If China Killed Commodity Super Cycle, Fed Is About to Bury It
The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999. That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011.
The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9 percent against a basket of 10 major currencies this year. That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.
DYI Comments: Is the cup half full or half empty? This is the bottoming of commodity prices. Be aware this bottoming will most likely be years in the making allowing the value player plenty of time to dollar cost average into your favorite natural resource fund. DYI's favorite is Vanguard's Precious Metals and Mining Fund symbol VGPMX; their share prices have been decimated.
The drop for these mining companies has been far greater than the metals they produce. A bargain in the making. Our proxy for our formula is the Dow/Gold Ratio. Currently gold is neither overvalued nor undervalued; at average valuation(at its mean). Our formula has us at 17% only until gold(commodities) become an increasing better bargain by stocks rising or gold falling (or some combination of the two) will that percentage increase. Our model portfolio has plenty of dry powder(cash). Stocks and bonds valuations have left the planet earth. Could they go higher? Who knows? At these levels a 45% to 60% decline in stocks is very much within the realm of reality. Bonds yields could very well rise(bond prices falling) but to a far lessor degree than stocks. So while everyone else is losing their head don't go and lose yours. Patience will be rewarded as greater valuation are ahead.
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