Recession or Not, Commodities Prices Have Room to Grow

CAPE TOWN (ResourceInvestor.com) -- A recession in the U.S. economy is clearly a concern - but it is not a “slam dunk,” said economist Dr. Martin Murenbeeld at the Mining Indaba 2008.

Murenbeeld kicked off this year’s Indaba - the biggest yet, bringing together more than 3,000 delegates representing nearly 700 companies, 150 sponsors and 40 government and quasi-government delegations - with his address “Commodities, Currencies and Interest Rates”.




In front of a packed auditorium, Murenbeeld said his company, DundeeWealth Economics, predicts there is a 50-50 chance of a recession in the U.S.

But a U.S. recession may not hurt emerging global economies as much as one might think, he said.

Although recessions are not good for commodities markets in general, efforts to combat rising inflation in the United States are devaluing the U.S. dollar, which is bullish for commodities.

“Turning points in the dollar tend to coincide with turning points in the gold price,” Murenbeeld said, adding that that is also true for energy and even zinc, among other resources.

He said that it is easy enough to predict that the dollar has more to fall, and it looks as though the dollar has already surpassed the first phase of devaluation: declining against the euro and the Canadian dollar. Now, the dollar is moving on to the second - and more significant - phase, according to Murenbeeld: declining against Asian currencies.

“The decline of the dollar against Asian currencies is more important than the decline of the dollar against the euro,” he said. In the short run, commodities markets in Asian countries may fall as the dollar weakens because they are priced in U.S. dollars. But as prices fall, demand will pick up, he said, and then prices will rise again.

In addition, lower interest rates are positive for commodities, Murenbeeld said. “When real interest rates decline, demand for goods and services generally respond positively. … Real interest rates declining is good for commodities prices.”

The commodities market is also looking strong due simply to the fact that this is the beginning of year seven of the current bull market. Even the shortest bull markets historically have lasted for more than seven years, so there is plenty of time to run, he said.

Forex markets will likely support the commodities markets as well, according to Murenbeeld.

“The total amount of global financial assets is $123 trillion,” he said. Of that, $55 trillion is in managed assets and $200 billion is in managed commodities. That number does not represent the recommended commodities diversification in investors’ portfolios, he said, meaning investments in the commodities complex have room to grow.