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Commodity Bubble: Are We Headed There, Too?
By Dr. Steve Sjuggerud, Chairman, Investment U
Thursday, April 1, 2004: Issue #325
Oil will be $100 a barrel “at a minimum by the end of the decade and possibly sooner.” A prediction from a new best-selling business book, The Oil Factor.
I couldn’t believe what was in the stack of mail when I returned home from Argentina There were the usual bills and magazines of course. But there was something new…
It was a pile of sales promotions to buy investment newsletters, all pitching commodities in some form “Why Natural Gas is Hotter than Ever” is the cover of one. “New Oil & Gas Discovery Rewrites the Energy Story for 2004″ is on the cover of another. Then CNBC was on when I was having breakfast. All the talk was about oil.
While I am bullish on commodities, I’m starting to think that the oil story is getting too popular. Apparently this week, CNBC took helicopters out to the oil sands area in Canada. CNBC is just going where the hype is, as usual.
While I have never followed oil investments closely (as I feel that I don’t have any competitive advantage in these investments, and things are constantly changing with OPEC), it feels like the oil markets are getting hot.
So this morning, I put in a call to my most trusted contact when it comes to commodities and sentimentto see if we’re headed for a commodity bubble.
A Call To the Best Commodity Trader I Know
Simply put, nobody trades commodities better than Canadian broker Chris Foster of Scotia-McLeod in Toronto.
“The hype is worrisome,” said Chris. “Oil sentiment is very high. But the story is simple, and real there is simply more demand than supply.”
Chris explained that, contrary to popular opinion, “the Saudis are maxed out” right now in their oil production. The Saudis are already using output-enhancing techniques just to keep their production up. Chris went through a laundry list of oil-producing countries, and why their production can’t keep up. It sure is a motley bunch Venezuela, Nigeria, etc.
Making matters worse, there is apparently not enough exploration – the source of future supply – going on. Chris wondered aloud what price oil would have to reach to get exploration in high gear again.
Then he said, “It wouldn’t surprise me to see the market meander its way to $50 a barrel.”
The Bigger Commodity Bubble Picture
Taking the longer view, I turn to Marc Faber, who a made a career of analyzing bubbles and busts for profit. In an article in the Financial Times this week, Faber said:
“I was leaning toward the view that some assets would continue to increase in value in 2004 while others [would] enter longer-term bear markets. After further consideration, I am now increasingly concerned that sometime soon ‘everything’ could begin to unravel. When interest rates rise, it is conceivable that bonds, stocks, commodities and real estate will all decline in value at the same time The only question is when.”
A scary thought, indeed. We are in a bubble in stocks. Real estate is entering a bubble. And it looks like a commodity bubble may be in the works as well, as they’re heading down that path, tooall built on the low interest rates.
You may disagree, of course. But you shouldn’t completely ignore Faber’s message, as he’s spent his career understanding the cycles of boom and bust.
And his ultimate conclusion is: In a big bust, cash is the most valuable asset of all.
Good investing (and saving),
Steve
Today’s Investment U Cribsheet
- If you’re a non-U.S. investor, and you’re looking for a great commodity trader, you have to get to know Chris Foster: 877.889.5111 or Chris_Foster@ScotiaCapital.com
- For more on Marc Faber, visit www.gloomboomdoom.com
- The Price of Oil: Is This Hot Commodity Becoming the “Mother of All Bubbles?”
- Commercial Real Estate Crisis: It’s nice to be first
- The Fed Raises the Discount Rate: What It Means For You
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