Apr 22 2009
Commodity Prices – Are They Going To Strengthen In The Near-Term
An article yesterday by Evan Smith and Brian Hicks, co-managers of the U.S. Global Investors Global Resources Fund titled ‘Coming Inflation Is Good for Commodities’ although it isn’t possible to predict its timing the trillions of dollars being injected into the global financial system make it inevitable, and that this “prospect of inflation will likely be one of the key drivers for the energy and commodities sectors over the medium term”. The article goes on to say that “the economic slowdown has reduced demand for oil and natural gas, but the supply-and-demand fundamentals are tightening rather than loosening. This is because supply has been declining at a greater rate than demand” in circumstances where “it is much cheaper and easier to cut supply than to bring that same supply back on line”. The authors then comment that “China has been buying commodities at a record pace in an effort to secure future strategic supply. Many have speculated that the Chinese are opting to invest in commodities and other hard assets rather than continuing to invest their massive currency reserves in low-yielding U.S. Treasuries. If you read several of my recent posts on this blog you will quickly find that I am one of those who so speculate.
The views expressed in this article make sense to me, so long as one assumes there will be recovery in the near term before the current recession deepens, perhaps to ‘depression levels’ of 20% unemployment in the U.S. I am certainly not predicting a depression, and hope it doesn’t happen. That said, I continue to watch for early U.S. job loss forecasts and U.S. consumer confidence indicators for the month of April, as I consider these to be a critically important bell-weather short-term indicators of whether there is any possibility of the beginnings of U.S. economic recovery any time soon.
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