Last Updated : 29 January 2010 at 17:30 IST
Gold drives commodities super cycle
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Is gold the main driver of the commodities super cycle that began in 2000? There are opponents and proponents to this question. Some say the yellow metal is driving the ongoing commodities super cycle. Others argue that it is not just gold, but crude oil and base metals like copper and nickel are equally pushing ahead the commodities super cycle.
But looking at the ongoing rally in gold price, it seems that gold is the hottest commodity that is leading the powerful commodities super cycle these days. Before we get into tough arguments whether gold is a bubble that will burst, pushing down the commodities super cycle, let us know what is this grand cycle of commodities, after all.
Analysts have been saying that equities move in cycles. If in one decade, equities crash, the next decade stocks boom. Likewise, commodities too tend to move in long-term, or secular, bull and bear cycles. But the long-term cyclical movements are often punctuated by short-term, or cyclical, movements.
According to Chris Watling of Longview Economics, these secular cycles can be traced back to 1750 – the average bull run has lasted over 20 years, with average cumulative gains of 293%. And the secular bull market of the mid-1960s to the early 1980s was followed by a bear market that ended when the latest upswing began in 2001.
Generally, commodity super cycles last 20 to 25 years. The current supercycle began in 2000. According to renowned global commodities analyst and investor Jim Rogers, the world is just only half-way through the commodities supercycle that began in 2000. Rogers feels that the current commodities supercycle will last for 20 to 25 years and gold is one of the main commodities that is leading this cyclical bull run in commodities.
Jim Rogers expects the commodities super cycle to drive commodity prices higher for another eight years… including gold. And he’s stockpiling the yellow metal by the day. Every pullback, says Rogers, is another buying opportunity. Considering he’s been dead right on every major trend of the past 40 years, we wouldn’t bet against him.
Rogers may be true. Look at the gold price run in the last few years. In the last one decade, the yellow metal price has more than doubled, as investors piled their money into gold. “Gold is now the best investment asset among the commodities class. So naturally, it is correct to say that gold is the leader that is driving the commodities super cycle,” says Mark Robinson, a Dubai-based bullion analyst.
According to Robinson, commodities super cycle has become an important barometer for investors as commodities, especially gold, have turned out to be a natural hedge against weak dollar and high inflation. “Therefore, commodities investment has become a major turning point for several countries, banks, investors and common people,” he added.
People have found a number of reasons to consider an investment in commodities or commodity-based equities, be it through an actively managed natural resources fund or a passive vehicle like an index fund or exchange-traded fund. If prices for fuel or other commodities rise, one way to hedge against the impact of that price increase is to invest in those commodities.
The secular bull market for commodities, especially gold, and natural resources stocks remains intact and could even intensify in 2010, depending on the extent of economic recovery in developed nations.
If gold is driving the commodities super cycle, gold producers have a lot of things going for them, longer term. A higher gold price certainly means that their output carries great investment potential.
If gold is pushing the commodities super cycle, gold bugs like Jim Sinclair predicts that the yellow metal will zoom to $1,650 per ounce in 2010. “Gold is in a grand commodities super cycle. Gold is insurance. Gold is money. Gold is solid investment,” says Sinclair.
If gold trades at $1,650 as predicted by Sinclair, some 100,000 call option contracts at Comex will be in the money. Big-money players Goldman Sachs and JPMorgan are reportedly helping to drive the action in gold action.
In 2008, NYC-based hedge fund Paulson & Co’s flagship fund returned 37%, as the world markets burned. Paulson’s bullish on gold, big time, including the Mar. 17 purchase of 39.9 million shares of AngloGold, worth $1.28 billion. Other major hedge funds are piling into gold, too, including Eton Park Capital, Green light Capital and Hayman Advisors.
China that is zealously trying to build up gold reserves is one big beneficiary of the ongoing commodities super cycle. In the last one year, China has emerged as the top producer and consumer of gold in the world.
Since 2001, the U.S. Dollar Index has tanked 30%... while gold has risen 300%.
During major gold bull markets (and corresponding equity bears), gold and the Dow converge at a 1-to-1 ratio. During the last gold bull, the Dow sank to 850 and gold rose to $850. The Dow is now over 8,000… But even if it fell to 4,000, we could see $4,000 gold before this bull run is over!
David Lew is a precious metals commentator with Commodity Online. You can contact him at email@example.com
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