Commodity is back!

Commodity prices fell roughly 7.7% last two months, after it went ballistic earlier this year. Natural gas prices, which rose to multi-year highs in early July have fallen nearly 50% subsequently. Crude palm oil down 25% from RM3096/mt to RM2318/mt and not to blame many observers that claimed the bull is over.

The appreciation of the greenback versus most currencies may then be helping to reduce dollar-denominated oil prices arguably that global growth has slowed to the extent that will bring down demand. However, that is not the point of contention, rather the reasons for the surge in the US dollar, in turn for weaker commodity prices.

It seems news from the US front is far worse than expected. Fundamentally, nothing has changed for the US economy and talks have surfaced on the possibility that Fed may have to cut rates. As such, it is natural to see resumption of decline in the value of US dollar, hence by virtue of strong inverse relationships between these pairs of assets.

I remain committed to the 20-year commodities super-cycle that I professed in my previous posting. With these markets in decline, the demand is bound to rise again. It is the norm to look at the very short term cycles. Commodity gurus like Nikolai Kondratiev pointed out that there were three upswings:

(a) 1789 to 1814, spanning the French Revolution and Napoleonic wars;

(b) 1849 to 1873, an era of European industrialization; and

(c) 1896 to 1920, when the United States emerged as the world's largest economy.

Each was followed by a commodities decline of between 23 and 35 years. The average decline lasted 29 years, the average upswing 24 years. Combined with rising global uncertainties, especially commodity producing countries like Russia and Latam and strong demand, from emerging economies in particular, may continue for several decades.

By commodity indices growth relative to equities or other financial instruments, or by comparing the weight of commodities spending in average household budgets in OECD countries with spending in previous cycles, I come to the conclusion that this cycle has far to go and is not under threat!