As that great investment expert Tobert Prechter has stated, “Commodities are far more difficult to forecast than the stock market, the debt market, or even gold.”
He has written that commodities are less governed by the overall social mood. Clearly too, it has become obvious that the investor psychology is important.
In the long run equities move along with the economy and corporate profitability, but the reactions to events are quite unpredictable. When the United States raised the government’s debt ceiling, one would have assumed that its stock market would move higher, but that was not the case as other concerns intervened.
An earlier turn of tidal proportion in commodities occurred in 1980-1981. Then of all the markets propelled but inflation, including precious metals, mining stocks, and interest rates, commodities were last to peak. Evidence is abundant that the gigantic rise in commodity prices that began decade previously, ended. Then, in the 1990s, commodity prices once again surged, in part in response to soaring oil prices. That led to increases in the price of most commodities that were dependent to some degree on oil prices.
All that was fuelled further in recent years by the tremendous increase in the price of raw materials. Before that, however, commodity prices were rising in the same relentless manner as the early 1980s.
Conventional wisdom states “that this time it is different.” In Asia, notably in China, rising prosperity will entail a change in food consumption as more enter the middle class, and a heavily oriented protein diet is taking place. Too, overall populations are expanding, so there are more people to feed. Rising industrialization in the developing world will entail a tremendous expansion in the demand for raw materials, such as copper, iron or nickel, and so forth.
So why will commodity prices not remain at peak levels? First, a worldwide economic slowdown is inevitable and coming soon. That will include China, which has invested heavily in plant expansion, in turn contingent on continuing growth of exports to United States and Europe. The Chinese boom has an eerie resemblance to the Japanese prosperity in the 1990s. Then, everyone believed that the Japanese economy would continue to prosper and grow.
As the Chinese middle class starts to exerts its muscle. The entire communist regime will either change radically or experience a Japanese-style period of stagnation. The Chinese middle class will demand more freedom and not concentration on exports or investment to further them.
All that means that the present commodity boom is in its last stages and decline will follow.