The 30 and 80-year picture
Viewing the above chart, one could easily conclude that only people who are exhibiting a lack of good sense or judgment would buy commodities at presently high levels. Anything that has risen 100% in a relatively short time may in fact be a good sale - unless of course we are in "one in an age"-mega trend.
But how do we know? The following chart, going back to the year 1920, tells a different story, namely that commodity prices, adjusted for inflation, are as low as during the depression of the thirties. The prices of basic commodities world-wide have fallen so low that, despite modern efficiencies, many trade below their cost of production.
A secular rise in commodity prices during the next decade is a significant likelihood.
Commodities are bargains! If "buy low, sell high" makes any sense at all, this is the time to buy. As the above chart suggests, the secular decline in commodity prices has come to an end and a reversal is in progress. As commodity prices move back up to "normal" levels, they will attract additional investors into what is a relatively small arena. Even a tiny asset allocation shift from stocks/bonds into commodities could give a pronounced boost to commodity prices. Already there is evidence of growing investor sentiment in favour of commodities.
One key factor worth noting is the falling US dollar. If the US dollar continues to weaken, prices will rise to compensate. A trend of rising prices tends to attract more investors and they could push prices higher still. Eventually this process could develop into a classic spiral of rising prices such as occurred during the 1970s.
But for most, the rationale behind rising commodity prices is simple:
The long-term picture
On May 8 of last year, with the index at 273.53, we recommended "to remain long and to buy selectively" as we anticipated the break-out which now has evolved.
Today, we have to conclude that prices have moved too far too fast for the short-term oriented speculator. Those, nevertheless, who do not possess a trader's mentality and believe in the so-called secular bull-trend, may as well stick to their positions or buy on set-backs which occur especially at the early stages of a bull-market that could last for at least ten years, if the past in any indication of what may happen in the future.
The medium-term to short-term picture
The chart below displays what has happened since January 2003 until today.
By February 24, we had reached a temporary peak of 251 points and we had to wait until November 2003 to supersede it, a long period for a commodity bull, who may indeed question whether he is dying or is still alive, waiting for the next opportunity to forge ahead.
And patience, for those who had it, was rewarded. The bull moved on and reached a new high of 285 points by the end of March 2004.
Then a correction set in, which has brought the index down to the 270 level or by about 5%. This is not much, of course.
In May 2004, we wrote: "Yet if the past is a guide to the future, we may have a lengthy period of consolidation ahead of us, similar to the one we went through last year. We would certainly have to see whether the 260 to 270 point support area has the capacity to absorb further selling pressure. At this stage, we believe that it will." And indeed, the correction stopped right at 260 points at the beginning of August.
The short-term picture
The short-term chart nicely depicts the break-out at 290 points and the consolidation which set in when the Index crossed the level of 320.
This consolidation may continue for a while but should stop when the new support has replaced the old resistance level. You may well have a chance to buy below 290 points. A bit of patience at this time could be rewarded.
As the Reuters/CRB Index is composed of different products as shown at the beginning, namely energy, industrial metals, precious metals, grains, meats and softs, it is of course essential to analyse individually the product one wishes to buy or sell.
The Rogers International Commodity Index represents the value of a compendium (or "basket") of commodities employed in the global economy, ranging from agricultural products (such as wheat, corn and cotton) and energy products (including crude oil, gasoline and natural gas) to metals and minerals (including gold, silver, aluminum and lead). As of July 31, 1998, there were thirty-five different contracts represented in the Index. The value of each component is based on monthly closing prices of the corresponding futures and/or forward contracts, each of which is valued as part of a fixed-weight portfolio. Near month contracts on international commodity markets are employed to the extent possible. The selection and weighting of the portfolio is reviewed not less than annually, and weights are assigned in the December preceding the start of each new year.
The index was developed by Jim Rogers to be an effective measure of the price action of raw materials on a worldwide basis. The broad based representation of commodities contracts is intended to provide two important characteristics: The large number of contracts and underlying raw materials represents "diversification" and the global coverage of those contracts reflects the current state of international trade and commerce. Accordingly, in many cases, allocation of a portion of an investment portfolio in a product based on the Rogers International Commodity Index may reduce overall volatility while providing the opportunity to profit, assuming the continued growth of the global economy and that such growth translates into higher prices for those commodities.
ABN AMRO (http://www.abnamromarkets.com) have launched several structures allowing investors to participate in this unique underlying composed of 35 different commodity contracts.
Conclusion
While in the short-term the consolidation may continue for a while, we remain confident that we are in a secular bull-market which may last several years.
The following recommendations were valid at the time of writing, viz. at
and not necessarily when you happen to read them.
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
April 1, 2005
Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company's share price. Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.