Here at MoneyWeek, we’ve been bullish on commodities for a long time. For years we’ve talked about the supercycle, whereby demand from emerging economies, and China in particular, means that commodities will remain an important asset class for investors for many years to come.
However, bull markets don’t go up in straight lines and, as we’ve mentioned a few times in recent months, this year looks like being a tougher one for industrial metals. In our cover story this week, James Ferguson explains why the biggest economic risk now is not inflation, but a deflationary recession. This means the good times for some commodities could be over, certainly for the time being.
Now James has never been a big fan of the commodity sector, but on this occasion we largely agree with him. It’s unrealistic to expect the price of raw materials used in construction and manufacturing to keep rising at a time when the biggest consumers on the planet – the citizens of the US – are in the worst financial position they’ve been in since the Great Depression.
Few investors are still clinging to the ‘decoupling’ theory (the idea that emerging markets could somehow carry the world economy forward without America’s help). If global growth slows as a result of a US recession – which may already have begun – then demand for these commodities is bound to drop off. Back before Christmas we suggested you might want to take some profits in your mining stocks (at least, the ones exposed to base metals) – if you haven’t done so already, we think it’d be a good idea to do so now.
That’s not to say that there aren’t individual opportunities in the commodities sector. A few issues ago, we pointed out a number of ‘soft’ commodity plays that we like, including livestock, which should move higher as the boom in grain prices gradually feeds through to higher meat prices. We are also still keen on precious metals, and gold in particular, despite its slump from $1,000 an ounce. This seems to have been driven partly by hopes that the Federal Reserve and the US government can bring a rapid end to the current financial crisis, but as Cris Sholto Heaton points out in Banking bailout: is it working?, fixing a broken banking system isn’t easy.
And with recession looming on this side of the Atlantic too (our housing market is rapidly heading the way of America’s), more financial turmoil seems certain. That’s one good reason to hang onto gold as portfolio insurance. When the next wave of bad news breaks, I expect it to head higher once again.
In the longer term, as Tim Price argues, also in our cover story, emerging economies will continue to be an important source of demand, driving commodity prices higher. But for now, as our cover says, it’s time to ‘take profits’.
Merryn Somerset Webb is away