Commodity prices and the very bullish case for oil (page 3 of 3)

The period directly ahead will be very important since there is a possibility that bonds are about or have completed a major head and shoulders top traced out between late 2002 and now.

In previous reports, I have stressed that the year 2003 was unusual in the sense that every asset class including commodities, real estate, bonds in developed and emerging markets, as well as equities everywhere in the world increased in value. In fact, we had in 2003, a real flight into garbage with lower quality assets rising the most. This was unusual since bull markets in one asset class, are normally accompanied by bear markets in other asset classes. How can bonds and commodities rally in concert for long?

Therefore, it has been my view that in 2004, we would see diverging markets, with some asset classes rising, while other would decline. However, since Mr. Greenspan created a gigantic worldwide bubble in just about any imaginable form of assets, and because we had last year such a close connectivity between the different asset markets, in 2004, every asset class could also exhibit simultaneously downside volatility!

Moreover, once again I would most like to warn investors about short-term volatility in commodity prices - even in those with great fundamentals, such as the energy complex. Although it is true that commodity prices are likely to have begun a long wave-up cycle, which could last for a decade or more, cycles for individual commodities tend to be of far shorter duration. Indiscriminate buying of commodities that are in the midst of a parabolic rise purely on the China demand story, for example, may result in large losses.

Having made this point, however, the view that certain commodity prices may have become vulnerable in the near term doesn't change the presumption that a long-term (but volatile) commodity up-cycle began in 2001. The future for this sector would seem to me to be far more attractive than for financial assets, which tend to perform poorly when commodity price rise, such as was the case in the 1970s.

There is one more point that should be considered, which is the following. In the past, rising commodity prices have led to an up-turn of the historically well-documented War Cycle, as nations became concerned about sufficient supplies of vital resources. Thus, an increase in geopolitical tensions is only a matter of time - another negative for equities.

Lastly, the period from late April to November has in the past only led to very modest gains for equities. A failure to better the recent March highs for equities in the next few weeks would confirm that we have again put a major top in place, from where markets could sell-off sharply in May/June.