What key commodities tell us about the economy

published 19 December 2006

Copper is sometimes called Dr Copper, it is considered to be the most important of all of the industrial metals, its price action is a pointer to future global economic activity. We publish an up-to-date chart. Examination of the chart shows that the price peaked in May, since then there has been prolonged but deteriorating sideways activity. Any weakness from here would, we expect, cause a hole to open up and the price to fall precipitously. Should the price give way, it would add considerable evidence to support our view of a global slow-down.

It's interesting that each sector we examine delivers up an important clue about the underlying conditions, the copper chart is just another example of this.

Gold: also a key indicator

Persistent firmness of gold bullion is another key indicator, it is a signal of future dollar frailty and general economic concern. Gold bullion is, after all, the ultimate hedge against any financial situation that causes alarm. The gold price over the last two weeks has been consolidating well in line with a developing bull market condition. Because of the price action since the last report, the next key level which we previously said was $675/oz has been changed to $650/oz, a move above that would excite us considerably. Investments such as Black Rock ML Gold & General and Investec Global Gold have the potential to rise very significantly.

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We have been watching the development of the gold price and gold mining shares generally with a view to a small increase in exposure. This would most likely be triggered on gold bullion decisively breaking about $650/oz. When that happens, and we expect it to happen, we will probably increase the weighting in portfolios of this investment class by 5%.

Oil: expect short-term setbacks

The oil price looks vulnerable and this condition would be become more so on the price falling back below $60 a barrel. On any weakness, we would anticipate a fall before support could be found to about $50 a barrel.

If the evidence of the bond market, the copper price, gold and the US housing market are, as we think, correctly signifying a global slow-down centred on the US, then a setback in the oil price ought to be par for the course. However, in the longer term, the demand from the emerging middle class of the developing world will near enough guarantee that oil, as an investment opportunity, is long from being finished. Recently, the FT reported that the global middle class (and in the developed world it's fairly static) is set to rise from 7.6% of the world population to 16.1% by 2030. That's an awful lot more cars, fridges, air conditioning units, tv sets, etc., and the demands for energy and commodities of all types will rise exponentionally. In the absence of major new discoveries or completely new technologies, supply will have a tough job keeping up without the price of oil rising very significantly.

Portfolios' exposure to this sector is via the Merrill Lynch New Energy Fund which, following its sell-off back in May, has moved very steadily ahead up over that period by 17.5%. Although we have toyed with the idea of increasing portfolio exposure to this asset class, we think for the time being, sitting on our hands is the best thing to do. But of one thing there is no doubt, over the longer term this asset class will merit very considerably attention.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

For more from RHAM, visit https://www.rhasset.co.uk/