The Truth Behind the Bull Market in Commodities

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The Truth Behind the Bull Market in Commodities

The current bull market in commodities is the longest and most broadly based in history, affecting almost every commodity. 

For example, the price of crude oil has increased 418 percent since its last turning point 110 months ago.  For comparison, the average oil price increase in past booms was 54 percent, and the duration was 18 months. 

The boom in copper has pushed prices up by 617 percent, and has already lasted 75 months, compared to a typical copper boom that hikes prices by just 61 percent and lasts only 21 months. 

Eventually, of course, every bull market leads to a downturn.  So it’s natural to assume this bull market will end, as well.  The big question is “when?”  Some say it will happen within a few years.  Others believe it could remain a bull market for decades.  To gain insight into which view might be more accurate, let’s examine the two factors that some believe will keep these markets booming for many years to come:

1.    The growing demand from emerging economies

2.    A dwindling supply of natural resources

A common explanation offered for sustained high commodity prices is the growing demand from emerging economies.  Since these economies will continue to grow for decades, the theory goes, the bull market will be sustained as well.  China is the example that is typically used to drive this point.  But this argument assumes that economic growth in China will produce a proportional growth in the demand for commodities.  Although this may be true for oil, which we’ll cover in a minute, it is not true for base industrial metals.

The fact is, China already consumes a higher percentage of the world’s base metals than the U.S., the E.U., and Japan combined: 24 percent more copper, 59 percent more zinc, and 31 percent more aluminum.  Interestingly, in most developed economies, the demand for base metals has remained flat for decades, as the population and GDP have grown.  Why?  Because they have shifted toward a more service-based economy. 

Based on this historic precedent, it’s reasonable to believe that as China moves toward a developed economy, its demand for base metals will not grow substantially above what it is now.  Therefore, it’s doubtful that demand from emerging countries such as China will contribute significantly to a decades-long bull market — at least, not in base metals.  

Another reason commonly suggested for the latest bull market in commodities is that there is a dwindling supply of natural resources...

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