how long the great commodity revival will last. The farther it goes, the uglier things may get when the end comes.
Chet Currier
MUTUAL FUNDS
The world's commodity markets are making financial history.
They have staged a powerful rally heralding the emergence of a great global economic boom. Take a gander at the price of copper, which has roughly tripled in two years.
Oil last week soared above $75 a barrel for the first time. Gold, at more than $650 a troy ounce, looks to be mounting a challenge to the highs set 25 years ago. Silver rocketed 8 percent Friday.
All this has produced whoops of vindication from the commodity faithful, who spent the 1980s and 1990s sitting on the sidelines while stocks and bonds prospered.
It has also brought cries of alarm. However long it lasts, many voices of experience say, the commodity rally is headed toward a collapse like the one that ended the last great upsurge, which occurred in the 1970s.
Old hands remember the dawn of the 1980s, when the silver market plunged about 75 percent in less than four months. This time, says a poll of brokers and research companies released by Australia's Access Economics, commodity prices may be ripe for a decline of as much as 50 percent in the next two years.
''Prices at these levels can't be justified based on fundamentals only,'' says Christoph Eibl, head of commodities trading at Tiberius Asset Management AG in Zug, Switzerland. ''While we haven't seen the top of the market yet, the risk of prices collapsing is very high.''
To any contrarian investor, such entrenched skepticism might look like a sign that the resurgent commodities markets still have room to roam.
Whatever happens in this market cycle, however, the advance still bears all the hallmarks of a rally in a bear market - a bear market that dates back a century or more, dictated by inexorable forces in economic history.
Over the 20 years from the end of 1979 through the end of 1999, according to my Bloomberg, a Goldman Sachs Group Inc. index of spot commodity prices declined 1 percent a year while
the Standard & Poor's 500 Index in the stock market climbed at an 18 percent annual rate.
This was no new turn of events. ''Many commodity prices now stand near 100-year lows in real terms,'' says Di Tomasso Group, a commodities adviser in Victoria, British Columbia.
This speaks to powerful negative fundamentals for commodities: Namely, a world economy that has grown away from agriculture and manufacturing as a base, toward services and information.
A countervailing force in recent years has been the emergence of vibrant new economies in China, India and other fast-developing parts of the world. Behold, new demand for oil, copper and all sorts of other raw materials.
The catch is, these economies are emerging in a 21st century setting, not the 19th century environment in which the Industrial Revolution took place. Copper makes terrific wiring, pipes and all sorts of other good things. The question is, how bullish can you get on wires at a time when a Google search for the word ''wireless'' turns up 1.1 billion citations in less than a tenth of a second?
The higher prices go, the more they encourage the mining, drilling and production of new supply. In any case where new reserves can't be developed, each tick up on the price charts enhances the incentive to find alternatives.
There is no predicting how long the great commodity revival will last. The farther it goes, the uglier things may get when the end comes.
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