Saturday, March 12, 2011

Commodities Bull Run Over? Why Are Commodities Booming?

Has the commodities bull run over? Not so according to commodities guru Jim Rogers. According to him, the commodities bull cycles have historically lasted between 15 to 23 years, and predicted that the current commodities bull market will probably last until 2020.

Weekly Soybean Meal (CBOT) from the year 2000 to 2011
Weekly Soybean Meal (CBOT)

As seen below how the prices on this commodity (soybean) bull run cycle going very high record level. The same happens for other commodities like crude oil, gold, silver, copper, cocoa, wheat, gas and so on.

Why are the commodities booming?
Of course there are many reasons. Among all the reasons out there, the main three reasons are:

The China Effect
China economy has been growing at 8 to 10 percent every year for more than 20 year. Not only that there are 1.3 billion people to feed, huge of them are from the middle class people clamouring for all sorts of goods and services. According to a Management consulting firm McKinsey & Company, they are expecting 700 million Chinese to have joined the consumer class by 2020. This is not a revolution, but it is a tidal wave.

China today have the largest mobile phones users with more that 400 million subscribers and they are still growing rapidly. That is only around 30% of their population. Imagine that, every Chinese homes has one television, computer, refrigerator, or a car and motorcycle in their home. It is truly a China effect, a China boom. China's boom is also a reflection of the Asian boom in general. Forbes reported that the number of millionaires and billionaires in Asia have increased more that 40 percent in year 2008. Real estate price increases in Asia Pacific gone up very rapidly like a shooting star and should continue to impress in the coming years, while European Union, prices have moderated and US economy is still in the stage of recovery after 2008 crisis.

Tight Supplies
Supply and demand relationship is always influence the price of commodities. There are tight supplies across many commodities markets. The very obvious examples is crude oil. There have been no major oil discoveries in the last 40 years, while the oil reserves in Alaska, Mexico and the North Sea continue to decline. Of the top six countries in the world with the largest oil reserves, five are in the Middle East, and politically volatile Iran and Iraq are at number 3 and 4, where supply jolts can happen anytime and threaten production. Libra crisis is also heavily affecting the crude oil price lately. China has been growing rapidly and the oil consumption becomes larger. In future, China may become the largest oil importer.

The Falling US dollar
The US Dollar has been falling, combined with tight supplies across many commodities markets, has fueled the big run up in the commodities prices. It the US dollar falls, the commodities prices have to go up just to balance the relative values the same. The reason is because many non-US commodity producers are still pricing their exports in US dollar, and a weaker US dollar prompts them to seek higher prices.

In addition, the interest rate cuts by the Federal Reserve have also helped push the commodities price higher. The rate cuts make a recession less likely as it spurs the the growth of the economy. In a low interest rates environment, companies would continue to borrow money to seek growth. Thus, bolstering demand for commodities market. Apart from that, interest rates cut also encouraged currency or Forex investors an excuse to sell off the US dollar and seek other higher yield investments.

At the end of this article, you may has a clue on the commodities trend. If you are an investor, whether the commodities is going up or down, would you add commodities investment into your long term investment portfolio?

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