Commodities and Currencies

Commodities and Currencies

In the economic and financial environment that we currently have with news (economic, financial and policy actions), it is difficult to sort the noise from the facts. I have expressed my bullish views on all commodities for the long term; I consider 2012 to be a year for reinforcing my bullish long views with a cautious eye on the near and mid term possibilities.

Yes, I do have a taste for being bearish in the near term for commodities; the most discussed concern is the slowdown in China. There will be debates on the extent of the slowdown. Some sectors of the Chinese economy may experience a hard landing, while others might have relatively slower growth. In any case, there is no doubt that it will impact commodity demand and prices. Given the extent to which Chinese equity markets are discounting the slowdown, I am comparatively sure that commodities will decline significantly in 2012 as a reflection of the waning demand for industrial commodities (in the near term).

On our side of the world, the impact on commodity prices should come in the form of strengthening currency (specifically the dollar). A strong dollar is historically negative for asset classes such as equities and commodities. However, I won’t be shocked if the dollar gains in strength further in the foreseeable future. The euro zone crisis will keep the euro on a relatively negative downward trend. Therefore, the flight to the dollar will be significantly higher. With minimal growth, recession and continuous debt refinancing expected in the euro zone, I expect risk aversion to remain high.

The United States more than likely will need further policy action in 2012, in order to keep the economy going. I see this as a negative due to our government’s inability to even work through minor policy and governing needs.  Therefore, a relatively strong dollar for most of 2012 might keep commodity prices trending down.

With these factors in mind, I would certainly not consider 2012 to be exceptional for commodities. What might offset these concerns? Geopolitical tensions (read as the Middle East) and an amount of quantitative easing (both by the euro zone and the Fed). Nevertheless, I would assign a much higher probability of downside than any upside.

Now having said this, I do maintain my long-term bullish view on all commodities. Primarily, I would consider any meaningful correction in key commodities as a buying opportunity. So, now you’re impatiently asking…Which commodities will I be eyeballing in 2012?

Crude Oil – The long-term demand for crude isn’t going away.  In fact it will increase exponentially.  2012 should present a good opportunity to consider long-term holdings for crude and few exploration companies.

Copper –China has show the way in the recent term; however with the Chinese economy weakening a price decline in copper relative to demand is an excellent opportunity to add the commodity in a long-term portfolio. Yes, I do consider Copper to be better than Gold.

Coal –Coal consumption has shown vigorous growth in the past decade and that trend is expected to continue.

I sincerely expect volatility across all asset classes, as 2012 continues to move forward. 2011 was dictated by reactionary, short term trends and not fundamental facts. Those that rode the fluid, short-term trading mayhem of last year may realize damaging effects to their portfolios this time around. In my opinion, a long term view is critical this year even more so than the last two years.

Dempster Cherry is a Investment Advisor Representative with Nelson Securities, Inc.  For more information on weekly picks email  dcherry@Nelson-Securities.com