Is The Commodity Bull Market Finished?
Last week, I wrote an article asking whether it was time to worry about stocks. The topic was sparked by the recent selloff in the major indices.
However, maybe the question I should have been asking is should be worrying about commodities
As much as the stock market has gotten hit lately, commodities have been worse. Over the last month, crude oil is down nearly 5%, silver almost 6%, gold over 2%, copper 4%, sugar 5%, platinum 6%, and coffee 7%.
Articles are starting to pop up talking about the end of the commodity run. Some are saying that the Feds quantitative easing program is no longer working. Others are saying that investors are dumping risk assets for the safety of cash and bonds.
So what gives?
Well, as always, the reality is quite a bit more complex than any one reason can explain.
Certainly, there is an element of risk aversion taking hold of the market right now. Earnings are down. Europe is still a mess. And, now the election appears to be uncertain. Keep in mind, investors hate uncertainty.
That may explain some of commoditys fall this past month. However, there are fundamental reasons behind the drop as well.
For instance, crude oil inventories have been quite high recently. With robust supply and tepid demand, it clearly makes sense for oil prices to drop.
The situation with metals is a bit more complex. For the moment, precious metals arent being used as safe havens. Bonds (and cash) have become the go to safety investments of choice.
I believe its because precious metals are in some part tied to economic performance. And, the economic data has actually been fairly positive lately. As such, precious metals arent needed as a last resort investment. (In other words, a strengthening economy implies the government isnt going to default on any debt obligations.)
Heres the important part
The Feds recent QE program is just underway. Not even a fraction of the anticipated bond purchases have occurred. Its way too soon to say the program isnt working.
If and when the Feds stimulus does start gaining traction, it should give a boost to commodities. Not to mention, as the economy improves, demand for most commodities should increase as well.
What Im basically saying is this is likely just another bump in the road for the commodities market not a major turning point. Keep in mind, commodities are often more volatile than stocks.
Bottom line, its too soon to call the commodities bull market. Continue paying attention to the fundamentals so you wont be caught off guard if the market turns. And dont forget, there are plenty of opportunities to profit off commodities using small caps and penny stocks.
Yours in profit,
Gordon Lewis
Category: Commodity Stocks
