Oil be not proud

(An abridged version of this essay appeared in the Business Times of 4 October 2008)

Looking beyond the current financial crisis, the future is bright and breezy as solar and wind energy will spell the end of oil's importance.

By JOSEPH CHONG

CEO, New Independent

In the Sunday Times of 6 July 2008 (oil was trading at about US$140 a barrel then), I predicted that the price will fall to US$50 in ten years. Since then we have moved half way there. The price of crude oil rose by 50% in 7 months and fell by 35% in 6 weeks. Until today, many policy makers insist that it is because of supply and demand and speculation played only a minor role. Did demand rise or supply fall by 50% in 7 months? Clearly not.

Published data shows that, physical demand and supply are approximately in balance at around 86 million barrels per day. Indeed, demand worldwide has been decelerating since the beginning of the year. For example, US demand has fallen by about 4% yoy in June to about 20.4 million barrels a day. On the other hand, available spare capacity in the oil producing nations have been thin – perhaps 1.5 million barrels per day. To aggravate matters, demand and supply for crude oil is inelastic in the near term. Most cars can only run on petrol and it takes 5 to 10 years to bring new field discoveries into production. Thus, no matter what the price, consumers and businesses have to pay up until they cannot.

Why then should prices continue to rise when crude oil demand is falling? I believe this is because of the demand from financial investors such as hedge and pension funds and, more mundanely, ETF holders. If spare capacity is plentiful, the impact of financial investors would not be significant. However, if spare capacity is small, financial demand of just the equivalent of 1 million barrels/day could drive prices skyward. This would be equivalent to an investment inflow of about US$50 billion per annum or about 3 months of China’s trade surplus or about 1.5% of the US$3 trillion in Sovereign Wealth Funds i.e. US$50 billion is thus a fairly small sum. It is even smaller if one remembers that oil futures are bought on margin.

I also suspect that both buyers and sellers of oil have been hoarding. As a producer of crude oil, I would delay bringing my product onto the market if prices are rising at the rate of 10% per month if my finances are in good shape.

There was also a huge divergence between the price of oil and the performance of oil stocks such as BP, ExxonMobil etc., which underperformed the price of crude oil by some 55% in the first six months of 2008. Exxon Mobil, based on a present value analysis, was being valued as if crude oil will trade at an average of US$80/barrel over the long term. The reason for this is clear. Buy US$50 billion of the public oil companies and the needle hardly moves. Throw US$50 billion into oil futures creates a quake because it is a relatively small market. The financial speculators know this.

Another anomaly is the huge premium over the marginal cost of production. The most expensive marginal barrel of oil is estimated to be around US$60 -70 a barrel. Being a commodity, that should be the sustainable price. Indeed, coal, which is many times more plentiful than crude oil, could apparently be converted into crude oil at around US$40 a barrel. Being replaced by another fossil fuel, however, is not the crude oil killer. It is renewable energy.

Renewable energy sources, together with the re-tooling of our energy supply infrastructure, will spell the end of oil’s importance. It will come sooner than many think. A view shared by the perpetually pessimistic “Economist “in its June 21st edition. It is not a pipe-dream such as aiming to go the moon in 1960. Most of the technologies are already commercially viable – it is a question of how fast mankind can re-tool.

The most promising alternatives are wind and (thin-film) solar energy – our nuclear fusion reactor in the sky. The earth absorbs 400 times more energy from the sun than all of mankind’s energy needs. Investments in solar energy are growing at 200% per annum. Indeed thin-film solar using nano-tailored ink as the energy absorbing medium is analogous to one of nature’s more potent processes – photosynthesis. Yes, plants get most of their energy needs from sunlight - not crude oil. Apparently, the leaders in this new technology are able to generate electricity as cheaply as coal if the cost of pollution is factored in.

Even as we get excited about solar energy today, the developments in the laboratory are even more exciting. Scientists have now developed material that could absorb infra-red radiation (heat) and convert it to electricity. The potential here is mine boggling e.g. air conditioners as we know them may be obsolete in future.

Although renewables are relatively small suppliers of energy currently, their rapid growth and huge potential will erode demand for oil at the margin as their share of total supply grows. For example the US could generate the equivalent of 6 million barrels per day of oil in its “wind belt” running north-south from Texas to the Canadian border. If the oil market were oversupplied by 6 million barrels today, the price of crude oil would plunge fairly quickly to US$50.

This rapid growth in alternative energy is happening not only in the developed world. China is now the world’s second largest wind turbine market after the US and the central government has set clear goals for the exploitation of wind and solar energy. Renewable energy makes even more sense for China given that China requires about 80% more energy than the US for every GDP dollar generated.

Unlike a coal plant that takes 5 years to build or a nuclear one which takes 10 years, and would be useless if only half completed, a solar or wind generator takes less than a year to build and could generate electricity even if half finished.

However, can land scarce Singapore be energy independent? Just like our water supply, there is good possibility that careful planning and technology will make this a possibility to a certain extent. Every HDB block is a potential solar generator not only for the residents but could sell surplus electricity to the grid. Another possibility for Singapore is to float the solar generators over our numerous reservoirs or along our sheltered coastlines. This is what small Denmark, which gets 20% of its electricity from wind energy, has done. It has installed some of its wind turbines offshore. Indeed, the world’s largest wind turbine maker is a Danish company, Vestas Wind Systems.

On a more global scale, the commercialization of alternative renewable energy has tremendous implications for mankind. Especially, the rural third world where the main hurdle to development has always been affordable electricity. Cheap solar has the potential to make irrigation, mechanization, sanitation and communication assessable for these people. It has the potential to reverse the trend towards urban overpopulation and squalor.

Indeed, we see this happening to rural communities in the US. Sweetwater in Texas has seen a major rejuvenation in jobs and population after the installation of a major wind farm. Ironically, farmers in Texas earn more leasing their land for wind turbine use than from farming. Texan farmers get $3000 per acre from wind compared to $150 per acre from corn. Wind farming is the most profitable cash crop.

In many ways, this renewable energy revolution will dwarf the internet in its potential to improve the lot of mankind. Looking beyond the current financial crisis, the future is indeed bright and breezy.

Moon is potential goldmine

July 16, 2009

CAPE CANAVERAL - AS THE Earth's natural resources gradually dwindle, some scientists believe the moon could prove a goldmine for future generations.

Forty years after American Neil Armstrong first walked on the moon, and as the United States prepares to return astronauts to Earth's nearest neighbor by 2020, it remains an object of fascination and curiosity.

Part of the goal of once again returning to our only satellite, and establishing bases there, is to learn more about its hidden natural resources.

'The moon still has a great deal of scientific information left to be discovered that relates directly to... our understanding of the history of the Earth and early history of other planets,' geologist Harrison Schmitt told AFP.

Schmitt landed on the moon in 1972 aboard the Apollo 17, the last manned mission to ever touch down on the lunar surface. He is among an elite group of 12 Americans who are the only people to have walked on the moon.

Among the 382 kilos of rocks and lunar soil brought back by astronauts from the moon during six Apollo missions is a rock that scientists call 'genesis,' which dates back to around 4.5 million years ago, about the time when the solar system began.

The moon, which has virtually no atmosphere, is effectively a geological blank slate for scientists because it has not had the contact with water and air that has changed the Earth's surface.

'One reason to go back to the moon is to find out whether there is anything of value to be done there... If the answer is yes, you can do economically valuable things and use local resources,' said John Logsdon, a curator at Washington's National Air and Space Museum.

America's new lunar program, dubbed Constellation, was launched in 2004 with the intention of establishing a forward operating station for astronauts as well as to seek evidence of water beneath the moon's ground ice.

President Barack Obama has appointed a commission to review the program's cost and goals, but the launch last month of two preparatory lunar modules suggests it is likely to proceed in some form. -- AFP

El Nino is here

July 11, 2009

NEW YORK - WHAT meteorologists have suspected for weeks now is apparently official: El Nino has arrived.

The US government has warned that that a dreaded El Nino weather pattern is developing, putting countries from Asia to North America on alert for meteorological havoc to crops, infrastructure, ports and mines.

The phenomenon, caused by a warming of the seas in the Pacific, has already brought drought to Australia and delayed monsoon to India. It's impact could be felt in Latin American and North America by the fall.

The Climate Prediction Centre, an office under the US National Oceanic Atmospheric Administration, said in a monthly report on Thursday that the equatorial Pacific Ocean has 'transitioned ... to El Nino conditions.'

The trends favour a 'weak-to-moderate strength El Nino' into the northern hemisphere winter of 2009, 'with further strengthening possible thereafter'.

It was first noticed by Latin American anchovy fishermen in the 19th century and scientists say it tends to come in cycles of three to five years. The 1997/98 El Nino killed more than 2,000 people and caused billions of dollars in damages.

This El Nino is striking just as global economies are struggling to overcome the impact of the world's worst financial crisis since the Great Depression in 1929.

An El Nino-spawned drought would pose a major risk to wheat production in Australia, affect palm oil output in major producers Malaysia and Indonesia, and hit rice production in the Philippines, the world's biggest importer of the staple.

News over the past few days that this El Nino may be weak to moderate led to a sell-off in Malaysian palm oil futures, which slid to a three-month low on Tuesday. -- REUTERS

Weaker than normal monsoon in India

The main source of worry for commodity market players is India, where the weather cycle seems to have contributed to a weaker-than-normal monsoon rain season considered critical to the country's sprawling farm economy.

While rains have now covered all of India, its Meteorological Department said that as of July 1, the rains were running at 29 per cent below normal.

A US Agricultural attache report said the country may be hit by a severe drought if the monsoon remains weak since plantings for its major crops like soybeans, rice and sugar are closing by the middle of July.

An El Nino-induced dry spell in South America may hit soybean exports from Argentina and Brazil to China and India at a time when US soybean stocks are at a 32-year low - less than two weeks of normal commercial supplies.

A salutary effect of this El Nino may be fewer storms sweeping in from the Atlantic or the Gulf to threaten oil rigs and menace crops in Mexico, Cuba and Jamaica, and the southern United States. - REUTERS

Asian commodity traders vexed by liquidity gap

Business Times - 08 Jul 2009

Dearth of activity during Asian trading hours can lead to erratic swings in prices

(SINGAPORE) The rogue Brent trades that roiled the oil market in the normally placid wee hours last Tuesday have again put a spotlight on the lengthy period of Asian illiquidity for the world's main commodity markets.

The sharp jump in prices and volumes on Brent - and gold's drop two months ago - ultimately had no lasting impact on world prices, but vexed Asian traders who face a constant dilemma: Keep large stop orders out of the market during thin Asian trade to avoid moving prices accidentally, or leave them open in the hope of a burst of liquidity like last week's.

There are several ways to lift liquidity, none of them quick: Find a few brave souls ready to break their routine and make an early market, develop an Asian exchange with compelling local contracts, or wait for China and India to unshackle thriving domestic exchanges to allow outbound trade.

'I think it will be a combination of a few factors; the centre of commodities trade is shifting east more and more, so there will be more demand for liquidity, and I guess there will be some incentives from the exchanges for market makers,' said Roberto Tassinari, a proprietary trader with Saxon Financials.

As global exchanges like the New York Mercantile Exchange and the London Metal Exchange adopted near-24-hour electronic trade over the past decade, they also tried to foster greater activity in the Asian time zone, both to establish their market position and to grow business in the fast-expanding region.

They have largely failed, resulting in global benchmarks for soybeans, oil or copper that are open for trade but nearly dormant for one-third of the day.

'It will take at least five to seven years to have adequate liquidity,' said a Singapore-based industry source who trades global commodities. The best hope, he said, is 'China opening up and moving from a price taker to benchmark setter'.

For now the market may have to live with the risk of the occasional jolt like the one that occurred around 9am Singapore time last Tuesday, when a series of roughly 500-lot bids by a rogue London-based Brent broker at PVM triggered a more than US$2 surge in prices .

The reaction would have been far more muted if the same volumes had gone through during the highly liquid US and European trading periods.

In a single hour more than 11,000 lots of Brent traded, over 10 times the norm for the entirety of the Asia time zone, but about average activity for the main 1000 to 2000 GMT period.

The incident - which PVM says cost it nearly US$10 million and is under investigation - comes just two months after an apparently mistaken sell order for Comex gold futures triggered a sudden US$10 fall in midday Asian trade, a sizeable move that dragged down spot bullion and roiled the market.

While the latest incident is sure to cause a new round of questions about broker trading controls, the more immediate issue for the growing ranks of Asia-based commodity traders is how to protect themselves from erratic, low-liquidity moves.

Some find hope in the growth of local contracts, from the birth of the Dubai Mercantile Exchange's Oman crude oil futures contract two years ago to the ASX's launch of an Australian thermal coal futures contract last week.

Several other exchanges in Singapore are also in the works, some trying to capitalise on strong Indian demand for more venues that sidestep currency controls as well as regulatory risks in a country where the government has been quick to shut down any contract it fears is stoking local prices.

In China, Shanghai copper and Dalian grains contracts have become important global weathervanes for those markets.

When adjusted to compare like for like per-tonne trading volumes, total volume in the Shanghai Futures Exchange copper contract is roughly equivalent to total LME trade, according to Reuters data.

The liquidity gap is acute.

Front-month Nymex crude oil futures traded an average of under 8,000 lots a day from 0000 to 0800 GMT in June; from 1200 to 2000 GMT they traded over 200,000 lots. The two front CBOT soybean contracts Sc2 trade some eight times more in just five hours of Chicago trade than in 12 Asian hours.

Exchanges are unlikely to consider curbing hours to reduce the market's liquidity exposure, although ICE Futures rowed back extended hours over the past two years after concerns about market liquidity and complaints from London brokers who were reluctant to staff desks at all hours.

Ultimately what's needed in the short term is a few more players like Peter Maguire, the managing director of Commodity Warrants Australia, who faced down sceptical traders over the past five years as he sought to fill orders during his daytime.

'We started trading during the day here and people told us nothing was going to get done. But we just put the bid in and it gets hit. In Delaware or Moscow or wherever, somebody is messing around on their Blackberry and sees a good trade.' - Reuters

Gold only a safe haven at the right price

Business Times - 20 Jun 2009

If deflation is your call, stay away from gold - even if you buy it cheap. By Neil Behrmann

(London)

GOLD is a safe haven investment that retains its purchasing power over the long term. The proviso, however, is that the metal must be bought cheap.

This simple, basic fact is illustrated in The Golden Constant, a book that has just been published by the World Gold Council (WGC), which promotes gold on behalf of its producer members.

Before delving into the book's historical data, the natural question of investors is whether they should follow precious metals salespeople and buy gold now. The sales points are global economic and geopolitical uncertainty, potential inflation following considerable monetary ease and China and other central bank and sovereign wealth fund diversification from the US dollar.

Indeed, vast numbers of investors have already placed money in gold. Ironically for them, this is the biggest potential danger for a sharp downturn in prices. The investment and speculative crowd could sell if the price becomes volatile and breaks downward from its recent trading range of US$927-960 an ounce.

Their exposure is massive. Investment in gold exchange traded funds (ETFs) has soared from around 15 million ounces in 2006 to more than 45 million ounces. Hedge funds and managed futures funds held 20 million ounces of net bull futures and options positions on Comex, the New York Exchange, on June 9, while the small speculators held 37 million ounces.

Excluding coins and gold bars held with London, Swiss and other bullion banks, the total investment and speculative holdings of gold amount to around 100 million ounces or around 90 per cent of annual supplies. And this excludes large gold holdings in commodity mutual funds, pension and sovereign wealth funds.

In the meantime, jewellery demand for precious metals and diamonds has slid during the recession. Indeed, high prices and tough economic conditions have encouraged people to either sell or pawn their jewellery. Production of recycled gold scrap has soared to such an extent that it matched mine output in the first quarter of this year, according to the WGC.

This illustrates the extent that the market has become dependent on investors and fickle speculators.

Over the very long term, how has gold performed during the past few hundred years? The Golden Constant was originally written by former University of California professor Roy Jastram and published in the mid-1970s and has been updated by Jill Leyland, an economic consultant of the World Gold Council. It covers gold prices and the cost of living from as far back as 1560 to 2007. The book shows that gold prices, in real inflation-adjusted terms, unsurprisingly tended to increase its purchasing power during inflationary times. Its purchasing power tended to sag during depressions and deflation.

There have been exceptions. Gold rose by 43 per cent in purchasing power in the first four years of the Great Depression between 1930 and 1933 and then shot up when president Franklin D Roosevelt devalued the US dollar and increased the gold price to US$35 an ounce.

From the end of World War II, when consumer prices stabilised and fell back slightly, gold's buying power dropped slightly. These were the times when the gold price was fixed at US$35 an ounce.

When gold, the US dollar, European currencies and the yen began to float freely from the 1970s onwards, gold's nominal and real value began to fluctuate with increasing volatility.

From 1970 to 1980 when global inflation surged and there was a precious metal boom, gold's purchasing power soared by a whopping 700 per cent in US dollars, an annual real compound rate of around 22 per cent!

But from 1980 to the end of 1999, gold's purchasing power shrank by 78 per cent, a truly ghastly period for miners and gold bugs, although there were brief rallies in the interim.

From 2001, when the nominal price bottomed at US$251 an ounce to the end of 2007, gold's buying power rose by 119 per cent, an annual compound rate of 12 per cent. From the end of 2007, when the book's statistics end, gold in nominal terms has mainly traded within a range of US$800-1000 with a peak of $1031 early 2008, so its real price has fluctuated in a 25 per cent range.

Since gold began to float in a free market it has generally been a good hedge against inflation and more recently a safe haven against banking collapse. But such has been the volatility in currency and precious metals markets that investment within the present historically high range has been a guessing game.

Japan has been the only recent test for gold's purchasing power during times of deflation. During the 1970s, gold's purchasing power soared in Yen terms. But a Japanese investor who bought gold in 1980 would have experienced purchasing power shrinkage of 84 per cent in the subsequent decades.

Despite a strong gold market in recent years, the Japanese investor's gold purchasing power would still be down by 55 per cent.

Granted, 1980 was a time when gold hit an all-time high of US$850 an ounce, but even if a Japanese investor had bought gold when the market was weak in the mid 1980s and 1990s, real prices remained depressed until 2006.

So if deflation is your call, stay away from gold - even if you buy it cheap.

China rally for stockpiling commodities to end

Business Times - 22 Jun 2009

It has been buying up raw materials while demand for its exports has slashed

(SHANGHAI) China has been driving up commodities prices by stockpiling to prepare for global recovery, but with inventories overflowing and no end to the crisis in sight, analysts say the rally may soon end.

China has been buying up crude oil, copper, coal and a host of other key raw materials even while the financial slump has slashed demand for the exports responsible for the Asian giant's once ravenous appetite.

Despite the sharp drop in shipments, Chinese raw materials buyers have tapped a surge in bank loans to capitalise on low commodity prices and low shipping fees, analysts said.

But the buying is likely to slow, they warned.

'China has been stockpiling commodities since the fourth quarter when prices became really cheap,' said Yang Yijun, a commodities analyst at Wellxin Consulting based in the southwestern city of Chengdu.

'But large scale buying is gradually coming to an end. China's reserves are almost at full capacity.'
Macquarie Bank warned in a research note last week that 'the key concern centres around the scale of Chinese buying'.

Over the past three months, as the volume of China's purchases increased, the Standard & Poor's GSCI, an index of global commodity prices, shot up 26.5 per cent.

However, overall prices remain lower than before the financial crisis struck. Even with those gains, the overall index is down 58.5 per cent from a year ago.

Crude oil prices have risen 39.6 per cent in the past three months while copper prices climbed 45 per cent, according to the GSCI.

China's State Reserve Bureau has been stockpiling, but so too have producers, distributors and other speculators hoping to profit from an expected rise in prices once the world economy starts to recover.

The China Iron and Steel Association began investigating surging imports after the amount of iron ore coming into the country jumped 33 per cent year-on-year in April, hitting a monthly record of 57 million tonnes, state media said.

Spot prices for iron ore for delivery into China hit their highest level in nearly four months in mid-June, touching 76.50 a tonne, including cost, freight and insurance, according to Dow Jones Newswires.

Beijing ordered banks to cut lending to steelmakers and iron ore importers, who it admonished for failing to 'correctly control the volume and pace of iron ore imports in line with the actual demand of domestic steel production', state media reported.

China, the world's biggest steel producer and consumer, imported 188.5 million tonnes of iron ore in the first four months of the year, up 22.9 per cent year-on-year, according to customs data.

'Because of the massive supply, some ships carrying iron ore are having to wait to offload at ports,' said Xu Minle, an analyst with Bank of China.

But iron ore was not the only hot commodity in April. Crude oil imports climbed nearly 14 per cent, aluminium oxide imports were up 16 per cent and copper was up 64.4 per cent, according to JP Morgan.

Coal imports soared 168 per cent as Chinese utilities increased foreign coal buying during negotiations with domestic producers for better prices.

However, Moody's has changed its outlook to negative for base metals, mining and steel industries in the Asia Pacific region over the next 12-18 months, saying buying has soared ahead of demand.

'China's strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals,' said Terry Fanous, Moody's chief Asia metals and mining analyst.

'But we will not see a sustainable turnaround in demand until the major economies of the US, Europe, and Japan recover,' Mr Fanous wrote in a note.

Copper, essential for home appliances and other staples in China's economic boom, was seen as being on the most solid footing, hitting an eight-month high of over US$2.45 a pound on the New York Mercantile Exchange on June 11.

But prices fell in the past week as traders feared China's stockpiling was tailing off.

'As China has been the main driver of the copper price recovery so far this year, a period of reduced buying activity may see prices take a bit of a pause,' Standard Bank analyst Leon Westgate wrote in a note.

Stockpiling is fraught with risk, especially when borrowed money is used to buy goods when there is no demand, independent Shanghai-based economist Andy Xie said.

'Last year people who stockpiled went out of business,' Mr Xie said. 'I know one distributor who stockpiled six million tonnes of steel and went bust when it dropped by more than half.' - AFP

'Stockpiling is fraught with risk, especially when borrowed money is used to buy goods when there is no demand.' - economist Andy Xie

Can China keep buying all those commodities?

Business Times - 12 Jun 2009

By KEITH BRADSHER

STRONG buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable. At least 90 large freighters full of iron ore are idling off Chinese ports and waiting up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminium, copper, nickel, tin, zinc, canola and soya beans. Starting in April, China began stockpiling significant quantities of crude oil.

China's goals vary by commodity. Chinese companies have bought iron ore heavily on the spot market in anticipation of higher prices in annual contract talks now nearing completion. The Chinese government has been stockpiling oil and some metals for strategic reasons, and bought huge quantities of aluminium and canola to insulate domestic producers of these goods from falling global prices over the winter. 'There has been enormous stockpiling of all commodities' by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings Ltd, a big shipping line based in Hong Kong.

Those extra purchases beyond China's daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound. Moody's Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.

'China's strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the US, Europe, and Japan recover,' said Terry Fanous, a senior vice- president in Sydney for Moody's, adding that the leading economies were not likely to recover until next year.

The Standard & Poor's GSCI, an index of global commodity prices, has risen 41 per cent from its low on Feb 18, but is still less than half its record, set on June 9 last year. One of the best leading indicators of international trade in commodities is the Baltic Exchange Dry Index, which measures the daily cost of chartering a large freighter. While the Standard & Poor's GSCI has continued to rise in the last week, the freight index has fallen by a fifth in that period.

Richard Elman, the chief executive of the Noble Group, Asia's largest diversified commodities trading company, bounced up from the conference table in his office in Hong Kong when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong's harbour, and quickly punched up on the left-hand screen a list of daily charter rates for large bulk carrier freighters.

The list showed ship owners charging US$58,000 a day now but just US$24,000 a day for charters next year or in 2011 - an indication that there will be more ships than cargo in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom. Pointing to the rates for the next two years, Mr Elman said: 'That's the real market' for ships.

Optimistic over China's economy

From an immense new sugar mill in Brazil to an extensive coking coal operation in Australia, Noble is active in commodities around the globe, and its stock has nearly quadrupled since its low on Oct 24. Mr Elman voiced optimism about the future of the Chinese economy and of worldwide demand for commodities, but cautioned that for some commodities, 'the futures prices have gone ahead' of the prices for physical delivery.

According to JPMorgan, China's iron ore imports were 33 per cent higher in April than a year earlier. Crude oil imports were up nearly 14 per cent, aluminium oxide imports climbed 16 per cent and refined copper imports jumped 148 per cent. Imports of coal soared 168 per cent as Chinese utilities bought more foreign coal while trying to negotiate better prices with domestic producers.

Determining the percentage of each commodity that is being stockpiled is difficult, especially in China, where scant data are released. Assessing steel demand, in particular, has become a subject of almost obsessive interest among many shipping executives and economists as a barometer of emerging markets' health and as an indicator of demand for everything from iron ore to ships to cars.

Sanjay Mehta, one of the four managing directors of Essar Global, the big Indian multinational in steel, shipping and other heavy industries, estimated that North American steel mills are operating at 50-60 per cent of capacity, Chinese steel mills at 70 per cent of capacity and Indian steel mills at 100 per cent of capacity.

The resilience of the Indian economy is helping to sustain demand for commodities, Mr Mehta said. But he was cautious about the global economy. He suggested that part of China's purchasing over the last several months represents an effort to rebuild inventories that were drawn down during the autumn and winter.

'It is not all related to consumption,' he said, predicting that prices would stay roughly at current levels through the middle of 2011. Prices of many commodities have jumped sharply in recent months - spot oil prices, in particular, have doubled since late December. That is driving up the price of petrol and diesel in many countries, including the United States.

Steel demand in China is already recovering for types of steel used in construction, Mr Elman said. Local, provincial and national government agencies are ramping up investments quickly as part of economic stimulus programmes. But demand has been slower to rebound for higher grades of steel used in consumer products, despite US$1 billion in Chinese government incentives for the purchase of cars and household appliances, particularly by residents of rural areas.

Some economists are bullish on commodities because they believe that the United States and European economies are on their way to recovery. 'The commodity price rally is for real,' said Ajay Kapur, the chief global strategist at Mirae Asset, a big Korean financial firm. 'I'm not expecting any huge correction from here.' Other executives, particularly in shipping, are less optimistic, and see signs of a bubble in freight rates and commodities that may repeat the sudden rise and fall of prices last year.

'The past two weeks have been nuts and, rather than cheering this sudden comeback of the dry bulk market, I do have a considerable amount of concern that we are seeing the same bubble again,' Kenneth Koo, the chairman and chief executive of the Tai Chong Cheang Steamship Company Ltd, another big Hong Kong shipping line, wrote in an e-mail message. 'And like that past bubble, it's not going to sustain.' - NYT

Commodities strike rich vein of form

Business Times - 03 Jun 2009

But some strategists believe energy and metals prices will correct as investors wake up to the reality of a slow-burn economy, reports GENEVIEVE CUA

AN UPTICK in risk appetite, against a backdrop of falling volatility, has buoyed many boats. Commodities, which suffered precipitous falls last year, are creeping into the limelight again as investors place their bets that the dreaded deflationary spiral has been averted through fiscal stimulus.

But while commodity indices have climbed - the CRB Index, for example, rose 14 per cent last month - the near term outlook isn't that clear. Some strategists believe energy and metals prices will correct as investors wake up to the reality of a slow-burn economy.

Based on Lipper data on commodity funds registered for sale here, the funds have returned over 9 per cent in the current year to May 22. In pole position in performance is Schroders Alternative Solutions Gold and Metals Fund, which gained nearly 23 per cent. Over a 12-month period, however, the average return is minus 36 per cent. Most of the funds in the category are actively managed funds trading in the futures market, or linked to a commodity index.

The gold equities sector, which invests in producers of precious metals, has also fared well with an average 25 per cent return in the year to May 22, led by a 34 per cent gain by DWS' Gold and Precious Metals fund.

Here's a bird's eye view of how various commodities have performed: Crude oil has rallied roughly 50 per cent this year to nearly US$67 a barrel. Copper has risen nearly 60 per cent, and gold has risen 20 per cent to US$976 per ounce since its January low.

In terms of fund flows, EPFR Global notes that commodity and energy sector funds attracted US$303 million and US$153 million respectively in the last week of May. Commodity funds in particular have been seeing inflows for about 12 straight weeks, raising roughly US$2.8 billion.
But among analysts, caution reigns even as those in the long-term bullish camp point to fundamental strains in supply.

Michael Lewis, Deutsche Bank global head of commodities research, believes the recent gains in energy and industrial metals will be hard to sustain. 'This reflects our view that US GDP growth will not turn positive until January 2010 and that Chinese GDP growth is set to slow sharply into the fourth quarter of the year.

'While US dollar weakness may provide further upside price risks, we believe the main risk is that the S&P500 will surrender recent advances as it pushes back the date the US moves out of recession.'

While more voices are raising inflationary concerns, he believes deflation remains the main threat over the next two to three years. 'We believe US wages growth is worth watching closely as their collapse would heighten deflation concerns.'

In the medium term, however, investors will do well to factor in an eventual rise in inflation. 'We believe this will add to the appeal of commodities as investors seek inflation protection.'

Barclays Capital says in its May commodity research report that energy has helped to power commodity indices into positive territory this year. 'However, we have doubts as to whether this signals a longer term return to positive performance for the simple long-only index strategies. In particular, both industrial metals and energy markets look vulnerable to a deterioration in sentiment towards risky assets over the coming weeks as positive correlations with equity markets have strengthened recently.'

Fundamentals, on the other hand, convince Matthew Michael, Schroders product manager (commodities and emerging market debt), that commodities are still in the bull channel.

'We believe we are in a commodity bull market and are about eight years into this long-term cycle. We deem the recent downward move in prices as a cyclical correction within a long-term bull market.'

In a May report, he says the expansionary policy by central banks and governments is likely to have a positive effect on commodities. 'It is our opinion that the supply of money will continue to increase until such time as banks begin to extend credit again. While there is no doubt that the global slowdown in growth is not supportive in the short term, the overall monetary bias has the potential to be extraordinarily inflationary.'

Meanwhile, production cuts are being made at a time when inventories in many markets are close to or at historic lows. Producers are hamstrung by the credit crunch and low prices.

On the equities side, Joanne Warner, First State lead portfolio manager of the global resources portfolios, says that the firm has tightened its scrutiny on stocks in its portfolio, as the credit crunch shows up chinks on companies' balance sheets and cash flow. The firm manages a total of roughly A$3 billion (S$3.5 billion) in global resources funds.

'Some companies are flexible and able to adapt to prices, particularly those with the highest quality assets. They have the greatest ability to withstand a protracted downturn. Finding companies that represent good value is not that hard. The challenge is to find companies that are really robust, that if things get worse they live to fight another day and will be there when the cycle recovers.'

In terms of valuations, she says that stocks have seen sharp short-term gains. 'We'd need to see more consistent good news to justify that and warrant further rises.'

Advisers now routinely include an exposure to commodities in clients' portfolios, sometimes through emerging markets equities. If you are mulling an exposure, it is best to invest in the context of a diversified portfolio.

Crude hits 7-month high on China industrial growth

Business Times - 02 Jun 2009

Oil climbs after US dollar falls to its lowest against euro since December

(LONDON) Crude oil rose to the highest since November as China's manufacturing expanded for a third month, signalling that fuel demand in the world's second-biggest energy consumer may increase.

Oil climbed as much as 1.8 per cent after the US dollar fell to its lowest against the euro since December, heightening the need for commodities to hedge against inflation. China increased prices of gasoline and diesel by as much as 8 per cent, a move that may prompt refiners to boost crude purchases.

'Recovery optimism is on a roll with green shoots erupting everywhere,' said David Hufton, managing director of PVM Oil Associates Ltd in London. The 'stock overhang and the prospects of permanent damage and change to oil demand elasticity are being swamped by the macro factors.'

Crude oil for July delivery rose as much as US$1.98, or 3 per cent, to US$68.29 a barrel on the New York Mercantile Exchange. That's the highest since Nov 10. The contract traded at US$67.85 at 12.32 pm London time.

Crude had its biggest monthly gain in a decade in May, surging 30 per cent, after Opec left output unchanged on signs the global economy is recovering and fuel demand will increase.

'All the attention is on the weaker dollar and macroeconomic sentiment,' said Christopher Bellew, senior broker at Bache Commodities Ltd in London. 'The market has advanced a long way on flimsy fundamentals and may pause for breath or see a setback now.'

Manufacturers preparing for an economic rebound are rebuilding inventories of everything from benzene to plywood, sparking a commodities rally that Goldman Sachs Group Inc says will produce 19 per cent returns in a year.

Oil climbed last week as the dollar fell beyond US$1.41 against the euro for the first time this year, making raw materials such as oil and gold attractive alternative investments.

China is raising prices for the second time this year, allowing the nation's refiners to pass on climbing crude oil costs. China Petroleum & Chemical Corp, the nation's biggest refiner, said on May 22 it will lose money turning oil into fuels should crude trade above US$60 a barrel and the government prevent it from increasing prices.

'Energy has overshot the current bottoming phase, because we all know that demand is not turning around in the spot market, which is where consumption commodities are priced,' Stephen Schork of the Pennsylvania-based Schork Group Inc said in a report yesterday.

The dollar last traded at US$1.423 per euro, having weakened 6.3 per cent in May, the biggest drop since December's 9.2 per cent decline.

Saudi Arabian Oil Minister Ali al-Naimi said last week that the Organization of Petroleum Exporting Countries opted not to alter its output targets because 'prices are good, the market is in good shape.'

Hedge-fund managers and other large speculators increased their net-long position in New York crude- oil futures in the week ended May 26, according to US Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 40,122 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report on May 29. Net-long positions gained by 4,885 contracts, or 14 per cent, from a week earlier.

Brent crude for July settlement rose as much as US$2.17, or 3.3 per cent, to US$67.69 a barrel on London's ICE Futures Europe exchange, and traded at US$67.20 a barrel at midday in London.

The fastest rise in 24 years

Business Times - 02 Jun 2009

Surge driven by manufacturers rebuilding inventories across the board to prepare for an economic rebound

(NEW YORK)

MANUFACTURERS preparing for an economic rebound are rebuilding inventories of everything from benzene to plywood, sparking a commodities rally that Goldman Sachs Group says will produce 19 per cent returns in a year.

The Journal of Commerce index that tracks prices of 18 industrial materials gained 9.5 per cent in May, the most in a month since the measure began in 1985. Goldman's forecast last month would beat the firm's estimate for a 4 per cent rise in the Standard & Poor's 500 Index this year.
Aurubis, the top manufacturer of copper-wire rods for cars, said last week that demand improved since April. Huntsman Corp, the biggest maker of epoxy adhesives, said last month that second-quarter results will benefit from improved sales to customers who have depleted stockpiles. Dow Chemical, the largest US chemical maker, said its plants operated at 70 per cent of capacity in April, up from 45 per cent in December.

'The distribution chain will generate this giant sucking sound of demand,' according to Alcoa chief executive officer Klaus Kleinfeld. The largest US aluminium producer said metal distributors have 'seen some green shoots' in orders and are concerned they won't be able to satisfy clients as the economy recovers because inventories are near zero.

While the US contracted 6.3 per cent in the fourth quarter and probably will shrink 2.8 per cent this year, according to 61 economists surveyed, commodity prices show that investors and corporate purchasing agents anticipate a rebound will begin later this year.

The Journal of Commerce Industrial Price Commodity Smoothed Price index improved to an annual rate of minus 26.82 last week, compared with a record of minus 69.9 in December. While the gauge of materials from tallow to steel indicates demand is contracting, the narrowing gap suggests manufacturing is bottoming.

Among exchange-traded commodities, copper rallied 57 per cent this year to US$4,830 a tonne as London Metal Exchange stockpiles dropped 42 per cent since February to a five-month low of 312,275 tonnes. Crude oil surged 49 per cent this year to US$66.31 a barrel on May 29 after a weekly drop in US inventories that was the biggest in eight months. Cotton is up 16 per cent.

'When you see copper and commodities doing well, then it's a sign that there are meaningful parts of the global economy that are stronger,' said Evan Smith, co-manager of the US Global Investors Global Resources Fund in San Antonio that's up 37 per cent this year. 'We like the outlook for commodities right now.'

Prices are showing signs of a rebound less than a year after the Reuters/Jefferies CRB Index of 19 commodities began its plunge from a July 3 record, dropping as much as 58 per cent by Feb 24 as the global economy entered its first recession since the Great Depression.

A freeze in credit markets that started with the collapse of the US property market in 2007 halted world growth and the world's biggest financial institutions reported more than US$1.48 trillion of writedowns and credit losses. The contraction prompted central banks and governments to cut interest rates close to zero and pledge more than US$13 trillion for stimulus programmes and rescue measures.

Signs of recovery are appearing. The CRB index, after dropping on Feb 24 to the lowest level since June 2002, reached 253.05 on May 29, marking a 14 per cent gain for the month, the biggest rally in 34 years. The dollar slumped last week to a five-month low against a basket of six major currencies, bolstering demand for energy, metals and crops as a hedge against inflation.

'The global industrial engine is restarting and that will mean these industrial commodity prices will continue to rise,' said Lakshman Achuthan, the New York economist who predicted in November that the world was headed for its worst recession since at least 1981. 'There are very clear signs that demand for commodities is improving.' The rally boosted mining and metals companies. Phoenix- based Freeport-McMoRan Copper & Gold Inc rose 28 per cent in New York trading in May, the sixth straight monthly gain and the most in more than eight years. Pittsburgh-based US Steel Corp also gained 28 per cent and reached a three-month high.

A sustainable recovery would be a surprise to analysts at Charlotte-based Bank of America. In a May 15 report, the bank dismissed proponents of an economic rebound as 'overly optimistic' and said the 'protracted credit cycle' may last through 2016.

The US economy has lost 5.7 million jobs since the recession began in December 2007, and the jobless rate rose to 8.9 per cent in April, the highest since September 1983. Unemployment probably rose to 9.1 per cent in May, according to the median estimate of 60 economists in a Bloomberg News survey ahead of the Labor Department's June 5 report.

Mortgage delinquencies and foreclosures climbed to records in the first quarter, and US builders broke ground on the fewest homes on record in April.

The slumping auto and housing industries will weigh on US growth and limit consumption of raw materials, said Stuart Flerlage, who helps manage more than US$600 million at NuWave Investment Corp in New York. 'We don't really buy into the theory that the recovery is coming, because a lot of parts of the economy are still weak,' Mr Flerlage said.

Even a sluggish recovery may help commodities because manufacturers have drawn down inventories.

US inventories of durable goods, from plastics and fuel to airplanes and tractors, dropped for four straight months through April, the Commerce Department said on May 28. Stockpiles of iron, aluminium and steel slid for seven straight months and are down 14.2 per cent from April 2008, the department said. Supplies of fabricated products such as kitchen utensils, cans and plumbing fixtures fell 5.9 per cent.

Stores of gasoline have fallen for five straight weeks to 203.4 million barrels, according to the Energy Department, a sign that consumers are using more fuel. The Organization of Petroleum Exporting Countries decided last week to keep production quotas unchanged, 'seeing a light at the end of the tunnel' for demand, secretary general Abdalla El-Badri said on May 28. Ali al-Naimi, the Oil Minister for Saudi Arabia, said last week energy demand is improving and predicted crude will reach US$75 this year.

Jeffrey Currie, Goldman's London-based head of commodities research, said in the May 8 report that a jump in agriculture and energy prices will help the Standard & Poor's GSCI Enhanced Commodity Index return 19.1 per cent over the next year. The measure jumped 16.8 per cent last month.

Equities won't do as well, according to David Kostin, Goldman's chief US stock strategist. In a Feb 26 report, he predicted the S&P 500 will advance to 940 this year, down from his earlier forecast of 1,100. The index closed at 903.25 on Dec 31 and 919.14 on May 29. A Goldman spokeswoman said on May 29 that Mr Kostin hasn't updated his forecast since February.

Mr Currie said copper, zinc and soybeans will have the biggest gains in coming months because they're tied to rising demand in China. Energy prices, hurt by slowing economies in Europe and the US, will get a boost once growth resumes, he said.

Commodity shipping rates are rallying, suggesting world trade is starting to pick up. The Baltic Dry Index, the measure of costs to move bulk goods, jumped to an eight-month high on May 29 after falling 94 per cent in the second half of 2008, as China increased purchases of iron ore. Imports of the steelmaking ingredient surged 33 per cent in April, setting a record for a third month. China is the world's biggest steelmaker.

Demand is also poised to gain in India as the government increases investments in ports, roads and bridges, Steel Secretary Pramod Rastogi said on May 18. Steel Authority of India Ltd, the nation's biggest state-run maker, said sales would increase 5 per cent in May as demand rose.

'What is unshakeable is our belief that China and India and other emerging economies will be the key engines of any return to world growth and commodity demand growth,' said Sam Walsh, an executive at London-based Rio Tinto, the world's third-largest mining company.

China is spending 4 trillion yuan (S$840 billion) to revive what has been the world's fastest-growing major economy. The expansion will accelerate to 8.3 in the third quarter and 8.9 per cent in the fourth, according to the median estimates of eight economists surveyed by Bloomberg.

The nation is also buying commodities in part to shift its sovereign wealth amid concern that the value of dollar assets may decline, the Royal Bank of Canada has said. Oil imports and stockpiling may be the reason oil rose above US$60, according to Sanford C Bernstein & Co.

'The whole industry rebounded in the first half of this year because demand for automobiles in China remained strong despite the economic slowdown elsewhere,' said Zhu Yijun, an auto industry researcher at the state-backed Shanghai Information Center. 'Many consumers in China are only starting to buy vehicles for the first time. So the outlook remains more bullish for the Chinese market than in other countries.'

Deere & Co, the world's largest maker of farm equipment, reported second-quarter profit that topped analysts' estimates as sales of machines remained 'strong.' Caterpillar chief executive Jim Owens said in May the residential real estate market is 'finding a bottom' and the 'recovery potential in this sector is very significant.'

Investors have begun putting money back into raw materials. Hedge funds are making the biggest bet in 10 months that prices of US commodity futures will rise. Commodity mutual funds received US$303 million in new money the week ended May 27, according to EPFR Global. Raw-materials funds have attracted US$5.2 billion this year, lifting total assets under management to US$34.3 billion, the group said. Energy funds have lured US$1.4 billion, increasing total assets to US$20.3 billion.

US Global's Mr Smith said the fund has expanded its holdings of mining and energy stocks during the past few months on expectations rising demand may push oil to US$75 by October. Copper in New York may jump 12 per cent in the next 90 days to US$2.40 a pound, said Michael K Smith, the president of T&K Futures & Options. 'A lot of money is coming back into the commodity markets now on the view that things are going to turn around economically and on the idea that inflation will become a threat again,' he said.

Pensions put commodities on back burner

Business Times - 02 Jun 2009

Inflation, low prices keep them from raising exposure

(NEW YORK) Pension funds that helped fuel the commodities bull run for years with outsized allocations have done little during this year's rally as subdued inflation made a less compelling case for them to raise their exposure.

Pensions like Calpers, America's largest retirement plan, poured hundreds of millions of dollars into funds tracking commodity index futures and other derivatives in recent years as they diversified their investments from stocks and bonds.

Such money helped oil soar to a record high of nearly US$150 a barrel last year from below US$20 in 2002, sent gold to above US$1,000 an ounce from around US$300, vaulted copper past US$4 a pound from 80 cents and rallied soya beans beyond US$16 a bushel from under US$6.

But since the meltdown of world markets in September, pensions and other institutional investors such as endowments and mutual funds have virtually put commodities on the back burner.

Analysts said these conservative fund managers did not feel the pressure to buy more commodities as a hedge as the global recession had knocked prices of most raw materials down more than 50 per cent from their highs and wiped out any immediate risk of inflation.

Even with energy, metals and grain prices rebounding lately, these investors have not been convinced that they should raise their weightings in commodities before the markets rose any further.

'If you look to see where the activity in commodities is coming from now, my guess is that it's more from the short-term traders and hedge funds and tactical asset allocation strategies than endowments and pension plans that are watching inflation closely,' said Al Pierce, director at SEI Investment Manager Services in Oaks, Pennsylvania.

Oil's Slippery Slope

BT, 11 Dec 2008

R/J CRB Commodity Index

• Index was established in 1957, and comprises 19 components.
• Energy makes up 39%.
• Metals make up 20%.
• Agriculture makes up 41%.
• Further breakdown of the components are given below.
• Reviewed 10 times in the past, last one in 2005.
• You can invest directly in this commodity index by purchasing units of Lyxor ETF Commodities CRB, which is traded on the SGX.

GROUP 1 (33%)

• Crude Oil (23%).
• Heating Oil (5%).
• Unleaded gas (5%).

GROUP 2 (42%)

• 7 commodities, 6% weightage each.
• Gold, Natural Gas, Corn, Soya beans, live cattle, Aluminium & Copper.

GROUP 3 (20%)

• 4 liquid commodities, 5% weightage each.
• Sugar, Cotton. Cocoa & Coffee.

GROUP 4 (5%)

• 5 commodities, 1% weightage each.
• Nickel, Wheat, Lean Hogs, Orange Juice & Silver.

Boomtime for commodities

Business Times - 04 Mar 2006

OVERVIEW

COMMODITY markets are bullish - and have been for at least five years. Are we near the end of the upward cycle, or is it just beginning? This week we bring together some of the best brains in the business to answer those questions and to tell investors where they should be putting their money if they want to profit from the commodities boom.

PARTICIPANTS

in the roundtable

Moderator: Anthony Rowley, BT Tokyo Correspondent

Panelists:

• James ('Jim') Rogers, head of his own commodity investment firm, Rogers Holdings, and a global expert on commodities. He is a former co-investor with George Soros
• Marc Faber, investment adviser and publisher of the 'Gloom, Boom and Doom Report'
• William Thomson, chairman of Private Capital Ltd, Hong Kong and senior adviser to Franklin Templeton Institutional Hong Kong and Axiom Opportunities Fund, London

Anthony Rowley: We're pleased and privileged to have world-renowned commodities expert Jim Rogers joining us today - along with two old friends and savants of the investment world, Marc Faber and William Thomson. A warm welcome to you all.

Jim, I know you have insisted that your two-year-old daughter, Happy, should become bilingual in English and Mandarin, because you believe Chinese is the language of the future - and also that you have already put her into commodities. Is that because you think commodities are the investment of the future?

Jim Rogers: I just wrote a whole book on the subject. Historically, every 25 or 30 years we've had a long multi-year bull market (in commodities) followed by a long multi-year bear market. In my view, we're now in a new bull market. If history is any guide, this bull market will last until sometime between 2014 and 2022. That is not a prediction - just a reflection of past historical cycles. Essentially (what is driving it) is the imbalance of supply and demand similar to imbalances that have recurred regularly for centuries.

Throughout history, there have been bull markets in raw materials every 20 to 30 years. Supply and demand regularly get out of balance, leading to recurring periods of rising (and declining) prices. Virtually no one has built an offshore drilling rig, or opened a lead mine, or developed a sugar plantation during this period. Quite the opposite; productive equipment has deteriorated, been cannibalised, or scrapped while other capacity has closed.

Raw materials should always be represented in any diversified portfolio. Stocks, bonds, cash and real estate do not provide sufficient representation of the world's economy, nor sufficient non-correlation to each other.

Anthony: Let's talk about the background to the current bull market in commodity prices, and where we see it going from here. Marc, what's your view?

Marc Faber: Commodities were in a more than 20-year bear market between 1980 and 2001. Since then, industrial commodity prices especially have risen sharply as the incremental demand from China shifted the demand curve to the right. However, inflation adjusted commodity prices are still very depressed. This would especially apply to the agricultural commodities.

Usually, commodity cycles, also known as Kondratieff cycles, last 45 to 60 years from peak to peak. Since the last peak was in 1980, I would expect this cycle, which began in 2001, to last until between 2025 and 2040.

William Thomson: Each decade seems to have an overwhelming investment theme. The Eighties were all about Japan and in the Nineties it was high-tech. I expect the 'Noughties' to be the decade for commodities. After a 20-year bear market from 1980 to 2000, commodities should enjoy a recovery period that should last at least 10 years and could extend to 20 years.

It is powered by the totally mind-blowing growth in demand that is coming from the world's emerging economies led by India and China. The industrialisation of these two population giants is leading to the greatest shift in global economic power since the industrialisation of first, Great Britain 200 years ago, followed by the United States 100 years ago.

To put this in perspective, in 1820 Asia represented about 40 per cent of world GDP. By 1950 it had fallen to 18 per cent and has since recovered to over 30 per cent. The Asian Development Bank and Harvard estimate that Asia's share of world GDP should be over 40 per cent again by 2020.

So, in fact, Asia is just in the process of reestablishing its historic place in the world economy. This is the vital underpinning to the commodity demand bull story. Supply inevitably lags in its response to these increased demands in the early years.

Anthony: Which commodities do you feel hold out the best promise for further price gains - and why?

Jim: I would be doing research in the agricultural area as this is where there may be new opportunities. Many of them (agricultural commodities) are still far, far below their all-time highs while the fundamentals are changing for the better.

William: My knowledge is of the energy and minerals markets and, as noted, I believe there is plenty of opportunity there in the coming years. The soft commodities have lagged but I suspect they will now play catch up. After all, there has been the same lack of investment in these assets for many years while demand grows in the emerging economies.

Institutional funds will also increasingly try to access these commodity markets as they seek to diversify away from overpriced equity and fixed income markets.

Marc: Grains are the most inexpensive commodities. They are at a 200-year low against oil. I also think that gold and silver are still very inexpensive, when compared to the US dollar and to the Dow Jones Industrial Average.

Anthony: Talking of that, Marc, how much further do you think gold, platinum and silver prices have to go in this cycle?

Marc: In your lifetime, I believe investors will be able to buy one Dow Jones Industrial Average with less than five ounces of gold. So, depending on how much money the US will print, gold will either outperform equities on the upside or decline less than equities in a bear market. My target is for gold prices to rise to between US$5,000 and US$10,000 in the next 10 years.
Anthony: Are you equally bullish on these metals, Jim?

Jim: In bull markets, nearly everything eventually goes to a new all-time high and usually multiples above the old all-time highs. Gold and silver should too. Platinum is already there, but if you adjust its old highs for inflation, it too might have further to go over the course of this long bull market. Ask me again in 2018.

William: Much depends on how the growing geopolitical dangers develop in the coming years. However, even without significant global disruptions, I have stated before that US$1,000 an ounce gold should be attainable and, if we have major problems with war or inflation, then US$2,000 to US$3,000 can be envisaged since it would only be the equivalent of US$860, the high in 1980, in today's money.

Along the same lines US$20 to US$30 silver and US$100 to US$150 oil seems possible over the next half decade. It could even be worse if we fall into a situation where nuclear weapons are being used.

Anthony: All well and good, but commodity markets have been rather volatile lately, which may scare off some investors. What's behind this?

Jim: Nothing goes in one direction all the time. There are always corrections and consolidations in every bull and bear market in every asset class - especially in the long secular markets on which I try to focus. For example, in the long stock bull market from 1982 to the end of the 1990s, shares went down 40 per cent in 1987 and had other serious setbacks in 1989, 1990, 1994, 1997, 1998, etc, yet the secular trend was up. Things that shoot straight up for a while are especially prone to consolidations and need them to ensure the bull move lasts a long time.

William: Bull markets tend to run in phases moving from complete indifference or even revulsion to the class, as happened with commodities at the end of their 20-year bear markets around 2000, through disbelief as prices crawl off the floor amid early professional accumulation, and then a gradual recognition that circumstances have changed.

This, in turn, generates further speculative interest and flows both in the financial markets and real investment. Finally, the public is convinced that we are in a new perpetual bull market and a new way for everyman to secure his financial future is upon us as happened at the end of the dotcom, high-tech boom in the late 1990s as the last commodity bear market was finishing.

We have had two years of strong commodity markets, especially energy and minerals, on the back of surging demand from emerging economies and a recovery in the US with little or no increase in supply. The growing enthusiasm for the class has generated an over-bought situation short term and the need for a normal consolidation of prior price gains in the face of a maturing economic recovery in the US where the Fed has been increasing interest rates for over 18 months.

This is perfectly normal as the market digests the gains and attempts to assess supply and demand balances going forward. Geopolitical considerations will play an important role in this process as countries such as India and China attempt to assure future access to oil and other commodities in a less stable world where the US seems increasingly willing to pay any price to try and assert its hegemony over the Islamic world.

Once this period of digestion is over, then I expect prices to move up again. This could happen any time if the conflict between the US and Iran escalates in the coming weeks and months, as I fear it will.

Marc: As in other asset markets, approximately 20 per cent of the price gains can be attributed to speculative demand and not end-user demand. Speculators began to take some profits and, therefore, prices of aluminium, zinc and lead have come off by respectively 13 per cent, 15 per cent and 19 per cent from their highs. In addition, it is likely that industrial commodity prices underwent some kind of short squeeze recently - this especially for copper.

Anthony: How can individual or 'retail' investors best access these markets?
Jim: Academics, consultants, and banks have confirmed repeatedly that index investing outperforms active investing 80 per cent of the time year after year so stick with a good index. If you find a great active manager, give him your money and introduce him to me too. The chances we will find that manager early are very slim. If an investor knows a great deal about a commodity or commodities, he can invest himself after he has done a lot of homework.

Anthony: You have developed your own commodities index, the Rogers International Commodity Index. This is not an investment fund as such but it does provide investors with a way of gaining diversified exposure to the markets. Can you tell us a little more about it?

Jim: The Rogers International Commodities Index (RICI) was designed to meet the need for consistent investing in a broad-based international vehicle. Thirty-five commodities are represented in the RICI. This gives it breadth just as the S&P 500 is broader than the Dow Jones Industrials. International commodities are represented, whereas most other indices are regional or US-oriented. For example, other indices exclude rice, the staple food of a large percentage of the world. All commodities in the RICI are publicly traded on recognised exchanges to ensure ease of tracking and verification.

Anthony: Marc and Bill, how do you recommend accessing commodity markets?

Marc: For the individual investor, the easiest is to buy precious metals including gold, silver and platinum. There are certificates on other commodities but the costs associated with these certificates are fairly high. All commodities can be bought in the futures market and individuals could also buy shares of companies involved in oil, gold, uranium and plantations.

William: The investor's knowledge base will affect his chosen instruments. Some will want to invest directly in the producers such as the oil and mining majors, for instance, Exxon and BHP Billiton; some the juniors and the explorers while others will prefer to go through mutual funds and investment trusts. The more speculative might even try to invest directly in commodity futures - not that I am recommending they try it.

These are the traditional investment instruments. However, today we are fortunate in having others, especially exchange traded funds (ETFs), hedge funds and funds of hedge funds. Dozens of ETFs are available in the US and elsewhere. The number is expanding all the time. Some that are of interest just track the gold price and, shortly, silver. Another is the Goldman Sachs commodity index and yet another an index of the oil majors. They are an efficient, low cost way to invest on a trend.

Hedge funds and funds of hedge funds promise diversification and reduced volatility since they can go short as well as long and can invest over a variety of strategies, for instance, commodity trade finance, that are not available to the individual investor but promise steady above average returns. For some investors they will represent an important opportunity within a diversified portfolio.

Anthony: Any other comments, gentlemen, on investment in commodities?

Jim: The same as for every investment. Do nothing unless and until you have done a lot of homework. I might add that Singapore should be developing commodity markets of its own. I hope it will.

William: As with all investment themes I see commodities eventually going to excess levels, driven by speculative institutional funds. I also expect it to be a much more volatile ride than it has been to date.

Marc: International tensions are rising and nothing drives commodities as strongly upward as a war.

Anthony: And on that rather sobering note, we must end. Thank you all again for coming - and may your pickings be rich!

KEY POINTS

• This is 'the decade of commodities', suggests one of our experts while another suggests that the bull market could run for another 15 years, or even longer due to a multitude of factors.
• Investor favourites such as gold and silver still have a long way to go, in the consensus view among our experts - but the shrewd investor will also want to look closely at agricultural commodities (such as grains and others).
• Do not be scared off by commodity market volatility - 'nothing goes up in a straight line', as one market veteran suggests. But be wary of entering the commodity markets (as with any other investment arena) without doing your homework, he advises.
• The potential rewards of investing in commodities, even at this stage of the cycle, are great - but so are the risks for the unwary.

Gold to outperform oil as recession brews

7 Nov 2008, NEW YORK (Reuters)

The price of gold has not fallen as sharply as the price of crude oil and other cyclical commodities during the global financial crisis, and bullion should strengthen relative to other commodities as economic troubles deepen.

Gold bullion has dropped 16 percent since October after a recent wave of fund deleveraging. But its oil purchasing power, a key gauge of economic strength, is at its highest in nearly two years and is holding up relative to equities and other asset classes.

The precious metal's unique monetary functions as an inflation hedge and safe haven have not been tainted, fund managers said.

"Right now you would rather be long gold than short oil because you are still heading into a direction where gold will continue to buy more of everything," said Greg Orrell of California-based OCM Gold Fund.

Orrell said a key difference between gold and oil is that oil is produced for consumption and will deplete one day, but gold accumulates over time.

"For a commodity such as oil, you are getting a reflection of the global slowdown, and that's why it is going down on a relative basis versus gold," Orrell said.

An ounce of gold on Friday bought 12 barrels of oil, its strongest since January 2007. When oil peaked at a record near $150 per barrel in July, the gold-to-oil ratio was 6.6. Gold's weakest point relative to oil was in 2005 at just over 6, and its long-term average was about 15.

Historically, gold tends to rise in tandem with oil. Investors use the metal as a hedge against inflation because bullion's intrinsic value is not tied to any paper assets.

Gold also has risen against major industrial commodities such as copper and nickel.

In October, Deutsche Bank said the gold-to-nickel ratio, a key indicator of economic performance, could fall into single digits in the case of a deep recession as deep as that of the early 1980s.

BUY GOLD, SELL OIL

Gold's rise against oil in the second half of this year was a result of "recession trade" by investors, said Caesar Bryan, portfolio manager of GAMCO Gold Fund in New York, who manages $250 million assets.

"As the economy slows and central banks ease, you would expect gold to rally relative to the oil. We are coming off a huge 'buy gold sell oil' signal in the summer -- it was way out of whack," Bryan said.

Data released on Friday showed U.S. employers cut payrolls by a worse-than-expected 240,000 in October. So far this year, 1.2 million U.S. jobs have been lost, bringing the unemployment rate to 6.5 percent, its highest level since 1994.

Year to date, gold was down 12 percent, while crude oil dropped 36 percent and has lost more than 50 percent since it hit a record $147.27 per barrel, and the MSCI All Country World Index index .MIWD00000PUS, which tracks the performance of the global equities market, dropped 43 percent.

"We are still in a flight to liquidity rather than a flight to safety," Orrell said.

Other fund managers expressed optimism about gold as global central banks fight a deepening economic downturn.

Brian Hicks, co-manager of the Global Resources Fund PSPFX.O at Texas-based U.S. Global Investors, which oversees $2 billion assets, said the extra money flow related to the stimulus packages could spur inflation and weaken the dollar, which would be bullish for gold.

"At some point you have to wonder how that is going to impact price levels. I think gold will return as a safe haven as we come out of this short-term deleveraging process," Hicks said.

"As we move away from the peak of this financial crisis, we will start to see gold outperform relative to oil," he said.

James Steel, chief commodity analyst at HSBC, said bullion could still rise further but not because of rising price levels.

"We are clearly not in a period of inflation, but that doesn't mean that gold won't trade higher. It's a risky world and there is still a high degree of uncertainty in general as far as paper assets go," Steel said.

Oil & Gold Ratio

Eric Hommelberg, 5 Dec 2004.

This is chapter VII of the Gold Drivers 2005 report. It discusses the historical Gold/Oil ratio which suggest a price of Gold exceeding $700 nowadays and shines a light a light on previous oil shocks and their consequences. Furthermore it discusses PEAK-OIL and why it is about to bring a nasty Oil shock coming years.

As we will see, previous oil shocks were a perfect call for higher inflation figures and recession. Will this time be any different ? According to Alan Greenspan yes, he says that higher oil prices won't be much of a problem for the economy these days and inflation won't pop up as during the seventies. Well, energy experts such as Mathew Simmons and Colin Campbell do think otherwise. They make a powerful case for the end of cheap energy. The nasty consequence of a lack of cheap energy is the end of economic growth. Will we ever come out of a recession again for a sustained period of time ? Well, Richard Heinberg author of "The Party is over - Oil, War and the Fate of Industrial Societies" doesn't think so. Matthew Simmons (energy advisor for Dick Cheney) just uses different words, he says :

" there is not one serious economist in this world who would say that you can have significant economic growth without the availability of cheap energy." END.

Simmons rules out the possibility of cheap energy coming decades. When asked if there is a solution to the impending energy crisis he said :

"I don't think there is one. The solution is to pray. Under the best of circumstances, if all prayers are answered there will be no crisis for maybe two years. After that it's a certainty." END. We'll have to get used to oil prices far exceeding the $100/barrel mark. This leads us to the Gold/Oil ratio which is at an historic low these days. Such imbalances won't stay there for a long period of time so what gives ? Oil going down or Gold catching up ?

Let's focus on the following issues :

• Previous Oil shocks and their consequences
• Gold as a financial protection against coming Oil shock
• PEAK-OIL and the end of cheap energy

Previous Oil shocks and their consequences.

Stephen Leeb (president of Leeb Capital Management and editor of the prestigious newsletter 'The Complete Investor') wrote an excellent book this spring called ' The Oil Factor - Protect Yourself (AND PROFIT) from the coming Energy Crisis'. In this book he explains how to use the Oil indicator in order to predict upcoming stock bear markets and economic recessions.

In an interview with Jim Puplava on the Financial Sense Newshour Stephen Leeb says :

It's so easy, nothing has been a more reliable indicator for an upcoming recession as the price of Oil. Every major bear market, every major economic decline has been preceded by a large spike in oil prices. The 73-74 recession, recession of beginning 80's and the recession of 2000. Oil prices jumped 80% between 1999 and 2000. Oil prices have been the most important indicator of major economic disasters. Whenever Oil prices rises about 80% from year ago levels, a fair chance does exists that a recession/bear market will follow. END.

So any sudden increase in the price of Oil should be something to fear or at least pay serious attention to it. Furthermore Stephen Leeb warns for the rapid rise in the price of Oil in the face of a less rapid growing demand. He says :

When you are facing rising commodity prices in the face of a declining or less rapid growing demand, it tells you something. It tells you that you can't count on the supply being there when needed. It tells you that the world has changed. END.

It tells you that the world has changed. Stephen Leeb sounds serious, maybe even a bit alarming. What consequences Stephen Leeb expects from rapid rising Oil prices ?
Stephen Leeb says :
Sharply rising energy prices, similar the the 70's, will lead to double digit inflation figures over the next 10 years. It's going to turn the economy on its head.END.

But wait, the FED can fight inflation by engineering a recession (rapid increase of interest rates) as former FED chief Paul Volcker did in the early 80's right ?

Stephen Leeb says :

Today, we cannot engineer a recession. In 1980 when Paul Volcker took over the head of the FED, he was able to say : Well, inflation is at 12%, I don't care what it takes, I'm getting Inflation down and he was willing to engineer a big recession.

Today because of all that debt, that's not a policy alternative. Sure , the FED will raise interest rates a little bit here and there but not in such a dramatic way to create a recession. In the face of the giant total US debt, a recession would be a catastrophe. END.

Stephen Leep's Oil indicator has worked remarkably well over the last 30 years. If this Oil indicator is going to perform as well in the future as it did before than investors should be on high alert for possible nasty future economic events and be prepared to take appropriate measures in order to protect themselves financially.

Gold as a financial protection against coming Oil shock

So why to buy Gold when Oil prices are rising rapidly ?

The reason for this is two-fold :

• Gold as an Inflation Hedge
• Gold/Oil ratio says Gold is a screaming Buy.

Gold as an Inflation Hedge

Gold is being considered as the ultimate Inflation Hedge. The most obvious example is of course the 70's whereby Gold really took off when inflation kicked in. In 1977 when inflation began to pick up steam it reached 9% by 1978. Gold followed by breaking its previous high of $200. When Inflation hit 10% in 1979, Gold really took off skyrocketing to $500. Excitement kicked in and a Gold rush mania launched the yellow metal to its all time high of $850 in 1980. In times of Inflation you are losing money by holding paper money. A flight from paper money into real money (Gold) is just a logical result.

The Gold/Oil ratio

The Gold/Oil ratio says Gold is a screaming Buy.

Over the last 30 years Gold has been trading at an average of 16-17 barrels of Oil per ounce of Gold. At the moment Gold is dirt cheap compared to Oil and trades for about 9 barrels of Oil for an ounce of Gold. Such extremes won't last for a long period of time so what gives, lower Oil prices down the road or Gold catching up ?

According to Matthew Simmons we shouldn't count on cheap Oil anymore coming decades. Let's repeat once more what he said when asked if there is a solution to the impending energy crisis he said :

"I don't think there is one. The solution is to pray. Under the best of circumstances, if all prayers are answered there will be no crisis for maybe two years. After that it's a certainty." END.
So with these kind of statements in mind, would you bet on lower Oil prices or higher Gold prices ? (see chart below)

OK, fine you'll say, higher Oil prices should make a case for Gold indeed but how serious are those people screaming about the end of cheap Oil ? Should we take their claims seriously ? Why hasn't the mainstream media hardly picked upon it ? Why didn't we hear anything about it during the presidential debates ? I've heard that at least for the next 30 years there should be plenty of Oil, what about that ? Well, many questions which deserves serious attention.

PEAK-OIL and the End of Cheap Energy

Alarmist preaching a peak in oil production within a few years are referring to studies by Shell geophysicist Dr. Marion King Hubbert. Hubbert predicted already in 1956 that US domestic Oil production would peak around 1970. Unfortunately Hubbert wasn't taken seriously at all. But what happened ? US Oil production indeed peaked in 1970 as predicted by Hubbert but still it took many years before geologists were willing to admit that Hubbert was right and that US Oil production indeed had peeked in 1970.

So based on what theory Hubbert made his predictions and how reliable is this theory in order to predict a future peak in world wide oil production ? It goes far beyond the scope of this article in order to explain the scientific background of PEAK-OIL (Hubbert's Peak) , it'll just focus on its conclusions backed up with data available for the last 100 years.

Hubbert says more or less that oil discoveries and oil production do follow a so called Bell Curve. The production curve follows the discovery curve with a 40 year delay.

Prof. Kenneth Deffeyes who wrote the book 'Hubbert's Peak - The Impending World on Shortage' explains in detail the scientific background of Hubbert's theory. But let's focus on just two important issues here :

• Oil discoveries do follow a Bell Curve
• Oil production does follow a Bell Curve with a 40 year delay compared to the discovery curve.

OK, fine you'll say, but what does actual data regarding oil discoveries and oil production tell us so far ? Could Hubbert be right ?

Dr. Colin Campbell is most probably the dean among Hubbert's followers. He worked for Texaco and Amoco as an exploration geologist working in countries as Borneo, Trinidad, Colombia, Australia, Papua New Guinea, the US, Ecuador, the UK, Ireland and Norway. Later on he was associated with Petroconsultants in Geneva, Switserland and brought about the creation of the Association for the Study of Peak Oil (ASPO). Dr. Campbell did a tremendous amount of research regarding Peak-Oil and published his findings in his book 'The Coming Oil Crisis'. His findings indeed confirmed what Hubbert predicted so many years ago.

Let's focus first on data available regarding world wide Oil discoveries. We'll see that the peak of Oil discoveries already occurred in the 60's, see chart below :

Now please digest this carefully. If Hubbert is right then the world Oil production should peak somewhere during this decade (40 years after discovery peak). But the problem is that you can't say with certainty that Oil production indeed has peaked until several years after the fact. So the only thing we can do is to analyze the production curves of oil producing countries which had a discovery peak way earlier than the 60's. A good example is the US which saw it's discovery rate peaking during the early 30's. Hubbert concluded that the US therefore should experience a peak in Oil production somewhere during the early seventies. At the time Hubbert made that prediction in 1956 he was ridiculed by Oil experts and economists, but nevertheless Hubbert's prediction came true in 1970, see chart below :

So the US Oil production peeked in 1970 indeed and declined ever since then just as Hubbert predicted.

When examining the production curves of all Non-Opec countries combined we'll see a production curve which matches the predicted Bell Curve almost 100%. See chart below.

So what do we see so far :

• US Oil production already peaked in 1970.
• Non OPEC Oil production already peaked in the early 90's.

What does it tell us ? It tells us that the world oil production still hasn't peeked because OPEC Oil production still hasn't peaked. So in order to make predictions about world peak production one should focus on the main OPEC producers.

So when will OPEC peak ?

According to Bush energy advisor Matthew Simmons OPEC will peak when Saudi Arabia peaks.
So what about Saudi Arabia ? When will Saudi Arabia peak ?

Matthew Simmons says :

When Ghawar peaks (Ghawar is the largest oil field ever found) Saudi Arabia peaks and when Saudi Arabia peaks the whole World peaks. END.

But the problem is that Ghawar is aging rapidly. It's one of the oldest Oil fields in production and lots of water injection is needed in order to keep production going. At one moment more water injection won't be able to keep production going and Oil production will fall off a cliff meaning the Oil field dies.. According to Matthew Simmons, the end for Ghawar must be near. It goes far beyond the scope of this article to specify why Matthew Simmons does think so but interested readers can study Simmons findings themselves at :

Matthew Simmons : Saudi Arabian Oil - A Glass Half Full Or Half Emptywww.simmonsco-intl.com/files/Hudson%20Institute.pdf

So with the peak of world Oil production in sight, what kind of production curve could we expect for total World Oil production ?

Dr. Colin Campbell calculates the following production curves :

Any case whether it's the high case, base case or low case, what should be obvious is that the end of World Oil production increase is near. A World which requires ever increasing amounts of energy (eg China, India, increasing world population etc…) and facing a limit in increasing Oil production simply has to face an increase in Oil prices. It simple as that. Demand outstrips supply by a great margin coming years. Yes, people arguing that there is still Oil left for 30 years, they are right. The Earth contained approximately 2 trillion barrels of Oil. We just consumed 1 trillion barrels of Oil by now so still 1 trillion barrels of Oil to go. With current demand of 80 million barrels a day it's easy to see why people come up with an estimate of another 30 years of Oil supply. Again, it's not the problem of No Oil, but it's the End of Cheap Oil what causes economic turbulence. Matthew Simmons says that Oil prices exceeding $100 / barrel is unavoidable and that should be a wake up call for all investors out there because the end of cheap energy could lead to an unwelcome economic slowdown.

Highlights :

• Oil discoveries have peeked already 40 years ago
• According to M King Hubbert Production peaks follow Discovery peaks after approximately 40 years.
• US Oil production already peaked in 1970.
• Non OPEC Oil production already peaked in the early 90's.
• World Oil production will peak when OPEC peaks
• OPEC peaks when Saudi Arabia peaks
• Saudi Arabia peaks when Ghawar peaks
• Ghawar is aging rapidly and its life expectancy isn't rosy. Matthew Simmons says that the end is in sight.
• World Oil peak production means the End of Cheap Oil
• The End of Cheap Oil means continuing rising Oil prices which translates itself into Oil shocks.
• Previous Oil shocks were an perfect call for recession/Inflation
• Gold is the ultimate Hedge against Inflation
• Rising Oil prices brings the historical Gold/Oil average way out of balance
• Historical average of the Gold/Oil ratio suggest a price of Gold exceeding $700 nowadays.

Historical average of the Gold/Oil ratio suggest a price of Gold exceeding $700 nowadays. Please think about that !

Eric Hommelberg

ehommelberg@planet.nl