Rudi's View | Aug 14 2008
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck, editor FNArena
Welcome to our class “Understanding the Commodities Super Cycle”. What you need are the following: one piece of wood, one nail, an elastic band and one hammer as tool.
Drive nail into wood. Make sure elastic band is solidly connected to nail. Press wood with one hand to the table. Use other hand to pull elastic band as far as you can. Further please. C’mon, you know you can do better!
OK, now observe how far the elastic band stretches. Think US$51,000 per tonne nickel. US$8,800 per tonne copper. US$138 per pound uranium. US$147 per barrel light sweet crude oil.
Let go of the elastic band. See how far it swings to the downside? Now we’re talking US$17,000 per tonne nickel. US$57 per pound uranium. And copper and oil? That’s what we are going to find out.
Congratulations. You have just graduated. This is all you need to know to successfully understand the Commodities Super Cycle. Good luck!
The past weeks have been a hard lesson for those investors who believed that China, and China alone, determines the direction of commodity prices, and therefore of share prices for metals and mining companies. With economic data pointing in the direction of rapidly slowing economic growth in all major economies across the globe (including China), financial speculators, momentum traders and large fund managers have chosen to exit commodity markets.
The result has been nothing less than devastating with crude oil now trading circa 20% off its peak in June, nickel and zinc both more than 40% down from prices reached in February, and with even the least damaged aluminium and copper still losing 14-15%.
So what has happened?
This is where this story becomes rather intriguing for those experts who never really believed in the multi-decade long Super Cycle concept have been quick in announcing the end of the bull trend for commodities. In their favour speaks the fact that nearly all commodities -soft, hard, light and heavy- have been falling through key technical support levels since last month, indicating the trend forward has now turned bearish (southward bound). Gold in particular has been breaching all sorts of short term, long term, trend, channel, key and critical technical support levels; up to the point that experts seem genuinely concerned about the metal’s long term price direction.
Is this the end of what should have lasted for at least another decade? No way, say those still firmly in favour of the Commodities Super Cycle. What we are experiencing will ultimately turn out to be nothing but a blip in a long term uptrend, they say. Investors are advised to “toughen it out” and “stay faithful and committed”. Meanwhile, the list of ASX-listed companies whose share prices are hitting twelve month lows is increasingly populated by miners and mining prospectors.
Surely, this is as bad as it gets and we will soon see a rebound for the sector? After all, isn’t that the scenario we’ve become accustomed to over the past five years?
Remember what we learned previously. Take your piece of wood. Place your hand firmly on top. Stretch elastic band with your other hand. Let loose. See how far it can stretch to the downside? That’s the effect on commodities when investors abandon and exit.
It has been argued financial investors cannot set nor maintain a trend all by themselves; they need solid support from underlying market fundamentals to guide them. This is true. But every time investors find a certain market in tight supply (in other words: a nail to wrap their elastic band around) they will jump on the opportunity and stretch the band as far as their arms reach. As a result of this prices move much further (and I mean: much, much further) than they would’ve otherwise. The flipside is that prices decline much further when these same investors move elsewhere (same principle but the other way around).
Now you understand why the world was talking crude oil prices at US$200 per barrel until last month – and why experts at National Australia Bank have started talking US$70-65 per barrel again. (Can anyone believe the folly of stockbrokers and mainstream media earlier in the year trying to launch the “commodities are the new defensives” slogan?)
What we are experiencing is a major change that is likely to take months, not days or weeks, to mature. The fundamentals underneath the Commodities Super Cycle are suffering considerable stress because of slowing global economic growth, a resurgent US dollar, the Olympics in China and global investors re-allocating their funds.
I have an eerie feeling that this is the stage wherein the previous Super Profits that have been achieved on the back of the Commodities Super Cycle are now being replaced by Super Losses for those investors who fail to understand the true nature of what is happening. Better make sure you’re not one of them.
