The commodities bull market has a long way to run
Dominic Frisby Feb 16, 2011
Anyone buying precious metals and commodities now is coming late to the party. They've missed the champagne cocktails, the nibbles and the polite conversation. They've missed the DJ playing any song he can think of to get people off their seats. They've missed the first dance.
Now the thing's in full swing. It's midnight. There are gate-crashers at the door. The girls are all declaring they will survive and – cringe – even Dad's dancing.
But that's not to say the party can't go on a lot longer – till dawn, perhaps, and even into tomorrow. Ordinary bull markets in commodities tend to last 15 or 20 years, after all.
Today I wanted to take a step back at look at the bigger picture – at supercycles…
Nothing looks cheap today
It's hard to find anything at the moment that looks 'cheap'. Cheap in the way that oil, copper or gold looked at the turn of the century. Or that US government bonds looked in 1981. Or stocks in 1982.
These were, of course, major, cyclical turning points, the ends of bear markets and the beginnings of bull markets.
If we look at the two years surrounding the turn of the century, we see that in 1999 precious metals and commodities made a low, and in 2001 they retested that low. They've been rising ever since. Copper is now up seven-fold. Oil is up nine-fold. Cotton is up six-fold. Grains are three or four times higher (although their low came a couple of years later). And gold is up five-fold.
During that 1999-2001 period, when commodities were going through their lengthy bottoming-out process, stocks entered their exponential phase, their blow-off top. Ten years later the Dow is more or less at par. Our own FTSE 100 is down about 15%, as is the S&P 500. Down 15% in the face of all that monetary inflation – that's a shocking statistic.
Looking back, I think we can consider the bust of 2007-9 – and the action coming out of it – as another major cyclical turning point. As we know commodities and stocks all capitulated, regardless. But commodities, precious metals and emerging market stock indices made their first low in October-November 2008 and a higher low in March 2009, just as major Western stock markets were making a lower low.
Since then most metals, precious or base, and soft commodities (coffee, cotton, sugar etc) have all broken out above their pre-crash levels to new highs. In fact, virtually all commodities have, except for oil and natural gas. Many emerging markets have retested their 2007 highs, but been unable to break above them.
But Western stock markets, however, despite their outperformance in 2011 so far, are still 10-15% off their 2007 peaks.
'Things' are outperforming paper.
Is the government bond bull market over?
Bear in mind that the major low in commodities took three years – from 1999 to 2001 – to unfold. I am wondering if yields on US government bonds have just gone through a similar process. In other words, have we just seen the end of the US government bond market?
Amid the panic surrounding the liquidity crisis of 2008, yields fell to almost 2.5%, in December of that year. Last summer, bond prices spiked again, and yields fell to 3.5%, but they couldn't reach those levels of December 2008.
This is a bull market that began 30 years ago in 1981, when the US government bond yield was around 16%.
Here's that picture in reverse, showing yields. Are we seeing a bottoming-out process?
It's not hard to see why the government bond bull market might be over. Governments are sinking in a sea of their own debt. In the event of another 2008-style panic, I can see that bonds might benefit. But with inflation now so patent everywhere you look, with even the official measures unable to hide it, it's hard to justify buying 30-year bonds that yield only 4% or 5%.
It's all further confirmation of my things-vs-paper theory.
How much longer will the commodity bull market last?
Since 1792 there have been five major bull markets in commodities. These lasted 23 years, 21 years, 23 years, 18 years and 12 years – an average of 19.4 years. We are ten or so years into the current bull market. If history is any guide, we're probably more than halfway through now. The bull market is mature, but it's not necessarily over. (Although in the short-term, I wouldn't be a buyer.)
Inflation is starting to get out of control, there are conflicts brewing with unions on both sides of the Atlantic, and an energy crisis could be looming. It's all eerily reminiscent of the 1970s, with President Obama cast in the role of Jimmy Carter, and David Cameron doing his best to be Maggie Thatcher (perhaps before the populace is ready for it).
But as yet there is no sign of a Ronald Reagan or a Paul Volker. When Volker, at the helm of the Federal Reserve, put up interest rates, he effectively ended inflation and, shortly after, the bull market in commodities. He also effectively laid the foundations for the subsequent bull market in financial paper. I can't see the commodities bull market, driven as it is by loose monetary policy, ending until we see another Volker.
Here's a little bit of 'pub theory' to finish off. The might of the Soviet Union in the 1970s was, of course, highly dependent on commodities prices. Copper and precious metals peaked in 1980 and began to fall. Grains, oil and natural gas peaked shortly after. By the mid-1980s commodities were in a well-ensconced bear market. By the end of the decade the Soviet Union was falling apart.
Similarly, the bull market in financial paper which began in the early 1980s has underpinned US 'imperial' might. That bull market in stock market paper ended in 2000. We may also have seen the end of the government bond bull market. Before the end of this decade, is it possible that the United States will in fact be far less united? Might we see the independent, 'satellite' states – Texas, for example – detaching themselves from the union? It's just a thought, but I wouldn't be surprised.
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