The 21st Century Is the Century of Commodities - dummies

The 21st Century Is the Century of Commodities

By Amine Bouchentouf

Since autumn 2001, commodities have been running faster than the bulls of Pamplona. The Reuters/Jefferies CRB Index (a benchmark for commodities) nearly doubled between 2001 and 2006. During this period, oil, gold, copper, and silver hit all-time highs (although not adjusted for inflation). Other commodities also reached levels never seen before in trading sessions.

Many investors wondered what was going on. Why were commodities doing so well when other investments, such as stocks and bonds, weren’t performing? Many investors believe that we’re witnessing a long-term cyclical bull market in commodities. Because of a number of fundamental factors, commodities are poised for a rally that will last well into the 21st century — and possibly beyond that.

Although commodities look bullish for the long term, be aware that at times commodities won’t perform well at all. This statement is simply the nature of the commodity cycle. Furthermore, in the history of Wall Street, no asset has ever gone up in a straight line. Minor (and, occasionally, major) pullbacks always happen before an asset makes new highs — if, in fact, it does make new highs.

Consider an example. During the first few months of 2006, commodities outperformed every asset class, with some commodities breaking record levels. Gold and copper both hit a 25-year high. Then during the week of May 15, commodities saw a big drop. The Reuters/Jefferies CRB Index fell more than 5 percent that week, with gold and copper dropping 10 and 7 percent, respectively.

Many commentators went on the offensive and started bashing commodities. “We are now seeing the beginning of the end of the rally in commodities,” said one analyst. A newspaper ran the headline “Is This the End of Commodities?”

An endless number of commentators hit the airwaves claiming that this was a speculative bubble about to burst. A respected economist even compared what was happening to commodities to the dotcom bubble: “There is no fundamental reason why commodity prices are going up.”

Nothing could be further from fact. A couple weeks after this minor pullback, some of these commodities that were being compared to highly leveraged tech stocks had regained most, if not all, of their lost ground. Even after the global financial crisis, most commodities are now back to their precrisis levels, with many others making all-time highs.