Bear case for commodities

I am not a huge fan of relying on opinion pieces from Wall Street analysts--in this case an analyst from Morgan Stanley--but I felt the following Newsweek article summarizes many of the reasons I am staying squarely away from commodities. My impression is that most readers of this blog, as well as the market itself, is still bullish on commodities. One just needs to look at the futures curve to see how the market is betting.

The article If It’s in the Ground, It Can Only Go Down by Ruchir Sharma for Newsweek was pointed out to me by Naked Capitalism, which in turn relied on Metal Miner. I recommend it to anyone interested in commodities; even if you are bullish, it's worth reading the bearish case. Here is an excerpt of it:

As playwright Arthur Miller once observed, "An era can be said to end when its basic illusions are exhausted." And most of the illusions that defined the late global economic boom—the notion that global growth had moved to a permanently higher plane and housing prices from Miami to Mumbai would rise indefinitely—are now indeed exhausted. Yet one idea still has the power to capture imaginations and markets: it is that commodities like oil, copper, grains and gold are all destined to rise over time. Lots of smart people believe that last year's swoon in commodities prices represented a short pause in a long-term bull market.


At some point, of course, commodities will spike again, but only temporarily. To date, the centuries-old slide in prices has been marked by long bear markets and short bull runs. Data from CSFB shows that the average bull market in oil has lasted from four to nine years, and the average bear market from 11 to 27 years. The bull market that ended last summer saw prices rise tenfold over nine years, mirroring the duration and magnitude of the previous bull market, which ended in 1979. That was followed by a bear market that lasted 20 years. If history is any guide, we're only at the beginning of another long one.

The problem with a bullish bet on commodities right now is that it requires (i) strong economic recovery, and/or (ii) the fundamentals of the world to have permanently changed. (One can also bet due to an expectation of a strong decline in purchasing power but there are better ways to achieve that--such as betting on gold or foreign currencies or shorting bonds.)


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