Demand from governments and private investors for gold and other commodities suggests that, contrary to popular opinion, the latest super-cycle has plenty of life left in it
WE’VE BEEN HERE before, haven’t we? Perhaps the clamour of Cassandra-like voices was not so great in 2011 when Spear’s previously wrote about the supposedly imminent demise of the commodities super-cycle, but it was nonetheless already a clamour. The past nine months or so have heard that clamour amplified several times over.
The Financial Times declared that the super-cycle was dead at the end of June, only to declare about ten days later that rumours of its death were greatly exaggerated. Most recently, the Wall Street Journal reported that the broad consensus of analysts and investors has called the end of the super-cycle.
But super-cycles tend to die slowly. The first identifiable commodities super-cycle in modern times lasted from 1894 to 1932, peaking in 1917, according to academics Bilge Erten and José Antonio Ocampo. The second lasted from 1932 to 1971, peaking in 1951, and the third lasted from 1971 to 1999, peaking almost as soon as it began.
Given that these three previous super-cycles lasted for twenty years or more, it is hardly unreasonable to expect the current super-cycle to last for another couple of decades.
Hogs and bears
The current super-cycle, which began in 1999 and may not yet have reached its peak, was founded on China’s urbanisation programme and construction boom, which began in the late Nineties. In 2011 China accounted for 40 per cent of global demand for iron ore and aluminium, 42 per cent of zinc and coal, 43 per cent of copper and lead, and 50 per cent of lean hogs.
If China’s GDP growth drops from around 10.5 per cent to 5.5 per cent over the next few years, as its policy-makers switch into a different growth model based on services and consumerism, will that translate into falling commodity prices?
While many analysts remain bearish, based on the assumption that the Chinese economy will experience a hard landing, Société Générale has come out strongly with a prediction that while gold prices are likely to fall further in 2014, to around $1,050 an ounce, the outlook for commodities will remain positive.
‘It would take something dreadful to happen to make the super-cycle suddenly end,’ Michael Haigh, SocGen’s head of commodities research, told a media briefing in July. If you believe that the current super-cycle ‘is a function of population and urbanisation, you’re looking at another fifteen to twenty years. But it’s not going to be an upward price for all.’
Haigh is not alone. Another analyst who doubts that the super-cycle is over is Eugen Weinberg, head of commodity research at Commerzbank in Germany. ‘Price movements in the market indicate an end to the commodities super-cycle,’ he has said.
‘But we do not believe the super-cycle is coming to an end. It’s just taking a break. Twenty million people a year move from the countryside to the cities, triggering a huge demand for better infrastructure.’
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