Why commodities cycles inflict pain (as we are now feeling) – by Robin Bromby (Investorintel.com – July 8, 2015)


InvestorIntel publisher Tracy Weslosky asked some pertinent questions on my posting Tuesday about low prices not, in the long term, affecting the validity of technology metals stories. In the 24 hours since I wrote that piece, we have seen the Chinese markets tumble further with 51% of A-shares in Shanghai and Shenzhen suspending themselves to avoid the carnage (boy, if only American stocks had had that option in October 1929). Then the base metals took more hits. Get this: in one session (Tuesday) on the London Metal Exchange nickel lost $1,050 a tonne. In one session!

Things don’t look too good, in other words. Tracy asks when we will turn around: I don’t know, and I doubt whether anyone else does either. But last year I self-published a short e-book on Amazon that attempted, not to explain what various metals do, but rather to pick some underlying, long-term factors that investors should keep in mind. Here’s a short excerpt:

In 2013 David Jacks, an economics professor at Simon Fraser University in Vancouver and a research fellow at the Massachusetts-based National Bureau of Economic Research, put the metals world into some sort of perspective. As he pointed out, the global economy witnesses protracted and widespread commodity booms once in a generation.

He’s right. As was shown two years earlier by McKinsey & Co in their study of commodity prices, if you look at a commodity price index graph then adjusted to real terms it shows that, until post-2001, the prices of commodities expressed in terms of a basket of currencies were at their highest in about 1910. Then they declined, peaking (but to a lesser extent) again toward the end of the First World War.

Then there were two deep, rapid declines: the post-war bust that began in 1920 and, of course, the Great Depression. By contrast, the Second World War (which began in 1937, 1939 or 1941 depending on whether you look at the conflict from the Chinese, British or American point of view), and then the Korean War, led to modest upward spikes, and we see that trend again with the 1970s oil price shock.

But David Jacks has looked at real commodity prices over 164 years (for thirty-two commodities ranging over animal products, energy, grain and metals — an assortment of hard and soft commodities). From this, he argues that we, too, often confuse cycles with trends. Just since 1900, and based on 2011 prices, real commodity values have risen 244.69 per cent (177.59 per cent since 1950 and 38.9 per cent since 1974).

For the rest of this column, click here: http://investorintel.com/technology-metals-intel/why-commodities-cycles-inflict-pain-as-we-are-now-feeling/