|
Outlook for global commodities
A year ago, I predicted a 10% rise in the CRB index, a sustained recovery in oil, and a short squeeze in gold. All of these predictions (controversial at the time) were vindicated by the market over the course of the last twelve months. The pundits have changed their gloomy tune from "deflation" to "inflation."
It's fun to make shocking predictions ("oil at US$2"; "oil at US$100"). It's a good way to sell subscriptions or build a cult following. But I follow what I call Passin's Law: Never jump to structural conclusions from cyclical market action. And nothing is more cyclical than commodity prices.
The easy money has been made in cyclical stocks. There are still special situations (Russia; SASOY; CMT) that are interesting. But it's a bad time to load up commodity producers with fresh money. Commodities no longer represent screaming buys. I don't buy into the hyperinflation story.
Oil should hold up until March, when OPEC compliance may begin to slip. Industrial metals will get hurt by softness in the U.S. economy--although economic growth in Asia may partially mitigate any fall in U.S. demand. Industrial chemicals seem to be in the early stages of a cyclical recovery.
 Commodity Trust Ltd. (CMT-London)
Commodity Trust Ltd. (CMT-London) has been an excellent, low-risk performer. CMT is up 45% since the beginning of the year. Since CMT is a non-leveraged, closed-end fund holding a basket of commodities, it represents a safe, long-term bet on commodity inflation.
Commodities across the board recovered from the 1998 Deflation panic. Crude oil rebound to the US$20s. Industrial metals like copper and nickel recovered. Gold finally had its move in late 1999. While Taipan does not expect hyperinflation to set in, the era of collapsing commodity prices is over.
The Goldman Sachs Commodity Index still looks bullish. The Index has broken the 100-week moving average -- and is still down 40% from the 1996 peak. While commodities are unlikely to double from current prices, there is still some upside over the next year or two as the Asian economies continue to recover.
 CMT is trading at 7% discount to Net Asset Value (NAV). This discount may be warranted: CMT's managers have been underperforming the Goldman Sachs Commodity Index. However, there is a catalyst to eliminate the discount: the December 14 extraordinary meeting of shareholders (which will have occurred by the time you read this).
If shareholders vote to liquidate the fund, you should be entitled to full NAV. The NAV may appreciate prior to actual liquidation (if commodities continue to trend higher). The worse the managers perform, the more likely it is that shareholders will vote for liquidation..
I don't recommend selling CMT below NAV.
Please read on...
|
