Oil continues a slide to its lowest point since May, gold also declines
John Morrissy
Sun
OTTAWA — Investors eager to pounce on the recent dip in commodities may be buying into a bursting bubble rather than an overdue correction, says National Bank Financial chief economist and strategist Clement Gignac.
With everything from oil to gold to corn plunging in value in recent weeks, many analysts are advising that these declines may be the beginning of the end for the world’s multi-year commodity boom.
Gignac traces the market’s moves in recent years from one bubble, the dot-com era, to the next, housing, and asks: “Will the commodities theme perceived as the ultimate safe haven asset class since last fall also prove to be a bubble?”
Bullish camp observers continue to push the argument that supplies will remain strained, driven by demand from emerging nations, Gignac said. But recent price declines in the face of record-high values tell a different story, one of demand destruction.
Evidence of that is cropping up across North American energy markets, as consumers cut back on driving in the face of record-high gasoline prices.
Subsequently, since hitting a multi-year high on July 3, the UBS Bloomberg Constant Maturity Commodity Index has fallen to its lowest level in almost seven weeks, and has fallen 12 per cent in the past two and a half weeks.
Oil continued its recent slide Wednesday, falling $3.98 to $124.44, levels not seen since May 29. Gold lost $25.70 to fall to $922.80.
At the same time, demand from emerging nations shows signs of weakening as second-quarter growth in China, the largest of the lot, advanced at its slowest pace since 2005.
“Time will prove that Economics 101 still applies to commodities with an eventual demand destruction and technological innovations,” said Gignac, who is sticking by his recent call for crude to fall to $75 to $80 a barrel in the next 12 to 18 months.
Recent research by National Bank shows the highest negative correlation between oil and U.S. bank stocks in a generation, Gignac said.
This suggests oil’s run to a peak of $145.86 on July 3 had more to do with safe haven buying by speculators and hedge funds than it did with fundamentals, as sharp concerns about the U.S. dollar, the U.S. economy and its financial institutions permeated the market.
As confidence has begun to return to U.S. financials, however, oil and other commodities have fallen sharply.
“The bubble is starting to burst,” said Gignac. “Think twice before buying the recent pullback on commodities as the ultimate cyclical trough may be much lower than current levels.”
While that limits a Canadian investor’s prospects, considering the market’s near-50-per-cent weighting toward energy and materials, Gignac he is now bullish on Canadian financials, transportation and consumer discretionary stocks.
“I believe in six months from now Canadian bank stocks will be higher and oil will be lower,” he said.
© The Vancouver Sun 2008