Hardly a day goes by without an expert voice lending weight to the debate over the status and future of the commodities supercycle - if indeed there is one. The number of experts in the field has increased exponentially since early 2002, when the commodities bull market dug its hooves deep into the dirt, and faced the world.
Just take two examples from this week. First, Goldman Sachs, the most active investment bank in global energy markets, raises its forecast for oil prices in the second half of 2008 to an average of $141 a barrel - and oil promptly moves to new records above $135 a barrel. Next, Citigroup analyst Heath Jansen says that the rally in commodities - including metals - is only half way through. Next, Edward Morse from Lehman Bros calls investments in commodities a potential asset bubble.
In commodities trading pits around the world, the jargon of the ultra short-term seller is now a mixture of global economic slowdown supply surplus and dollar strength. At the other end of the scale investors can, however, find hardened professionals who have been studying and analysing commodity markets for years. These are people who have published their views through good times and bad.
Like weather forecasters, the duty of commodity professionals is not to get the facts right like a supernatural time traveler who has been into the future and come back, but to provide useful information, hopefully some of it in the future tense. The challenge today is that the noise around commodities has reached a deafening pitch. This week, oil moved back to the forefront of media - and investor - concerns.
Yet at least one seasoned group of professionals will tell you that this is not time to sell oil (the commodity), even if it is indeed overbought. There are a number of reasons for this; too many to mention here; suffice to say that while oil expenditure as a percentage of global gross domestic product (GDP) has doubled in the past four years (to nearly 6%), there are still no serious signs that a choke point has been reached.
One classic golden rule is that where consumers are coughing up more for a specific good or service, it's inevitable that some smart investors out there are in the money - past, present and future tense. So how do investors benefit from the cacophony of expert voices? While there's little doubt that yet another guru will call the gold bullion price to above $1,000 an ounce within the next week, how can that be turned to use? Commodity forecasts are notoriously short lived in terms of investor memory; relying more on the big picture can be far more rewarding.
Looking at stocks listed around the world, studies going back to the start of 2006 on stock prices and price-to-earnings ratios indicate that both energy and mining stocks are neither cheap nor expensive. Among relevant sub-sectors, it is only listed gold stocks which continue to rank as expensive. Measured relative to earnings, listed gold stocks are roughly twice as expensive as other mining stocks, and nearly three times as expensive as energy stocks.
This has at least a little to do with the fanatic gold community (no matter how small) scattered across the planet. These days, gold as an asset class is increasingly outranked and outflanked by other commodities, most recently those dowdy voyagers, iron ore and coal, and, even more recently, with stunning refrain, by potash. Mention the latter to a gold bug, and chances are that you will end up (leaving out the middle part of the story) needing your jaws wired.
GLOBAL LISTED RESOURCES STOCKS
Average weighted 12-month net gains/losses
* Investable market capitalisation
*** IMC counted in other sub-sectors
Source: Analysis by Barry Sergeant