By MoneyMorning.com.au
2011 was a tough year for commodity investors.
Only a handful of major commodities rose over the year. So what were they?
Gold was the best performer, rising 10%. This completes 11 straight years of consecutive gains for the metal, making it one of the longest unbroken bull markets in history.
There were just a few other commodities that made any sort of gain last year. These included crude oil, which was up by 8.2%. Coal was up 5.7%. And corn scraped in with a 2.8% gain. It was slim pickings.
Precious metals, energy and food did better than most.
Almost all other major commodities fell. All the base metals, like copper, nickel and zinc, fell. That’s because these metals are used in industries, such as manufacturing and construction, that were slowing down. Zinc had one of the worst performances in 2011, down by 25%. Tin doesn’t show up on the chart, as it is too small a market for this list, but fared even worse with a 30% drop in price.
This chart shows how the major commodities have ranked for each of the last five years.
We’ve cut the list to the last five years to make it easier to read. Click here if you’d like to see the record over the last 10 years.
The first thing to notice is just how much the gains and losses can jump around each year. Take zinc (Zn). During four of the last five years it did terribly. It lost nearly half its value in 2007 when everything else was soaring. But then in 2009 it more than doubled, jumping 129.4%.
Then look at silver. Up 14.6% in 2007, then down 23% in 2008, up 48.2% in 2009, up another 83.2% 2010, then down 9.9% last year. All over the place! But the net result was that silver doubled in price in this time.
Since the start of this year, silver has come back to life in a big way. I wrote about silver in Money Morning two weeks ago, explaining why I think 2012 will be big year for silver.
It’s been an exciting few weeks for the metal, with prices up 10% since then. There have been some big daily jumps. The silver price exploded out of the gate during US trading on Friday, putting on 5%.
The reason for the sudden jump is Eric Sprott (he runs a silver fund out of Canada) is planning to buy an extra $300 million worth of silver on behalf of clients. This is not much when you consider that there is around $50 billion worth of silver bullion available. Sprott is trying to buy just 0.6% of the market. For silver to move 5% on the news of this alone, the silver market has to be incredibly tight.
One commodity that has been close to the bottom of the chart for the last four years is natural gas. It lost 24.9% in 2008, a terrible year for all commodities. But it then went on to lose 0.9% in 2009, and then 21.2% in 2010. It was the only commodity to lose value in both years, during which most commodities soared. Natural gas then went on to lose another 32.2% last year as well. This four-year decline saw natural gas prices fall 63%.
And the pain hasn’t stopped this year. It has dropped from $3.00 to $2.33 this month alone. The natural gas price is now at a 10-year low.
What is going on? Since its peak in 2008, the price has fallen over 80%.
The gas industry has been revolutionised by ‘fracking’ (fracturing) technology that allows gas-bearing rocks to be opened up, so drillers can extract more gas from them. Thanks to fracking, the US now has more gas than it needs. The market is flooded with gas, which has sent the price down. What is most remarkable is that the United States is switching from being a gas importer, to a gas exporter.
Compare the gas chart to the oil chart over the same period. It’s a different story. Oil has had a strong recovery since the market collapsed in 2008. Oil was one of the few commodities to make a gain last year.
I think the oil market has started a new era of higher prices. What is happening around Iran right now is just part of it. What I think is more important, long term, is that the world’s biggest oil exporter, Saudi Arabia has recently set a new fair price of $100 per barrel of oil.
This is as good as saying ‘the oil price is never going under $100 again’. This means oil producers are now looking at a certain future of three-figure oil prices. This is important for oil stock investors because it removes a great deal of risk from oil stocks. This will translate into higher share prices.
But on top of that, the oil market is tighter than ever. If oil exports cease in one part of the world, there is almost nothing in reserve from other exporters. Everyone is going full tilt. For example, Libya produces just 1.6% of the world’s oil. But after it stopped exporting during last year’s civil war, the oil price increased 20%.
The other problem is that many of the major oil exporters are in increasingly unstable countries. Oil importing nations like ours are at the mercy of the stability and cooperation of countries like Nigeria and Kazakhstan. Both export enough oil to have just as big an effect, if not bigger, on the oil price as events in Libya. And the oil industries of both countries have come closer to shutting down in the last month than we realise.
Iran’s threats to block the world’s busiest oil shipping channel could cause a big short-term spike in price. But I think we also have the makings of higher prices well beyond that. There is a $100 floor to the oil price to stop it falling far. Sending it higher will be the unreliable supply from exporters; right at a time that there is no slack in the system.
Oil’s fundamental set up is very bullish, and oil stocks stand to do very well this year. After waiting for this opportunity, I’ll be tipping a few oil stocks in Diggers and Drillers in the next few months.
When we come to review 2012′s commodity performances this time next year, I’m confident oil will be near the top of the list. Along with gold and silver of course!
Dr. Alex Cowie
Editor, Diggers & Drillers
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