By Stephen Blumenthal, CEO, CMG Capital Management Group
All cycles eventually come to an end. In the case of commodity bulls, 16 years is the average duration. The longest lasted 24 years (1896–1920), the shortest lasted 8 years (1972–1980), and the most recent secular bull ended in 2011 after 12 years.
What ends a commodity bull cycle? Success. Success invites increasing amounts of capital—oil is a prime example. High prices over a number of years invite competition; capital races in, with more drilling, new technology, fracking, shale, natural gas, and alternatives. High prices drive the need for improved fuel efficiency. Supply and demand imbalances force corrections, but in commodity cycles, those corrections tend to take time. Producers need to cut production, but no one wants to.
There are conspiracy theories surrounding the Saudis, Syria, the United States, and Putin’s Russia; however, the real bull market cycle killer is success itself. With capital committed and drilling in place, the players exit the game slowly.
Thoughts on the Commodity Bear Cycle
Here is the historical data on Commodities—Secular Bull Markets (shaded grey) and Commodities—Secular Bear Markets (white):
The next chart shows commodity prices since 1800. Note the arrows marking bull market tops tied to the peaks in price momentum (large yellow circles). This chart shows, as NDR Research says, “that the momentum of commodity prices has a history of killing its own super-cycles.” Source: NDR Commodities 2014 and Beyond Dec 18, 2014.
With permission, for which I am very grateful, I have attached an excellent piece from NDR entitled “Commodities 2014 and Beyond.” The research takes a look at what the Saudis did in the 1980s to knock much of their competition out of the oil game (a playbook they appear to be following today). And there’s this note on gold:
“Much to the disbelief of gold bugs, the gold market is saturated; another common trait of aging super-cycles. Yet, gold producers cut reluctantly, or not at all. As commodity super-cycles die, producers often do what they need to do to survive, which may or may not be at marginal cost.”
Steve Blumenthal is CEO and Chief Investment Officer of CMG Capital Management Group. CMG manages tactical portfolios and strategies for advisors, individuals, and institutions. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long-term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek,” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.