Global Asset Trends for 2010

Tue, Jan 19, 2010 - 12:00am

Every year, I write a review issue in January with my summary of past trends, and my predictions for the new year. I was pleased to see that most of my calls were correct. Last year, I predicted the rebound in the commodity sector, especially the surge in precious metals and oil. Grain supplies were tight as I anticipated, especially in soybeans, and stock markets were extremely volatile. In the US, bailouts and foreclosures continued, while the vaunted stimulus plan failed to create jobs or have much impact on the real economy.

With this article, I will focus on my thoughts and predictions on commodities. Although commodities have been labelled a bubble every year since I began writing financial commentary, they are still in a bull market. In February 2009, when many analysts were still bearish on the sector, I called for a resurgence in the commodity complex and a drop in the dollar index, which happened a few weeks later.

Base metals like copper and zinc were big winners last year, more than doubling since the 2008 crash. With such a powerful run, I expect a correction in 2010, although I believe they will still make small nominal gains.

Crude oil also had an impressive 2009. The rebound was not surprising, as oil plunged in 2008, and the magnitude of the fall couldn't be adequately explained by either fundamental or technical analysis. There is evidence that the oil price is manipulated by large institutions like Goldman Sachs to increase their profits. In addition, Rob Kirby’s research indicates that WTIC (light sweet crude) was swapped from the Strategic Petroleum Reserve for cheaper sour oil in order to cause an artificial glut and depress prices.

Although demand has dropped due to the global recession (and depression in some countries), the price has been supported by supply destruction outpacing decreased energy use. Crude is forming solid support around the US$77 level. While I don't expect 2010 to be quite as impressive as last year, I believe crude will top $100 by next winter.

Although precious metals have performed well over the past decade, they still dropped sharply in 2008. Even with a recovery in 2009, shortages and rationing recurred. This indicates that prices are too low, and must go much higher. Silver is far below its peak in nominal terms, and gold is only half its inflation-adjusted high of US$2,200.

Gold received a big boost in 2009 from the conversion of central banks from net sellers to buyers, and I expect that trend to continue in 2010. New major players like Russia, China, and India scooped up many tons of gold. The long-threatened IMF sale was finally completed, and eager buyers stepped in above the $1000 mark.

The price was also supported by two major gold scandals which erupted last year. In June, the Royal Canadian Mint “lost” 17,500 troy ounces of gold, but claimed customer metal was unaffected. In the fall, a depository in Hong Kong allegedly found LBMA Good Delivery bars filled with tungsten, causing panicked audits around the globe. If depositories and exchanges do not really hold the amount of precious metals they claim, gold would be in much shorter supply than is currently believed and prices could skyrocket. I look for gold to rise above $1,450 an ounce next year.

While gold's fundamentals are excellent, silver is even better. Silver went into backwardation for 47 consecutive days last year, demonstrating extreme tightness in the physical market. In fact, silver has been in an acknowledged supply deficit for 20 years, as mining cannot keep up with demand. Whatever stockpiles were left must be largely depleted, if not gone.

The gold:silver ratio has shrunk back to 61, but has plenty of room to reach its historic level of 17. While 2009 was a great year for silver, I believe we would have seen a greater explosion in price if it weren’t for paper products like SLV diverting bullion demand. For these reasons, I am looking for silver to top $23 in 2010.

Another metal, uranium, was overlooked in 2009. It traded in a range from US$40 to $55 per pound last year, dampened by the US Department of Energy threatening to sell its metal stockpile. While the metal clearly went parabolic in 2007, the yellow metal is a steal at its current spot price of $44.50. To generate 40 million kilowatt hours in energy would cost almost $6.4 million worth of crude oil, but only $89,000 in the equivalent amount of uranium.

Now that the DOE has sold its excess uranium, utilities should return to the market for discretionary purchases. At the same time, supply is waning as demand is picking up in the developing world. Uranium has plenty of room to appreciate, as it should cost over $140 per pound to match its 1977 high in inflation adjusted terms. Although the metal has a lot of technical damage to overcome, I expect a rebound in the spot price to $57 in 2010.

Although agriculture lagged the other commodities in 2009, I expect a stunning reversal in 2010. Stockpiles are low in many commodities, from cotton to sugar. In addition, I found a lot of evidence which suggests that governments around the globe are exaggerating the quality of the grain harvests in order to avoid panic and hoarding among the population. Any large sovereign purchases will shatter the complacency in these markets.

With expanding populations, and increased prosperity in developing nations, there is little margin for error if a catastrophe did occur. The current El Niño could become more severe, causing crop failures and fires as in 1997-98. The Ug99 stem rust fungus might reach global wheat belts next year, causing devastating losses. While prosperous nations won’t go hungry, disappointing harvests will curb exports, leaving poor countries at the mercy of local rainfall.

Even with normal supply and demand factors, agricultural commodities are cheap when adjusted for inflation. As measured by broad ETFs like DBA, this sector has formed a huge base. Although some foodstuffs will soar more than others, I predict an average increase of 35% in 2010. I advise you stock up on nonperishable food now before the fireworks start.

I expect commodities will have a strong year again in 2010, especially in the agricultural markets. There are many ways to play this trend, from futures contracts to stocks of commodity producers. However, one of the safest and simplest roads to profit is simply to buy physical bullion. Precious metals in your possession have no counterparty risk, and are an excellent hedge against currency depreciation.

Copyright © 2010 Jennifer Barry

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jennifer [at] globalassetstrategist [dot] com ()