The raw commodities sector has been in the business media spotlight for months, as several major bull runs are playing out in individual commodities futures markets. That spotlight got a little brighter this week when gold futures pushed above $700.00 an ounce and hit a 25-year high.
How long will these bull markets in raw commodities last? Will major bull markets in other commodities develop soon? Is there a “speculative bubble” in some commodities markets, such as precious metals and liquid energies? If so, when will the bubble burst?
These are compelling questions and opinions vary widely on what may be the right answers. I’ve heard at least one respected markets analyst forecast the general bull market in raw commodities will see a climax by the end of this year, due to speculative excesses already being built up in many markets, such as the metals. And I’ve seen forecasts by other respected market analysts that the bull market in commodities will persist for several years to come, due to the simple laws of supply and demand: Increasing demand for the finite supplies of raw commodities, due to growing worldwide industrialization. My bias is that the general bull market in raw commodities will continue to play out in the coming months, and probably longer, with different commodity sectors leading the charge at different times.
In a compelling discussion with the Pro Farmer editorial team this week, we discussed the above questions. (This team has well over 100 years of collective market experience.) We came to no consensus answer regarding when the general bull market run in raw commodities markets will likely end. However, we did discuss what event could occur (and may even be likely to occur) to prompt a possible sudden end: A “change in the rules” of trading markets or in market structure.
We do not know specifically what rule change will occur, or when, that would prompt the end of the bull market in commodities. However, we did discuss the realm of possibilities that could lead to a major change in trader psychology that would turn commodities traders from generally bullish to generally bearish. Here are a few:
— Significant increases in margin requirements for speculative trading of futures contracts. When markets do get wild at higher price levels, exchanges do raise margin requirements to help to ensure the integrity of futures markets.
— Loss of public confidence in the “price discovery” process that determines the price of raw commodities–namely the futures markets. With energy prices at record highs, there is presently consternation with the oil companies and their record-high profits. What if that consternation spills over into loss of public confidence in the energy futures markets? Already, there has been some grumbling that the high volatility in the energy futures prices is not good for the consumer.
Importantly, it’s very highly unlikely that futures markets would ever be outlawed. (And it’s my strong bias that traders and futures exchanges do a highly efficient, important and representative job of price discovery in all futures markets.) However, it’s not unrealistic to think that, in the face of wild price fluctuations in many futures markets, legislators could “cave in” to some pressure groups and pass laws that would significantly alter the structure of futures markets, including curtailing how much speculators can participate in them.
— A change in the rules that govern U.S. monetary policy. The declining value of the U.S. dollar versus the other major currencies has helped to accelerate the bull market runs in gold and silver, and copper. The weaker value of the greenback also enhances the perception that “hard assets” like physical commodities are of greater value than “paper assets” like bonds and stocks.
If the U.S. government took steps to increase the value of the U.S. dollar versus the other major currencies, such as foreign exchange intervention or even government official “jawboning,” then that could tip the scales in favor of the commodity market bears. In 1985 then U.S. Secretary of the Treasury James Baker make official remarks at a Group of Five meeting that roiled the currency markets and sent the dollar plunging in value.