Seems like the current thought amongst most investors is that a recession will put an end to the commodity bull market. Seems reasonable doesn't it? If the economy slows or shrinks commodity demand will contract. Falling demand equals lower prices right?
Now let's look a little deeper into that theory shall we.
First off let me clear up one critical point. Commodities have been in a secular bull market for the last 7 years for one reason and one reason only. Supply and demand imbalance. This goes back to our original question of will a recession cure the commodity price explosion.
Let me point out another important fact. Recessions don't last forever.
Now let's examine what is going to happen if the recession worsens and commodity prices fall.
If prices are falling rapidly does anyone seriously think oil companies, copper miners, gold and silver miners, farmers, etc. etc. are going to continue to rapidly expand production or exploration?
I can guarantee you they won't. They all remember the bear market years from 80-2000. Heck anons come on this blog daily to remind us of those times. No what's going to happen is commodity companies are going to start tightening their belts again and put expansion projects on hold waiting to see what unfolds.
The end result is as the economy comes out of recession and commodity demand surges again new supply will not be coming online. As a matter of fact new supply would now have been delayed even further down the line.
Now do you see why commodity bull markets last so long. Rising commodity prices tend to slow or stagnate economies. When this happens it just serves to slow the production of desperately needed new supply.
A serious recession will only guarantee much higher commodity prices in the future.
2 months ago