These days, the market for tangible goods is like some high octane action thriller starring Commodity John as the rugged financial hero who walks barefoot over broken "glass-ets" singing "Yippee Ki-Yo-Ki-Yay!" To wit: Since the start of 2009, inflows into commodity-linked markets reached a record $121.2 billion while hedge, mutual, and pension funds hold their largest-EVER position in the sector.
That's the what. As for the WHY -- According to the mainstream experts, commodities' appeal stems from its apparent win-win, "safe-haven" status. Win-Win being -- If the US economy recovers, commodity markets benefit from the increased production at home. More importantly, though, if the US stock market and economy weakens, the commodity-driven growth in foreign countries such as China and India will continue to drive the sector higher. A slew of recent news items sets the bullish scene surrounding all things drilled, mined, and farmed:
- "Commodity Super-Cycle Seems To Be A Runner Again. In the long term, of course, excessive capital flows into commodities are not healthy. But ... in the long run, we are all [also] dead." (Financial Times)
- "Commodities are experiencing a long-term bull market that will last for years. Strong demand for infrastructure upgrades in emerging markets such as India and China" will continue to lead investors to seek shelter here. (Investing Daily)
- "All those countries such as China and India are keeping a floor under global demand for commodities." (Barrons)
There's just one problem with this kind of logic: Namely, it was the same one given by the mainstream to explain the late 2007-2008 run-up in commodity prices that blew up like a bomb. Check out the following news clips from the time to refresh your memory:
- "Confidence in commodity super-cycle" (MarketWatch November 11, 2007)
- "Until such time as the people [in China and India] decide that they no longer want to develop a standard of living equivalent to the Western world -- which is not likely to happen -- the commodity bull run will continue." (AP, August 22, 2007)
- "Commodity Bull Run In Early Stages. The appetite for commodities in China's booming economy has driven price up." (Bloomberg, December 4, 2007)
YET -- contrary to popular wisdom, China and emerging-market Co. did NOT keep the commodity bull running on all cylinders. From its May 2008 peak, the commodity sector plummeted 58% in seven months, alongside a synchronized descent in global stock markets. The supposed win-win, safe-haven status of hard assets was a no-go, no-show.
And, while the coordinated sell-off of supposedly divergent markets caught the mainstream by surprise, it was exactly what EWI had been expecting. Here, the June 2010 Short Term Update explained:
"EWI's All-the-Same-Market theory was first proffered by Robert Prechter in his best-selling book, Conquer the Crash, in early 2002. Bob observed a rare shared cycle between stocks and commodities, based in part on expanding and contracting liquidity (credit flows).... As credit waxes and wanes, formerly disparate markets such as stocks, commodities, forex, oil and metals, have, more or less, been moving in synch. Sometimes these trends will manifest in a clear and strong across-the-board move; sometimes these shared trends will weaken. But as credit has waxed, these seemingly unrelated markets have rallied together, and as credit has waned, they have declined."
Fast-forwarding to today, the December 2010 Elliott Wave Financial Forecast reinforces the "All the Same Market" paradigm with the following chart of the 52-week correlation between the S&P 500 and the S&P Goldman Sachs Index of Commodities since 1996.
As The Elliott Wave Financial Forecast observes: "The bottom panel of the chart shows how much stronger the 52-week correlation is now than it was in late 2007 (a reading of +1 describes a positively positive correlation), and it's been pinned to a high level for a much longer period."
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