Investment Contrarians

Reduced Commodity Trading Indicates Dire Days Ahead

By for Investment Contrarians |

Reduced Commodity Trading Indicates Dire Days AheadI’m the first to admit that the economy is faring much better than it was a few years ago—back when America entered into the Great Recession. Manufacturing is continuing to grow in the United States, and even though that’s at a slow pace, pundits seem impressed with the growth.

But if the U.S. and global economy are on the mend, then why is there actually a decline in the prices of those commodities used when economies are growing?

You would think that commodity prices should be stabilizing and showing signs of edging higher if the global economy was expanding—but they are not.

The price of spot gold is down 36% from its peak.

Silver, used in electronics and industrial goods, has fared even worse, plummeting 61% from its peak.

Oil, the fuel driving the supposed economic recovery, is down 28% from its peak a few years ago.

Copper, used in the housing, electronics, and industrial markets, is down a whopping 65% from its peak.

Those numbers don’t lie.

The widely cited catchword “supercycle,” used to describe the superlative run-up in commodity prices over the past decade, appears to be fading.

Just take a look at the chart featured below. The prices of gold, silver, copper, and oil peaked in early 2011, and have since all been in a decline. This price action doesn’t indicate a recovery.

Gold-Spot Price Chart

Chart courtesy of www.StockCharts.com

The fact is that even if the media doesn’t talk about it, the great price moves we have witnessed in the commodities may be a thing of the past.

The growth of China and the global economy was a major reason why the demand for commodities surged, as was the superlative growth in India, Eastern Europe, Latin America, and Asia.

But while China is now showing fractures in its economic foundation, the pundits are still expecting double-digit growth and a can’t-miss economy for years to come.

However, the growth isn’t happening. The decline in commodity prices is a telltale red flag that the global economy may actually be in a decline and stalling, rather than growing the way pundits are saying.

The dire situation in the eurozone is also an example of the state of the global economy.

So, if you attest to the possibility of a slowing global economy, you know that businesses will also see their revenues and earnings fall.

The muted growth in U.S. corporate revenue growth is another red flag.

That means companies from the financials to the industrials could face slowing in the years ahead, especially those with exposure to the global economy such as Alcoa Inc. (NYSE/AA), NIKE, Inc. (NYSE/NKE), and Exxon Mobil Corporation (NYSE/XOM), just to name a few.

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