Is the commodity bull run facing a threat?

How does the end of a counter cyclical market help you as a trader or an investor?

I have been debunking the commodity super cycle theory since 2021, when it first began appearing on my social media timeline. Those were heady days in the financial markets when any and every traded asset was flying into the stratosphere. Lumber (chopped tree wood) appreciated 600 percent. Were trees migrating to Mars? Ask the super cycle believers!

What was really happening was that rampant unbacked currency printed by central bankers was finding its way to the financial markets and boosting asset prices. Traders making abnormally high returns thought that the gravy days were here to stay. Yet, I have been consistently warning readers that the bull market in commodities was nearing a peak. Read my previous articles dated September 27, 2022 here and November 29, 2022 here and April 7, 2023 here.

Rising interest rates are a big dampener for commodity bull markets and it is reflecting in the prices of industrial metals. These metals are a good proxy for manufacturing activity worldwide. As a matter of fact copper is trading 20 percent below its peak which puts it in bear market territory. The Dow Theory states that any traded security falling 20 percent from its peak is in a bear market. The same goes for other metals. I had written about it in my article dated May 23, 2023 here.

When interest rates started rising, the countercyclical phase in commodity markets ended. A countercyclical phase is when asset prices move in the opposite direction of the real economy. Remember during 2020 and 2021 lockdowns how financial markets were zooming inspite of little or no commercial activity in many sectors. Remember lumber jumped 600 percent. Talk about irrational exuberance. Once the countercyclical phase ends, the procyclical phase begins. Procyclical is when asset prices move in the same direction as the real economy. In the current world order that means downwards. I wrote about it on January 17, 2023 here.

That explains why oil and gas prices are falling off a cliff in spite of a war in Gaza. My research suggests a structural bear market in gas. I wrote about your LPG cyclinder coming down to Rs 500 in a few years in my article dated October 31, 2023 here . Note how gas prices collapsed last week itself.

Now for the crux of the article. How does the end of a counter cyclical market help you as a trader or an investor? We all agree that most traders tend to make profits in a bull market. Only specialists (short sellers) know how to profit in bear phases. As commodity prices start falling slowly at first and faster thereafter, benefits of lower raw materials start to trickle in.

Take crude oil, for example. It’s approximately 20 percent below its recent peak and therefore in a bear market. Lower oil prices result in lower overall inflation. It means lower raw material costs for plastics’ manufacturers, oil-based paint companies and adhesives’ makers. I think a bull market may start here after the dust settles.

Lower metals prices would mean lower raw material costs for auto makers, power cables and home cooking appliances companies. Lower gas prices would bring more savings to households, lower raw material costs for fertilizer companies.

Markets are like chessboards. Our money is like chess pieces on the board. We need to make the right move at the right time or face defeat. Instead of focusing on metal-mining companies (metals are their finished products), go for utensils companies (metals are their raw materials). I have already mentioned plastics, paints, fertilisers and adhesives earlier.

A falling market does not necessarily mean doom and gloom. If one segment of the market is falling, there must be another that could be rising. Just move your chess pieces (investments) on the chess board (market) in time.

Traders are brain warriors. We win the investment and trading game with our ideas. Let’s keep the cutting edge sharp and stay ahead of the crowd.

Happy Diwali and a prosperous new year.

Vijay L Bhambwani

Vijay is the founder and Ceo of proprietary trading firm www.bsplindia.com. He tweets at @vijaybhambwani. Views are personal and do not represent the stand of this publication.