After the Commodities Rebound

I'm of mixed opinion when it comes to surveying Wall Street experts for their prognostications on commodity market forecasts. After all, the macro view comes not only from studying charts, but also the actual buying and selling of commodities themselves for end-use, not just for the P/A or investment accounts of clients. But some experts have more to say than others. One such interview worth reading comes from Barron's (registration and subscription required) and features a discussion with Derek van Eck, a principal of his own firm Van Eck Associates. In the interview, Barron's notes that van Eck "still likes the outlook for copper, maintains that gold is an important hedge against inflation, and has become more bullish on agricultural commodities -- corn and soybeans, in particular".

Van Eck believes that "The general outlook is improving, due to both cyclical and structural factors. The red light, which had been flashing, is now gradually turning green in some markets … In China, recent PMI [purchasing managers] data, electricity demand, real-estate transaction data and very strong loan and credit growth suggest a turnaround. And spending from government fiscal-stimulus programs is likely to continue." But can the China and developing market super cycle alone drive commodity markets inflation? Probably not, unless there's global demand from Western countries to back it up over time. However, with the Chinese government continuing to divest themselves of new investments in the dollar in favor of raw materials and commodities, it's unlikely that they'll do anything (e.g., flood the market) with raw material to negatively impact their investments. I would suggest that if the Chinese central bank is bullish on commodities -- and is putting their money where their forecasts are -- then you should be too. And you should also plan your commodity markets hedging and cost management strategies accordingly.

Jason Busch

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