Is this the end for the commodities bull run?

published 8 October 2007

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As John Authers puts it in the FT, "September 11 was an eerily inappropriate date for a decline in the global perception of geopolitical risk."

Yesterday, the price of gold, regarded as the safest of safe havens, slid sharply below $600 an ounce. It fell in tandem with the price of oil - now trading at its lowest level since March.

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The yellow metal's decline came in spite the fact that gold jewellery demand is at its highest ever - up 12% to an all-time record of $11.2bn.

MoneyWeek has been keen on both yellow and black gold for a long time. But are both now losing their appeal?

Perhaps the real problem is that the markets have an unusually rose-tinted view of the future. The International Monetary Fund has warned that the markets believe risks to the global economy are so minuscule, that "if a shock occurs, the scale of the surprise means markets would probably suffer more severe corrections' than normal," says the FT.

People - and at the moment, especially people in the financial services sector - believe the good times will continue forever. The big investment banks are already worrying about managing staff's bonus expectations this year. The FT again reports that "most City financial workers expect bonuses to be at least 50% higher this financial year." That follows a bumper season last year.

With all that imagined money being spent across the City, it's little wonder that London house prices have seen something of a revival in recent months. After all, why worry about taking out an interest-only mortgage this summer when you know you'll be receiving a whacking great chunk of cash at Christmas to stick towards the capital repayments?

Of course, some would suggest that making concrete plans today for tomorrow's as-yet purely theoretical pay rise is the surest step on the road to wrack and ruin. But such old-fashioned thinking has no place in today's apparently risk-free world.

In fact, the entire notion of risk seems to be offensive to today's optimistic sensibilities. Now that oil has fallen for a whole six days, the mainstream press is rushing to declare the end of the commodities bubble', as though glad to be rid of the inconvenience of worrying about the soaring price of the world's second-most important natural resource (after water which is in short supply too, though that's another story (for more on which, read here: How to profit from the world's water crisis

It's almost funny. The oil price is still sitting at around six times what a barrel of crude cost back in March 1999, when the Economist printed its infamous "Drowing in oil" cover, and suggested that the price could fall as far as $5 a barrel.

Much of the global oil supply is still largely in the hands of Opec, a cartel whose members comprise some of the least Western-friendly governments on the planet. Commodities trader Kevin Kerr rightly points out that while Opec has held production steady at the moment, if there's any suggestion of oil breaching the $60 a barrel mark, cuts are likely. With winter approaching, that could be bad timing for the US and Europe.

Meanwhile, although the Lebanon-Israel conflict has eased up for the time being, the situation in the Middle East can in no way be described as having improved at any tangible level. Iraq and Afghanistan are lumbering on towards further disaster, and as Mr Kerr points out: "The Iran problem is far from over, as much as they would like the world to think it is."

So all in all, we'd argue that it's not oil and gold that are overpriced - it's risk that's under priced. That may continue for some time it may not. In any case, as we reported in Money Morning yesterday, gold commentator Paul van Eeden expects the price of gold to rise much further in dollar terms (see: Why the gold price is set to double), so it probably doesn't really matter if you buy in a little before the next leg up begins. If you'd like to take advantage of this mis-pricing of risk by buying into gold before the markets return to their senses, then check out our investing in gold page on the website for more information: Investing in gold and precious metals

Turning to the stock markets

The FTSE 100 was in the red for the entire session yesterday, eventually closing 28 points lower at 5,850. Miners led the blue chips down, as falling commodities prices saw the likes of Vedanta Resources, BHP Billiton and Rio Tinto head sharply lower. For a full market report, see: London market close

Across the Channel, the Paris Cac-40 ended the day 15 points lower, at 5,058, as the miserable start on Wall Street and an unexpected drop in French industrial output weighed on sentiment. In Frankfurt, however, the Dax 30 closed 3 points higher, at 5,798, with gains led by Deutsche Telekom.

On the fifth anniversary of the 9/11 attacks, Wall Street trading began slowly, with losses in early deals. However, markets recovered to end the day higher as the commodities sell-off eased inflation worries. The Dow Jones Industrial Average was up 4 points to 11,396. The Nasdaq climbed 7 points to 2,173. And the S&P 500 closed a fraction of a point higher, at 1,299. Shares in Dell fell 2% as the software manufacturer delayed its Q2 results as a result of probes into its accounting.

In Asia, weaker-than-expected machinery orders saw the Nikkei end the day 75 points lower, at 15,719.

Crude oil prices ended lower for the sixth straight session in New York last night, but had risen by 49c to $66.1 early this morning. Brent spot was also slightly higher, at $65.05 a barrel.

Spot gold had also rebounded slightly from yesterday's lows, last trading at $597.60 this morning.

And in London today, it was announced that Nationwide, the world's largest building society, is to merge with the UK's third largest, Portman, to create an institution whose assets will total over £150bn. The merger, which will become effective by September 2007, will allow the new entity to compete more effectively with retail banks, Portman's Chief Executive Robert Sharpe said in a statement.

And our two recommended articles for today...

Why markets have further to fall

- Markets may be recovering from their early summer lows, but this bear market still has further to fall - say John Robson and Andrew Selsby of RH Asset Management. At the moment, investment's 'four horsemen of the Apocalypse' are galloping towards us. To find out what they are, see: Why stock markets have further to fall

How the US is 'pushing on a string'

-JM Keynes called it 'pushing on a string' when an economy is unresponsive to traditional monetary stimulation. And that's what's threatening to happen in the US right now. For more on what this means for America, and the rest of the world, read: How the US is 'pushing on a string'

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.