Well, that’s it. Apparently the commodities boom is over. The folks at Deutsche Bank (NYSE: DB) told clients to get out of commodities. They say China is slowing. The whole world is slowing. Oil will return to its “marginal cost of production,” somewhere between US$60 and $80 and gold will settle around $650.
Of course it’s possible they’re right. You have to take each one of these predictions from the investment banks for what they’re worth, though. Sometimes they’re late to the party (Goldman Sachs calling for an oil ‘super spike’ to $200 in March). Sometimes they miss the part altogether. And most of the time they’re just morons who are making it up as they go along.
That said, it’s pretty clear the institutional infatuation with commodities as an asset class is over. It’s not at all clear the case for resources has been defeated. Remember, the up-trend in resource prices that started in 2003 came at the end of a period where resource prices declined in real terms…for nearly two hundred years.
Two-hundred year down-trend…three year up-trend…resumption of down-trend? Does that make sense to you?
Remember, the world’s population has doubled since 1960, from three billion to well over six billion. The first two great periods of industrialisation in Europe and North America brought more resources on-stream, and thus, lower prices for tangible goods.
There was a lot of coal in Newcastle and West Virginia, and a lot of farmland in Kansas. But now, the latest period of industrialisation begins with more people than ever chasing scarce resources. China is not Kansas.
It could be that demand for resources will fall (as it appears to be doing simultaneously all over the planet). It could also be that in some sectors, supply will finally catch up (this appears to be what’s happened with base metals). But what’s really changed in the last month is that investors are simply demanding fewer resource shares. That’s it. It’s important to distinguish investment demand from real demand.
The trendy investors who want to own the latest “It” sector will be back. Let them go trawl for beaten down financials and retail stocks. If you missed out on the first phase of the boom, this will be your next best chance to get into long-term positions at much lower prices. Those prices may not go anywhere for a year, mind you. But at least it won’t be so crowded in the aisles while you browse through firms, projects, and management.
What we have in the commodity and credit markets now is what the geopolitical crowd calls a kind of “durable disorder.” Things can remain disorganised a lot longer than a neat freak would prefer. Replacing one global currency regime with another isn’t easy, is it? Yet we still believe that’s what you’re witnessing and living through: a grand changing of the economic guard.
Markets and Money