Commodities have surged in the past year as investors sought inflation protection, economic recovery picked up, and middle class growth from emerging economies pushed industrial demand.
But when commodities like silver, copper and oil slipped at the beginning of May, many investors panicked.
The Standard & Poor's GSCI Index that follows 24 raw materials fell 11.4% in five days, from May 2 to May 6, the most since December 2008.
Investors who had piled money into precious metals and raw materials feared their safe haven investments had reached a bull-market peak. Some said the commodities bubble had burst and the great rally was over.
But other analysts said the drop was panic-driven profit-taking by investors responding to commodities price dips early in the week. Higher margin requirements for silver futures trading, a rising U.S. dollar, and mixed economic data drove some investors out of the markets. Then the fearful quickly followed suit.
Since then, the same commodities have rallied and many analysts have reiterated their bullish outlook on the sector, saying the fundamentals for a long-term commodities bull market still exist.
They say global demand, driven by emerging economies like China and India, will continue to rise for metals and raw materials. Energy demand will also remain high as the world continues using four-times as much oil as it's discovering.
Dr. Kent Moors, Money Morning contributing writer and editor of The Oil & Energy Investor, said the oil price slide does not mean the market environment is any different than before.
"This is the really important point: market dynamics have not changed at all; neither has trajectory or forward trends," said Moors. "The price of crude oil will still be increasing. A $150-a-barrel price may be delayed for a bit because of the 'correction,' but nothing has changed."
JPMorgan Chase & Co. (NYSE: JPM) recently raised its oil price outlook for 2011 and 2012, and Goldman Sachs Group Inc. (NYSE: GS) said oil prices next year will match or surpass their recent highs.
And now that some of the "nervous money" is out of the markets, hedge funds and institutional traders with deep pockets will fuel a commodities price rally.
Many investors have written to Money Morning asking what they should do with this recent volatility.
"If you're already exposed to commodities, don't sweat it, just mind your trailing stops," said Money Morning Contributing Editor Peter Krauth. "If you're not yet invested, look for some further weakness and then take a position. The bull run is likely to last at least a decade still."
Despite some market bears who think speculators have pushed commodities prices so high they no longer accurately reflect supply and demand, many analysts tell investors to sit tight.
"Commodities prices will be back," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "In fact, 12 months to 24 months from now, gold, silver and other commodities will be trading at higher prices than they were just a few weeks ago - when they were trading at record levels."
This prompted last week's Money Morning "Question of the Week": Do you agree with the bullish long-term commodities outlook? Did last week's slide prompt you to get out of the commodities markets, or do you see this price drop as a buying opportunity? What are your concerns, if any, over commodities maintaining their gains?
The following collection of reader comments highlights middle class growth and weakening fiat currencies as reasons the commodities bubble is far from over.
China/India Middle Class Growth a Driving Force
I'm bullish, long-term. The debasement of the dollar has not yet begun to show up in the consumer price index, but it will. I have a large (too large, really) portion of my portfolio in gold, silver, and oil, and I was actually thinking of taking some off the table, or hedging, when iShares Silver Trust (NYSE: SLV) was around 48, but, stupidly, I didn't. Had I done so, I would be getting back in now. It may go down some more.
They say the dollar is having a rally vs. other currencies, and that may continue, but in absolute terms it has to keep going down, and the more the recovery persists, the more the effect of QE and QE2 will be felt in demand for goods of all types.
There's a lot of middle class growth in Chindia, and that huge demographic development will be the major driving force in world economics for years to come, just as the baby boom has been in the United States. They will be buying cars, and air conditioners, and cell phones and other electronics, and all the stuff that middle class citizens around the world want and buy, and that use electricity and oil. And they want more food, and more meat in their diets, and it takes two to four pounds of grain to make one pound of meat. And they have no clean water, and we're turning farmland into shopping malls, and wasting our energy and money to divert our corn crops to ethanol. Food and water are going to get really expensive, and people who don't have enough are going to get really upset about that, and all that leads to higher and higher prices.
-- John O.
I agree, because of massively increasing middle class growth (which equals heavy consumerism) in Chindia and its major, associated factor, which is highly increased demand of food, natural resources for manufacturing. This equals scarcity, which equals...well, you know the answer.
Corrections always occur, but after that, skyrocketing prices... the numbers of poor and hungry will increase dramatically across the globe. In the meantime, the United States produces/manufactures less and less. You can see where this is going...
-- Chuck K.
Currency Bear = Commodities Bull
I am not so much bullish on commodities as I am bearish on fiat currencies. Commodities are things that we need, day in and day out, and the number of people who need them is increasing. On the other hand, the supply of money is increasing a lot faster than the supply of commodities, so the nominal prices paid for the commodities is almost certain to continue to increase, adding to increases caused by population pressure. Prices will be volatile, and at times will fall, or even crash, but the crashes will be followed by new highs, and the odds that commodity prices will enter a multi-year decline is virtually zero in my opinion.
Of course, this would quickly change if all governments decided to act responsibly and quit trying to fix their solvency problems by printing ever more money, but I will worry about that when I see any evidence that it may actually happen!
-- Gordon F.
The real question is what happens to the value of fiat currencies everywhere. If people lose confidence in them, then there is no telling how high commodity prices can go when they are valued in these fiat currencies. I see lots of Chinese buying gold to hedge against their fast falling yuan.
-- JJ
China: A Big Shopper for Copper
Global expansion of less than 2% will mean no fall in unemployment because that 2% can be created by innovation and greater efficiency. Whilst "gloom" could persist with these low levels of growth, it would be growth nonetheless, which would translate into increased commodity demand.
China is currently on a huge shopping spree for all mines and resources worldwide. They do not dare be without the materials for their intended growth.
I am most bullish for copper and LNG (in the long term)
-- Antony
Don't Sell Commodities
Those who bought into the silver boom saw their investment grow quickly, and so took their profits and ran. With gold climbing higher and higher, you can see there is no backup.
Wrong, I think. Silver will rocket by the end of 2012, and the trick is "do not sell." Keep on, and the price will increase by at least 300%.
-- Steve B.
50 More Years!
I'm bullish for the next five decades, at least. The commodities bubble won't pop until the inflationary growth bubble of China pops.
-- Shaun C.
Normal Cycle
It's not done yet. As long as the stock market is open, ups and downs are just part of the game.
-- Sharon Z.
Market Manipulators at Work
The ups and downs of the commodities, e.g. silver, is just manipulation by those who are capable of interfering. The poor souls who read the stock market in the local paper and then call their broker are the losers. The system is top-oriented, the sheep are paying for it.
-- Walter W.
Be sure to answer next week's question: Are you worried about the future of the U.S. job market? Is increased efficiency and a shift to hiring abroad going to leave many without work, or will industries rebound in the United States? Are you worried about your employment future? What can be done to improve the U.S. job market?
Send your answers to [email protected].!
Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]
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