When it Comes to Commodity Prices… Don’t Confuse Weather and Climate


There’s a raging argument about global warming. I’m not getting involved. Not because I don’t have an opinion, but because I am not informed enough to be very confident in my opinion.

But there is an aspect of the debate that I find interesting. That is, proponents of global warming now argue that the very hot weather we’re experiencing across the U.S. is, NOT what they are talking about.

Their point is that we should not confuse weather – the monthly and even annual fluctuation in temperature and precipitation – with climate, which is of course much longer term.

And I find this interesting because that’s exactly how we view the commodities markets…

We make every effort to separate the short-term fluctuations (weather) from the long-term trends (climate).

So while we obviously see many commodity prices high for the moment – like oil, corn and even gold – we also see that the long-term economic Winter Season will do its work, bringing these prices to heel.

Why is this the case? Because demand and the dollar will drive commodity prices lower.

The drop in global demand is evident as U.S., Chinese, European and Indian manufacturing have all slowed in recent months. In the U.S. and Europe the numbers now point to contraction.

Manufacturing is slowing because of a decline in sales. So naturally, commodity producers feel the pinch as well. And as the demand for commodities slows down, commodity prices will fall.

There will be droughts, there will be geopolitical scares, but these are short-term events. Long-term, the lower demand environment will push commodity prices lower.

As we’ve written many times, the U.S. dollar should keep moving higher. Already showing strongly against the euro, a move up against the yen and other currencies is next on the hit list. This is not because the U.S. is doing so much right, but because other currencies have long lists of their own troubles.

The troubles in the euro are obvious.

In Japan, the problem is a very strong yen, which is crushing exports. And the lack of corporate growth is ruining the already limited opportunities for the young. The Bank of Japan has committed itself to a weaker yen, which must occur to give that walking-dead nation just a little more time on life support.

As for other currencies, like the Canadian dollar and the Aussie dollar, their economies are built upon the demand for commodities themselves. So as global demand for commodities slows, these countries will see their economies slow as well… and that will weigh on their currencies.

So what’s the takeaway?

Should we all write-off commodities and leave these markets behind?

Of course not! These markets are always quite volatile, which gives investors many opportunities to be on both the short side and the long side.

The thing to understand is that there is most likely going to be constant negative pressure in the commodity markets for the next several years. So do your best not to “fall in love” with any of your positions.

And most important of all, don’t make the mistake of confusing “weather” for “climate.”


Rodney

 

 

Ahead of the Curve with Adam O’Dell

Poppin’ Like Corn in a Kettle

I once ventured an attempt at an inter-generational debate with my grandfather, asking “What do you think about climate change, Gramps?”

“I believe in climate change,” he quickly blurted out. I was surprised and curious. But that quickly ended with the second half of his weigh in… “It gets hot in the summer and cold in the winter. Been like that for years.”

Needless to say, his humor is as dry as Nebraska’s corn cobs are this year.

 

 

Dow Heading for Historic Drop – Take Immediate Action

World-renowned economist Harry Dent now says, “We’ll see an historic drop to 6,000… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly.”

Considering his near-perfect track record of predicting economic events long before they occur, you need to take action to protect yourself now. Get the full details…

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Categories: Commodities

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.