How Low Will Commodities Sink in 2016?

Gold versus paper money

The US Fed hiked its benchmark rate for the first time in nine years last week. The lift of 0.25% might seem insignificant.

But based on the news, Western Texas Intermediate (WTI) crude oil got slammed. WTI crude futures are now trading at US$34.73 per barrel, hovering just above the yearly low of US$34.53. WTI’s Global Financial Crisis low was $32.40 in December 2008.

Gold and silver were pumped…and then dumped. Gold’s now trading at US$1,065.92 per ounce. The ongoing weakness is a clear signal that the bear market’s not over.

And then there’s copper…

Showing little sign of life, copper traded relatively flat on the Fed news. Copper investors have endured a nightmare this year. The base metal’s now trading at US$2.10 per pound, down from US$2.75 per pound at the start of 2015.

Fed hike means tough times ahead for commodities

If you think the bad news for commodities is over, think again. As I’ve been warning Resource Speculator readers all year, this story is about to take an abrupt turn for the worst.

The US rate hike this week — which I’ve warned you about all year — will put more upwards pressure on the US dollar. This comes at a time when Europe’s playing with negative interest rates. Emerging market currencies are collapsing. And commodity currencies — namely the Australian and Canadian dollars — have felt huge pressure all year.

At the end of the day, this is just the start to many US interest rate hikes. According to the Fed’s ‘median dot point forecasts’, it will raise rates four times in 2016. That may or may not happen. But you shouldn’t discount its bullish outlook.

Many punters will look at rising rates and see a ‘recovering US economy’. Said differently, the US is the ‘least badly’ performing economy in the world. For this reason, looking to earn even a bit of interest on their capital, smart punters will move it into the US.

The end result: the US dollar is going to become MORE bullish — along with the broader stock market — next year.

But as I’ve explained to Resource Speculator readers all year, this combination won’t spell ‘good news’ for commodities. You see, mathematically, commodity prices move inverse to the US dollar.

And a rising US equities market will only cause more problems for resource punters. Seeing lower prices thanks to the US dollar bull, many will give up and sell their resource stocks, moving their capital into a more attractive sector.

It’s going to be a blood bath in the months ahead…

The coming crunch in commodity prices will completely destroy investor morale.

Looking at the Bloomberg Commodity Index, a measure of returns for 22 raw materials, you can see that hope’s vanishing quickly. This week the index closed at its lowest level in 16 years. You can see this on the chart below.

Source: Bloomberg

[click to open in new window]

At the moment, commodity prices are 22% below the 2009 trough. As Bloomberg reports,

Raw materials sank to the lowest level since 1999 this week as China’s slowest expansion in a quarter of a century cut demand in a reversal of the pattern seen a decade ago, when booming growth in Asia fuelled a surge across commodity prices that was dubbed the super-cycle.

Continued concern about China, coupled with a rising dollar as the Federal Reserve raises rates, will make it difficult for commodities to rebound, according to [Stephen] Roach, a former non-executive chairman for Morgan Stanley in Asia.’

Indeed, the writing is on the wall for commodity prices in the short term. According to Bloomberg, Roach concluded:

Commodities are, after a super-cycle, obviously going the other way, big time. [Some companies] are in denial that China is changing its character, its structure. It’s going to take a while for that to sink in, and until it sinks in, there’s still downward pressure on commodity markets and


Do you have a strategy for the crash ahead?

Roach’s message won’t be a shock to Resource Speculator readers. I’ve been warning them about this crash since November 2014. And in a November update I wrote,

On a fundamental level, thanks to economic deflationary pressures, supply keeps outweighing demand for many commodities. Technically, resource stocks have remained in their bear market trend formations.

Adding to this, the US dollar bull has shown resilience all year. And after December’s US Fed rate hike, which I believe is imminent, the greenback will be unleashed to higher highs. These facts combined will put a knife to commodity prices in the months ahead.

As you can imagine, if commodity prices crash like I expect, resource company share prices will get destroyed…

This is a very tricky period that we face. For this reason, I suggest being cautious. [The very best] opportunities, [will be] worth buying in months ahead. So make sure that you have some cash available — they’ll be worth the punt!

While commodities are set to crash in the months ahead, this bear market won’t last forever.

In fact, the next phase of the commodities bull market isn’t too far away. This forecast has nothing to do with China. It comes down to a combination of rising geopolitical risk, the US dollar bull and the coming global sovereign debt crisis. A crisis that will see multiple nations defaulting on their debts.

Resource Speculator readers understand the best time to buy commodities. They also know which commodities should — and shouldn’t — outperform in the next bull market. If you want to know more on this story, and the best stocks to buy in the months ahead, you can find out more here.


Jason Stevenson

Analyst, Resource Speculator

Ed Note: This article originally appeared in Money Morning.

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