Commodity Research Bureau Index (CRB)

Fundamental Analysis

The commodities have been in a long bear market since 1980. The commodity bull markets of the 70s were caused by severe supply disruptions brought about by the oil shock which the author believes was triggered by a weak U.S dollar and the removal of price controls on gold. A weak U.S dollar is inflationary since most of the commodities are priced in U.S. dollars. The Federal Reserve took a strong anti-inflationary stance in the early eighties allowing the U.S. dollar to strengthen and the inflation fears to abate. Also, the big run-up in commodity prices resulted in producers producing more commodities than the world could consume (There was a time when oil producers thought that oil would soon hit $100 per barrel). The severe supply-demand imbalance resulted in a collapse in commodity prices.

Fundamental reasons for the 90s bull market in commodities and a bear market in stocks and bonds are the incredible demands for capital and natural resources that you are likely to see as the many third world countries wake up and begin to encourage free market reforms. The unwinding of communism worldwide will have a tremendous impact which will be felt for decades to come. Demand for financial resources by the developing countries will force interest rates up as countries compete for this scare resource. The result will be a run-up in interest rates.

Commodity prices have been depressed in part due to indiscriminate dumping of natural resources by countries strapped for hard currency. This dumping is already showing signs of petering out. For the last several years, many commodities have been selling below production cost. Agricultural land in many third world countries is extremely cheap. Until recently tin was hitting 20-year lows and late last year oil was selling below pre-World War II prices in inflation adjusted terms.

Temporarily, the commodity prices can be expected to fall due to the run-up in interest rates and the invariable drop in economic activity that is likely to follow. Very soon however, the fast growing economies of the developing nations will exert upward pressure on commodity prices as their demand for the commodities grows.

Eventually as commodity prices go through the roof, commodity producers will begin producing more of their products and supply should begin to catch up with demand and perhaps even surpass it as these companies begin to fantasize about a never ending price spiral. The increasing prosperity of the developing nations should lower the demand for capital which should result in a drop in interest rates worldwide. Also the general increase in prosperity should then launch a spectacular bull-market in stocks and bonds the likes of which we haven't witnessed yet. I don't expect this bull market to begin until the end of this decade.