Morgan Stanley recently published a research report on the global mining sector that concludes that we are still in the early to middle years of a commodities supercycle. We use oscillators as a tool to monitor price movements over a rolling 60-day trading period.
The rising dollar has also contributed to the recent decline in the price of commodities and commodity stocks. You can also see on the oscillator that once the dollar is up two standard deviations, it usually reverses direction and starts correcting to the mean long-term price. This chart from Morgan Stanley goes back more than 200 years to show cyclical trends in commodities prices. These commodities supercycles often last 20 to 25 years, according to Morgan Stanley's research, and if the current one follows the pattern, we have many years to go before it plays out.
The leveraged hedge funds and their problems aren't the only reason for the current volatility in commodities markets. These predators are allegedly aggressively short-selling the stocks that are in the portfolios of their vulnerable peers, which sends prices even lower. These stocks are trading at very low price-to-earnings ratios and at large discounts to cash flow. The intensity and magnitude of these price swings, which we measure in bands representing standard deviations above and below the long-term mean, can provide a clue that a price reversal may occur. Gold's price is more than two standard deviations below the long-term mean over the past 60 trading days, and oil is nearly that far down.
If the current rally follows that pattern, we could soon see the dollar again losing value, which would be supportive of oil, commodities and gold. As we have published in the past and featured in these special commentaries, different commodities rotate in leadership each year; however, long-term supply constraints have not disappeared, and demand from global infrastructure spending continues to remain robust. The price drop has had a profound impact on the price of the equities linked to these resources.
The dollar is up about two standard deviations over the past 60 trading days—you can see on the dollar chart above that this has happened only a handful of times in the past decade.
The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions.
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