Commodities: the supercycle is over (except for gold)

Commodities have been 2012’s worst-performing asset class. While many stockmarkets have managed double-digit gains, raw-material indices have struggled to stay above zero since the second quarter, says Deutsche Bank. A rapid rebound, moreover, is unlikely.

After years of lagging behind, “supply has caught up with demand in a number of commodity markets”, says Francisco Blanch of Bank of America Merrill Lynch. Copper stockpiles in China have hit a record. Stores of crude oil in the developed world are expected to finish this year at a two-year high. Supplies are likely to “continue to loom over the market” in 2013, says Jerry A DiColo in The Wall Street Journal.

There is no sign of a take off in demand to whittle away stockpiles. Europe and Japan’s downturn, China’s tepid recovery, and historically sub-par American growth hardly adds up to a backdrop “conducive to sustained increases in commodity prices”, says Capital Economics.

The big picture is that the 11-year bull market, or supercycle, in industrial metals and oil looks over. Supply constraints have been overcome, while Chinese growth is slowing and is set to become less commodity-intensive as the government concentrates on spurring consumption rather than investment. Goldman Sachs reckons that commodities will now return to the pattern of the 1980s and 1990s: trending sideways.

The one commodity still in a long-term bull run, however, is gold. Western central banks are printing ever more money, debasing currencies and increasing the risk of a nasty jump in inflation in the next few years. Meanwhile, emerging-market demand is rising as states rattled by the slump in the West diversify their cash reserves. As developing countries grow richer, there will also be a larger pool of gold investors. Deutsche Bank expects the price to average $2,100 an ounce in the second quarter of 2013.