Will this commodities bull run continue?

As most investors are aware, the global commodity markets went through a massive bull run between 1999 and 2008. The crude oil price rose 1300%, the gold price rose 400% and the copper price rose 600% – just to name a few.

However, in late 2008, every commodity in the world came crashing down. Crude oil fell 78%, copper fell 70% and gold fell 32%.

Most commodities fell to their production costs, that is, virtually all profit margins for the production companies were wiped out. Obviously the market became oversold and was primed for a rebound.

From March 2009 we have seen that rebound. In fact, commodity prices have been rising faster this year than in any previous year. The crude oil price has risen more than 140%, copper is up more than 120% and gold has reached all time highs.

However, most commodities, including copper and oil, are only about half way back to their 2008 all time highs. Some like wheat and natural gas are still floundering near their 5-10 year lows.

The question now is, will this current commodity bull market continue?

One of the most telling signs will be the crude oil price. Crude oil is by far one of the most important and influential commodities on the planet. The price of virtually every product and service sold in the world is influenced by the crude oil price. In simple terms, the higher the crude oil price, the higher the price for products and hence higher inflation. Higher inflation leads to higher interest rates, which creates wildly fluctuating foreign exchange currency values. Most commodities tend to follow the crude oil price. As it rises, other commodities tend to follow suit. Interestingly, one of the most important price points for crude oil is around $75-$78 USD per barrel.

A few years back, between 2004 to 2006, crude oil rallied up from $30 USD per barrel to $75 USD. That rally took more than two years and was the highest price crude oil had ever reached at that time.

Inflation in America rose to more than 4%, the highest it had been in 15 years. The American interest rate was 5%. As a consequence of the combined high inflation, high interest rate and record oil price, the international stock markets fell more than in any time in the previous six years.

The drop in the stock markets slowed the oil price rally and oil fell to $50 USD per barrel over the following six months. Once the stock markets started to rally again, the oil price resumed its climb back to $78, which it reached in mid-2007. This time, however, once it pushed through $78, it shot to $100 in less than three months and an all time high of $148 USD per barrel in less than a year – a rise of almost 100%.

Now, humans are funny creatures. They don’t believe anything is possible until they see it demonstrated. When crude oil was originally pushing $78 a barrel, people thought it was a ridiculously high price. Then at $100 it triggered a massive stock market collapse in January 2008. Then at $148 it helped trigger the biggest stock market collapse in our lifetimes.

Now that crude oil has fallen back to $32 a barrel in February 2009 and bounced back up to $75, people around the world have the feeling that oil is cheap. They’re used to it being much higher.

Crude oil has stalled at $75-$78 a barrel four times before. But once it finally broke $78 the first time back in 2007, it hit $100 in less than three months.

As at the time of writing this article, crude oil is back pushing at the $75 a barrel barrier.

The world is now watching extremely closely, for if crude oil breaks through $75 it could rally back to $100 very quickly, just like it did back in 2007.

The world is significantly different this time around however. These days, American inflation is actually the lowest it’s been in our lifetimes. Interest rates around the world are also at multi-generational lows. Economies are being stimulated by phenomenal government financial incentive packages, particularly in America, where the massive printing of money has substantially reduced the value of the US dollar. In fact, investors around the world are looking for the best place to invest their money away from the US dollar.

Fixed interest investments (eg. term deposits) are being abandoned due to the low interest rates. Real estate has yet to recover. Stocks could be on shaky ground as investors are worried that the recent rally has only been caused by the government stimulus packages and not by true economic growth. The US dollar has fallen more than 45% against the Euro since 2002.

That leaves commodities as the most popular market to invest in and so far this year investors have been flocking to commodities like seagulls on a french fry.

The reason? Commodities have become the new global currency. Why invest in cash, particularly US dollars, when it is devaluing faster than ever before? With massive growth in China and other emerging markets, along with a recovering global economy, the demand for commodities will continue to soar.

And with most commodity prices still around half of their 2008 highs, there is still a lot of room to grow.

The key will be the $75-$78 price resistance on oil. Should oil break above that level in the next few weeks or months, we may see oil shoot to $100 or more relatively quickly. That would in turn help pull up the value of most other commodities too, thus continuing this commodity bull market.