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BookmarkDon’t let depressed commodity prices fool you. They won’t stay depressed too long. The single most important global economic reality remains resource scarcity.
At last, I see short-term commodity price depressants starting to dissipate. Very shortly, the overwhelming consensus against commodities will start to shift, possibly as early as yearend. Then the long-term upward climb of commodities will resume.
Commodities slid mainly due to Europe’s fixation on austerity. They began to fall in 2011 at about the time the European Union started to falter. The euro zone hasn’t posted a single quarter of GDP growth since mid-2011. Overall regional unemployment stands well into the double digits, while auto sales hit generational lows.
Even Germany, Europe’s economic powerhouse, is barely growing. Weaker economies, including Spain and Greece, sit mired in full-fledged depressions. As Europe represents the largest economic entity in this deeply interconnected world, its swoon instigated a sharp drop in global growth and therefore in demand for commodities.
Now Europe shows signs of starting to recover, albeit very slowly. Forward-looking indicators including the Purchasing Managers Index (PMI) surveys have gradually risen over the past year. Though the rise has been very slightly sloped, its persistence suggests that Europe, while hardly ready to boom, will soon start generating at least marginal positive growth.
These glimmers of growth come as Europe’s leaders increasingly realize that austerity is a dangerous economic recipe. Chancellor Angela Merkel’s likely reelection in September and the growing danger of social unrest in Spain and Greece will spur more growth-oriented policies. Whether Europe grows at 1% or 1.5%, it will grow, and any improvement in this massive economy will alter worldwide economic dynamics for the better. One upshot will be commodities’ emergence from the doghouse.
As that happens, I expect gold to start to outperform. On balance, precious metals, base metals, and oil alike tend to move in the same direction. During overall periods of rising commodity prices, precious metals outperform all the others. In commodity price slumps, precious metals tend to underperform.
Since their 2011 peaks, both gold and silver have underperformed other commodities. From their highs, you can see weakness especially in commodities ETFs that track the precious metals markets. SPDR Gold Trust (GLD) fell nearly 33% since its September 2011 high, and iShares Silver Trust (SLV), tracking silver, declined almost 60%. The price of oil, on the other hand, strong of late, stands roughly level with that of two years ago. Since oil ETFs like USO and OIL tend to have a negative bias, however, I don’t recommend them. If you have a futures account, you might want to buy long-dated oil futures, expiring at year end in 2014.
In 2008, by contrast, gold outperformed, although silver did uncharacteristically underperform. The same was true in the 1970s. When commodities rose, gold climbed much faster, but mid-decade when commodities faltered, the 50% plunge in the price of gold far exceeded the decline of virtually any other commodity.
Gold’s outperformance during periods of rising commodity prices is consistent with its relation to resource scarcity. When commodity prices are rising, businesses and individuals exhibit less willingness to trade hard assets, i.e., commodities, for paper money, and gold takes on the aura of a currency. When commodities fall, gold’s “currency” fades as well.
At least marginally better times in Europe should boost the global economy. Commodity shortages should also result due to the closure of many mining projects while commodity prices fell. The combination of these two factors will help drive the reemergence of a dynamic uptrend in commodities.
Oil looks especially vulnerable. Rising oil scarcity will also power rising prices for all commodities as higher energy prices increase production and transportation costs. Iron ore, for instance, one of the earth’s most plentiful materials, faces no danger of true scarcity. Since the century started, however, iron ore prices generally have followed those of oil as iron ore production and transportation require huge energy input.
Food, water, and energy move the price of resources overall. Scarcity of any one creates scarcity of all. Look at two of the most resource-rich countries, Peru and Chile. Both boast huge copper, silver, and other resource deposits. Both also face ongoing, protracted struggles on how best to allocate water and energy and benefit from their mineral wealth but also satisfy basic human needs for food and water. Limits on water and energy almost certainly mean that these countries dramatically overstate their officially indicated resources.
Today the U.S. diverts more and more energy and water to fracking for oil and gas, leaving less available for agriculture. Meanwhile China builds infrastructure to fully accommodate renewable wind and solar energy sources that don’t require water.
Such factors in both the U.S. and China will continue to stretch available supplies of commodities, and shortly again start to push their prices upward.
