Ongoing Commodity Boom or Bust???
Linda says:
Look beyond the headlines to help you decide what to do?
How do you figure out whether a recession is likely when governments, central banks, newspapers and other groups are often lying to you?
In the field of commodities, 2007 was a very good year with increases in grains, metals oil and gold.
But what does the future hold? If you try to get a picture of future economic activity, you can look at measures such as housing starts and building approvals. In the resources industry, with mega takeovers proposed, it is hard to get an unbiased and accurate picture as opposed to spin, and public relations statements.
One infrequently reported, but extremely important measure is the Baltic Dry Index.
This measure is actually London based, and measures the cost of moving bulk goods around the world by sea. It deals with cost of carrying materials such as ores, coal and grains but does not measure the carriage of manufactured goods.
In the last couple of years, being in the bulk goods business has been highly profitable, with the Baltic Dry Index rising 150% last year. But in the last week, there have been 3 major falls, with a Plunge of 5.7% in a single day. The index has fallen rapidly and is now 37% off from its highs.
When there are more goods to ship, than ships available, the cost goes up and this, of course, also works in reverse. Thus, if the cost of shipping is falling so rapidly, the demand for shipping is falling and there will be fewer bulk goods to transport. And, eventually, a decrease in manufactured goods as well. The shares of shipping companies are busy falling too!
Thus commodity prices and the economies dependent on them, may not be as insulated from global woes as they might like to think they are! In other words, mining and other commodity related stocks are likely to go DOWN if the demand for their products is falling. Instead of the crystal ball, keep an eye on the Baltic Dry Index.
