Commodities | Sep 26 2006
By Chris Shaw
Gold has tested support at around US$572 per ounce, oil continues to fall through supposed support levels and base metal prices have weakened in recent weeks, all of which suggests the end of the commodities boom is here.
Are the doomsayers right? Partly, according to Giles Keating, head of global research and the Global Economic Strategy Group (GESG) at broker Credit Suisse. Keating suggests in the short-term yes, commodities have peaked, but prices should regain some lustre by the next northern spring.
In Keating’s view the selling has not finished in the short-term, so his advice is for investors to take some profits on positions. This short-term view corresponds to what he sees as a shallow downturn in the US economy, which is expected to flow through into lower growth in Asia generally and China in particular.
He stresses a recession in the US remains unlikely, as while the US housing market is currently weak this weakness is likely to prove beneficial for the global economy as it gives it a chance to pause in the middle of the upswing. Growth is expected to resume next year, Keating’s view being the US is likely to have to lift interest rates early next year rather than cut them as is currently being factored in.
Such a move to lift rates would indicate increased concern over the potential impact of a pick-up in inflation and a strengthening of the US economy, both of which should provide support for commodities, meaning the long-term bull story for commodities remains intact.
In the meantime, Keating suggests equities still look good, though focus should be on more defensive issues such as food, banks and pharmaceutical stocks, with investors best to avoid stocks heavily exposed to the US consumer.