Commodity Trade Mantra

Bull Market in Commodities – Central Bankers’ Prayers for Inflation May Soon be Answered

Bull Market in Commodities - Central Bankers to be Blessed with Inflation Soon

Bull Market in Commodities – Central Bankers to be Blessed with Inflation Soon

The primary reason for investing in commodities should always be as an inflation hedge. And there is every reason to argue that higher inflation is coming.

I was in Dubai this week-end answering a plethora of questions at an investors meet, attended by several eminent personalities and stalwarts from the Banking sector, the Commodity and the Equity markets. The “Future Price and Trend Forecast – by Moneyline investors meet had been organised by a dear friend – Mr. Sandesh Pandhare, who has himself been in the financial industry for over 25 years. The focus of the meet was on key issues like upcoming market trends and the golden opportunities waiting to be tapped – especially in the commodities markets. The extraordinarily accurate “Future Price and Trend Forecast” by Moneyline has helped several traders and investors gain unbelievable profits, regardless of market or economic conditions. We today focus on the Commodities sector, as I see it as the most promising segment for the near future.

Commodities have had a lot of false breakouts before, but this time around, things are much different. Sentiment towards commodities has been at rock bottom for quite some time now. But it’s starting to turn following the surge in the prices of a wide variety of products since the beginning of the year. Commodities have suffered five straight years of declines and devastatingly poor returns through 2015 as China slowed, denting raw-materials demand after producers ramped up supply on expectations the boom in Asia’s top economy would persist. The global gluts that had plagued markets from crude oil to zinc are finally starting to subside, sending commodities to their biggest monthly gain in April 2016, since December 2010.

Commodities are now nearing bull-market territory after rebounding from the lowest level in at least 25 years as oil prices rallied, complementing advances in recent weeks in soybeans and zinc. Investors have poured more than $17 billion into exchange-traded products linked to commodities since the start of the year. Prices of zinc used to rustproof steel in auto bodies and suspension bridges climbed above $2,000 a metric ton for the first time since July on Thursday after mine production cuts by Glencore Plc and others. Goldman Sachs has now dubbed zinc the “bullish exception” among metals in contrast to the bearish outlook for copper and aluminium. Citigroup said that commodity prices were unlikely to return to lows seen in the first quarter and the bank increased forecasts for metals to grains amid the oil-led recovery. Soybeans consumed in cooking oil and livestock feed have jumped 34 percent this year to the highest since 2014 because of lower crops in South America and concerns dry weather will cut U.S. output.

The Bloomberg Commodity Index, which tracks returns from 22 raw materials, climbed 0.6 percent to 87.24 (a 7 month high) by 3:32 p.m. in Singapore on Friday. The gauge bottomed at a closing low of 72.88 in January, and a finish above 87.45 would mark a 20 percent advance, meeting the common definition of a bull market. The measure is still about 50 percent below the high reached in 2011.

The rebound in commodity prices this year has been consistent with the big picture of constrained supply, recovering demand and improving sentiment that we expect to lift prices further over the medium term. Brent crude has surged from a 12-year low in January amid disruptions from Nigeria to Venezuela, and as U.S. output declined, pressured by OPEC’s policy of sustaining production. The global oil market has flipped to a deficit sooner than expected, Goldman Sachs Group Inc. said in May.

Given the continued printing of money by the world’s central banks, there is every reason to argue that higher inflation is coming in the future. Many argue that the money printing that has taken place so far has not caused inflation, so why worry? We compare the current extreme monetary policy regime globally as similar to a person shaking a bottle of ketchup: nothing comes out the first few times you shake it, until suddenly more than you could possibly need pours out. In our view, sharply rising commodity prices since the beginning of the year are a warning sign that perhaps the inflationary times have begun. And one way to protect oneself could be through buying commodities.

With prices down 70-80% in many commodities, production is no longer growing. The dollar bull market from 2011 to 2015 was also a major contributor to weak commodity prices. Also, when the dollar is strong it generally forces foreign central banks to adopt tighter policies in order to support their currencies, which restricts liquidity creation. But this year, the dynamic has started to reverse as the dollar has weakened. Of course, the dollar could start to strengthen again, especially if the Federal Reserve starts tightening monetary policy more sharply. Historically, however, taking gold as an example, Fed tightening cycles have more often than not been unable to reverse the depreciating dollar trend or the rising commodity price trend; which is the main catalyst for tighter policy in the first place.

There was one particular question, which I have had to answer at the investors meet in Dubai has also been the one that I have been asked several times before. Unfortunately, at Dubai, due to lack of more time, I was unable to answer the question in detail. Here below is the point as I see it.

Q: Why do you expect a commodity price boom when the Chinese economy is down? After all China is undoubtedly the world’s largest importer of raw materials –

A: The China-driven commodity boom may be over for now, but we are seeing strongly-rising commodity demand from another emerging market: India. India’s demand for crude oil, for instance, is currently growing at a much faster rate than that of China, which is making a big difference to oil market dynamics, and Indian demand for a whole range of commodities, including palm oil, sugar, rubber and natural gas, is rising fast. In our view, India is likely to become a very important focus for commodity market participants in the future. Natural gas is a classic example of a misunderstood commodity story currently: every day, we read in the financial press that natural gas is in oversupply, but these stories completely ignore the fact that, because the price has collapsed in the past two years, demand is rising. Liquid natural gas (LNG) in Asia, for instance, has fallen in price from $18 per million British Thermal Units to less than $6 since 2014, and Indian LNG imports in 2016 to date are now 48% higher than last year.

At least a dozen commodities have gained more than 10% this year and a number have gained over 30%; clearly, the bear market is over. Goldman Sachs said commodities had rallied on the back of a dovish U.S Federal Reserve, Chinese economic data and supply disruptions. It has upgraded commodities, saying that such supply disruptions should support oil prices.

Commodities are under-owned and under-researched. The relentless selling that has been seen in recent years has eased, but few investors have started to buy; the majority are extremely nervous. Nothing goes up in a straight line, and not every commodity will have yet seen a bottom. After some strong gains, it is normal to see corrections – which may be occurring for some such as gold right now. And the poor outlook for China is still a major question for many industrial commodities such as copper. But in our view, when considering risk against potential return, the reasons to consider investing in a diversified, actively-managed commodity fund are as strong today as they are ever likely to be.

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