18 July 2013

My Opinion On Commodities - July 2013

We see a softening market in commodities trading. As you noticed, almost all the agricultural companies had experienced a weaker share price this year due to the fact that the selling price of raw material has dropped from the peak just before 2008 Financial Crisis.

The interesting story here is the sudden drop of Gold price to about US$1200 from around US$1800. Gold is identified as one of the best hedging tools against inflation. So what does it mean if gold price is dropping?

We need some catalysts to boost up the commodities price. For example, recovering of US economy may increase the needs of crude oils and its alternatives in long run. Bio-diesel, one of the hot topics in last decade, shows that it could only survive if the crude oil is always maintaining in a higher price, for example US$100 or higher. I still remember that the price of palm oil, one of the choices for bio-diesel ingredients reached about RM 4,000 peak and subsequently dropped to about half of it as of current. The main reasons could be a few:

  1. Depreciation of USD against RM. Investors try to find other asset class to hedge against the depreciation of USD due to the weaker economy and Quantitative Easing. However, as US economy is picking up, it may force or encourage the commodities traders back to US equity market or money market as they may expect a rise in US interest rate in coming years. 
  2. Slower growth in China and India, the top 2 nation who contributed as major importers of crude palm oil. 
  3. Fast expansion in the planted lands by commodities players. 

As the commodities prices are reflected quickly on the supply & demand trend, so any of the changes in these two aspects could give an impact to the commodities market. Jim Roger, guru of commodities market remains optimistic on commodities market in long run, as his argument is due to limited supply of farm lands and increase in usage on bio-diesels / cooking oils / other commodities products as global population growth and demography changes (more younger farmers would move to the town to look for a better job).

Nonetheless, I do expect a fluctuation in commodities price, as what it always happens here since last couple of years. We may experience a slow and steady growth in commodities price once the long term equilibrium is found.

P/S: Above is just my own opinion on commodities. Please do your homework before making any investment decision.

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