Secrets Of Success: The bubble has deflated, not burst

For those who have tried to persuade investors that commodities are where widows and orphans can safely stray (which has been one of the investment sales stories of the past 12 months), the behaviour of the commodities markets this year has surely been a disappointment.

Commodities have so far borne much of the fallout from the global risk attack among investors in the middle of the year, and - unlike stock markets, which have bounced back strongly - they have not properly recovered since.

If nothing else, this at least supports the argument that the two asset classes have a low correlation, which is one of the planks on which the case for commodities is now made.

As he contemplates a year in which his record of beating the S&P 500 index looks like being broken after 15 years of outperformance, Bill Miller of Legg Mason can at least look back on his warning about the overhyping of commodities in the spring with some satisfaction.

One other thing I have learnt all over again this year is that when it comes to commodities, as with currencies, looking at charts can add valuable perspective to more fundamental analysis. I have to give credit to Brian Marber, once the doyen of City technical analysts (now semi-retired), for helping me keep my feet on the ground all year about prospects for oil, gold and other commodity prices.

As early as February, Brian was telling me, via some characteristically trenchant notes about the latest market movements, that oil and gold were both looking vulnerable to a significant change in direction. This was at the time when brokers and others were talking the price of gold up to $900 an ounce and oil to $100 a barrel. As we know, it hasn't quite worked out that way.

This week, gold has fallen back to around the $550 an ounce mark, while oil has dropped below $60 a barrel, its lowest level this year, having touched more than $76 a barrel at one point. Given that commodities generally produce no income, this year's experience has demonstrated that they will periodically produce much more volatile price behaviour than most other types of asset.

Needless to say, talking about commodities as a general asset class is not always that helpful. The CRB index, for example (probably still the most widely quoted index of commodity prices), has a high weighting in energy, whereas other indices give greater weight to different types of commodity. When oil prices take a sharp move, therefore, as they have done in the past month or so, it will tend to produce a similarly sharp movement in the most quoted commodity index, even though the picture is less clear-cut when you look at the individual index components.

In general, agricultural commodities have mostly lagged energy and industrial commodities since the bull market began five years or so ago, but they have recently done relatively better, as the charts show. The supply and demand pressures, led by rapid Chinese growth, that have propelled oil and metals prices higher over the past few years are not so marked in the agricultural markets.

In his latest monthly commentary, Robin Griffiths of Rathbones, another technical analyst I've followed for years, makes the point also that commodities, as measured by the CRB index, having trounced equities handsomely during the latter stages of the bear market, have only just kept pace with the stock market in the past three years.

While they have done very well, doubling in the last five years, commodities as a class have not yet participated in the kind of unsustainable bubble that is evident in the US housing and private equity markets, for example.

In the short term, commodity prices seem to be reflecting the same influences that have been driving down bond prices again since the summer; namely, expectations that the monetary squeeze being applied by central banks, coupled with technically overbought markets, is leading towards a slowing of economic growth and possibly a mild recession. (As always with economic prognostications, it is sensible to avoid taking predictions of this kind too literally, as events almost invariably confound consensus projections about the timing of such trends.)

The most interesting question for those interested in commodities is whether the events of the past six months invalidate the general argument for commodities as a buy for the long term, put forward by the likes of Jim Rogers and others.

It seems to me that this year's setbacks are in no way inconsistent with that thesis, which is predicated on the fact that capacity constraints in mining, oil production and so on cannot be removed overnight, but will take several years (and lots of capital investment) to eliminate.

What we saw at the start of the year were clear signs of speculative excess in a number of commodity markets, and with oil and gold having fallen by around 20 per cent from their peaks, much of this has now usefully been unwound.

Most of my technical analyst friends, who by definition are more accustomed to the cyclical behaviour of commodity prices than first-time investors, seem to think so too. You would be unwise to expect commodity prices just to go on falling indefinitely - no markets ever do that - and it is more likely that once the economic runes become clearer, they will start to rise again, in due course resuming the secular upward trend.

But just because a bunch of consultants with advice to sell have declared that commodities are now an alternative asset class, it does not mean that the price behaviour of commodities will start to change. As long-duration assets, they are inherently more volatile than other types of investment and no amount of legitimisation will change that fact.

In the meantime, in the stock market, note the strength of large cap stocks; the long-awaited rotation away from small and midcap shares might finally be under way.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
i100This Instagram photo does not prove Russian army is in Ukraine
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
Morrissey pictured in 2013
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    Day In a Page

    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine