Two years ago, almost to the day, I wrote a column with this headline: “Everybody’s Into Commodities—You’d Better Duck”.
Since then, an index of 24 commodity prices from oil to corn to aluminium, the S&P GSCI, has gained 45%.
Two years ago, a barrel of crude oil traded in the low $70s on the New York futures market. Crude closed Monday at $111.76 (Rs4,459) a barrel, the highest closing price since trading began in 1983.
The slump in the greenback has increased the demand for oil, priced in dollars. High oil prices has, in turn, raised crop rates
I’m tempted to say that my timing was just off. Speculation in commodities looks even more rampant today. Investors are betting on a never-ending world growth in demand for copper, three petrol-wasting light trucks in every American driveway and perhaps widespread famine.
But no, Dennis Gartman, a former trader of financial futures and currencies and editor of the Gartman Letter for commodities investors, says I’m just wrong. Gartman says commodities generally will keep on climbing, that we’re in the fourth innings of a nine-inning baseball game.
Still, haven’t we heard this all before? Internet stocks that would climb forever. Can’t miss subprime mortgage securities with AAA ratings. What’s changed?
“China has changed. India has changed. South-East Asia has changed,” says Gartman, who once owned a seat on the Chicago Board of Trade and now publishes commodities advice five days a week from Suffolk, Virginia.
Flying Asian economies create an unprecedented demand for industrial materials and food. People in remote areas, who see the good life on the Internet, won’t accept their old life.
There can’t be a recession great enough in Asia to end the trend, Gartman says. “A recession in China is 15% growth in gross domestic product dropping to 9%,” he says. A recession in the US might even be good for the markets, according to Gartman. It would keep demand for commodities within reason.
This doesn’t mean certain commodities won’t flop, Gartman says. There may be a bubble developing in rice, the staple food for much of the world, he says.
Rice prices have jumped by about half so far this year and governments worry about running out. Gartman insists, though, that there is no “collective bubble” in commodities.
Gartman’s customers pay him about $500 a month for his advice, so who am I to argue?
I see that there’s some logic in higher oil prices. The demand for energy in Asia is heady. Oil is priced in dollars and sellers demand more of them given the slump of the US currency. But that doesn’t seem to justify crude oil’s rise from $94.65 a barrel at the end of 2007.
Higher oil prices unfortunately boost the prices of farm crops, which used to rise and fall on the weather. Corn, sugar and soya bean oil can now be used in motor fuels as substitutes for high-priced oil.
Corn futures closed on Monday at $5.92 a bushel, compared with $4.12 a bushel 12 months earlier. Sugar futures traded at $13.01 a pound (0.45kg), up 32% in a year. Soya bean futures closed at $13.89 a bushel, up from $8.15 a year earlier.
Nor is it a surprise that copper trades near its record $4.04 a pound (0.45kg) set in 2006. It’s China again, demanding copper for plumbing fixtures and wire for its expanding economy. Still, was it realistic for Frank Holmes, chief executive officer at US Global Investors Inc., to predict last week that copper would go to $8 a pound?
There’s a herd mentality here. Citigroup Inc. says global investors poured about $70 billion into commodities in the first quarter, bringing the total to $400 billion.
Historically, such exuberance has led to market collapses. I hope I’m at least allowed to say I’m confused. If it’s any consolation, Gartman says he’s confused too.