Commodities: Correction, not collaps
Overview
Commodity prices are likely to suffer somewhat
from a slowdown in economic growth
this year, but we see the long-term upward
trend as still intact.
We expect crude oil prices to stabilize above
USD 100 before recovering next year.
Top investment idea
u BUY Gold with a target of USD 950.
Commodity prices are suffering a correction
During July and early August, the commodity price rally
reversed, turning into a sharp correction. As a result, the
major commodity indexes declined considerably. We have
been concerned for quite some time that the commodity
rally was unsustainable, given the fact that the world economy
is slowing and monetary conditions are turning less
friendly. Over the next few months, we think that commodity
prices will suffer somewhat from the weaker economic
growth prospects, which translate into lower demand for
raw materials. However, in our view, the long-term upward
trend is still intact, as demand for commodities, especially
from emerging markets, should remain healthy, and supply
struggles to keep pace with demand. As we move into 2009,
the world economy is likely to recover, given fading inflationary
pressures, which should support commodity prices next
year. As a result, we think that yearly commodity returns
should remain positive, but turn out significantly lower than
we have seen in the previous months (see Figure 1). An
investor in the Dow J ones AIG Commodity Index should
expect the index to deliver a return of 7%–9% in the coming
12 months.
Oil price likely to remain above USD 100
Over the recent weeks, oil prices have dropped from more
than USD 140 to below USD 120. The main reason behind
the price decline is falling demand in developed countries,
particularly in the USA, but recently also in E urope. That
helped to shake the oil market balance to a point where
prices started to react. However, the supply problems that
were an important factor in the previous rally have not disappeared,
and thus we expect prices to climb higher over the
longer term. Once the global economy stabilizes, oil prices
should find a bottom as well. We even see the potential for
renewed price increases in 2009. A similar scenario holds
true for agriculture. Favorable weather has caused a price
correction recently, but overall, the market remains very
tight. Precious metals prices suffered quite strongly from
the sharp appreciation of the US dollar against the euro.
However, we think that prices offer good value at these
low levels. The financial crisis is far from over, and given
the economic slowdown, there is still plenty of demand for
safe-haven assets such as gold. We expect gold prices to
increase above USD 900 again in the months ahead. Nevertheless,
over the very short term, investors have to be
aware that, from a technical point of view, gold prices could
fall somewhat further before recovering afterwards. Base
metal prices should be well supported by supply side problems.
In our view, the recent weakness is also attributable to
seasonal effects. However, given the economic slowdown,
we think that upward potential is also likely to be capped.
Figure 1
Commodity returns have peaked
Annual commodity returns peaked in June and are now
declining. We expect them to remain positive but go
down to as low as 7%–9%.
