What next for commodities?

Tue, 10 May Pre-Open

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US$ 99 bn. Bloomberg reports that this is the total value that got knocked off in the meltdown in commodity prices last week. Infact, the S&P GSCI index, a widely followed commodity index, did not have a single commodity that closed the week in the positive. Indeed, just as most commodities went into gravity defying mode in recent months, their journey back to terra firma has been equally swift. Five trading days is all it took to bring back the prices to more meaningful levels.

Now that commodity prices have corrected a significant deal, guessing game has begun in all seriousness over where are these prices headed next? Is there some room for more correction or there will be more of a sustained rise from here on.

As usual, the opinion is pretty divided. Bulls are of the view that emerging markets will continue to grow at a robust pace and this will boost demand, especially at a time when producers are finding it hard to keep up.

Indeed. Hundreds of millions of people in China and India want to emulate the lifestyles of their developed counterparts. And even if some of their goals are met, the pressure it will put on earth's finite resources is indeed going to be enormous. In view of this, there is a strong argument to make that prices should firm up on a sustained basis going forward.

Then there are bears who argue that even if economies grow, speculation is so excessive that prices no longer reflect supply and demand. And hence, commodities could well be at the start of a bear market that could last as long as 5-10 years.

It is certainly a confusing state of affairs. When even experts are so divided, it is really difficult for an average investor out there to take a meaningful call. Little wonder, commodity prices are witnessing so much volatility in recent times as experts can't seem to see eye-to-eye on the underlying fundamentals.

As far as we are concerned, we believe that demand will certainly keep going up year after year. Hence, there is a case to be made for a sustained increase in prices over the long term. But we would rather stop short of recommending any particular commodity for long term investment. This is because as per us, it is rather difficult to arrive at an intrinsic value of any commodity. We just can't put our finger to a price and say with a great degree of certainty that a particular commodity is indeed trading well below or above its intrinsic value.

Thus, we would like to stick with fundamentally good stocks available at attractive valuations for the long term and perhaps buy gold as insurance against adverse market conditions.