Lowly times for commodities market could spark investor interest
Even a fleeting glance back through the past 100 years of economic history will show you the cyclical nature of most of the world’s financial markets.
Peaks and troughs are inevitable and there can be no denying that right now commodities investments are taking a hit. A heavy one, too. But for people examining different alternative investment vehicles, they ought not to be deterred from investing in commodities; it is just a question of choosing the right commodities at the right time.
As an article in the Business Spectator recently noted, there is “an opportunity at the bottom of the commodity cycle”. And that is where the market stands now, particularly in oil, gold and mining.
The article advises: “Investment is the lifeblood of mining but getting the timing right to maximise the returns to investors over the commodity cycle takes skill and courage. The decisions to buy, build or give back to shareholders are all valid strategies for mining companies over a commodity cycle. To maximise the benefits to shareholders, you buy at the bottom, build in the upswing and return at the top.”
Buy low, sell high – it is the oldest cliché in the investment world. So while it takes courage to put money into a market that has faltered in recent years, this is also the time to find opportunities in buying as a market prepares to bounce up from rock bottom.
Is a Bull Market Round the Corner?
Financial markets experience bull and bear markets, which describe an upward or downward market trend respectively. And while commodities right now are experiencing there longest and most severe bear market since 1973, experts are predicting a change in fortunes ahead.
It has been seven years of steady decline for commodities values since the heights of 2008, but an article published by Forbes on 27 July 2015 suggested that the evidence is pointing towards an upward trend in the near future.
Examining the US market, the article highlights the connection between the strength of the dollar and the weakness of the commodities market; in short, when the dollar is performing well, the commodities market is not, and vice versa. Right now, as commodities continue to lose value, the dollar’s stock is rising. But this could all be about to change.
Forbes states that two options seem likely for the US economy: inflation or recession. And assuming the dollar weakens if the country slides back into recession, the article notes that “both predictions could be good for commodities”, with people reverting to traditional investment options and prices responding positively.
Looking at the oil market, Michael Lynch, president of Strategic Energy and Economic Research Inc., also believes prices could rise in the not too distant future. He cites the examples of electric cars – when oil was expensive these vehicles could offer significant cost saving benefits, but with the cost of a barrel of oil half of what it was 10 years ago consumers are less worried about a vehicle’s petrol consumption. The result is that SUV sales are on the rise, which in turn will build demand for oil and help stabilise this market.
So while Mr Lynch thinks oil prices will plateau at their current low-level, he believes this commodity will turn a corner before too long and when demand increases again, the value of oil will start to increase.
Predicting the Cycle
In both cases, the experts have identified cyclical patterns. When one commodity falters it impacts on the performance of another market and over time, the examples illustrate, the cycle will be complete and the commodities will enter another bull market.
Naturally, predicting when this will happen is difficult, with the signs suggesting that while it is not far away, commodities could still experience further declines. Nevertheless, decades of economic data has clearly given experts faith that commodities will bounce back, and buying during this current low could provide healthy returns.
Of course, it helps that commodities are so integral to everyday life. Indeed, the Economist wrote in a blog on the matter in July 2015 in which it said: “Commodities will remain vital for humanity but going forward you need to pick them correctly.”
Elements like graphite, aluminium, titanium will remain in high demand because of their role in modern technology – specifically batteries and electronic circuits – while water and natural resources will also remain in high demand as the planet’s population grows.
The challenge for investors is to wait for the market to bottom out and then have the courage to put their money in commodities ahead of the return of the bull market.