



Many commodity prices have dropped sharply in the past few weeks. The main excuse: The dollar has rallied off its lows.
Call it a bloodletting. In the Middle Ages, people believed bloodletting made a body stronger, but that’s certainly not the case today. Is this an opportunity to pick up some cheap commodities, or has the commodity bubble burst?
There were, of course, exceptions to this general commodity weakness. Last Monday, crude oil surged above $120 per barrel for the first time, and copper hit an all-time high price of $4.27 per pound in the morning. (By the end of the week, it was back below $4.)
Perhaps it’s no coincidence that these two are strongest. After all, they’re both major Chinese imports. Oil hit yet another all-time high May 6, nearly $123 per barrel. Despite a bearish inventory report, oil hit yet another all-time high May 7, at nearly $124 per barrel. Then, May 8, oil hit a new high at $124.61 per barrel. Like a broken record, oil topped that record, hitting above $126 per barrel and closing at a new record high May 9.
The common belief is that the Federal Reserve has finished cutting interest rates. Therefore, the dollar is through declining, and commodities will fall as a result. Although a weak dollar will tend to increase commodity prices in general, what this logic fails to address is the core supply/demand fundamentals of specific commodities, regardless of where the dollar sits.
The crux of this issue has to do with the emerging markets. Do you believe China and India are headed back down simply because the dollar strengthens? Their population growth alone places a floor on oil prices during corrections.Consider this: In America, we have about 900 cars for every 1,000 people. By comparison, only 45 people per 1,000 own cars in China. Think about what would happen to oil demand if ownership in China merely doubled to 90 vehicles per 1,000. And China has recently surpassed the US as the biggest world consumer of copper, accounting for 27 percent of the world’s total demand.
But oil demand could certainly drop because of sticker shock and a slowing economy. On the other hand, food demand is relatively inelastic with the world population rate rising by 80 million people annually. To put that number in perspective, population growth is equivalent to adding the current population of Mexico to the world each year.
George Kleinman is editor of Futures
Market Forecaster, an exclusive futures trading advisory that seeks to
profit from the fast-moving commodities markets. He also presides over Commodities
Trends, a free e-zine that reveals powerful trading strategies and secrets
that will keep you up with the latest trends and developments in these
lucrative markets. From energy and agricultural products to metals and
currencies, George’s market wisdom has become quite a commodity among
individual investors.
George is the founder and
president of Commodity Resource Corp, a futures advisory and trading
firm that assists individual speculative traders as well as institutional and
corporate hedgers. He has been trading full time since 1977, an Exchange member
for over 25 years and is the author of three seminal books on commodity futures
trading. George entered the business with Merrill Lynch Commodities in
1978 and in 5 years entered the “Golden Circle” as one of firm’s top ten
commodity brokers internationally.
George is a graduate of The Ohio
State University and has an MBA from Hofstra University.
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