Commodities big picture

C

Cutten

In the 1970s commodity secular bull market, there was one year where everyone had got really carried away with commodity bullishness and thought everything was going to the moon, and then commodities experienced a crunching setback. That was 1974. You had grains going bananas in the year or two beforehand, gold had rallied from $35 to $200 over 4 years, oil quadrupled in 2 years. Rather reminiscent of recent times.

A huge gold fund was launched so private investors could get in on the party. What happened? Gold promptly HALVED, falling from $200 to $100 that year. A classic case of buy the rumour sell the fact. Everyone had gotten gaga on commodities, and they piled in just in time for a brutal one year bear market.

Well, it looks as though the same might be happening here. The long-term outlook for commodities is still bullish, however the medium-term outlook is bad. Signs of excess speculation, collapsing global demand, political attention, demand destruction due to the high prices, and a tape that trades like a defenestrated cold war dissident.

Another interesting fact was that this coincided with the recovery from a brutal bear market (73-74). The current market has not been as brutal, but it has been a rather sharp-toothed bear.

Now, looking back to the 1970s, I'm sure after that bear market in 1975, most people had given up on commodities. Yet what happened was the greatest buying opportunity of the decade. From the 1975 lows, gold went up 8 fold in 5 years, silver went up 20-fold, and some other commodities (e.g. oil, sugar) soared into the stratosphere as well. Could it be that the same happens this time? In other words, a nasty 1 year commodity bear market (from July 08 to mid 2009, for example), followed by a resumption of the secular bull, just as everyone is giving up on commodities as an investment class.

If the late 70s are anything to go by, then the later stage commodity bull market resumption will be more narrow. You won't want to just buy the GSCI and hold on. Rather, focus on the commodities that are making new highs, stick to them alone.

Another suggestion is that the commodity market may experience more selling than people expect. It really needs to go down far enough so that almost everyone gives up on it. Every bull, every "end is nigh" gold-bug, every pension-fund that has been sold on commodities as an asset class - all must be driven into despair and practically abandon commodities. That's what it would take to make a real bottom - and it's some time off IMO.
 
Quote from Cutten:

If the late 70s are anything to go by, then the later stage commodity bull market resumption will be more narrow. You won't want to just buy the GSCI and hold on. Rather, focus on the commodities that are making new highs, stick to them alone.

Another suggestion is that the commodity market may experience more selling than people expect. It really needs to go down far enough so that almost everyone gives up on it. Every bull, every "end is nigh" gold-bug, every pension-fund that has been sold on commodities as an asset class - all must be driven into despair and practically abandon commodities. That's what it would take to make a real bottom - and it's some time off IMO.
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With all due respect, the problem with your analysis ( and why commodities need to head a lot lower in order to create what you label as a "real" bottom ) is that you cannot even begin to compare the amount ( and character ) of current players in the commodity markets to that of the 70's.

It's like comparing "apples" and "oranges".

For anyone that can't understand why, I'll give you a little hint . . . Pension Funds and (long only) funds that are indexed to Commodities. In fact, the latter, according to Dow Jones-AIG got up to $155 BILLION in assets that tracked commodity indexes as of the end of last year.

For example, CALPERS has $240 Billion in its portfolio, yet back in February of this year their board authorized putting as much as 3% of its total equity into commodities. That was a "watershed" event.
 
I agree that a big opportunity is shapping up.
Rogers says the avg bull takes 18 years, that is confirmed by US data.

That suggests that is the average time that humans take to realize the imbalances and to bring the change necessary to kill the market.

I dont think human nature has changed much on the last decades(certainly not in politicians) and the amount of skepticism towards commodities (even with much better data easily avaliable) confirms that 18y thesis even more(if people were quicker to realize what is going on bulls would be shorter). I'm not a huge fan of contrarian signals but in this case a big change on the way people live will give the contrarian sell signal(or the 'hang in there because I'm always early'), the contrarian signals the skeptics are using(like ETFs, investment funds, books) are not big enough in my mind because the supply and demand picture still suggest further moves
as far as how to time the near term bottom, we will need some help from marketsurfer :D
 
What changes from here on forth is the way individual commodities cycle. The run in commodities was driven by macroscopic reasoning that raised prices unilateraly. The declining dollar and increasing oil prices became the most prominent banners for the trend, and it is not suprising to see both reversing in this fashion.

The sell off creates a lot of opportunities for discriminate traders. It's going to be very important to become sensitive to the factors that drive individual commodities, rather than hope for a rising tide that lifts prices across the board. Doing so will allow you to rotate capital into commodities as they start their individual cycles.

Increasing dollar or not, in the next few months we'll see a number of commodities recovering in order to make new highs and traders should be on alert to put their capital to work.
 
I understand your point of view, however the demand cycle has changed significantly, i.e China and India. Also consumption patterns have changed dramatically .

Therefore, the "collapse" of commodity prices would seem to be unlikely, but a significant price reduction will be a benefit, albiet temporary as standard of living in the Asian countries has improved that is not likely to be reversed.
 
imo we are just going to get back to the historical 10:1 ratio between gold and oil however that happens (gold 900? oil 90?) i dunno but for disclosure purposes i am short oil through equities such as airlines and refiners which i have been scaling out of as of yesterday and today looking for a bounc in crude after alot of down days
 
Quote from Daal:

I agree that a big opportunity is shapping up.
Rogers says the avg bull takes 18 years, that is confirmed by US data.

That suggests that is the average time that humans take to realize the imbalances and to bring the change necessary to kill the market.

I dont think human nature has changed much on the last decades(certainly not in politicians) and the amount of skepticism towards commodities (even with much better data easily avaliable) confirms that 18y thesis even more(if people were quicker to realize what is going on bulls would be shorter). I'm not a huge fan of contrarian signals but in this case a big change on the way people live will give the contrarian sell signal(or the 'hang in there because I'm always early'), the contrarian signals the skeptics are using(like ETFs, investment funds, books) are not big enough in my mind because the supply and demand picture still suggest further moves
as far as how to time the near term bottom, we will need some help from marketsurfer :D
More...

I don't think we hit a secular top in commodities. Everyone here lived through the dot.com bubble. We need to see THAT level of mania before the boom ends. IMO this is gonna be a shortish but nasty bear market and will be over by the end of 2009.

Stocks went up from 1982 to 2000 - 18 years. They had 1987, 1990, 1998 bear markets/massive corrections. Right now I would say we are in short bear market for commodities that might last up to one year. Since commodities are more volatile than stocks it could correct 50% even. Once people get to a point of maximum pessimism and fear (similar to how they felt after 1987, 1990-91, 1998 in stocks), that is when it will be time to buy commodities again. The runup from this bear market low will make the last 5 years of commodity gains look like chicken feed. It will parallel the 1975-1980 gains - think the Hunt silver bubble, the sugar bull market, the oil boom.

Now is the perfect time to start working on your strategy for how to buy those discounted levels in the next 12 months or so, and (more importantly) how to hold on for subsequent years and then sell at the point of maximum commodity market mania. This is not an easy thing to do, even if you are a raging bull. But it can be done.
 
Cutten - Interesting post, this concept is something I will look into further.

Although the participants in the market may have changed considerably since the 70's when this occurred, this does not mean one could not use this idea to identify some strategies that fit into this picture. The swings up & down may be larger now, in terms of absolute price, but may be very similar relative to other swings during that period.

Thanks,
Eric
 
cutten said: Another suggestion is that the commodity market may experience more selling than people expect. It really needs to go down far enough so that almost everyone gives up on it. Every bull, every "end is nigh" gold-bug, every pension-fund that has been sold on commodities as an asset class - all must be driven into despair and practically abandon commodities. That's what it would take to make a real bottom - and it's some time off IMO.


Then in a later post he says:

Now is the perfect time to start working on your strategy for how to buy those discounted levels in the next 12 months or so, and (more importantly) how to hold on for subsequent years and then sell at the point of maximum commodity market mania. This is not an easy thing to do, even if you are a raging bull. But it can be done.

and i can find the fountain of youth before i hit 66...... <a href="http://www.sweetim.com/s.asp?im=gen&ref=11" target="_blank"><img src="http://content.sweetim.com/sim/cpie/emoticons/0002006E.gif" border=0 ></a>
 
Industrial demand for commodities is dropping, but rapid inflation is going to make them the only safe asset class to own. People want something solid to protect them from the Fed's money printing.

I think the turnaround is already beginning.
 
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