The 70’s were much like the previous decade.
While, as Mark Twain said, the past doesn’t repeat itself, but it does rhyme, the 70’s and the noughties had many of the same elements, war in the middle east, commodity boom, market crashes. Its likely a generational effect.
Commodities was a stand out similarity to me.
Commodities soared, resource plays sizzled. Plenty of crazy volatility lit up the various markets attached to commodities.
Commodities is the fastest game in town. The volatility and the leverage combine to create a potent cocktail for a dangerous speedball of speculation.
Commodity trading is a story of fortunes won and lost. Unless you love high stakes gambling, commodities is strictly for the birds.
However with Oil and Gold such objects of fascination, its hard to leave commodities alone.
So what is the big picture?
The big picture is the US dollar.
Commodities are proxy dollars. Dollar down, commodities up and vice versa.
So right now we have a situation where the dollar is going to rise, because interest rates are going to rise.
Let imagine interest rates will get to 4% at some point from there nearly zero levels. The will be a long road of dollar strengthening because yen and euro are going to be weakening for years ahead with their QE efforts.
That means the dollar is going up for years and commodities therefore are going down.
However it doesn’t stop there.
Commodites have a cycle. It goes:
Global growth.
Commodity prices rise because supply is inelastic.
Commodity boom.
Extraction industry boom.
Commodity glut
Commodity slump.
Production goes off line
Long price trough
Global growth…..
With commodities, the cure for high prices, is high prices. While central banks can print money, miners are even more efficient in creating raw materials when the price is right.
The commodity glut and slump is where the cycle sits, although it might even be on the cusp of production going off line.
The commodity supercycle is dead.
The commodity cycle is a long cycle. The last one took over 20 years to play out. The next commodity boom is perhaps 15 years away.
As such the glory days of commodities will not return soon and we will all be too old and fragile when the next boom comes to make a fortune from pyramiding commodity positions when the next bubble hits.