The Commodity Super Cycle Ain’t Over – Yet

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.”

CRB Commodity Super Cycle(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…

 

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Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.