Jul 1, 2012

Commodities Super-Cycle Revisited

Back in January we wrote a post highlighting that money has now started exiting commodity funds for the first time in the past ten years. (See Commodities Super Cycle Reversing Course.) This event has proven quite significant, as can be seen by observing the price action of most non-agricultural commodities this year. Gold and Oil are down significantly year-to-date, despite continued calls for a rebound by commodity bulls.

It is quite clear that something fundamental has changed. For example Oil is still very much correlated with equities, but despite Friday's massive bout of short-covering, it tends to go down
more than equities when the S&P drops and hardly bounces when the market recovers.

The secular commodities bull market that was heralded by the massive investment-lead growth boom in China and other BRICS countries appears to be ending, as those economies slow and/or rebalance to an internal-demand growth model. As all long-term market cycles this one will take awhile to become obvious to everyone, with the bulls and bears alternately taking turns to claim vindication for their positions during medium-term swings.

(More Whatif Economics posts are here)