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General Comments
In the 2010 MEGA
Commodities Forecast issue (click the link for 50% off and free bonus
book) I discussed several markets currently experiencing a cycle
change. In this issue of the WCR I
want to discuss cycles in commodities and how impactful they are to long
term trends, and in some markets just how
unavoidable such a change may be.
Cycles are not seasonal and they are not necessarily timed
events. Cycles in commodity
markets occur when a shift in the supply and/or demand causes a change in
production. For example, back in
1998 crude oil prices hit impressive lows below $11 a barrel. This price point was well below
producer average breakeven which was closer to $18-$20 a barrel at the
time. Exploration for new drilling
sites, offshore drilling construction and R&D basically all grounded
to a halt. This was the beginning
of a cycle shift because producers contracted supply chains instead of
expanding them. Soon inventories
shifted from oversupply to undersupply, demand spiked on global growth
factors and geopolitical concerns, and weather became more impactful on
the market because of the limited access to supply and distillate
production. Soon the biggest
percentage rally in the history of that market occurred over a 10 year
bull cycle. This cycle came to a sudden
halt in 2008, crashing over 70% in a matter of months instead of years. The market has recovered substantially
but has found itself in the unique position of setting both a cycle high
and crash low in very little time.
One could easily argue that there is not
cycle in oil at this point, but more of a congestion period in a price
range that affords the market stabilization for both supply and demand
channels to flow smoothly.
However, there are several markets that I believe are not in the
same boat as oil. Based on my observations, I feel that these
markets are about the experience cycle changes comparable to oil’s 1998
shift or have already begun such a cycle change.
Past performance is not indicative of future results.
**Chart courtesy of Gecko Software's TracknTrade
Energies
Cycle Change: Natural Gas (in play)
Why has natural gas hit a cycle low? When identifying cycles it important to
acknowledge key shifts in supply or demand components. Also, looking at technical
confirmations is key. In natural gas this cycle low occurred
in October, marking the third major cycle high and low since 2001. The market does follow general energy
price fluctuations at times, but its correlation going forward will likely
be inverse.
The market is shifting into a unique category of being a targeted
alternative energy source. This
trend will likely expand demand over time while experiencing significant
bouts of supply shortages, not unlike the current situation affected by a
mere few weeks of extreme cold winter weather. The current weather panic in China, Europe and the U.S.
highlight the shift in natural gas demand and its growth as a global
energy commodity. This growth
lacks the same expansion on the supply side seen in oil over the 10 year
cycle bull run that began in 1998.
This same factor is also a big reason why natural gas has
experienced 4 significant price spikes in 8 years, as the market is very
susceptible to supply inconsistencies and demand spikes. It is for this reason that I suspect a
bull cycle began in October and should continue through much of 2010.
Financials
Cycle Change: US Dollar (just begun)
The dollar has had some historic cycles, but how can a
currency have a cycle? After all
the market does not have the typical commodity based supply and demand
structure, so what actually causes a cycle shift in a currency? In currencies the basis for a cycle is
more of analysis of whether a long term trend on policy shift has
occurred. Currencies tend to
maintain long term trends as economic outlook and monetary policy offer
periods of years in which policy is implemented, not weeks or
months. In the case of the U.S.
dollar the cycles over the past 20 years have been long and pronounced. In 1995 the market set a secondary
bottom, not unlike what the market did in 2009, and began a 7 year plus
bull cycle. In 2002 the cycle high
was in and a 3 year collapse retraced all of that
7 year move, only to be followed by additional selling until a cycle low
was likely hit in 2008. A
secondary bottom, formed by a near perfect double bottom on two
consecutive monthly lows in November and December of 2009, has likely
setup a technical cycle shift into a bull run that I expect to last 3-5
years. Technical confirmation of
the cycle shift will occur if and when the market closes above the high
set in April 2009. On a
fundamental level the cycle is shifting based on the U.S.
being the leader of a global economic recovery, as well as the inherent
flaws in the unified euro currency’s structure. If the euro is to lead the currencies
it will have a difficult time as the countries that compose it all have
different economic problems not addressed by unified monetary policy – a
clear issue that will be exposed in 2010 and beyond.
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Metals
Cycle Change: Copper (around
the corner)
The copper market has hinged
primarily on China and
India
demand growth as producers trail behind this expansion and race to expand
operations. This rapid mining
expansion, although downplayed by many analysts, will ultimately play a
large part in the cycle top that likely is right around the corner for
this market. How can one see a
cycle shift coming in a market?
Cycle predictions are simply supply and demand forecasts, and for
copper the supply side is catching up with demand and demand, I suspect,
is about to collapse. The supply
side of copper takes a good two years to trail the demand needs, a
downside of the mining industry.
On the demand side can anyone honestly think that 2010 will offer
the same or greater demand from China
and India
than in 2007? There is little
argument to the current tenuous economic stability seen in these
countries. China is
raising rates – too early? Can
growth be stunted by premature tightening? You bet. Will a strong dollar hurt the global
demand for copper? This is likely
the biggest growth restraint the copper market will see in 2010. Right now a major strike in Chile,
very high hopes for global economic growth and low inventories have this
market riding high with a short term commodity rally – this is when I
become contrarian and also when cycle tops tend to occur.
Softs
Cycle Change: Cotton (in
play)
Cotton hit a cycle low in
late 2008 as major oversupply forced government subsidies on a global
level to help stabilize plunging prices.
Well the subsidies did just that.
Moreover the global planted acreage of cotton is on a downtrend as
profitability of other grains and general migration away from cotton
supply is causing a cycle supply shift during a period of rebounding
demand. This suggests a bull cycle
is underway and I am seeing the strong secondary bottom in 2009 help
catapult prices back into the mid-range of prices seen over the past two
decades. Over the next 6 months
this cycle shift will hit into high gear as I expect 2010 supply to come
in much lower than anticipated while demand is stabilized.
To find out more about cycle
forecasts and market predictions by James Mound and to take advantage of
50% savings on the 2010 MEGA Commodities Forecast visit: http://www.futurespress.com/mega-forecast.html
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