The End of the Global Commodity Boom?


Commodities have been booming for more than a decade.

Gold has been on a historic bull run, increasing manyfold since bottoming in the early 2000s. Oil prices peaked in 2008, but are still up roughly ninefold since the late 1990s. Compare these returns to stock prices - mostly flat over the last decade - and we're talking real money.

But no bull market lasts forever. As we enter 2013, several reputable analysts have issued caution on global commodities, worrying the decade-long bull market could be nearing an end as China's voracious appetite wanes, and U.S. economic growth climbs, providing greater investment opportunities elsewhere.

Two weeks ago, I sat down with Mohamed El-Erian, CEO of PIMCO and one of the brightest investment minds in the world. Here's what he had to say about commodities (transcript follows):

Morgan Housel: Citigroup put out a report a week ago saying that the global boom in hard commodities is nearing an end; Goldman Sachs put out a similar report this morning referring to gold, the 12-year gold bull market nearing an end. What's your take on that?

Mohamed El-Erian: So I think first you have to differentiate between commodities, OK? Different commodities respond to different factors. There was a massive commodity boom that was a reflection of global growth, particularly growth in emerging economies. Why is that important? Because the average American economy is a very inefficient user of commodities, they need more commodities to produce a unit of output than the (unclear) economy. So when you have a global economy in which the emerging world is the locomotive, the multiplier effect on the commodity segment is huge. I think that is behind us. We're not going to see China growing in double-digit numbers and we're not going to see consuming commodities and stockpiling commodities like we did before, so that's correct. Where I hesitate are commodities that provide investors with access to more than just global growth. While I think that it's too early to call it an end, so gold and oil in particular.

Gold, we're entering an inflationary period and most people have not experienced inflation, so most, retail investors in particular, have very little inflation protection in their portfolio. The TIPS, the inflation-protected bonds are now trading at significant negative yield, real yield. So they will not provide you as much protection as they once did. So I think you'll see that a lot of people will say, You know what? It makes sense for me to have 5% gold allocation, 7% gold allocation, and I think we are early in that journey. Oil provides you with some hedge vis-à-vis geopolitical risk in the Middle East, and I would never underestimate geopolitical risk in the Middle East.

So I think the overall commodities story is gone because it was based on global growth, but I think that our individual commodities still make a lot of sense.


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