- Markets never go up forever. Eighteen years is the average length of stocks or commodities bull market in the 20th The three long commodities bull markets were 1906–1923, 1933–1953, 1968–1982. Cycles last so long because of the long time from recognizing a shortage, to discovery or growing of commodities, to its delivery to market.
- Oil– bullish: no new ‘giant’ or ‘elephant’ fields have been discovered for 40 years, major existing ones are 60 years old; oil that is left will be expensive to find and get to market; U.S. oil production, rigs, and refineries have peaked and dramatically decreased beginning since 1980 (Hubert’s Peak); large oil-exporting countries like Saudi Arabia, Russia, Venezuela, Nigeria, and South Africa are politically tenuous.
- Natural gas– bullish: expensive to extract and lacking sufficient pipeline infrastructure to get to market; drilling is environmentally restricted; hazardous to transport (leaks of liquefied natural gas can explode).
- Metals– bullish except gold: virtually no new mine shafts in 20 years, and most exploration is for gold, which is abundant and non-consumable; smelters used to convert raw metals have been in decline; demand for lead increasing for car batteries while supply decreasing faster due to environmental poisoning.
- Sugar– bullish: prices 85% below all-time high, production in decline. Major exporter Brazil uses half of its sugarcane for ethanol, which is becoming widespread in Brazil, Japan, and eventually China.
- Commodities currently priced lower, inflation-adjusted, than any time since the Depression.
- War, terrorism, and political turmoil are positive price shocks for commodities.
- Stocks (except commodity-related companies) and commodities have in general negative correlations, due to differing behavior during the business cycle: rising commodities prices create not only higher input costs for companies, but eventually reduced demand, causing lower profitability; low commodities prices help jump-start the economy. Commodity returns positively correlated with and outpace inflation.
- The dollar and speculators only have a short-term effect; market dynamics (supply and demand) have a longer-term effect.
- Commodity countries and company stocks are inefficient ways to invest in commodities. Countries are susceptible to external and internal (e.g. political) instability. Stocks are subject to the psychology of the market, and have specific risks. Returns to futures are 3 times those of commodity company stocks (“Facts and Fantasies About Commodity Futures”, Gorton and Rouwenhorst).
- Spain was the top in the 16th century, France in the 18th century, Britain in the 19th century, the S. in the 20th century. The 21st century belongs to China. There are 57 million overseas Chinese in 60 countries.
Finished: Aug-2007