According to Barclays Capital, the emerging markets (EM)
requirements for the world’s natural resources are growing at such a rapid pace
that commodity prices are likely to become a lot more volatile. Amrita Sen, who
is a commodities analyst at Barclays Capital, stated her opinion shortly after
food prices went through the roof and mining companies all over the world
announced good profits due to the growing demand from the EM - especially Asia.
Ms Sen was speaking at a recent event in London which
announced BarCap’s 2011 Equity Gilt Study which is a long term study of the
returns of financial assets. The analysis shows that demand is so great that
technology and production cannot keep up. The report goes on, “The rise of India
and China has completely altered the face of the global economy. These economies
have accounted for virtually all of the demand growth in the past few years.”
Allan Conway of Schroders and who heads up their EM
department said that investors must get used to food crises happening more often
and this is down to the growing wealth of the people living in China and India.
He carried on, “It is likely to a recurring problem. This is the second food
crisis in two years and we will have to get used to this whenever there is bad
weather or a bad crop.”
Conway has also noted that the increasing price of staples
has been one of the reasons for the recent troubles in the Middle East. Barclays
does not disagree, “Resource scarcity is a crucial social, political and
economic factor of our era and will likely remain so for the foreseeable
future.”
Going back to the Barclay’s report, it is also interesting to
note that the links between food and fuel have gone up with fifty percent of the
rise in worldwide corn consumption now being used for ethanol production.
This is not the only problem though. Sen believes that with
the world wanting more and more commodities it could have serious repercussions
for the global economy. Whilst admitting the fact that there was not much
individual consumption in China or India these two countries were “driving the
commodity market, and in a lot of cases global GDP is being influenced by them.”
Precious metals play an important part in the commodity
markets as well. Dr. Marc Faber sees that there could be short term volatility
here, especially in gold and silver, but this will only be in the short term.
However, he is forecasting the possibility of gold dropping to around USD1,200
or even less but is not worried as the fiscal problems of America and yet more
monetization will soon see precious metals soaring again. He does raise the
point that if gold does fall to these prices it would be a good time to buy.
Like Sen, Faber is concerned about other commodities as well.
He believes they are well overbought. He thinks they are almost at a parabola
stage, i.e. going straight up. When this happens there is a chance they will
head right back down. Maybe not now but it will happen sometime just as they did
in 2008.
According to Faber, this cycle usually happens when higher
prices means supply will improve thus giving the potential problem of causing
the markets to fall. It must be stated that the cycle for industrial commodities
will be longer than that of soft ones as it takes longer for production to
materialise. Faber does not care how much money the Fed is printing, he believe
this cycle will happen and there will be volatility in commodity markets.
Faber is not a fan of Quantitative Easing as he believes
inflation has to happen with more and more money coming into the world. The Fed
thinks the best action it can take is to expand the money supply to ease the
public debt that stands at four times the size of its economy. Therefore, even
with the short term volatility, precious metals are still well worth having in a
portfolio.
Faber is not that impressed with T-bills or deposits. He also
believes the Fed will try and maintain its interest rate below that of
inflation. This is so as to try and avoid the worsening impact from the credit
market collapse which expanded to over three times the American GDP. Faber
explained, “The US public debt could be much higher if unfunded liabilities like
Medicare are included. There are not many options. The US will need to keep
printing money for the time being.”
Like Sen and Conway, Faber has worries about the Middle East
but puts the reasoning down to oil rather than soft commodities. With the rising
demand for black gold in EM and America he thinks there will be geo-political
problems for all oil producing countries. Whilst not good for the people of
these countries it will help the prices of commodities increase.
The general uncertainty of what is going on worries Faber,
“If there is a war, gold and silver would be desirable investments to hold.
There will be times like the 1990s until 2008 when gold outperformed stocks and
vice versa in 2009. But the key is flexibility. We don’t know how the world will
look in 10 years’ time.”
Without doubt, the world’s economies are in for interesting
times over the next few months and maybe even years. Like MitonOptimal, Faber
believes there will be a short term rebound in the US Dollar but this will not
last long. Scott Campbell believes it will not go into Q4. Faber says the value
of the Greenback has to go down as the Fed is more than likely to increase its
printing of money over and above the USD600 billion which they have already
committed to. He says, “Paper [money] will have less and less value with the
exception of currencies not printing money, considering what central banks plan
to do. Inflation will be an issue in Asia and the Western world. (But) I think
governments around the world will increase interest rates sufficiently to combat
inflation.”
Finally, Faber is concerned that the slowdown of the Chinese
economy may also affect the world economies as it may lead to a reduction in the
demand for commodities and so affect the likes of Canada and Eastern Europe.
So, how accommodating are commodities? Well, they should
definitely be a part of a portfolio. Depending on how much volatility you are
prepared to take will then result in what percentage you decide to invest. In
the long term though, with careful nurturing, they will do well for you.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on [email protected]
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