CALLING THE END OF THE COMMODITY BULL MARKET IS A FOOL´S ERRAND / SEEKING ALPHA ( RECOMMENDED READING )

Calling the End of the Commodity Bull Market Is a Fool's Errand


by: Kevin McElroy

June 3, 2011

.Over a year ago, people were saying the bull market in commodities was coming to an end. As proof or evidence, they pointed to the price of gold, which after peaking at around $1200/ounce in late 2009 dropped to below $1100.

That wasn’t the first call for the end of the commodities bull market, nor was it the most serious. We heard it proclaimed that 2008 was the official end of the bull market – no ifs ands or buts -- as in a New York Times article headlined “Bull Market In Commodities at an End, For Now.”


The proof? Well, you might recall that gold, oil and nearly every other commodity on the planet was on the receiving end of a huge uptrend until early 2008, when the “bubble” began to deflate a bit. As The New York Times said in October of that year:


Since July, when prices for many commodities peaked amid fears of a permanent shortage, the prices of wheat and corn -- two cereals at the base of the human food chain -- have dropped 70 percent. Oil prices have dropped 55 percent. Important metals like aluminum, copper, nickel and platinum have declined more than half.


Again, I’ll use a chart of gold as a proxy for the “commodity bubble”:

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Not to take a cheap-shot at the Times, but it's probably a better contrary indicator than anything. In other words, we should look to the Times to provide confirmation of the trend’s continuation when it says it’s over, and visa-versa.


When the Times or any other mainstream publication begins prognosticating about the end of the bull market in commodities, you know that the bull market is more likely to resume the uptrend than end entirely. Likewise, when such a publication says that the bull market is here to stay, you know it’s time to pull up your tent stakes and look for another asset class.


Of course, trying to accurately predict the beginning or end of a bull market in a given asset class is a fool’s errand. The accuracy of such a prediction can only be measured months or years after it’s made.


This bull market in commodities is probably getting a bit long in the tooth, but calling the end now seems quite premature, because what we know about bull markets is that they tend to end in fantastic manias.


Today, after a decade of fantastic gains across the commodity sector, the average investor (let alone the average person) still has not purchased a single ounce of gold or silver. How can I make such a bold statement? Well, the math is pretty clear.


Annual gold production last year was about 85 million troy ounces. Production for gold has been relatively stable for the past decade. About half of that production (~48 million ounces) was consumed by investment demand. That means that if just one out of every nine Americans bought just a single ounce of gold, it would wipe out the entire stock of gold produced for investment purposes.


Of course, we also know that China is buying more gold. India is buying more gold. Even Europe is buying more gold. That leaves very little gold left for Americans to buy, which is why I’m still confident that not one person in 100 has purchased a single ounce of gold.


There are plenty of buyers left out there who haven’t bitten the golden bullet yet. When they come into the market, and everyone you and I know has a hot gold investment or a favorite gold coin, then you’ll know that the bull market is coming to an end.

Until then, use proclamations from mainstream media sources to build your positions.