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Another surge in commodities due? - Views on News from Equitymaster
 
 
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  • Jul 20, 2009

    Another surge in commodities due?

    The choice of asset class is always a hot topic of discussion for long term investors. Although commodities, as an asset class, were forgotten in the 1980s and the 1990s they made a strong comeback in the current decade. The reason they have done so well in recent times is the consumption boom in the emerging markets, especially China. Also investments in mining and agriculture have not kept pace with the unprecedented surge in demand.

    However, as demand is directly linked to global economic activity, the turmoil in 2008 did lead to a sharp correction in commodity prices. The most notable being that in crude oil prices. After touching levels of US$147 about a year ago, the price of 'black gold' dropped to US$ 32, a fall of almost 80% within a period of five months. In addition, the CRB Commodity Index, one of the most recognised indices to track commodity prices, also posted a loss of about 58% after reaching a record high a year back.

    The strong rise in the dollar is also believed to be a key reason for the sharp correction. However, commodities guru, Jim Rogers believes that a currency crisis is likely to occur in a year or two. His rationale is that the world is full of currency imbalances and that economic trade imbalances would have to be corrected, one way or the other. He also believes that the current politicians are likely to get things wrong. As such, he expects problems in the currency market although it is difficult to pin point whether it is the Pound Sterling or the US dollar or the Rupee which will face the music.

    In a recent interview with a leading business daily, Mr. Rogers has reiterated that commodities are still the place to be invested in. In his view, the world continues to face a shortage of commodities. Once the world recovers, they are likely to recover first due to inadequate supply. Even if they don't, he still believes that commodities are the best place to be, as governments across the world are printing large amounts of money. The inflation will work in favour of hard assets like gold, silver, crude oil and agricultural products.

    In addition, Mr. Rogers also believes that inventory levels of foods have been at their lowest in decades. This too, in spite of not having any major weather problems. As such, if there is a bad harvest season this year, the only way for prices of agricultural products is up.

     

     

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