Norman: The last time you made an appearance here, commodities - all commodities, pretty much - were in a very powerful bull market with prices rallying across the board. Recently, though, we've seen a pullback, a pretty nice pullback, in a broad range of materials. What do you suppose this is? With some people, there's a debate now as to whether this is just a correction in an ongoing, longer-lasting bull market, or if it's a turn in the market.
Kerr: We have to take a step back and really look at what the bigger picture is. Let's look at two, three years. We saw a parabolic rise in the commodities, and most of us who have been trading all our lives - or our adult lives anyway - looked at it and said well, it made sense to a certain point and then it got ridiculous.
Certainly in energy, we looked at that above $120/barrel and said, where's the support for this? When it got above that, I think most of us stepped back, and of course it continued on to $145-$146/barrel, but there was really no tradability above that.
Now here we are back at these levels; things have corrected. Whether there's further to go or not is yet to be seen; it's very choppy right now with the dollar the way it is. Let's not underestimate two things: speculators and the dollar. OK? The dollar higher [means] commodities lower, the dollar lower [means] commodities higher; that's basic trading. And of course, speculators have had a huge role in this, and I think it's been downplayed quite a bit. Speculators have also had a huge role in pulling it back, so we have to realize speculators are a big part of this market, and to deny that is silly.
Norman: Now some of them are liquidating, or in fact, betting that prices will go down. But that's certainly been one element of the story. Let's talk about the real underlying economics fundamentals. We've seen over the last six years very strong demand growth out of China, India … all these emerging and developing economies. U.S. growth was strong up until recently. But now we see a cooling off of growth here in the United States; indeed, we see a cooling off of growth in China, in India, in other countries where a lot of the new demand has been coming from. Talk about this and what sort of an impact it's having, and how long this could play out.
Kerr: Well, short term, it could have a significant impact. We've seen a slowdown … let's take one example … a slowdown in driving here. High gas prices certainly put a crimp on drivers, and we saw fewer miles driven. Now we can go around the world and offset that with the increase in driving, say, in China. So it all pretty much balances out, and I would say demand is not something we should be concerned about, certainly longer term. Short term, though, we have seen a reduction in demand, and that could continue as prices stay high. But of course, now that prices have pulled back, we could see that same situation pop back up, and its price could move high.
Norman: Now, is this more in the economically sensitive materials, like metals for example? Metals are probably at the front of the line, with industrial metals at the front line in terms of their sensitivity to economic cycles. Will they be the most impacted?
Kerr: I think so. Let's set precious metals aside - silver and gold - because that's an emotional trade; it's an inflation trade to some extent.
Norman: Some people think of them as money, so there's another whole aspect.
Kerr: Exactly. It's a quality vehicle and all that, so let's set that aside. The industrial metals, though, are the real engine of the economy, and so steel and zinc and ore and all these things we use to make these plasma screen TVs … when we start seeing those industrials metals be picked up at whatever level that might be … and we know that demand is picking up. I do think that some of these commodities got just out of sight, as far as people melting down light poles and going to graveyards and digging out … pretty extreme.
Norman: When you start behavior like that, that's sort of a tip-off that we might be getting to a peak in the cycle. Oil perhaps is a little bit different because you do have maybe some monopolistic forces within the market: You have the OPEC cartel - certainly the Saudis could be deemed as price setters at the margin; you have geopolitical developments recently with Russia and its move into Georgia. What about that? It was perhaps difficult for OPEC to raise output and meet all that new demand, but it seems to me it would be an easy thing for them to cut back on production and put a floor under the price.
Kerr: Sure, and they can at any time. We've seen these recent reports that we have plenty of supply in hand of crude and not as much product [like refined gasoline]. That's because the crude has been so expensive, and we're going to need all that product - heating oil and all the gasoline - is good for. And sure, the Middle Eastern countries - Saudi Arabia being the biggest one - could just instantly cut production. They don't want us to have more oil, they want us to have less oil.
Norman: And they want more of the money. All right, folks, stick around for our second part of the interview with my guest Kevin Kerr. This is Mike Norman, your host on HardAssetsInvestor.com. Be sure to check Part II of our interview with Kevin Kerr. |
Loading data ...