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The American public has just finished being treated to a 16 year bull market in equities, culminating in the largest speculative financial bubble in modern times. Now that the bubble has clearly burst we are at that chapter in the script where the bubble is in the midst of unwinding. No bubble of the proportions we just experienced ends in two year lows. Usually it takes 10-15 years of lows before investors have sufficiently lost their taste for paper assets to the extent that you can find some bargains. Demographics will play a key role in this secular bear market for paper assets. An avalanche of selling looms over the horizon in 2005 as the leading edge baby boomers can start withdrawing funds from their retirement accounts.
What is an investor to do? Well if history is any guide we can get in on a brand new bull market that is just starting to show signs of emerging. One of the by-prodcuts of a mania which focuses on one particular asset class is the exclusion of investment in other asset classes. As stocks and bonds attracted ever increasing amounts of capital, that capital had to flow out of other less attractive areas. Commodities and natural resources happened to be hit especially hard--for good reason. There was a huge commodities boom during the 1970's for a number of reasons. Investors fearful of inflation pulled money out of paper assets and poured it into energy and precious metals. Tensions in the middle east and oil embargos sent oil skyrocketing to $40 a barrel. Demand for many commodities increased as stockpiles were built up in preparation to fight a "cold war". Naturally, the rising prices attracted speculators which drove prices up even further. Fast rising prices attracted a frenzy of investment in mining and drilling as people were sure oil was going to $100 a barrel and gold was going to eclipse $1000 an ounce. Well all that over-investment in natural resources led to a glut in supply. People started driving smaller cars, they started turning down the heat, and oil plummeted. Fed Chairman Paul Volcker said he was going to beat inflation and he meant it. There goes your demand for gold. The cold war wound to an end and there goes your demand for many other base commodities.
All during this time during the 70's investment in technology was overlooked because we had an energy crisis and interest rates at 21%. By 1982 we had a new president who cut taxes. Inflation and interest rates were settling back down, and baby boomers hit their late 30's and wanted to start investing for their retirement. This was the perfect set of conditions for a technology led bull market in stocks. Productivity was the buzzword thrown around which was going to maximize profits and minimize inflation. (incidentally it was the same buzzword used in the 1920's). Falling commodities prices helped support these circumstances. As the equity bull market raged on into the 90's more and more capital flowed away from natural resources and into the stock market. Exploration and production finally began to wane, but prices were held low by a number of factors. Stocks had been built up too high and there were a lot of above ground inventories. It made no sense to invest in planting crops or to explore for more resources because there was a glut of supply. The dissolution of the USSR exacerbated the supply problems as their political and economic turmoil caused massive dumping of commodities on world markets in a scramble to raise cash.
In the 90's it wasn't hip to start a sugar or cotton plantation, it was hip to start a software or internet company! It wasn't nearly as lucrative to be a mining company or an energy exploration company. In fact you would just get a bunch of environmentalists hot on your trail if you did. All this focus on technology the last 20 years has caused a glut in technology spending which will take years to work off. It has caused basic materials industries to be largely ignored. Rubber is at 30 year lows, cotton is at 15 year lows, and many other base metals are at multi-year lows or are emerging from bear markets. Gold is near 30 year lows in real dollar terms and a report just came out that South African output for gold in Q1 is the lowest in 47 years. Silver demand has outstripped supply for the last 10 years in a row. We have already seen some early indications of a resurgence in commodities, mostly in the energy sector. Oil ended it's long running bear market with a panic sell-off to $10 a barrel in late 1998. A couple of years later and it hit nearly $38 a barrel. Natural gas was soon to follow suit and nearly quadrupled. More recently coal has exploded after years of languishing and coal IPO's are the hottest ticket in town. Platinum and palladium were explosive last year and some other exotic metals such as titanium showed signs of life in recent years. More recently tantalum which is used in capacitors for cell-phones and PC's saw an explosion in price. Slowly but surely shortages are starting to "crop" up in commodities and it's starting to spread.
I'm starting this thread as a place to gather information and ideas for those of us who are independent thinkers and don't believe Alan Greenspan's money printing panic is going to do paper assets any favors during the coming decade. Please keep topics related to commodities or economic issues affecting the outlook for commodities. Discussions about equity plays, options & futures on commodities are all welcome. I want this thread to be about all commodities and natural resources, from energy such as oil, natural gas, coal, uranium, electricity, etc to all the metals including base metals such as zinc, lead, copper, nickel, aluminum, etc. I welcome information about coffee, cotton, hogs, cattle, palm oil, sugar, corn, cocoa, wool, lumber, rubber, orange juice, soybeans, wheat, you name it. I would hope this thread doesn't get overrun by a bunch of gold bugs or oil sheiks, as they have their own separate threads devoted to them. I am not discouraging discussion of gold or oil, but I would like discussions to be well balanced with other commodities spoken about as well.
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