Great long-form piece by Erik Swarts over at Market Anthropology (we borrowed the title) talking the commodity super-cycle, and how it might not be dead… We’ve talked about it being on the way to the morgue here and here.
Mr. Swarts bases his logic on multiple comparisons to different past market regimes – be it the 1930s – 1940s interest rate regime, the 1970s commodity cycle, or the 1980s stock market breakout; and gets a bit technical both with his charts and the writing:
…when we extrapolate a normalized comparative study – balanced by momentum (RSI and stochastics) signatures across the complete run of the 1971-1980 boom, we find an estimated comparative leg higher up to the early part of the next decade. Fittingly, this would roughly match the duration of the previous commodity boom that extended for ~20 years along the mirrored trough of the long-term yield cycle in the early 1930’s and 1950’s.”
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Market Anthropology
Now, it’s easy to gather from all of the charts and talk about rates continuing to be lower that this is all a way of saying that low rates will spur inflation and re-fuel the commodity super-cycle Jim Rogers style. But in fact this is a much more nuanced conversation than that. Mr. Swarts’ main point, from what we can gather, hinges on this one line:
“For gold to reach $700/ounce or oil $50/barrel, real yields would be pushed significantly higher.”
We have to admit that took us a second to understand, and in fact we went looking for some explanation. Why would real yields be pushed higher for Gold and Oil to go down… Doesn’t it seem higher yields = inflation = higher commodity prices?? Enter Pimco, with a great description of the link between Gold prices and real yields.
….when real yields on other assets are high, investors would likely want a bigger discount to the long-run estimated real value of [a store of value, constant long term purchasing power] asset. Conversely, when real yields are low, the opportunity cost of owning the [store of value, constant long term purchasing power] asset drops and investors would likely be willing to pay a higher price relative to the asset’s long-run estimated real value… As gold increasingly becomes a financial asset, when real yields rise, gold prices should fall if they are to maintain a given level of financial demand relative to investors’ other opportunities. Similarly, when real yields fall, we expect the price of gold to rise. “
A little technical, but the basic idea is that the more people view Gold… and its cousin Black Gold (Oil), as a long term asset which will hold its purchasing power in real terms, the more that assets nominal price will move in relation to the level of real yields. And that relationship will be an inverse one, with prices down as yields go up, and vice versa. Indeed, this is why – in part – Gold and Oil have sold off so violently over the past 12 months (especially the past month), as investors are assuming a rise in real yields.
We’re by no means Gold bugs trying to make a call on where Gold will go from here. And this analysis misses the fact that there is more to ‘commodities’ than just Gold and Oil. There’s things like Coffee, Corn, and more which aren’t really considered to hold their purchasing power (although we’re sure people would much rather have Coffee in an apocalypse than Gold); but this is definitely something to noodle over…