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%.